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Federal-Mogul (NASDAQ:FDML)

Q1 2012 Earnings Call

April 24, 2012 10:00 AM ET


David Pouliot – Director, IR

Rainer Jueckstock – CEO

Alan Haughie – SVP and CFO


Patrick Archambault – Goldman Sachs

Brian Sponheimer – Gabelli and Company


Good day ladies and gentlemen and welcome to the first quarter 2012 Federal-Mogul Corporation Earnings Conference Call. My name is a Ferris and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session. (Operator Instructions). As a reminder this call is being recorded for replay purposes. And I would now like to hand the call over to your host for today, David Pouliot, Director of Investor Relations. Please proceed, sir.

David Pouliot

Thank you operator, good morning and thanks to all of you for joining Federal-Mogul's first quarter 2012 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 the statement of notification of the applicability of the safe harbor provisions to today's call and the documents referenced during the call. Please turn to the Agenda Slide.

(Inaudible) start, Federal-Mogul's CEO will begin this morning's call by providing a brief overview of the company highlights for the first quarter. 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.

Rainer Jueckstock

Yes, good morning. Thanks David. Good morning to everybody on the phone. As I am just since three weeks CEO of this company I will use this first call to introduce myself. I am born and raised in Germany and since 10 years I am living here with my family in the US and so it means some also of this US (inaudible). I am graduated college engineer and since two years I am with Federal-Mogul. I grew in Federal-Mogul in various function regions and product lines. I have been an application engineering, in commercial sales; I was as a crew controller for a few years. I was running a plant and since early 2005, I was running Federal-Mogul's powertrains and energy division. During this time I gained experienced running and developing operations and units in Europe, North America, in some big countries and I have been leading and participating in setting up new operations, joint ventures and acquisitions in India, Sweden, China, Russia, Turkey, Korea and virtually in every countries where Federal-Mogul is operating and has been. I know most of the OE product lines and units in Federal-Mogul and for many years, Federal-Mogul's aftermarket was one of my largest customer, but since a few weeks I am also intensively in (inaudible) in softer markets.

I took over a company with a proven (inaudible) especially on leading technology and so equipment OE portfolio. We continue to invest in technology and just yesterday evening, one of our proposals that final year awarded this award technology watch here into US. On the aftermarket, I think this company has a great set of premium plans and we provide exceptional service to our aftermarket customers around the world. And we do have on those OE and aftermarket a highly diversified customer base with strong regional presence in virtually all segments so it's likely (inaudible) or industrial applications. So we are well placed in growth and mature markets.

In the future I am going to run the OE segment of Federal-Mogul and I am going to ensure profitable growth with efficient use of capital and resources and the prime part for me to push for this growth will be to drive a focused approach around our core product lines we have in Federal-Mogul on a global basis. We want to enhance our competitiveness and customer orientation especially for this core product lines in every single market.

Federal-Mogul is a (inaudible) company that's excellent technology grants interpretation and we are responsible to persist into the future to create value for our shareholders customers and employees. One of the key task I got from the board of directors of Federal-Mogul is to prepare the company for a segmentation into OE and aftermarket segments. My team is focused on preparing this in the best way and the fastest possible and we see opportunities to find an optimal model for the two units which have very different customers, business models and processes. The customers and the market requirements of these two segments are very different. Think about those unique working capital requirements we have to serve our aftermarket operations compared with the capital investment requirements to expand and install capacity for our OE business around suburb. We believe that this segmentation will enable us to customize and optimize the decision processes should foresee two different segments.

Important for us is to do this segmentation in a way that we establish optimal relationship between the two segments OE and aftermarket going forward. These two segments will make business together in the long run and we have to ensure that this business runs in a way to create value for our shareholders, customers and employees.

I see segmentation could be done in different ways and we are currently putting together models to understand the pros and cons of each of this alternatives. It could go from an integrated aftermarket unit with limited manufacturing capabilities up to a fully integrated aftermarket unit with manufacturing capabilities for most of the product lines they are selling. We will put together these models and the decision for which model to go will be made jointly after the new aftermarket CEO is appointed with him and the board of directors so that we have to come an understanding how to go forward. We believe the new aftermarket CEO will show up in the next few weeks before end of quarter two, selection process is an advanced status.

The timeline for this segmentation between OE and aftermarket is set in a way that we will have some modeling in the coming weeks. We will have early phases of implementation already in 2012 and we have target to be operational segmented in these two segments going into 2013. We have a clear understanding why this segmentation process will take a lot of management attention. The key for us in this time is to run the two business in the best way possible. We ensured our shareholders that we will not be distracted from running the operations from developing the business while we are talking and executing this segmentation.

I would ask you to advance the presentation to page five. We spoke about our investment in the future. Clearly we have a long term view about the performance of Federal-Mogul and we will put a lot of focus and emphasis on the turn of assets as a key performance criteria for long-term oriented company. We continue to invest in R&D for product differentiation and enabling us to gain premium pricing in the OE segments and in the aftermarket we are clearly going forward to investment in our branding and product offering.

For the OE business very important but also to a certain extent for the aftermarket segments that we invest in our global capacity and to support organic growth and we take also opportunities in the market for strategic and mid-type acquisitions to develop our core product lines both in OE and aftermarket not only for the organic growth but also by using acquisition opportunities into market.

We will keep growing in all segments and we intend to retain and gain market leadership through differentiating technology in all segments so its light vehicle, commercial vehicle, industrial which is a very interesting market for us as well as aftermarket. For the OE business we execute record growth in several markets by launching a new product, especially this new technology developed in-house of Federal-Mogul and we have a clear investments tied achieved for developing our footprint and portfolio in line with such new business and new market share. Footprint optimization to retain and establish competitive cost factor is very important for us.

On the aftermarket side we strengthen our product and service offerings in all market and it's very important for us that we launch new product lines in all regions to intensively utilize existing infrastructure we have on the sales side as well on the distribution side in the aftermarket and in new markets and in highly growth markets. We defiantly will spend to the sources to expand our sales, the presentation and our ability for distributing our product.

Please flip to page six. A few points about quarter one. Federal-Mogul had in quarter one 2012 continued sales growth towards $1.8 billion. In several cases based on solid market share gain especially into growth markets and on the OE segment we recorded a record sales of 1.2 billion in quarter one 2012 well above 2011.

On the global aftermarket in quarter one 2012, our sales have stabled with continued momentum in North America, solid growth in Brazil, Russia, India and China. But at the same time we have also to record somewhat softer sales in the aftermarket in quarter one 2012 in Europe.

Our operating margins, our net income and our EBITDA were solid whilst the company is still heavily investing in our growth initiatives. We spend significant capital investment in quarter one to support this growth. SG&A and especially our spending for R&D, engineering and sales, were consistent this prior quarter and to cash out flow, we had to record in quarter one 2012 was similar to prior quarters and is an effect of our continued investment in growth and technology but also to a certain it’s a reflection of the seasonal needs for the aftermarket regarding net working capital.

Our liquidity remains strong at more than $1.13 billion and we this I hand over to CFO, Federal-Mogul, Alan Haughie to give you more detailed explanation about our quarter one. Thank you.

Alan Haughie

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

Turning now to slide eight. Sales increased 2% year-over-year to $1.8 billion. Growth in constant dollar terms was 5% but given that 60% of our sales are outside of the US, the relative strength of the US dollar reduced reported sales by 3% resulting in net sales growth of 2%. The constant dollar sales growth of 5% actually reflects OE sales growth of 8%, offset by a 1% decline in the aftermarket and of this 8% OE sales growth about 3% was driven by increases in global vehicle production and 5% by market share gains. In fact, all three OE segments had market share gains over and above the changes driven by vehicle production alone. As mentioned, aftermarket sales fell by 1% and this comprises a US decline of 1% and a 4% decline in Europe being almost offset by 5% increase in sales and the rest of the world. And given the rate of OE sales growth our powertrains and energy segment is now the largest segment representing 34% of total sales followed by the aftermarket at 32%.

Regionally, in the US we have seen strong OE growth in both production volumes and market share gains dampened somewhat by the soft aftermarket resulting in a net sales increase of 4% and in Europe where vehicle production actually fell year-over-year, we increased OE market share sufficiently to offset the reductions in European production volumes and the softness of the European market resulting in net growth of sales and Europe of 2%. However the largest proportional growth occurred in the rest of the world including the Brit countries of 13% and 12% respectively.

Slide nine provides a greater detail of our OE sales compared to both light and commercial vehicle production by region. In macro terms, global light vehicle production increased by 4% year-over-year and commercial vehicle production fell by 6%. At a regional level, it is difficult to perfectly correlate vehicle production growth rate to our OE sales given that many of the engines manufactured in one region are destined for vehicle assembled in a different one. However, given Federal-Mogul's relative presence in these and other non-automotive markets, a simple growth rate expectation for Federal-Mogul's OE sales were the first quarter of 2012 versus last year due to market forces alone would be around 3%. Therefore as demonstrated on this slide, our growth rates continue be at or above the production rates of the underlying market.

Now please turn to slide 10 for more details of our first quarter earnings performance. The sales increase of $40 million comprises $85 million of constant dollar growth offset by $45 million of adverse currency movements. Gross margin decreased by $2 million to $277 million including unfavorable currency impacts of $8 million. Productivity improvements, material cost decreases and improved customer pricing were largely offset by adverse mix and this mix was partly within the OE business segments and partly due to shifts in both customer and product mix in the aftermarket some of which is carry over from 2011. And this resulted in a decline in the gross margin percentage of 5/10 of a point.

SG&A increased by $12 million versus last year and when adjusting for unusual items during the quarter, SG&A as a percentage of sales remained relatively consistent with 2011 reflecting the company's continued control over functional costs during this growth period. Restructuring expense increased by $5 million, the majority of which relates to programs implemented in the aftermarkets to realign our distribution and customer strategies in North America as discussed in the prior quarter and this resulted in the decrease in net income of $19 million versus the prior year. EBITDA decreased by $11 million for the quarter, $268 million. This will be covered in more detail later in the presentation but largely reflects the decline in gross margin and increased SG&A. cash out flow of $112 million is consistent with the prior year as it reflects normal first quarter seasonality and continued increases in capital investment.

On slide 11, we have a reconciliation of our profit measure operational EBITDA to our net income for the period. As just mentioned, we realized EBITDA of $168 million in the first quarter compared to $179 million last year. The decrease in income tax expense was relatively stable effective tax rate of 23% compared to 21% last year. And there was a slight increase in the US pension expense compared to last year reflecting small changes and assumptions for discount rate and expected long term rate of return on planned assets.

Restructuring expense increased for the period as already discussed and interest expense and depreciation charges are both largely unchanged from last year.

Slide 12, represents the year-over-year roll forward of our first quarter sales in EBITDA. The light blue bar on the foot of the page walks sales from last year to this year and the waterfall above it represents the associated EBITDA impacts and this chart also illustrates how we separate the impacts of volume, mix, price, exchange and so forth.

Now with regard to sales. We attribute $60 million of sales growth to new business wins in our OE business segments representing growth of about 5% with roughly the same rates of growth of about 5% with roughly the same rates of growth in the US, Europe and rest of the world and given our spread of OE business, the largest dollar gains were therefore in Europe. Now although the OE weighted production volumes increased globally by about 3%, this was softened by a 1% decline in aftermarket volumes primarily in Europe leaving net volume increased of $20. Year-over-year pricing was favorable by $2 million and the remainder of the sales movement is exchanged largely $45 million.

Now turning to EBITDA. The impact of the market share gains was an increase in EBITDA $14 million, a healthy conversion on the increased sales of 23%. However, EBITDA decreased by $39 million due to adverse mix impacts experienced in all business units and there are three primary causes of this mix variance each roughly equal in size.

First, included in mix is a reduction in year-over-year absorption resulting from lower production for the aftermarket. Over the first quarter of last year we built around $40 million more of inventory for the aftermarket in support of the expansion of our midgrade portfolio than was necessary in the first quarter of this year.

Secondly, although the OE segments grew year-over-year sales, there was a shift in the regional and product mix and this reflects lower vehicle production in Europe compared to the US and higher growth of our sales in Asia compared to that market.

And thirdly, during 2011 there was a significant mix shift in the US aftermarket demand towards midgrade and away from premium products. The full year carryover impact is reflected in the year-over-year analysis. And in Europe, the general economic climate has impacted consumer spending creating some adverse regional mix impacts as well as slight shift in product mix. Material cost however improved significantly year-over-year resulting in an increase in EBITDA of $22 million. And our continued investment to improve operational efficiency translated to year-over-year productivity gains of $21 million; however this was partially offset by labor and benefits inflation of 17 million. As a result of these items, EBITDA decreased $268 million versus $179 million last year.

Page 13, introduces our review of business segment performance for the first quarter which focuses on the comparison and trends in sales and operational EBITDA.

Turn to slide 14. Pro Forma used for the business segment discussion will be to cover the first quarter sales performance on the left side or the right side of the page covering the first quarter EBITDA performance compared to last year. And then there was the highlight the evolution of our segment performance, we have also included a chart comparing the first quarter of 2012 to the fourth quarter and first quarters of 2011.

Starting with powertrain energy, our largest business segments serving the OE market and representing 50% of our OE sales. The significant items in the quarterly comparison include a 10% constant dollar sale increase as market share gains in all regions and market volume increases in all regions except Europe. However, even in Europe, market share gains more than compensated for the lack of production growth resulting in the net sales increase in Europe to 6%. Furthermore, of our four business segments, PTE has the lowest proportion of sales in the US and so has the largest impact from currency and in dollar sales in the rest of the world are roughly the same as those in US and Canada.

EBITDA increased by $7 million, a conversion of 23% on the increased sales, resulting in EBITDA as a percentage of sales increasing by 4/10 of a point. Volume increases in market share gains were partially offset by a negative mix impact, the majority of which occurred in Europe. However, productivity increased by $6 million as the company's continued investment in plant efficiency translated to increased EBITDA and significant year-over-year material cost savings of $6 million more than offset customer price decreases of $2 million. And as shown in the chart, powertrain energy continues to grow sales and EBITDA in absolute dollar terms and as a percent of sales.

The next slide 15 provides an overview of our powertrain sealing and varying segment and significant items include a 4% constant dollar sales increase due to market share gains in all regions and volume increases in North America and Asia. Market share gains in Europe were not quite sufficient to offset the claims in European production volumes resulting in a 1% drop in sales in that region. However, US, Canada and the rest of the world experienced both market share gains and production volume increases. EBITDA increased slightly to $13 million versus the prior year improving EBITDA margin by 1/10 of a point. The impact of lower volumes and adverse mix in Europe offset increases in EBITDA for market share gains and volume increases in other regions. And this segment continues to improve customer pricing with increases of $3 million year-over-year as well as material cost savings of $6 million and as shown on the chart, sales and EBITDA remain strong with an improving trend in EBITDA as a percent of sale.

The next slide 16 provides an overview of our vehicle safety and protection segment. The main items in the first quarter include a 9% constant dollar sales increase, the majority of which occurred in North America as sales in new conquest light vehicle programs commence. As a result, sales in US and Canada increased by 14%. New business wins in Europe more than offset production volume declines in the region resulting in a 2% year-over-year increase in sales in Europe. The rest of the world increased by 17% from market share gains and increased volumes. However EBITDA fell by $7 million and VSP is a segment most impacted by the lost absorption from reduced production for the aftermarket. As a result of this factor, EBITDA feel by $8 million. This decrease however was partially offset by net increases from market share gains and volume and as shown on the chart, sales continued to increase; however the impacts just discussed result in lower EBITDA dollars and margin versus the first quarter of 2011.

And finally, the global aftermarket segments on page 17. Sales fell 1% in constant dollar terms with a slight decrease in the US and a soft Europe offset by increased sales in the rest of the world as discussed previously. EBITDA decreased by $4 million to 65 million. Our continued outsourcing strategy to reduce material costs actually increased the EBITDA by $8 million and productivity improvements added a further $5 million to EBITDA. But these factors only partially offset the adverse mix and volume impacts discussed previously of about $60 million. And the chart at the bottom of page demonstrates that although the carrier of impact into 2012 of the mix shift well occurred last year, the EBITDA margin has still improved from the fourth quarter level of 10.2% of sales.

And finally on slide 18, we provided a summary of the first quarter consolidated cash flow. Cash flow from operations and investing activities was a net outflow of $112 million compared to a net outflow of $109 million in the prior year both reflecting normal first quarter working capital requirements. The cash outflow from accounts receivable actually reflects increased OE sale in both 2012 and 2011 with first quarter normally being hiring sales than the fourth quarter of previous year. The reduced outflow from inventory in 2012 versus 2011 reflects lower season, at seasonal aftermarket build in 2011, the absorption impact if which was covered earlier. Included within the assets and liabilities is a $25 million of partially insurance proceeds as a result of the Thailand flood in 2011 and although capital spending for the quarter of $113 million is high this does include significant payments for capital projects commenced late in 2011 and this leaves us with the liquidity of $850 million in cash and 0.5 billion in undrawn revolver.

That concludes our presentation and now operator I believe we are ready to open the lines for the Q&A. could you please give the instructions.

Question-and-Answer Session

(Operator Instructions). And your first question comes from the line of Patrick Archambault of Goldman Sachs. Please proceed.

Patrick Archambault – Goldman Sachs

Forgive me I dialed in a little bit late, so I may ask some stuff that you covered just on the structure of the two businesses but in terms of the segmentation could you maybe just elaborate a little bit, I think you said that you were looking to at least finalize the structure within the reasonable time period this year. What are some of the things that are the main attributes of different models that you are thinking about? Is it sort of a legal structure? Is it level of vertical integration because if I remember well 60-70% of the components you sell in the aftermarket are made by Federal-Mogul? What are some of the main characteristics that are sort of being debated back and forth in those various models?

Rainer Jueckstock

I understand your question and see this is virtually core of the discussions we have currently and Federal-Mogul to define some models. One extreme could be to have softer market as a pure sales and distributional organization and OE segment retains also manufacturing for the aftermarket and sees as one extreme of (inaudible) softer market might have all manufacturing operations which are currently producing parts for the aftermarket and we believe that somewhere in between these two extremes we will find the sweet spot for the segmentation between OE and aftermarket. When we discuss this in Federal-Mogul, one of the core element of this discussion is, we believe that a manufacturing operations should have a very clear focus is on the high volume or being a small better facility for the aftermarket. We will use this segmentation also to sharpen this profile in our manufacturing operation. We do have a large number of our plants producing for the aftermarket already focused as aftermarket manufacturing but we still have several plants in Federal-Mogul producing both OE and aftermarket and therefore somewhat in a compromised way and an unfocussed way between high volume and small betters. So that is one and I believe we will in the end find somewhat model for some of the product lines manufacturing will be in the aftermarket and for some of the product lines where we have less exposures for aftermarket manufacturing, we might retain this in the way side. We will establish in these upcoming months a solid news about some long-term contractual relationship between these two segments, so that we have a clear way forward for both. We want to create value by this segmentation and not ending up in short term activity. So the importance appears to establish long-term solid relationship for both segments because we intend to do business to get on to long-run. This question about legal separation is a question we currently don't have on our table. We have a clear step that means operational separation to be active by beginning of 2013 we know there is a lot of things going. We have to do afterwards call it IT segmentation, we have a lot of integrated systems see and Federal-Mogul is currently serving those. Sometimes in a suboptimal way because we have in some instances a warehouse distributional organization when in a similar ERP or in the same ERP system we run manufacturing plants. So there is a lot of things to do going forward and we are focused for the time being on operational segmentation in the best possible way.

Patrick Archambault – Goldman Sachs

My second question maybe more for Allan on slide 12; I guess you gave us a number of the components of the adverse mix in that 39 million headwind on the EBITDA side. Can you just give us a sense of how permanent some of them or how long lasting these are or if any of them are things that you think sort of in subsequent quarters might be less of a headwind and I guess I would have the same question for maybe labor inflation. This is turning in to a long question, but clearly you guys have been reinvesting very significantly over the last couple of quarters to service the growth on the OE side and ultimately we would expect those investment costs to come down but just still not really sure about when.

Alan Haughie

Okay, let me start with, if I can remember the question, let me start with discussion of the mix. If I were to rank these elements, the one that essentially is the closest to let's say being a one-off because it’s the result of low inventory builds is the absorption impact. And like I said, treat this $39 million as roughly being three $13 million buckets for simplicity sake. And that one is essentially represents a shift as it were in the level of output compared to last year. So that's a direct comparison not as it when underlying set of costs with any sense being incurred. So that's the closely per your definition essentially to being not a headwind.

The second factor is the aftermarket mix. Now as I mentioned, when I talked through the aftermarket profitability, our margins have actually improved, EBITDA margin in the aftermarket is higher than the first quarter than it was in the fourth quarter. So what we're really seeing is the carryover impact into 2012 compared to last year changes that occurred in the second half of last year. Those changes have already occurred and moving on from the fourth quarter to the first quarter we're actually seeing improved margins in the aftermarket. So again, I would say the transformation that I am referring to on these slides have largely occurred.

And then the third one is the issue of the OE mix and really this is a function of the rates of growth both in product line and in different regions. Here's an example. We've grown strongly year-over-year in the Brit countries and in Asia, but although the technology offering in those regions is on upward curve and that plays right into our wheelhouse, it's still generally lower than say, in North America and Europe. So those profits and prices let's say for the technology offering is slightly lower in Asia. So it’s a good trend because it's on its way up and as we move forward in that market, there is a slight mix shift because that area has grown at a greater rate than Europe and North America in this first quarter. So we're actually moving into an area that's going to demand greater technology and ultimately I believe have greater margins. So that summarization is a fact that impacted the mix.

The next question was on the productivity issue. If you actually were to look at these similar slides from last year, generally speaking our productivity was lower than our labor inflation so we actually had a negative on those issues. As we have gone through the first quarter we have begun to solve some of the issues that caused things like premium freight to be incurred as we maintain very high delivery levels. So the fact that we're actually starting to have productivity over and above labor inflation is actually a good sign in my opinion reflects positively.

Patrick Archambault – Goldman Sachs

Okay, and last just from me. The labor inflation, that is mostly like engineering cost going into support the business. Is that correct?

Alan Haughie

No, its underlying changes in wage rates and medical cost inflation, that kind of thing. It's underlying economic inflation on labor rates.


And your next question comes from the line of Brian Sponheimer from Gabelli and Company. Please proceed.

Brian Sponheimer – Gabelli and Company

Just a couple of questions here. If you could maybe give a little more color as to the relationship between the vehicle safety and performance volumes in those within the aftermarket and then potentially relate into where we are relative to last year as far as the inventory build for the midline products in the aftermarket. Basically how long volume headliner would you expect us to see.

Rainer Jueckstock

Okay, Brian I will try to answer the first question from the second question and Alan will assist me. The relationship between vehicle safety and performance business unit and aftermarket, we have in these vehicle safety and performance segment the product lines friction with above 50% aftermarket volumes. We have in these our (inaudible) operations which are virtually completely aftermarket. We have next as if from purely OE focused operations for system protection as well as for some mining operation but we have also fewer and lighting here in the US and some aftermarket operation. So VSP as a business unit has the greatest exposure to service in the aftermarket. So it’s a decline in the aftermarket in some of the segments as well our inventory management in the aftermarket where we came down in inventory has more impact on VSPs than any other product line we have in Federal-Mogul and the financial advice shown by Alan for the vehicle safety and protection isn't reflection of this high connection between the aftermarket business unit and VSP.

Alan Haughie

All right, in response to the second question and let me see if I can get this right, I think the first of the question was where are we in the evolution of our inventory within the aftermarket given the shift from premium to midgrade. The majority of the existing programs incurred that shift in inventory in 2011. So what I was trying to describe was that in 2012 through the first quarter we felt aftermarket inventory almost flat and that is improvement in our own logistics and supply chain offsetting any other changes. At this same point last year we built $40 million of inventory which is essentially now become a permanent part of the pipeline at this point in time because of the proliferation of parts required to serve that mid-grade market. So let's say last year the inventory build the curb, now we're running at a more stable level of inventory. There are still opportunities naturally as we mature in the mid-grade offering to reduce that level but at the moment the levels are relatively stable.

Brian Sponheimer – Gabelli and Company

Okay and just please refresh my memory, was there any inventory build in the second quarter no the aftermarket side similar to that in the first last year?

Alan Haughie

Last year, yes, there was.

Brian Sponheimer – Gabelli and Company

Okay and just one more quick question if I may. If I am looking at your operational EBITDA versus that of your segments, it looks like there was about an $8 million pickup in corporate expense. What would that have been an indicative of?

Alan Haughie

Of the increase in corporate expense?

Brian Sponheimer – Gabelli and Company


Alan Haughie

Yes, we did have a one-time charge of $6 million as consulting fees for our former CEO. So we took a charge of $6 million in SG&A for that. And importantly we also maintain very intensive focus on our recession developments. So as our OE sales increased, we do use that to fund continued recession development cost as Rainer mentioned earlier.

Brian Sponheimer – Gabelli and Company

Okay and that $6 million should be a one-time thing.

Alan Haughie


Brian Sponheimer – Gabelli and Company



(Operator Instructions). And your next question comes from the line of Michael (inaudible) Capital Management. Please proceed.

Unidentified Analyst

I just had two brief questions. One, what do you think the normalized capital expenditure number should be? And then secondly, this was sort of a drift in the first question, but in regards to the operational split of the aftermarket business from the OE business, is a spin-off of that business is under consideration currently. Thanks.

Rainer Jueckstock

For the first question, I will answer the question about normalized capital. We have in Federal-Mogul around a distinguish between what we call maintenance capital and growth capital. The maintenance capital is relatively stable amount we think about in the neighborhood of 240 to 260 million per year for both segments OE and aftermarket and then we add for the expansion of our footprint and our capacity for manufacturing but also for our infrastructure and distribution and R&D, we add additional amount of capital expenditure and depends on the growth rate, we want to add going forward season one could be smaller or larger and it depends on the regionalization of our footprint, it depends on new contractual wining. So I can't give you a long term number for this productive growth capital. Its maintenance capital is relatively stable one.

Second question about the aftermarket separation as I said, before we believe the markets and the customer requirements in these two segments also different that we will be in a better shape if we have dedicated management teams, if we have dedicated processes or for these two segments, therefore the intention is to create value by separating it and giving both segments more freedom to be fit in its processes for its special market and therefore a potential spin-off is not in our current picture we are separating seasonal and operational way.


And at this time there are no further questions in queue.

Rainer Jueckstock

Okay, again thank you operator. And once again, I would like to thank everyone for joining our Q1 2012 conference call. We look forward to your participation in our second quarter 2012 conference call. Thank you.


And ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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