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Federal-Mogul (NASDAQ:FDML)

Q2 2012 Earnings Call

July 26, 2012 10:00 am ET

Executives

David Pouliot - Director of Investor Relations

Rainer Jueckstock - Chief Executive Officer, Director and Member of Strategy Board

Michael T. Broderick - Chief Executive Officer of Global Aftermarket Division

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

Analysts

Brian Sponheimer - Gabelli & Company, Inc.

David L. Kelley - BB&T Capital Markets, Research Division

Michael Tanzer

Operator

I would now like to turn the conference over to your host for today, Mr. David Pouliot. Please proceed.

David Pouliot

Thanks, Francel. Good morning, and thank you for joining Federal-Mogul's Second Quarter 2012 Earnings Conference Call.

Before we begin, I would like to refer you to the company's Safe Harbor statement shown on this page of the presentation and included in our earnings press release filed this morning. Please consider my reference to the statement as notification of the applicability of these Safe Harbor provisions to today's call and the documents referenced during the call.

Please turn to the agenda slide. We will have speakers today that provide an update on our quarterly results and recent developments in the company. After their comments, we will finish with closing remarks and then open up the call for your Q&A.

Rainer?

Rainer Jueckstock

Thank you, David, and good morning to everybody on the phone. Before we go into the second quarter results of Federal-Mogul, I want to introduce Mike Broderick, the CEO of our Aftermarket segment. He finished his first month now with Federal-Mogul, and he's getting familiar with Federal-Mogul, its people, products and structure. Mike, your turn.

Michael T. Broderick

Thank you, Rainer. It's a privilege to be a part of Federal-Mogul, working with our great people and our brands, well, after 16 years in various roles with AutoZone and the past 3 years as the President of CARQUEST. My role as representing the customer has been a good fit so far for the past 5 weeks.

So well, with regards to this conference call, I do look forward in the future of communicating the success of our segmentation of the business and -- which includes our key product lines and of course, driving results.

So with that being said, Rainer?

Rainer Jueckstock

Okay. Thank you, Mike. If you turn to Page 5, we announced in March the segmentation of the company in 2 main segments. We are working hard on this process. We move the process towards product line. We want to keep together what needs to be kept together and to have led on strong segments with good play in the market.

By evaluating all of these options and Federal-Mogul's strength, during this process, we have no doubt that -- about our long-term stability and ability to compete. We have strong position in both OE and aftermarket on both powertrain and vehicular components, and we have incredible positions in all major global markets in our industry, combined with a disciplined approach to assess and execute our strategy. Federal-Mogul is a great company to invest even though markets are currently somewhat rough to us and our peers.

If you turn the Page 6, you have an overview about our main product lines and the main brands. We have -- you'd see in the aftermarket, we have leading brands in engine gaskets, chassis, wipers, ignition and friction. This is complementary to our position in the OE market, where, with most of our engine components and our friction business, we have the #1 or #2 position in the world. Our brands and our core product are telling a compelling story in all markets, and we are committed to create, based on these assets, further value.

With having said this, on Page 7, we move into an overview about Federal-Mogul in quarter 2 of this year. We had sales of $1.7 billion, that is around 1% growth in constant dollars. So OE sales was $1.1 billion, was up 3% based especially on the strong demand of our OE customers here in the U.S. The U.S. sales, in particular, was up by 9%. The sales in our operations in the BRIC countries, Brazil, Russia, India, China, and similar, were up 7%. Unfortunately, the European markets, sales declined by 4%, but we see our position still strengthening as the market in Europe move to faster downturns in our fields.

So global aftermarket in quarter 2 was impacted, especially in the U.S., with mild winter. The mild winter requires less replacement for our wiper business -- wiper blades and also, for some of our chassis components, and we see, similar to the OE business, a softer market in Europe, but solid growth in the rest of the world.

Federal-Mogul had to report, in quarter 2, a $59 million net loss. This includes $100 million noncash impairment charge, primarily due to our brake friction business intangible assets. EBITDA was $159 million. That is heavily impacted not only by volume in Europe, but also by negative currency.

And especially the weakness of the European market and its currency is hurting today, but the weak euro, in the long run, will potentially help us to boost export out of Europe and definitely our customers in the OE, car manufacturer, truck manufacturer and engine producers in Europe will benefit from the weak euro currency with a solid position for export markets. We are well positioned as a company to participate on this as we have -- with all major OEMs in Europe who are exporting into China and into the U.S. and into other markets, we have a strong position with them.

SG&A and cash outflow are consistent with prior quarters due to the growth, technology investment and our aftermarket commercial programs. We announced in quarter 2 the acquisition of the BERU spark plug business to strengthen our core ignition portfolio, especially in Europe. We have still a strong liquidity of $1.2 billion. And with this, we are well positioned for upcoming opportunities.

In quarter 2, we had 2 main events additional to the day-to-day business. The first one, and here we are on Page 8, we had to announce -- or we announced the restructuring program to realign our footprint to the global demand on friction and wipers. We implement a $60 million restructuring program, which will involve the downsizing and the closure of several sites, mainly in the U.S.

In order to be able to compete in the long run in both OE and aftermarket, we need to optimize our manufacturing footprint, and we had to rebalance the capacity available in high-cost versus low-cost countries. And we are also to make some adjustments in capacity where overcapacity was placed. With this, we moved capacity, especially out of our brake friction and wiper manufacturing, to low-cost countries, including into a newly acquired friction plant in Mexico.

The program will improve cost competitiveness on friction and wiper products, increase our low-cost plant capacity utilization, and we recorded, out of the $60 million total program, around $7 million already in quarter 2. We anticipate the employment severance capital investment and also, restructuring costs out of this program will be booked over the next 18 months. That's the duration of the program.

The second major event in quarter 2 for Federal-Mogul was the announcement of the acquisition of the spark plug business of BorgWarner under the brand name of BERU. This is a business with approximately $80 million in sales. You see on Page 9 some details about it. So the BERU brand, especially in Europe, for spark plugs is a well-recognized brand both in automotive and industrial ignition technology. We acquired 2 plants in Europe to be able to produce close to our OEMs in this region.

And Federal-Mogul adds capacity to its existing spark plug capacity in the size that we have now, it's $350 million annual capacity. And we are clearly establishing ourselves as the #2 on the global spark plug market. This acquisition provides Federal-Mogul with additional diverse customer relationship in all markets with automotive OE aftermarket, as well as industrial spark plugs, and we are quite positive about this acquisition.

It's a clear element of executing our product-focused strategy. Spark plug is one of the core product line in our portfolio. We are going to invest, first, on not only in this acquisition, but also in technology. And if we have opportunities for market consolidation -- further market consolidation, we will try to pursue them. And definitely, we'll invest, first, in our plant and manufacturing footprint to improve productivity.

With this, I'll hand over to Alan to go more into details of the financial results.

Alan J. Haughie

Thanks, Rainer. This morning, I will be discussing Federal-Mogul's second quarter 2012 earnings, which will be filed later today on Form 10-Q with the SEC.

Turning to Slide 11. Sales fell 5% year-over-year to about $1.7 billion. However, negative exchange impacts accounted for about 6 points of the decline. In simple terms, approximately 60% of our sales are outside of the U.S., and there was a general weakening of international currencies against the dollar of about 10%. So in constant dollar terms, sales grew by 1%.

Now this constant dollar growth of 1% reflects OE sales growth of 3%, offset by 3% decline in the aftermarket. And given that 2/3 of our sales are to OEMs, the growth in OE sales slightly offset the decline in aftermarket sales. Furthermore, this 3% growth in OE sales reflects market share gains on top of a global production market that was, for Federal-Mogul, essentially flat. The aftermarket sales decline of 3% comprises a drop of 4% in the U.S. and Canada, a 5% decline in Europe, with a partial offset from 5% growth in the rest of the world sales.

Now some comments on regional sales. In the U.S., we've seen strong OE growth, the result of both vehicle production increases and the market share gains. In the aftermarket, U.S. sales were weaker due to a very mild winter; carryover, largely from 2011 of changes in the mix of products; dampening the overall U.S. sales increase to 2%.

In Europe, we've experienced the second straight quarter of lower vehicle production than the prior year. Increased sales from new program launches in all segments were more than offset by this production volume declines. And combined with a 5% drop in aftermarket sales, as a result of the weaker European economy, overall European sales declined by 5%. The largest proportional growth occurred in the rest of the world, including the BRIC countries, up 15% and 6%, respectively.

Slide 12 provides information on our constant dollar year-over-year OE sales performance compared to year-over-year changes in light and commercial vehicle production by region. At a regional level, it is actually difficult to perfectly correlate vehicle production growth rates to our OE sales given that many of the engines manufactured in one region are destined for vehicles assembled in a different one.

However, given Federal-Mogul's relative presence in these and other known automotive markets, a simple growth rate expectation for Federal-Mogul's OE sales for the second quarter versus last year due to market factors alone would be set essentially flat. So as demonstrated on the slide, our OE sales growth of 3% continues to be at or above the production growth rates of the underlying markets based on the local market data sources.

Now please turn to Slide 13 for more details on our second quarter earnings performance. The sales decrease of $96 million comprises $18 million of constant dollar growth, offset by $140 million of adverse currency movements. Gross margin decreased by $44 million to $255 million, including unfavorable currency impacts of $16 million. Other than exchange, the main margin decline is primarily the result of changes in regional market and product mix. These factors will be discussed in more detail in a moment. However, the result is a year-over-year decline in the gross margin percentage of 1.6 points.

SG&A remained similar to last year, but as a percentage of sales increased by 0.6 point. Restructuring expenses increased by $8 million, the majority of which relates to the recently announced programs in the friction and wipers manufacturing businesses with the closure and downsizing of several high-cost aftermarket manufacturing locations.

And we recorded a noncash impairment charge of $119 million for the quarter, including $100 million associated with our friction product line intangible assets. The friction business continues to be impacted by lower volumes and adverse mix. And in the light of the associated restructuring plan, the company reassessed the value of the related goodwill and intangibles during the quarter, resulting in the impairment.

However, we reported a tax benefit to the period of $29 million compared to our prior year tax charge of $17 million. This improvement primarily relates to the release of uncertain tax positions due to audit settlement in the U.S. of $19 million; valuation allowance releases in Germany, which continues to be profitable, of $11 million; a $5 million tax benefit relating to a special economic zone incentive in Poland; and the credit due to impairment charges of $7 million.

EBITDA, however, decreased by $41 million over the quarter to $159 million. This will be covered in more detail later in the presentation, but largely reflects the decline in gross margin. In the absence of the impairment charges, on which the tax impact is $7 million, net income would have been $53 million for the quarter.

On Slide 14, we have a reconciliation of our profit measure, operational EBITDA to our net income for the period. As just mentioned, we realized EBITDA of $159 million in the second quarter of 2012 compared to $200 million last year. The largest change to the reconciliation of the items previously discussed, namely, the change in income taxes and the restructuring and impairment charges.

On Slide 15, we provide a summary of the second quarter consolidated cash flow. Cash flow from operations and investing activities was a net outflow of $99 million compared to a net inflow of $22 million in the prior year. And this is largely a reflection of the working capital uses in the aftermarket, plus continued capital investment in support of current and future growth. This leaves us with liquidity of $700 million of cash and $0.5 billion in undrawn revolver.

Slide 16 represents the year-over-year roll-forward of our second quarter sales and 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. Before discussing the components in detail, the essence of our year-over-year EBITDA decline is negative product mix, both in OE and aftermarket, coupled with lower-cost absorption due to lower year-over-year inventory build for the aftermarket.

Specifically, with regard to sales, about $75 million or 4% growth in sales is the new business wins in all segment and in all regions, with slightly higher proportional gains in Europe. As mentioned previously, the economic conditions in Europe played a major role in the year-over-year sales evolution, with lower production of both light and commercial vehicles, as well as the generally weak economic climate impacting the aftermarket.

In North America, aftermarket demand was impacted by the mild winter, and price continues to be a significant driver of consumer spending decisions. These adverse volume impacts were partly offset by increases in OE volumes in Asia and North America, resulting in a net sales volume decrease of $57 million. And the remainder of the sales movement is primarily exchange of $112 million.

Turning to EBITDA. The impact of the market share gains was an increase in EBITDA of $18 million, a conversion on the increased sales of 24%. However, EBITDA decreased by $64 million, with almost 3/4 of this change relating to adverse mix impacts, with the remainder of the decrease, about $16 million, being the direct impact of lower volumes. So similar to the first quarter of this year, the mix impact of about $48 million can roughly be divided into 3 equal pieces.

Firstly, within the OE business, there was a market-driven geographical mix shift away from the more technically demanding and higher-margin European platforms, including a shift away from light vehicle diesel towards gasoline, a trend exacerbated by the fact that gasoline engines are dominant in the U.S. Secondly, the U.S. aftermarket consumers continue to favor lower-priced products. And thirdly, during the second quarter 2011, we built around $60 million more of aftermarket inventory than we have done this year. And this change is reflected in lower comparative year-over-year cost absorption.

Material costs have improved significantly year-over-year, resulting in an increase in EBITDA. That's a pricing of $21 million. And the negative impact of exchange on EBITDA was $11 million, bringing EBITDA to $159 million.

Page 17 introduces our review of business segment performance for the second quarter, focusing on the comparison and trends in sales and operational EBITDA.

Turning now to Slide 18. The format used for the business segment discussions will be to cover the second quarter sales performance on the left side of the page, with the right side of the page covering the second quarter EBITDA performance compared to last year.

The 3 OE segments show similar things, with light and commercial vehicle production in Europe being lower and increased vehicle production in the U.S. and the rest of the world, with the greatest proportional growth in regions outside of Europe and North America. All of these segments have been hit by the adverse mix to some degree.

Starting with powertrain energy. The significant items in the quarterly comparison include a negative impact on sales due to exchange of $47 million or 8%; a 3% constant dollar sales increase, with market share gains in all regions; and market volume increases in all regions except Europe. EBITDA, however, decreased by $12 million, $7 million of which related to negative exchange. And although we benefited from lower material costs, this impact was more than offset by adverse price and mix. These factors resulted in a decrease in EBITDA as a percent of sales of 1.4 points.

The next slide, 19, provides an overview of our Powertrain Sealing and Bearings segment. The significant items in the second quarter comparison include a negative impact on sales due to exchange of $22 million or 6%; flat constant dollar sales, with increases from market share gains experienced in all regions sufficient to offset the impact of lower vehicle production in Europe. EBITDA was flat year-over-year, with material cost savings and customer price increases offsetting the adverse mix. And this resulted in an increase in EBITDA as a percent of sales by 0.7 point.

The next slide, 20, provides an overview of our Vehicle Safety and Protection segment. The main items in the second quarter comparison include a negative impact on sales due to exchange of $17 million or 7% and a 9% constant dollar sales increase. This business segment had market share gains across all regions, with the U.S. and Canada up 20% due to significant new programs in friction and systems protection. And the rest of the world was up 26%. However, in Europe, volume declines more than offset new business wins resulting in a 7% constant dollar decline in the region. EBITDA fell by $16 million, including $3 million in negative exchange.

Now VSP is the segment most impacted by the lost absorption from reduced production for the aftermarket. And this contributed approximately $12 million of the EBITDA decline, resulting in a 6-point decline in EBITDA percentage. But this is the result of much improved inventory management compared to last year, as will be shown in the first half cash flow.

And finally, the Global Aftermarket segment on Page 21. The negative impact on sales due to exchange is $28 million or 4%. In constant dollars, sales fell 3%, with a 4% decrease in the U.S. and Canada and a 5% decrease in Europe due largely to the economic climate. However, our aftermarket product portfolio continues to expand in the rest of the world, resulting in a 5% constant dollar increase and representing 15% of total sales for the period.

EBITDA decreased by $14 million to $60 million, with $4 million of the decline relating to negative exchange. Furthermore, our continued outsourcing strategy to reduce material costs increased EBITDA by $8 million. Productivity improvements added a further $5 million to EBITDA. But these factors only partially offset the adverse mix and volume impacts discussed previously of $23 million.

Now please turn to Slide 22 for more details on our first half earnings performance. The year-over-year sales decline of $56 million comprises $159 million of adverse currency partly offset by $103 million or 3% of growth in constant dollars. And this includes a constant dollar increase of 6% in OE sales and a 2% decline in aftermarket sales. The gross margin decline of $47 million includes $24 million due to negative exchange. And as with the second quarter, the principal cause of the remaining margin decline is regional market and product mix.

SG&A expenses increased by $13 million, including $6 million of increased U.S. pension expense and about $4 million of increased U.S. medical expenses. The increase in restructuring reflects the charge taken in Q2 on the recently announced programs in the friction and wipers business, as well as the program implemented in the aftermarket in the prior quarter to realign our distribution and sales force in North America.

The impairment charges for the first half reflect the charge taken in Q2. This resulted in a net loss year-to-date of $26 million. EBITDA declined by $51 million to $327 million, and $20 million of this change relates to unfavorable exchange.

On Slide 23, we have a reconciliation of our profit measure, operational EBITDA to our net income for the period. As just mentioned, we realized EBITDA of $327 million in the first half of this year compared to $378 million last year. The decrease in income tax expense and the impairment charge largely reflects the second quarter items previously discussed.

And finally, on Slide 24, we provide a summary of the first half consolidated cash flow. Cash flow from operations and investing activities was a net outflow of $211 million compared to a net outflow of $87 million in the prior year. Similar to the quarterly analysis, this is mostly due to the working capital uses in the aftermarket, combined with continued capital investment in support of current and future growth.

However, it should be noted that the year-over-year improvement in inventory build of $100 million, and that is a $40 million build this year compared to the $148 million build last year, is entirely in the aftermarket. And it is this significant reduction in the inventory build that is the source of about $30 million last year via absorption in gross margin for the first 6 months of the year.

And this leaves us with liquidity of $700 million in cash and $0.5 billion in undrawn revolver.

That concludes our presentation. Now operator, I believe we are ready to open the line for Q&A. Could you please give the instructions?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Brian Sponheimer.

Brian Sponheimer - Gabelli & Company, Inc.

A few questions. One, I want to go in from a strategy perspective into where we are now 3 months after the announced changes to your business structure and where you see -- you foresee the next 6 months going here.

Rainer Jueckstock

Okay. Brian, we'll try to answer your question. When the board announced the separation in OE and aftermarket, we started this deep dive into what other segments we have in these 2 main markets. And we are currently moving in 2 directions, as the separation will be done in a way that we have, on one hand -- on one side, a pure powertrain business focused on OE and OES. That will include piston rings, bearings, sealing operations as well, system protection, ignition and valve seats and guides. On the other side of the aisle, we will have our global aftermarket activity embedded in these. We will have the total friction business, which is large unit with close to $1 billion sales on a global basis. We will have our wiper activities embedded in this business segment as well. Our chassis activities in this segment, and so this segment will cover for friction, wipers and chassis. Both OE and aftermarket activities, we will keep together with -- had to be kept together. And we move towards what we call operational independence of these 2 segments by the beginning of September. We are currently fine-tuning the organization needed to run Federal-Mogul's 2 main segments in these 2 -- in this structure. And we will use the next 3 months to consolidate the organization around these 2 main segments.

Brian Sponheimer - Gabelli & Company, Inc.

Do you foresee -- at that point, is the ultimate goal to spin one business to the other to operate independently or to hold both -- is the board's plan to hold both in-house or monetize one by one way or the other?

Rainer Jueckstock

Our picture is that we have to get separated in order to provide better management structure and better way to focus on our global customers. It's not the intention to do this separation in order to sell 1 of the 2 segments.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. Going on from an operations perspective. Michael, welcome. You have a big task at hand. We're looking at a businesses now operating 350 basis points below where it was in 2009. I guess, what's been done that has changed the profitability of the aftermarket? Where do you see the easiest way to get that margin back up to the mid-teens? And essentially, when does the bleeding stop?

Michael T. Broderick

I think that we've already started with the announcement of moving to low-cost countries. That's probably the most I'll comment from a 5-week perspective at this time. But I understand your perspective on when the bleeding stops. That's going to be the challenge for my business segment, obviously, put things in place so that it will stop. And I'll be able to communicate that to you in the quarters -- in the future.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. As we're thinking about use of cash going forward, you made the BERU acquisition this quarter. You'll be running up against some debt maturities beginning next year. How are you thinking about use of cash and as it relates to your balance sheet over the next 12 to 18 months?

Rainer Jueckstock

As you said, we do have solid liquidity, and our strategy is clearly to be focused on our core business. And if in this core business, if we have opportunities to acquire assets and companies fit into this core business, we will do it. We have several projects on the way. But you know how it is in M&A. You need a lot of ideas before you have a project which really comes to a deal. And so our intention is to truly use liquidity we have to strengthen the business going forward, both for organic growth. As well, if opportunities show up, there's acquisition.

Operator

Your next question comes from the line of Bret Jordan.

David L. Kelley - BB&T Capital Markets, Research Division

This is David Kelley in for Bret. Just a couple of quick questions. I noticed you guys mentioned you have market share gains in virtually every segment in the quarter. And I just wanted to know, are you seeing any pressure from outsourcing currently?

Rainer Jueckstock

On the OE business, outsourcing is not a strategy which is pursued by us or by our customers. The customer want to have production, engineering, customer service all in one hand. And we truly, on both powertrain as well as on the friction side of the business, we gained market share by executing this strategy with close proximity to our customers and make -- we see, with our technology and with our customer proximity, good opportunities going forward to gain further market share.

David L. Kelley - BB&T Capital Markets, Research Division

Okay. And on the aftermarket, is it similar situation?

Rainer Jueckstock

Yes, that is a similar situation. We do not have what I would call a plain outsourcing strategy, yet there are products and batch sizes which are fit for our organization and our manufacturing footprint and others we can buy more in a more efficient way from third parties. But this is case by case. It's not our strategy to get out of manufacturing for the aftermarket.

David L. Kelley - BB&T Capital Markets, Research Division

Okay, great. And then just going back to some of the headwinds you're seeing currently with mix shift, is this something that we're seeing -- is this a onetime impact? Or are you your expectations for this similar going forward end of -- the end of fiscal year '12 and end of fiscal year '13 as well?

Rainer Jueckstock

We see -- and here, I'm focused on Europe. So first, Europe, powertrain, we see that the customers are quite price-sensitive, that companies are buying lots of smaller fleet cars than they bought in the past. And we see also a trend towards small engines instead of, let's call it, 8-cylinder engines. We see a trend towards 6- and 4-cylinder engines. And even the first high-volume 3- and 2-cylinder engines cars on the market. The content per cylinder is growing up in this case. But still, an 8-cylinder engine provides us just more sales opportunities than with the 3-cylinder engine. That's for sure. What we see also from a regional market shift, the contents of cars in China, India and Brazil are significantly lower than the content of cars we have in Europe or the pickup trucks in the U.S. that provide much more content. And so car volumes alone are not perfect measure for the trend in the market because we see in countries like India or China the content per vehicle is significantly lower than what we have in North America. So it's a mix. We will have an impact going forward, both regional, as well from a product point of view. And on the aftermarket, without going into details, I think Alan highlighted that we see price sensitivity of the end customers as the main driver in the aftermarket going forward. And it's our opportunity to provide the right value proposition for this trend in the market.

David L. Kelley - BB&T Capital Markets, Research Division

Okay. Great. And then just one last question, just going back to the press release, noticed there was a comment that inventory reduction on the aftermarket side at certain distributors are somewhat impacting sales. Just wondering if you would comment maybe on the magnitude of the reduction that you're seeing in the market currently.

Alan J. Haughie

So we -- the comments in our press release about inventory. I'm sorry, I'm a little confused by the question. Oh, the European .

David L. Kelley - BB&T Capital Markets, Research Division

Yes, some of the European...

Alan J. Haughie

By the European customers. I'm sorry. Yes, I mean, this -- you have to bear in mind that a lot of European vehicles are manufactured to order, not as it were filling car lots as it goes in North America. So what we see at the moment is that the number of our customers, yes, have announced declines in their production schedules, and they've been very public about this. And there are a couple of isolated impacts. Essentially, when you look at the, let's call them the reliable sources that project production demand across Europe and the world, these are essentially in line with those factors. So what I'm really commenting on is what we've seen in our results today, for example, the lower production in Europe, we do expect to continue for at least the remainder of this year based on the outlook that we are getting from our customers, yes…

Operator

And your next question comes from the line of Bill Kenney [ph] .

Unknown Analyst

I just had another question on the balance sheet. I mean, your revolver comes due in December of '13. So it's going to current at the end of this year. The term loans come due pretty soon after that. I'm just wondering to what extent you would look to come back to market to refinance those, while market is open.

Alan J. Haughie

Well, a couple of things. At the moment the revolver is undrawn. So we have nothing drawn on the revolver. And the honest answer is that we are looking, let's say, opportunistically at the right time. So it is highly likely that at some point within the next year that, yes, we'll be looking to the market.

Unknown Analyst

Okay. And then on working capital, I mean it was a large use of cash in the first quarter. It was a use of cash last year. To what extent -- or can you comment on what it might be do in the second half?

Alan J. Haughie

Yes, I think the number of the factors, particularly in accounts receivable will -- we should be plateauing between, I think, for the second half of this year. That's about as much as I'm willing to say.

Operator

And your next question comes from the line of Mr. Michael Tanzer.

Michael Tanzer

Just a quick question on CapEx versus free cash flow generation. Do you expect the second half of the year to be similar in terms of CapEx spend? And then when do you expect to return to a normalized level of CapEx that's closer to your previously guided maintenance spend? And then finally, you've commented in the past that the incremental capital expenditures are going to contribute to growth on the OEM side. So when can we sort of expect to see that above the volatility in the market place?

Rainer Jueckstock

We do not expect to see the same level of CapEx in the second half. It will slow down. The CapEx is not divided by quarters, so we work on projects customer by customer. And our current forecast is that we will have a somewhat lower level of CapEx spend in the second half of the year compared with the first half of the year. We truly believe that the CapEx we spent in the last year is helping us to gain some market shares. We reported the volume increase on the OE side. We see in several markets is the result of the investments in capacity, investments in new technology. And we continue to pursue opportunities where our customers are keen to take on our technologies in their engines and their cars. And so the CapEx spending is as far as -- to a large extent, an opportunity to go with our customers and to gain market share and to create a solid foothold.

Michael Tanzer

So when do you think you will be able to generate excess free cash flow?

Rainer Jueckstock

We do have very positive free cash flow beyond and above net working capital currently already. And our CFO comment on some net working capital, and we expect that some of the outflow will plateau into the second half of the year.

Operator

I would now like to turn the conference back over to Mr. David Pouliot for closing remarks.

David Pouliot

Thanks, operator. And once again, we'd like to thank you for joining our Q2 earnings conference call and look forward to your participation on our third quarter call later this year. Thanks.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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