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Federal-Mogul Corporation (NASDAQ:FDML)

Q2 2008 Earnings Call Transcript

July 24, 2008 9:00 am ET

Executives

David Pouliot – Director of IR

Jose Maria Alapont – President and CEO

Jeff Kaminski – SVP and CFO

Analysts

Patrick Archibald – Goldman Sachs

Craig Perry [ph] – Swissray [ph]

Fred Taylor – MJX Asset Management

Nicole Torraco – Babson Capital

David Miller [ph] – Allen Associates [ph]

Operator

Good day, ladies and gentleman, and welcome to the Federal-Mogul Corporation second quarter 2008 earnings conference call. My name is Silvana. It will be my pleasure to assist you. (Operator instructions)

I will now like to turn the presentation over to your host for today’s call, Mr. David Pouliot, Director of Investor Relations. You may proceed.

David Pouliot

Thank you, Silvana. Good morning and thank you for joining the Federal-Mogul Q2 2008 earnings call. Before we begin, I would like to refer you to the company’s Safe Harbor statement shown on page 2 of the presentation and included on the earnings press release filed this morning. Please consider my reference to this statement as contained in these documents as notification of the applicability of these safe harbor provisions to today’s call and the documents referenced during the call. Please turn to slide three.

Our speakers for today are Jose Maria Alapont, President and Chief Executive Officer; and Jeff Kaminski, Senior Vice President and Chief Financial Officer. Both gentlemen have some materials to share concerning our company’s strategy and our quarterly results. And after their prepared material, they will be available for questions. Please turn to the agenda slide.

We will begin with Mr. Alapont providing a brief overview of the company and presenting some key financial and operating highlights for the second quarter. He will also discuss Federal-Mogul’s revenue diversity, strategic business initiatives and Q2 accomplishments. Following the overview, Jeff Kaminski will cover the Q2 results. Mr. Alapont will have a few summary comments, and then we will open up the call for Q&A. Please turn to slide five. Mr. Alapont?

Jose Maria Alapont

Thank you, David. We are really pleased to report our record second quarter revenue and strong net income which demonstrates the benefits of our solid operating performance combined with our market, customer and product diversification. Our quarterly revenue increased by 13% to almost $2 billion, up from $1.8 billion in the second quarter 2007. This is the eight consecutive quarter of year-over-year increase of sales.

The gross margins improved by 23% to $396 million or 19.8% of sales as compared to $322 million in the previous year. SG&A was reduced to 10.6% of sales compared with 12.1% in the second quarter 2007. Operational EBITDA increased 21% or $45 million to $257 million from the $212 million in 2007. The net income rose sharply to $90 million or $0.19 per share compared with the $4 million in the prior year. Our cash flow remained strong during the quarter and added to our overall strong balance sheet and available liquidity of about $1.3 billion.

Let’s move now to slide six and talk about the second quarter business development. We completed several actions during the quarter to support customers and to build a strong foundation for the future. During the quarter, we began another significant cross border core development program with one of our major customers focused on fuel economy and CO2 reduction to optimize the next generation of engine designs. We have seen where our development program is with other major customers around the globe.

Our innovation is also focused on developing environmentally friendly products. We recently have developed and introduced a new material for insulation applications that utilized recycled materials which were previously not usable. We also finalized a contract with a major Chinese wind turbine manufacturer to supply bimetallic self-lubricating industrial bearings. We provide these products in several applications into the power generation industry.

To support our emerging markets expansion, in particular Brazil, Russia, India, and China, known as the BRIC countries, we are building a strong infrastructure. An example of that in Brazil is the recently completed successful launch of the new Powertrain component facility in Araras enabling our customers to begin their production activities ahead of schedule.

Further evidence of our efforts in the BRIC markets includes introduction of our wiper and brake pad portfolio in the Russian market where we already have a growing aftermarket presence. We will be presenting this and other major Federal-Mogul product lines in the Moscow Motor Show in August.

Let us move now to slide seven and I would like to share with you how leading technology and innovation drives differentiation. As we have stated, our leading product portfolio is designed to support customers to be successful in their markets. Current customer challenge includes fuel economy, CO2 reduction, engine downsizing, well, Federal-Mogul, we have leading technologists and product designers to develop optimum power cylinder solution for engine downsizing and to improve fuel economy and reduce CO2 emissions.

We are also a leader in the introduction of lead-free bearings and other innovative bearing designs that reduce friction and therefore improve as well fuel economy and CO2 emissions while simultaneously improving durability and optimizing material costs.

Our Vehicle Safety Team has the world’s leading market share brake friction business and continues to develop next generation solutions to improve vehicle safety by reducing stopping distances yet delivering high durability, reducing noise and impact on the environment.

Finally, we offered to our aftermarket customers' product designs and chemical [ph] support that simplify and optimize their repair process and ensure their original equipment quality replacements all from the same source, Federal-Mogul.

If we move now to the slide eight, I would like to show with you the second quarter sales by region. The global market is an integral part of our strategy for long-term success and profitability. We are diligently working to increase business growth in key areas of the world like China, India, Eastern Europe, Russia, and South America while strengthening our market leadership in North America and Europe. You can see from the data that the trends of increased revenue coming from markets outside of US and Canada. In fact, Europe and the rest of the world represent more than 60% of Federal-Mogul sales during this quarter and it was a similar thing during the first quarter.

Let us move now to slide nine and I would like to talk about the achievements that we did during the second quarter. We achieved sales growth of 23% in Europe and 50% on the BRIC countries, as you know, Brazil, Russia, India, and China during the second quarter. US and Canada sales were flat, but as you know as well, we are comparing to a downturn on these markets. We reduced our SG&A expenses on a quarter-over-quarter basis, yet we remain committed to product development and innovation because research and development is one of our points of strength and differentiation in a source of creativity to meet competitive market challenges.

Key to our competitiveness is the ability to meet customer requirements for innovation but also market requirements to reduce cost while improving overall performance. Our team has continued to do a good job of developing alternatives to allow the company to offset material price escalation without impacting performance and neither service to our customers.

The challenge to reduce energy and material cost goes throughout the organization and we are accelerating our programs to improve the company’s energy efficiency and to reduce our environmental impact.

Let me conclude this part of the presentation and turn to slide 10 because I would like also to share with you how revenue diversity drives success. With global programs across all major markets, customers and product categories, our revenue has a solid base and a low risk of profile. Our extensive diversification provides more stable revenues and operating performance and the ability to offset situations in one market by capitalizing on growth in the others. In fact, we supply products to more than 215 vehicle platforms in over 700 Powertrain programs.

No single customer accounts for more than 6% of our revenue. We generate over 10% of our 17% [ph] of ROE business from the commercial and industrial segments. We’ve continued to develop leading technology and highly engineered products for both, the automotive and the commercial and industrial customers including some of those that I mentioned earlier. We believe that it is our diversification that distinguished Federal-Mogul. This is the primary objective of our global sustainable profitable growth strategy and we are seeing the results and the progress of that.

Now, Jeff will dive deeper into the numbers to give you a better picture of our strong performance for the quarter and year- to-date. Jeff?

Jeff Kaminski

Thank you, Jose Maria. This morning, I will be covering Federal-Mogul’s second quarter financial highlights including a review of the sales and gross margin performance of our five business units. I will also comment more briefly on the company’s year-to-date performance. In addition, as a point of information, later today we will file our 10-Q with the SEC containing the full details of our second quarter and year-to-date results. Now, please turn to slide 12 for more details on our second quarter earnings performance.

Starting with revenue, as mentioned by Jose Maria, we had record sales of $2 billion representing the eighth consecutive year-over-year quarterly increase. The $232 million improvement versus prior year will be explained in more detail later in the presentation, but it was primarily due to European OE sales growth, expanding sales in BRIC and the rest of world market, and domestic aftermarket growth. We realized a healthy 23% increase in gross margin contributing $74 million and 1.5 points of improvement versus the same prior year period.

Our SG&A expenses reflect negative currency impacts of $11 million which were more than offset by reduced pension expense of $8 million and $4 million of other reductions. The net result was a $1 million improvement or 1.5 points in percent of sales terms. Interest expense improved by $10 million resulting from the new 2008 capital structure consisting of the $3 billion of term loans at very favorable terms and rates. This improvement was net of $5.5 million of non-cash amortization relating to the debt discount adjustment. The increase in amortization expense is caught up [ph] on the schedule is associated with higher intangible asset balances established as part of the fresh-start reporting.

Chapter 11 costs were down to $3 million in the quarter, a $25 million reduction. The $13 million improvement in restructuring charges compared to prior year was mainly due to the heavy activity experienced during the second quarter of 2007. The negative year-over-year variance in other is primarily due to the non-recurrence of the $7 million asset gain recorded in Q2 ‘07. And then finally, at the bottom line, we had a very solid increase of $86 million in net income resulting from the above factors combined with a more favorable second quarter 2008 effective tax rate.

On slide 13, I would like to provide a reconciliation of net income as reported to our operational profit measure. Federal-Mogul management believes that operational EBITDA most closely approximates the cash flow associated with operating earnings of the company and we use the operational EBITDA to measure the performance of our business segments. This chart walks through a definition and reconciliation of operational EBITDA and I will make a few comments on individual line items starting with Chapter 11 costs.

This item represents current quarter emergency-related expenses including legal and administrative fees for creditor distributions and professional fees relating to fresh-start reporting. These costs are excluded from our operational EBITDA measure. Restructuring charges are also excluded as we treat them as investments back into the operations, supporting improvements in future earnings. These charges are evaluated on the same basis as CapEx spending and acquisitions, with the same required payback and return hurdle rates.

Interest expenses and taxes are obviously excluded from EBITDA. Depreciation, amortization, and other non-cash charges to earnings are also added to that. At the bottom line, we realized a 21% increase in operational EBITDA reaching $257 million for the quarter which is $45 million higher than the same period of the prior year.

Slide 14 represents a roll forward of our EBITDA from the second quarter of 2007 and the second quarter of 2008. I will make a few comments on individual sections of the waterfall moving from left to right. In relation to volume and mix, overall there was a minor impact due to reduced market volumes with only a net $7 million decline in market volume sales on a global basis. Unfavorable product mix within the US aftermarket and varying levels of sales growth within the four business units serving OE customers are kind of promotes for the $20 million variance versus the prior year.

We achieved a solid conversion on the $108 million of market share gain and an average EBITDA margin of 31% contributing $33 million to the quarter-over-quarter variance. The $6 million negative pricing impact was predominantly due to contractual price reductions contained in our OE contracts, partially offset by material recoveries and escalators. We also had $3 million of favorable price impact in the global aftermarket.

We had strong improvement in productivity during the quarter especially considering that this number is net of labor and commodity inflation of an estimated $26 million negative. Therefore, gross productivity and reductions in materials and services contributed about $55 million incremental to the bottom line versus Q2 ‘07. The positive $9 million EBITDA contribution from exchange and other was primarily due to reduced pension expense of $8 million. The exchange impact on EBITDA was minimal in the quarter due to transaction exchange offsetting translation.

Next, reviewing the same slide that Jose Maria discussed earlier, I will provide a few more details of our sales by region. Overall, sales were up 13% versus the same period in 2007 with exchange and market share growth each accounting for roughly half of the increase. You can see the trend of increased revenues coming from markets outside of the US and Canada, with Europe and rest of the world now representing more than 60% of the company’s total sales.

European sales rose to nearly $1 billion for the quarter with an increase of $176 million or 23% versus the prior year. Our rest of the world sales had strong growth of $58 million or 28%, with $37 million of the increase coming from the BRIC markets which increased by 50%. US and Canadian sales remained essentially flat despite a market downturn with share gains in the aftermarket segment offsetting OE volume declines.

Moving to slide 16, this is a view of our sales by market detailing our global OE and aftermarket revenues. OE sales increased by $172 million or 16% versus Q2 ‘07, while the aftermarket increased by $60 million or 9%. As can be seen on the chart, a number of factors have impacted our second quarter revenue with various positive and negative effects, again emphasizing the advantage of our market, customer, and product diversity. The individual impacts will be covered in more detail as we review the results of the business units later during this presentation.

On slide 17, we have a high level summary of our reporting segments. As a reminder, FederalMogul is organizing the five business units; Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products, and Global Aftermarket. As you can see, these segments represent a broad range of products serving OE, service, and replacement parts customers in automotive, off highway, and commercial and industrial markets.

On the next slide, we had summarized the sales by business segments and you can see that each of the five operations realized increased quarterly sales versus 2007 with double-digit percentage increases in three of the five segments. The detailed drivers and specific factors relating to the increase in each will be covered in the following segment detail slide starting with the Powertrain Energy business unit on slide 19.

Powertrain Energy is our largest business unit serving the OE market and represents about 50% of our OE sales. The PTE quarterly sales increase of $107 million versus 2007 is the largest increase in any of the segments in absolute dollar term. Highlights of the quarterly sales performance include growth in all regions, notable that this even includes growth in US and Canada despite the current conditions of market contraction. Heavy duty volume increased in all regions due in part to customer market share gain.

We also had a large favorable exchange impact due to the significant component of European sales for this business segment as can be seen in the pie chart. The primary drivers behind the 50% improvement in margin dollars include the strong impact from volume and market share growth combined with positive contributions from productivity improvements and reduced depreciation. These favorable factors were partially offset by price balance principally due to contractually committed OE customer price reductions.

The next slide provides an overview of the Q2 performance of our Powertrain Sealing and Bearings business. Overall, we experienced a $30 million increase in quarterly sales reaching $301 million. In this segment, we had strong sales growth in Europe and rest of the world, offsetting declining light vehicle volumes in the US market. Our global volumes were essentially flat, again showing the benefits of global diversification. We gained market share in Europe and Asia during the quarter. We had a small impact from a February 2008 acquisition in India and again experienced a favorable exchange impact on sales, with over half of the segment's revenues coming from Europe.

In relation to gross margin, we achieved a significant year-over-year increase of $21 million representing an improvement of 6.4 percentage points. The turnaround of this business that started in the second half of 2007 and was discussed during our first quarter earnings call has certainly continued. The main drivers of the improvement were positive contributions from both productivity and decreased depreciation which accounted for $17 million of the 127% improvement in gross margin.

Moving now to slide 21, which summarizes the second quarter performance of our Vehicle Safety and Protection business, quarterly sales increased to $215 million versus $205 million for the same period of the prior year with a wide variance in regional results ranging from an increase of 53% in the rest of the world sales to a decline of 27% in US and Canada.

Reduced US light vehicle volumes and a net decline in customer business both contributed to the variance in US sales. The result was $19 million of favorable exchange impacts during the quarter with almost 70% of the segment OE revenues now coming from Europe.

Vehicle Safety and Protection realized a $9 million or 16% improvement in gross margin for the quarter with strong timely implementation of productivity projects, net of inflation, accounting for essentially all of the improvement. Lower depreciation and favorable exchange were also positive factors but were offset by the margin impact from the declining volume and material price inflation.

On slide 22, I will summarize the results of the automotive products business unit. This segment has a diversified product offering that internally transfers the majority of its manufacturing output through our global aftermarket business. The sales performance for the slide represents direct OE customer sales of the business unit as was the case for the three segments just discussed. The 31% positive sales variance is the largest increase in percentage terms of any of the segments, driving this increase with double digit percentage increases of OE sales in all regions.

Gross margin was up $5 million or 25% versus the prior year with a slight decline in margin points. The improvement was driven by the strong impact from OE volume and market share, along with favorable productivity and lower depreciation. Negative absorption impacts from the lower second quarter 2008 product transfers to the global aftermarket business segment partially offset these improvements.

To wrap up the business segment performance summaries, I will now move out of the OE focused segments and cover slide 23 summarizing the global aftermarket. This segment reported $753 million of quarterly revenue, up $60 million or 9% versus the prior year. Sales were up in all regions with the US increase mainly due to market share gain and Europe due primarily to favorable exchange impact from translation. The US market share increase was driven by significant business gains of premium branded products in the major domestic customers. Margin dollars increased 3% to $169 million due mainly through contribution from net buying and market share gains.

Favorable customer pricing partially offset negative impacts relating to product mix. There was also favorable exchange impact in the quarter in proportion of sales at approximately the average historical margin.

That wraps up the review of our Q2 business segment performance. We will now move to a few slides covering the first half results starting with slide 24, where we summarize our first half earnings performance.

The first column of this slide represents the GAAP-based consolidated P&L for the six months ended June 30, 2008. The second column reflects one of the fresh start accounting adjustments. Management believes that excluding the first quarter 2008 one time non-cash impact of this evaluation of inventory from gross margin and net income provides information most comparable to the prior year. Other adjustments to earnings as a result of fresh start accounting are repeating and somewhat permanent and as such have not been adjusted out. In addition, the other adjustments are not material on a net basis.

Moving to the net sales line, revenues increased to $3.9 billion representing a first-half year record performance for the company. The $374 million increase is primarily due to European OE sales growth and exchange. The adjusted gross margin percentage increased by almost 1 point, mainly driven by productivity improvements, lower depreciation and exchange. Combined with the impact from the increase in sales, this resulted in $100 million increase in gross margin dollars versus the same period in 2007, the various other line items and an additional $19 million of positive impact in pretax income versus the first half of 2007, and finally at the bottom line, we reported a solid increase of $112 million in adjusted net income resulting from the above factors along with a more favorable 2008 effective tax rate.

On slide 25, we have a reconciliation of net income as reported to our operational EBITDA. I talked about our operational EBITDA measurement on slide 13, so I will not repeat a rationale for using this metric. In the top section, we have the one-time, non-cash fresh-start reporting adjustment that is added back net of tax to arrive at adjusted net income of $121 million. The rest of the line items are the same nature as explained earlier relating to the second quarter arriving at operational EBITDA of $462 million for the first six months of 2008. This represents an improvement of 12% and an increase of $50 million versus the same period of 2007.

On the next slide, you can see a roll forward of our first half of 2007 EBITDA to the first half of 2008. Starting with volume and mix, we were unfavorable versus the prior year mainly due to US aftermarket and OE volume declines more than offsetting the growth of our European OE business. Unfavorable mix primarily in the aftermarket also contributed a portion of this negative variance versus 2007.

Market share gains at a conversion rate of about 30% generated $49 million of incremental EBITDA in 2008. Pricing was predominantly contractual price reductions contained in our OE contracts, partly offset by material recoveries and escalators, giving us a net OE price down of $18 million. Price impact from the global aftermarket was a favorable $2 million.

We had a strong improvement in productivity which has shown net of approximately $52 million of labor and commodity inflation. Gross productivity and reductions in materials and services contributed over $100 million incremental to the bottom line versus the first half of 2007. The exchange and other category primarily includes the $15 million benefit of translating foreign denominator profits to US dollars all relating to the first quarter and $16 million of reduced pension expense, offset by $17 million of Q1 2007 mark to market in asset gains not recurring in 2008.

Now turning to slide 27, we provide a summary of the first half consolidated cash flow starting with net income and adding back depreciation and amortization as non-cash items at approximately the same amounts for both periods. The next $225 million line item relates to receipts from the 524G Trust.

Net working capital created a larger outflow in the first half of 2008 compared to 2007 due to higher sales volumes. Also, significant progress was made through the first half of 2007 to increase supplier payment terms. These improvements remain but the one-time cash benefit of that improvement in 2007 was not repeated this year. Capital spending was up slightly versus the same period in the prior year supporting our continued growth and globalization. Overall, a solid six months of performance with $116 million of positive net cash flow from operations net of investing activities comparing favorably to the $79 million for the first half of 2007.

In the financing activity section, and as discussed earlier, the company set up our post-emergence capital structure during the first quarter resulting in a net of $292 million of positive cash flow. In total, cash balance has increased by $419 million in the first half of 2008, ending the period with $844 million in cash and when combined with our revolving credit line providing the company with approximately $1.3 billion of liquidity.

With that, I will turn the presentation back over to Jose Maria for closing comments.

Jose Maria Alapont

Thank you, Jeff. Let me conclude summarizing the second quarter performance. As we mentioned at the beginning of our call this morning, we are really pleased to report this record second quarter revenue and a strong net income. This is resulting from our improved global operating performance combined with market, customer, and product diversification as we mentioned before.

With revenue of almost $2 billion or an increase of 13%, we have recorded an eight consecutive quarter or year-over-year sales growth and the gross margins have improved 23% to $396 million as compared with $322 million of the previous year. These represent a continuous improvement as well of our operational EBITDA that increased 21% or $45 million to $257 million, from the $212 million of the previous year. Also, continuing our focus on streamlining the company on SG&A that was reduced from 12.1% to 10.6% on the second quarter of this year.

Federal-Mogul’s net income rose to $90 million or $0.19 per share which compares very favorably to the previous year and the cash flow remained strong during the quarter and added to our overall strong balance sheet and available liquidity of about $1.3 billion. The second quarter performance and the results show that Federal-Mogul is well positioned to continue to deliver our sustainable global profitable growth.

Thank you very much for your attention. Now we will open the call for questions. Operator, will you please give the instructions?

Question-and-Answer Session

Operator

(Operator instructions) And the first question comes from the line of Patrick Archibald from Goldman Sachs. You may proceed.

Patrick Archibald – Goldman Sachs

Hi good morning,

Jeff Kaminiski

Good morning, Patrick

Patrick Archibald – Goldman Sachs

Wanted to just – I guess – had a couple of questions on slide 14, the sequential EBITDA average. Clearly, market share is something that for the first half you guys have made a lot of progress in and just want to see if you could add a little bit more color as to the kinds of products you guys are winning a disproportionate amount of new business in, just a little bit more color there where you think your competitive advantage is driving some of those gains.

Jeff Kaminiski

Okay, yes, I will talk about that a little bit, Patrick. First of all, if you look at the segment slides, it goes through fairly good detail by segment by region where we had the largest gains. So, starting with Powertrain Energy, we had some nice gains in the energy group and those are products like pistons, piston rings, et cetera, across all the regions. We also had nice gains in Europe and Asia in Powertrain Sealing and Bearings, and also in the global aftermarket in various regions around the world.

Patrick Archibald – Goldman Sachs

I guess, yes, sorry I should have been more clear. One of the things I was particularly interested are these mostly focused on the light vehicle side, or are you seeing these kinds of incremental wins both on the commercial and light side of those businesses?

Jose Maria Alapont

Patrick, this is Jose Maria. I think you are spotting right on target. The strength that you have seen in our performance, 23% up in Europe shows you that we are very well positioned on the high PIK across the light vehicle passenger cars but equally into the commercial vehicles because we are overperforming the growth of the region; that is because our products are very much involved in fuel economy, emissions, safety and those areas obviously has given us the strength. On the other side, in North America, where we know that the downturn has been fairly sharp, you see that we are flat which indicates again gains towards the passenger cars and commercial vehicles and a relatively, I would say, well-balanced impact on the SUVs.

Patrick Archibald – Goldman Sachs

And I guess, it seemed from past presentations that one of your particular strengths was diesel. I was wondering if may be any of this reflects perhaps a launch guidance that may be more oriented towards a diesel solution in terms of fuel economy or is there anything like that reflected that might be providing some support in the business wins as well?

Jose Maria Alapont

That is another of various strengths, as you know, we are market leader in those products and we have been strengthening our position in Europe and what is more important, we have seen the same trend of strength in market shares in North America where, with the current situation, there is an acceleration towards fuel efficiency, power trends, and diesel is becoming one of the areas that we are going to see as well progress. But, as a matter of fact, that our strength in the diesel and the growing market shares has been also an important factor of our some performance in revenue.

Patrick Archibald – Goldman Sachs

And on the same slide – I guess, in terms of productivity, wanted to get a sense how sustainable you think some of these gains are? Have you – are you kind of in late innings in some of the restructurings? I know that you’ve made a lot of progress on SG&A so far and I’m wondering how much there is left on that and then I think also on the cost side, if I’m correct, you’ve had the current sort of restructuring planned out at least for a year and a half. So just wondering how much further in the productivity bucket is there to go? Yes, I guess that’s the way I'd put it.

Jeff Kaminski

Okay. Yes, I mean a good comment or a good question. We’ve had a very strong track record in productivity for many, many quarters and obviously a lot of that has been driven by our restructuring efforts over the years and about our focus on reducing SG&A expenses and you’ve also seen I think our track record quarter-over-quarter reductions in SG&A. Whether that’s sustainable, we believe it is. We believe there’s always strides in the business. We’re constantly looking at ways of reducing cost, both on the cost of sales side and on the SG&A side, and we put a lot of focus and emphasis on it. On a gross basis in 2008, we had gross reductions of $100 million in our cost base and that was offset by some inflation both in materials and then labor inflation, but we've had strong performance there and it’s the focus in the company and the culture of the company.

Patrick Archibald – Goldman Sachs

Okay. Clearly, you’ve ended the quarter with quite a bit of cash. Can you just refresh us as to what your strategy is for acquisitions going forward?

Jose Maria Alapont

Well, obviously to have – on the strong liquidity of $1.3 billion dollars with us, in a great position. We are going to be conscious in the assessment of potential acquisitions but it is clear that the market has going to offer us good opportunities and we are reviewing that constantly with the Board. Our view on this will be three particular areas, strengthening our strong leading presence in the areas of fuel economy, CO2 environmental safety, as well the opportunity to go to other strategic areas within the auto industry which we consider that are going to be as well important in the coming future. And finally, as you noticed I'm sure, Patrick, we have been reporting as well a good growth on the what we call commercial and industrial that represents a rate more than 10% of our total revenue, that also could be an area that could show us opportunities.

Patrick Archibald – Goldman Sachs

Okay. Great. And I guess just a last one. The inevitable raw materials question. Can you tell us where there any hedging gains on raw mats included in this quarter’s results and how much those might have been?

Jeff Kaminski

As far as our hedging program, we do have a strong hedging program in place. It is determined to be an effective hedging program where it is offsetting all the increases but the hedge contracts are marked to market at the end of the year in accordance with fresh start reporting requirement. A dollar amount off the top of my head, I could not give you off the top of my head, but we've had nice performance in the first half on the material side. We have offset some of the market increases in obviously the metals, steel, a lot of the LME commodities with technical initiatives VAV [ph] activities with the customers. We've had some customer price recoveries and also escalators that have also helped offset some of the headwinds, I guess, in that area.

Patrick Archibald – Goldman Sachs

And just when I think about that, has most of the performance been VAV supply chain oriented or is it pretty evenly balanced with benefits from contract hedging? Just to give us a sense of how we might think about that going forward and maybe you can remind us sort of how further – how long out you are hedged.

Jose Maria Alapont

The strength of the base of our performance, Patrick, is based in having an action plan that has different factors to make it reliable through the time. You have hedging but you have as well a very strong work on technical cost reduction, redesign [ph], best cost countries localization, of course, negotiations with the customers for material cost escalators and it is this solid base of well-defined actions that are not based on a single item that I think gives the strength of the performance that you have seen and we obviously consider that that is what gives us as well strength through the coming periods.

Patrick Archibald – Goldman Sachs

Okay. I will leave it at that. Congratulations on the quarter.

Jose Maria Alapont

Thank you very much, Patrick.

Operator

And the next question comes from the line Craig Perry [ph] from Swissray [ph]. You may proceed.

Craig Perry – Swissray

Hey, guys. Congratulations on the excellent quarter in a tough environment.

David Pouliot

Thank you.

Craig Perry – Swissray

Two very quick questions for you. First is in relation to – and I know the company historically has not given outlooks or guidance, is there anything that may or may not change that going forward. I don't know if you have clarity ability to sort of forecast full-year numbers for the Street. And the second thing, kind of as a follow up to Patrick’s question, as the company considers uses for cash, at what point does it kind of look to its own stock price which – I guess, basically it is trading at, call it like, 15 times this quarter’s EPS and think that that represents good value. Thanks.

Jeff Kaminski

Okay. I guess I will answer the first question on the earnings guidance and I will leave that second one to Jose Maria. The guidance policy right now is the company’s policy. I don't see a changing – certainly not changing this quarter if that is the question and we are going to hold to it at this point in time.

Jose Maria Alapont

All right. I think that – regarding our liquidity, the $1.3 billion, obviously, you made a comment on the value of the stock, I am not going to add anything because the markets are what they are and we feel strong about our company. But for the time being, our focus on the liquidity is the potential opportunities that we will have in the company to expand our activity, as I said before to Patrick, in any of the three sectors that I indicated, either on the fuel economy, CO2 safety within the vehicle where we are already very strong and leading in the market, or in the area of other strategical products that we consider has a real potential for the future and as well in a sector that you saw we are performing very well and we have also strong market shares and leaderships which is what we call commercial and industrial – that is where, today, we are focalized on the potential opportunities.

Craig Perry – Swissray

Does that mean the Board doesn’t consider as it looks to raise [ph] array of options on what would provide the maximum return on invested capital, that looking at its own stock is not one of those options?

Jose Maria Alapont

Well, I would say that at this moment that this is not the subject that we think we should be entertaining any discussions and if there is anything, we will be very pleased to let you know.

Craig Perry – Swissray

Okay. Thanks.

Jose Maria Alapont

And thank you for your comments.

Operator

And the next question comes from the line of Fred Taylor from MJX Assets Management. You may proceed.

Fred Taylor – MJX Asset Management

I think most of my questions were answered. Just looking at slide 27, cash from financing, the 292, was that borrowing on the revolver or overseas, and besides just throwing some more liquidity on the balance sheet, what was the reason for doing that given you had a positive free cash flow quarter and half?

Jeff Kaminski

Yes, the 292, that really came from the Emergence refinancing, so as we retired the debt relating to last year and we took on the two-term loans, there has been no borrowing at all on the revolver at this point. It is completely open and all that happened back in January. It was really a function of the setup from the original restructuring.

Fred Taylor – MJX Asset Management

Okay. That is all I had. Thanks

Jeff Kaminski

Thank you.

Operator

And the next question comes from the line of Nicole Torraco from Babson Capital. You may proceed.

Nicole Torraco – Babson Capital

Hi, good morning. Just looking at slide 13, the reconciliation from net income to EBITDA, could you give a little more color as to what is in that other line?

Jeff Kaminski

The $4 million?

Nicole Torraco – Babson Capital

Yes.

Jeff Kaminski

I mean, it is miscellaneous – it's basically miscellaneous non-cash items that we don’t consider to be basically operational impact items.

Nicole Torraco – Babson Capital

Would you give us an estimate of CapEx for the remainder of 2008?

Jeff Kaminski

No, we won’t provide guidance on the CapEx, but you could see the first-half capital expending I think was right around $150 million.

Nicole Torraco – Babson Capital

Okay. That was all I had, thanks.

Jeff Kaminski

Thank you very much.

Operator

And the next question comes from the line of David Miller [ph] from Allen Associates [ph]. You may proceed.

David Miller – Allen Associates

Hi. A few questions, what is your annual steel utilization in tons approximately and what percentage of that do you have contractual pass-throughs for? And on the whole, what percentage of the increase in steel costs counting both contractual pass-throughs and other pass-throughs on a concessional basis or otherwise have you been able to mitigate?

Jeff Kaminski

You could see on a net basis, we had very small material impact for the six-month period. So in total of all our raw materials, finished good, et cetera, all of our buy, we were able to mitigate most of the increase, in fact all of the increase for the first six months of the year. We don’t provide specific details on our commodity buying. We don’t disclose tons of steel purchase or tons of copper, or any of the other of metals. So it wouldn’t really be appropriate to comment on that. But again, on an overall basis, we’ve done a nice job mitigating to the first six months.

David Miller – Allen Associates

Would you have a ballpark estimate in terms of percentage of increase that you have been to mitigate?

Jeff Kaminski

Yes, all of it. Between all the other materials on a net basis, we are up slightly – we are up marginally in improvement on material costs, including services I think it’s $2 million or so for the quarter versus the same period of the prior year.

David Miller – Allen Associates

And that is not driven in any significant degree by – is it a one time mark to market – I mean, a hedge portfolio that runs out beyond the current period?

Jeff Kaminski

Not a mark to market gain in 2008, no. I mean, we certainly had hedge contracts that helped also to mitigate some of the metals and we buy a fairly significant portion of nickel which has come down significantly from the prior year, which has also helped to offset some of the increases in the other metals. But we don’t have any significant mark to market gains in 2008.

Jeff Kaminski

Thank you.

Operator

At this time, we don’t have any further questions. I will turn the call over to Mr. David Pouliot for closing remarks.

David Pouliot

Thank you. Again, we would like to thank you all for joining our call and we look forward to the upcoming Q3 conference call to share with you our results then. Thank you.

Operator

Thank you ladies and gentlemen. This concludes the presentation for today. You may now disconnect.

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Source: Federal-Mogul Corporation Q2 2008 Earnings Call Transcript

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