Federal-Mogul Management Discusses Q4 2013 Results - Earnings Call Transcript

Federal-Mogul (NASDAQ:FDML)

Q4 2013 Earnings Call

February 20, 2014 10:00 am ET

Executives

Jim Burke

Rainer Jueckstock - Co-Chief Executive Officer, Chief Executive Officer of Powertrain Division and Director

Daniel A. Ninivaggi - Co-Chief Executive Officer, Non-Independent Director. Member of Compensation Committee and Chief Executive Officer of Vehicle Component Solutions (VCS) Group

Rajesh K. Shah - Chief Financial Officer and Senior Vice President

Analysts

Brian Sponheimer - G. Research, Inc.

Karl Blunden - Goldman Sachs Group Inc., Research Division

Bret David Jordan - BB&T Capital Markets, Research Division

Harpreet Anand

Frank Longobardi

Operator

Great day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Federal-Mogul Corporation Earnings Conference Call. My name is Katina, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jim Burke, Director of Corporate Communications. Please proceed.

Jim Burke

Thank you, operator. Good morning, and welcome to the Q4 and full year 2013 Federal-Mogul earnings call.

On Slide 2, you'll find the company's Safe Harbor statement. Please note that the contents of this presentation's slides and the comments and discussion provided by the speakers are covered by the provisions of this statement.

Our speakers today will provide an update on our fourth quarter and full year 2013 results. They will also cover important recent developments in the company. Rainer Jueckstock will provide a brief total company results overview. Then, he and Dan Ninivaggi will discuss the markets and current developments relating to their respective business segments. Their comments will be followed by our CFO, Raj Shah, with further detail of our fourth quarter and full year financial results. Finally, we will take questions.

At this time, I will hand the call over to Rainer Jueckstock.

Rainer Jueckstock

Thanks, Jim, and good morning, everyone. Please turn to Slide 4. Most of you are familiar with the fact that we have been operating in 2 segments for more than a year now, which is why Dan and I are both here today to talk about the financial performance of both segments.

As you know, Dan Ninivaggi just recently joined the company. In his previous capacity as CEO of Icahn Enterprises, Federal-Mogul's major shareholder, he is serving since 2010 on Federal-Mogul's Board of Directors, and he therefore knows the company very well. His knowledge of our management team, our markets and related opportunities will be invaluable in our journey towards growth and value creation, as well in facilitating a solid working relationship between Powertrain and VCS.

I'm also pleased to welcome Raj Shah, who joined the company in December as our new CFO. Raj has extensive finance experience in the automotive industry, and the team is pleased with his fast start and his contribution towards Federal-Mogul's future success.

Please turn to Page 5. Let me make a few comments about Federal-Mogul's quarter 4 2013 before I will speak about Federal-Mogul in 2013 year. We had a strong fourth quarter, with sales of $1.7 billion, 10% higher than quarter 4 2012. The company showed significant improvement in EBITDA as well: $140 million or 8.3% of sales, twice of what we reported a year ago. Federal-Mogul's pretax income from continuous operation was $13 million for the quarter, an $87 million improvement from quarter 4 2012. While we recorded a net loss of $19 million during quarter 4, this was an improvement of $61 million compared to quarter 4 2012, and it was primarily attributable to the restructuring and impairment charges and tax valuation allowance; all together, $40 million.

Our improved performance in quarter 4 was driven by a strong conversion of the additional sales and improved overall operating performance. So operating performance, as well the quite seasonal movement in our net working capital, resulted in a free cash flow of $50 million in the quarter, a good result compared to the massive outflows just a year ago. So far to the quarter. Give me a few minutes about the summary for 2013.

2013 was a year of significant changes and developments for Federal-Mogul. We've also strengthened our core product lines by preparing for acquisition agreements for Honeywell's friction business and Affinia's chassis business, by the aftermarket distribution agreement for ignition products in Europe and by finalizing the acquisition of a bearing company in Russia. And at the same time, we sold several non-core units like fuel, transmission components, camshafts and con rods. But even more important, we had very solid organic growth within our Powertrain segment, as well as in our European aftermarket.

But despite all of these M&A activities, we kept a laser-like focus to improve our operational performance. We have never had more restructuring projects going on at the same time. We've closed or downsized several plants in high-cost countries, and we worked hard to prepare further restructuring actions, especially in Europe and our OE business, and we did it with lower cost than original estimated.

The divestiture of non-core units resulted in an exit of 7 plants in high-cost countries, with well over 1,000 employees in France, Germany, U.K. and the U.S., with positive impact on our long-term cost structure. We streamlined our overhead within the corporate functions, as well as in several business units, while maintaining the critical resources for product, process and manufacturing engineering, as well as for customer contracts. We have been able to recruit great talent, and the management team, especially on the Powertrain side, is stable and running fast. And with Dan's arrival, we also see opportunity for growth in VCS.

It is important to understand all of these underlying activities and developments to see the solid foundation we created in 2013. The results in 2013 are not based on one-offs, but based on solid improvements of virtually all elements of our business model. And even more important, we delivered most of what we'd promised.

For the full year, total company sales were up 5% to $6.8 billion. This increase was driven by the global car market returning to healthier levels; share gains in OE, mostly from new engine programs; and share gains in our European aftermarket. We recorded, for the company, operational EBITDA of $587 million, nearly $100 million more than just a year ago, combined with net income of $41 million profit and $38 million positive free cash flow, despite significant restructuring activities and the healthy investments. While we have a positive view about all of our progress, we know there's a long way to go to reach leading performance. The cost structure and margins in both segments are not yet at the level needed to support the long run of our capital intensity, be it fixed assets in Powertrain or net working capital in VCS. We have to speed up our growth in both segments, with focus on Asia and on segments with sales with healthy margins. We have to work hard to improve the ways to the market, especially in our North American aftermarket operations, and further improvement in customer service is a must in both segments. But the progress of 2013 gives us the confidence that we are on the right track and that we are able to capture the great opportunities in front of us.

Please turn to Slide 6. Combined with operational improvements, we've made significant headway in strengthening our balance sheet in 2013. Along with improved cash flow from operations, the $500 million proceeds from our shareholder rights offering, solid proceeds from divestitures and after a $250 million prepayment against our Term Loan B, we finished 2013 with a cash position of $761 million liquidity. Federal-Mogul's stronger balance sheet supports all our activities to strengthen our core business, to grow above and beyond the markets, to continue with our activities to improve the operational performance and to reinvest in leading technologies in very tailored ways to the market.

Please turn to Slide 7. A few words about Powertrain, the segment I enjoy to run on a day-to-day basis. Powertrain had revenue of more than $1 billion in quarter 4, up $105 million or 10% versus quarter 4 2012. This reflects growth well above the underlying market movements. Powertrain's share gains are not at least reflected in the fact that more 35% of our sales growth during the quarter was based on new customer contracts, which is testament of our quality, leading technology and our close working relationship with the customers.

North American Powertrain revenue was up a healthy 17%, and we are able to report market share gains in Europe during quarter 4, where Powertrain derives approximately 50% of its revenue. Despite European light vehicle production remaining essentially flat over the comparative period, Powertrain's revenue increased 7%. Even more important, we have been quite profitable in our European operations during the quarter and the whole year.

In the Rest of the World, Powertrain revenue was up 19%, with China driving much of our growth in earnings in the region. Powertrain recorded operational EBITDA of $92 million in quarter 4 2013, up $61 million from quarter 4 2012. Our quarter 4 earnings performance continued to show that we are making good progress on restructuring in Western Europe and in the U.S., increasing operational efficiency and implementing ongoing cost reductions as we drive for growth and enhance margins.

Please turn to Slide 8. On the prior slides, I have spoken to the favorable industry dynamics, new customer contracts and market share gains that have enabled Powertrain to perform better than the industry's rate of growth. Solid market production growth, combined with fuel economy and emission regulations driving the need for higher-content products, are enabling continued gains in market share for Powertrain. As an example, we were awarded, in quarter 4, by a leading OEM, with one of the largest OE contracts we ever have received to supply millions of steel pistons for passenger car diesel engines over several years. This is a great example of Federal-Mogul's ability to drive technology and to capture market share.

In addition to organic growth, we are continuing to explore alternatives to strengthen our core product lines to enhance our capabilities and offerings to the customer. In December, we announced the acquisition of 100% of DZV, a Russian bearing manufacturer, which will expand our position in the growing Russian bearing market. We continue with our focus on having business that has a top market presence, holding the #1 or #2 position, which is cost-competitive and has technologies that allows us to gain market share by supporting our customers' drive towards lower CO2 emissions.

This is enough about Powertrain. I will now turn the call over to Dan.

Daniel A. Ninivaggi

Thanks, Rainer. Turning to Slide 9. Vehicle Components revenue for the fourth quarter was $727 million, up $42 million compared to the fourth quarter of 2012. The key driver behind the revenue growth was strong sales in Europe, which was driven by increased sales from the BERU product distribution agreement, as Rainer mentioned, as well as continued European sales growth in the Moog chassis product sales line. Our European OE business was up 3% as well.

North America VCS sales were up 1% in Q4, North American aftermarket sales were up 4%, while North American OE sales were down, primarily as a result of the decline in exports, mainly due to Venezuela, and the managed exit of low-margin contracts. In the Rest of World, VCS sales were down by about 8%, also impacted by managed exit of low-margin business.

Operational EBITDA for the quarter was $48 million or 6.6% of sales, an increase of $11 million compared to Q4 2012. The improvement was driven by higher sales and operational improvements, partially offset by acquisition and unusual -- other unusual project costs. During the fourth quarter, we completed the closure of 4 manufacturing plants and are proceeding with the closure of 3 additional plants, which were previously announced. We're also continuing to downsize other facilities in Western Europe and in the U.S. All of these restructuring initiatives contribute to more efficient capacity utilization within VCS, as well as strategic investment and allocation of manufacturing to lower-cost locations.

The financial results of our aftermarket business have stabilized, but I'm not satisfied with the overall performance of the business. We see further opportunity to grow the VCS business and improve our financial performance.

On Slide 10, I'll highlight our key initiatives for long-term growth for VCS. First, it's critical that we have the right distribution network in place. In the U.S., our distribution network is based largely in the Midwest, with some locations carrying limited product lines. We need to ensure that our complete product line is readily available to deliver high fill rates to customers with shorter lead times. This will require investment in regional multiproduct-line distribution centers with improved inventory and order management systems.

We also need to build on and optimize our distribution capabilities in other parts of the world, and we've made progress on that front. For example, next month, we'll begin supplying customers in Russia from within the market. Previously, we've been supplying customers in Russia from a distribution center in Belgium. Establishing this distribution center will allow us to better serve our customers in the growing Russian market.

Second, we will need to continue to improve our cost structure by improving our manufacturing footprint, strategically using low-cost sourcing and improving our operational performance.

Third, we have strong brands and solid market share in each of our core product categories, but there is room for improvement. We plan to aggressively invest in our product portfolio so that it's deeper and wider, including potentially expanding into new product categories through acquisitions or internal investment. The recently announced the acquisitions of the Honeywell friction business and the Affinia chassis components business are examples of this commitment.

Our objective is to be the category leader in each of our core product lines in terms of quality, innovation, coverage and value, and we believe that a broader product line, broader product coverage will allow us to leverage our assets and capabilities to better serve our customers.

Finally, we're focused on globalizing -- further globalizing our business. Currently, the aftermarket structure remains quite regional, despite the fact that the automotive industry, in general, is quintessentially global. This makes sense on the distribution side of the business, where there are distinct regional differences, but much less so on the product side. We see tremendous opportunity to expand regional successes to other regions and to invest to further grow our business in developing markets like China, where our presence is relatively small. In this regard, the car park in China is projected to grow to 200 million vehicles by 2020, which offers unprecedented opportunity for us. Other regions in the world afford us with opportunity to grow as well.

Clearly, there's much work ahead of us. I'm quite realistic about that, but I'm optimistic and excited about the opportunity. I am happy to be here. I'm happy to be back in Detroit. And I'll now turn it over to Raj for a more detailed financial review.

Rajesh K. Shah

Thank you, Dan. Good morning, everyone, and thank you, all, for attending our Q4 2013 earnings conference call. This is the first time I'm reporting to you from the Federal-Mogul platform. I'm very pleased to be part of the Federal-Mogul team, and I'm especially delighted to report such solid results at my first outing here.

As you've just seen and heard, Federal-Mogul's performance in Q4 2013 and for the full year 2013 far exceeded the performance for the comparative prior periods in all key financial metrics: sales, operational EBITDA, pretax income, free cash flow and net income for the year. The improved performance was, in large measure, powered by the Powertrain segment, with VCS also contributing to the improved results.

Admittedly, the size of the reported improvement against last year, particularly in the PT segment, benefited from a modest comparative prior period. But even so, we are pleased to report such all-around improvement, including cash flow, and particularly pleased that, concurrent with the 2013 improved results, we also invested in and made solid progress in strengthening the market and competitive position of both the segments for the long term.

With this overview, let me walk you through the line-by-line analysis of our continuing operations performance. Please turn to Page 12. I would remind you that the 2012 comparative numbers on Page 12 exclude results from divestitures completed in 2013, the results of which are included in the line loss from discontinued operations. The company reported sales of $1.7 billion and EBITDA of $140 million, a 47% conversion of the increased sales in the period. Sales increased by $154 million, including $13 million of positive currency impacts. On a constant dollar basis, sales increase was $141 million. Further adjusting for the Q4 impact of sales from the European distribution agreement for ignition products of $30 million, which started in January of 2013, the organic sales growth for the quarter is $111 million or 7%. Powertrain segment accounted for $104 million of this growth, which represented a solid 12% growth rate. VCS accounted for $7 million of this growth or 1% compared to the prior quarter.

On a regional basis, after adjusting for exchange in the sales from the European distribution agreement, North American sales increased by 7% or $51 million; sales in Europe were up 6% or $37 million; and Rest of World sales increased by 12% or $23 million.

Gross margin increased by $68 million or 310 basis points. This represents the strong conversion of 44% on the incremental sales of $154 million. This 310 basis point improvement in gross margin includes margin improvements in both segments and reflects a number of factors. In addition to efficiency and favorable absorption impact due to higher sales volumes, the profitability improvement reflects the favorable impact of our cost-reduction actions, savings in material costs and savings from our ongoing footprint restructuring programs.

SG&A increased by $4 million. However, as a percent of sales, SG&A decreased by 0.7 point from 11% of sales in 2012 to 10.3% of sales in 2013. The favorable run rate impact of lower personnel cost and spend due to restructuring actions was offset by the SG&A costs of the European distribution agreement and project expenses primarily impacting the VCS segment. Interest expense is lower than the prior year, as the company exited the interest rate swaps established in 2008, which were costing the company about $40 million per year, or roughly $10 million per quarter.

In the fourth quarter, the company recorded restructuring expenses of $20 million related to the 2013 restructuring program announced in the first quarter of this year. To remind you, we had announced total program costs of an estimated $18 million to be incurred from 2013 to 2015. Several of these actions required agreements with workers' council, et cetera. We are pleased to report that we are on track with this program.

In 2013, we have recorded $39 million in restructuring charges, including the $20 million in this quarter. At this point, we estimate to complete the majority of this program in 2013 and 2014, with probably a small tail in the early part of 2015 and at a total cost of about $73 million, which is less than the originally estimated $80 million. We continue to evaluate additional restructuring opportunities to improve our cost and market position.

The company reported impairment expenses of $5 million in the fourth quarter for certain plants, including plants in the 2013 restructuring program. The impact of higher sales and improved operating performance, as just discussed, resulted in a pretax income of $13 million in the fourth quarter of 2013, which is $87 million better than the pretax loss of $74 million in the comparative prior year quarter.

In the fourth quarter, the company recorded a tax expense of $27 million, including a $15 million tax valuation allowance. In the prior year quarter, the company benefited from special incentive tax credits in our European subsidiary. In the fourth quarter of 2013, the combination of tax valuation allowances of $15 million, together with the restructuring and impairment charges of $25 million, resulted in a total cost of $40 million recorded in the quarter. These costs, as Rainer indicated, offset the results from the strong operating performance in the quarter and resulted in a net loss of $19 million. Nevertheless, the Q4 2013 net loss of $19 million was substantially improved from the net loss of $80 million in the comparative prior period.

Now please turn to Slide 13. On Slide 13, we have a reconciliation for the period of our Q4 EBITDA of $140 million to our net loss from continuing operations of $19 million. The principal reconciling items are depreciation and amortization, impairment and restructuring charges and interest and taxes. Also consistent with the first 9 months of the year and as a result of the freezing of the U.S. pension plan in 2012, the non-service portion of the expense, which is negligible for 2013 and -- is reduced from the charge of $9 million in the comparative prior year quarter to $1 million in this quarter.

As indicated, Q4 EBITDA of $140 million was $72 million or 106% higher than the prior year quarter EBITDA of $68 million. Q4 2013 EBITDA at 8.3% of sales was 390 basis points higher than Q4 2012 EBITDA of 4.4% of sales, reflecting improved profitability due to higher volume impact and the cost reduction achieved.

Please turn to Slide 14 to review the Q4 performance of the Powertrain segment. In the Powertrain segment, revenue, including intersegment sales, increased by $105 million or 11%. On a constant dollar basis, revenue increased by 10% or $95 million. As Rainer already discussed, this growth is driven by improvements in vehicle production, as well as significant market share gains in the quarter. Powertrain EBITDA increased by $61 million to $92 million or 9% of revenue. As shown on the bottom left of the page, the trend since Q4 last year is very positive, with a slight expected dip in the third and fourth quarters due to the normal holiday shutdown schedules.

Breaking down the EBITDA performance, as shown in the waterfall on the bottom right of the page, the EBITDA conversion on incremental volumes alone was 26% or $25 million. This is due to the return to a more normalized mix of car products, especially in the European light and commercial vehicle markets versus last year, where we experienced a sharp decline in vehicle production volume, as well as a shift from higher-margin light vehicle diesel engine products to gasoline. A further $30 million of EBITDA were generated due to operational and overhead cost control actions, as well as significant material and sourcing savings. The improvement in currency and other is mainly due to the nonrecurrence of a charge for a commercial agreement with an OE customer for $10 million recorded in the fourth quarter of 2012.

Please turn to Slide 15, which describes the Q4 performance of the VCS segment. As Dan already discussed, revenue, including intersegment sales, increased by $42 million or 6% year-over-year, with minimal impact from currency movements. This was primarily due to sales from the European aftermarket distribution agreement for ignition products entering into the first quarter of 2013, and this accounted for about $30 million of the growth in the quarter. Excluding these factors, VCS revenue increased by 1% compared to last year.

EBITDA, however, increased by $11 million in the quarter to $48 million or 6.6% of revenue. As shown on the bottom left of the page, this is an improvement of 1.2 percentage points versus the same period last year.

On the bottom right of the page, we have a further breakdown of the movement of sales and EBITDA versus the same period in 2012. Focusing on the volume and mix column, EBITDA increased by $9 million on a volume increase of $45 million. The main driver of this improvement is coming from the aftermarket business due to a stronger mix of product sales, as well as a reduction in customer allowances. Customer price reductions and incentives represented a decrease of $5 million in EBITDA this quarter. Net performance of $2 million reflects productivity and material cost savings. The net improvement in currency and others is mainly related to the nonrecurrence of a charge recorded in the fourth quarter of 2012 of $9 million related to a foreign customs dispute from the period 2007 to 2011.

Now please turn to Slide 16 for brief comments on our full year earnings performance. The year-over-year revenue increase of $342 million includes $24 million of positive currency impact. On a constant dollar basis, sales change is $318 million. Further, when excluding the impact of acquisitions of approximately $43 million, as well as sales from the European aftermarket distribution agreement for ignition products of $112 million, we had $163 million of organic constant dollar sales growth. This sales increase is made up of an increase in the Powertrain segment of $202 million, partly offset by a decline in the VCS net sales of $39 million.

Gross margin increased by $107 million to $1.02 billion and is largely due to improved volumes and better mix, material cost savings, as well as significant progress in restructuring in our manufacturing footprint, which is now translating into positive margin impacts. Gross margin increased by 80 basis points from 14.2% of sales in 2012 to 15% of sales in 2013.

As I stated earlier in the quarterly results, the benefits of lower SG&A expenses from the restructuring actions were offset in absolute dollar term as the company continued to invest in programs and capabilities for strengthening our market position. SG&A as a percent of sales, however, improved from 10.9% in 2012 to 10.6% in 2013.

We recorded an OPEB curtailment gain of $19 million in the second quarter due to a reduction of active participants as a result of a plant closure. This is compared to an OPEB curtailment gain of $51 million recorded in 2012 related to the elimination of the retiring health care for non-union and salaried U.S. workforce in 2010.

The significant impairment charges in 2012 primarily related to the Friction business, which included an impairment of intangible assets of $120 million; a charge in 2013 of $8 million related to fixed asset impairments; and included charges related to plants identified for restructuring as we continue to evaluate our footprint.

In 2013, the company recorded a tax expense of $56 million, including the $15 million of tax valuation allowance in the fourth quarter. The tax benefit of $29 million in 2012 was primarily due to a number of tax valuation adjustments, including the release of uncertain tax positions from an audit settlement in the U.S. of $19 million, valuation allowances relieved in Germany of $11 million, a $5 million tax benefit relating to a special economic zone incentive in Poland and a credit due to the impairment charges of $7 million in 2012.

For the full year 2013, we reported income from continuing operations of $101 million compared to a loss of $91 million last year and net income attributable to Federal-Mogul of $41 million compared to a loss of $117 million last year. As a reminder, the loss from discontinued operations reflects all divested businesses within the year and is mostly attributable to the loss recognized in the first quarter related to the divestiture of the Sintertech business in France.

Please turn to Slide 17, where we have a reconciliation of our reported net income of $41 million to the operational EBITDA of $587 million for 2013. The structure of the reconciliation is the same as the one just described for the fourth quarter, so I won't describe it in detail again. Operational EBITDA of $587 million for 2013 was 8.6% of sales compared to 2012 EBITDA of $488 million or 7.6% of sales. The improved profitability reflects the benefit of higher volumes, improved efficiency, sourcing savings and cost reduction.

Please move to Slide 18 for a summary of the 2013 consolidated cash flow. As it shows, we generated $418 million of cash from operating activity compared to an outflow of $53 million last year. This was mainly due to a more stable working capital with an inflow of $59 million this year compared to an outflow of $292 million last year.

2012 cash flow was adversely impacted due to the onetime impact of the extended term provided to aftermarket customers in 2011, which has now stabilized. The improvement in cash flow from inventory, a cash outflow of $21 million versus a cash outflow of $93 million last year, was mainly a result of sustained inventory reduction actions in the North American aftermarket.

Improved EBITDA, lower interest and lower U.S. pension and OPEB payments all contributed to the cash flow generation this year at an operating level. Cash provided from investing activities was an outflow of $355 million versus an outflow of $427 million last year, mainly because of the proceeds from divestitures versus the payment made in 2012 to acquire the BorgWarner spark plug business.

Capital expenditures remained relatively constant at about $380 million in 2013. The net result from operating and investing activities generated cash of $63 million in 2013, a substantial improvement from an outflow of $480 million in 2012.

I would like to close with a couple of comments on the improvement in the liquidity position of the company. As you are aware, in Q3, we successfully completed the common stock rights offering, adding $500 million in cash, and subsequently prepaid approximately $250 million of debt during Q4. Also during Q4, we successfully refinanced our revolving ABL credit facility for $550 million, extending the maturity to December 2018. At the end of the year, the company reported a cash balance of $761 million in addition to the undrawn credit facility.

The company's tranche B loan of $1.6 billion matured in December 2014, and the tranche C loan of $940 million matures in December 2015. At present, we are enjoying the benefit of very low interest rates on this debt of about 2%. In the present economic environment and with our improving performance profile, we believe we can successfully refinance this debt in a timely manner. This is further underpinned by the backstop commitment to refinance $1.6 billion received in Q4 from our controlling shareholders.

And now, I will ask the operator to open the call to questions and answers.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Sponheimer, representing Gabelli & Company.

Brian Sponheimer - G. Research, Inc.

Dan, I guess I'll start with you. I guess, what prompted you to -- first of all, what prompted the change and what prompted you to raise your hand to take on this task?

Daniel A. Ninivaggi

Well, I think we've said publicly that Kevin decided to leave for personal reasons, and I'll sort of leave it at that. We've spent a lot of time -- I've been on the board for 4 years, but we spent a lot of time at IEP looking at Federal-Mogul and the aftermarket business, in particular, over the last 2 years. Obviously, the dynamics have changed somewhat, particularly in North America. There's some tremendous opportunity, as I talked about earlier, in other parts of the world. And frankly, we see tremendous opportunity for the company. Paul personally has invested a lot of time into studying it and seeing that opportunity. We want to invest in it, and I think there's great opportunity. So I raised my hand and I decided to come in and help do it myself. So that's what led to the change. And obviously, I wouldn't have come here if I didn't see that opportunity.

Brian Sponheimer - G. Research, Inc.

Okay. Along those lines, just given kind of the changeover in your seat over the course of the last few years, I think the branding strategy hasn't really been defined. How do you see Federal-Mogul's brands relative to where the demand is going in the aftermarket?

Daniel A. Ninivaggi

Yes. So we look at it on a product line by product line basis. I think our brands have held up in certain product lines. Fel-Pro and lube, for example, very strong, profitable. We've got great coverage, leading market positions in categories where brands and our capabilities really matter. Obviously, we've fallen behind on Friction. We're rebuilding that business. And there are a number of issues there. Product differentiation is one, cost structure, manufacturing footprint. It is a different product category that lends itself to both OE and the aftermarket. And frankly, the OE side of the business has dwindled, so we're rebuilding that. And so that one -- you really can't fix aftermarket overall unless you've solved the braking part of the business, where the brands may matter not or a little bit less right now than they do in some other product categories. But there are still lots of ways, we think, to create value in that business. The Honeywell acquisition, we're very positive on that. We think it will give us a greater ability to accelerate the restructuring that needs to happen in Europe. We've addressed the U.S. footprint, to a large extent, in some of our restructuring actions that we've announced. And so we think there's opportunity there. There's more work to do. We think that, as I alluded to in my prepared comments, there hasn't been -- we're one of the largest players in the aftermarket in North America, but we're still a relatively small company relative to the size of the market. And that -- the market is ripe for consolidation. We know we have to invest in distribution and in systems to better serve the customers. Having greater scale will give us the ability to leverage that investment over a larger revenue base, so we're very focused on that. And I guess I'll leave it at that.

Brian Sponheimer - G. Research, Inc.

Yes, I guess, along those lines, given that your customers are getting bigger and consolidating, do you, obviously, see size as being an important factor in defending pricing terms with them on a go-forward basis?

Daniel A. Ninivaggi

Well, it's not just about defending pricing power. Look, the customers -- and I've talked to all of them at one point or -- all the major customers at one point or another over the last year. They need things. They need better inventory management. They could benefit from improved distribution. So, for example, in certain parts of the country, it takes us 8 to 10 days to fill an order from the time the order is placed to delivery. That's just not a good thing, and we lose business because of it. So, listen, customers are always going to be focused on price, but there are lots of other ways that we can service customers by -- through better inventory management, better service. Fill rates have improved significantly over the last year. We still are going to be very focused on that. Category management, dedicated sales, field support. I mean, there are lot of different ways where it could be win-win with our customers. And being larger, having broader capabilities, having better distribution, investing in our brands or product lines are all things that we think could add value to both Federal-Mogul and for our customers.

Brian Sponheimer - G. Research, Inc.

I appreciate that. I look forward to speaking with you more. Rainer, not to make you -- put you on the back burner. You guys had a great quarter in Powertrain. Talk about this new diesel system contract. Is that a replacement contract, or is that all new incremental business? And what's the magnitude there?

Rainer Jueckstock

The magnitude is several hundred millions as of years 2015, early 2016. It's partial replacement business because we are incumbent of some of the engines for these customers for the diesel. But it's -- to first, to find that Federal-Mogul's participating in a big trend -- which is, of course, a European one, in this case. But we had a similar situation a few years ago with heavy duty, where engines moving to new emission standards bought for certain displacement currently are all in steel, and Federal-Mogul have been leading this trend, and it's quite an attractive segment for us. We are heavily invested in this, and we are the largest producer of steel pistons for truck engines in the world. And we are currently on a good path to get the same status for passenger cars. I believe that, over the year, high-powered diesel engine for passenger cars will turn into steel, and we're on a good position here.

Operator

Your next question comes from the line of Carl Blendon [ph], representing Goldman Sachs.

Karl Blunden - Goldman Sachs Group Inc., Research Division

I just wanted to just focus in on the balance sheet. With regard to the term loan backstop agreement that you have in place with High River, can you share details of contingencies that the market should be aware of?

Daniel A. Ninivaggi

No. I think we've disclosed the agreement. We have 2% debt. We have plenty of liquidity. We have improving operating performance. And we have a backstop from an entity that has net worth substantially greater than the backstop commitment. So we understand we have to refinance the debt. We will. As Raj said, we'll do it with plenty of time before maturity. But frankly, we're benefiting from that to such a great extent, we don't feel as if it's an urgent matter. Carl's -- IEP put in $434 million of equity in the recent rights offering and, obviously, owns 80% of the stock. So it's a huge financial investment and commitment to Federal-Mogul, and there aren't any conditions or contingencies in that backstop that are going to likely result in IEP or Carl personally not supporting the company and ensuring that our debt is refinanced in a timely manner.

Karl Blunden - Goldman Sachs Group Inc., Research Division

Got it. That's very helpful. And then, just as a follow-up, it sounds like your default assumption or our default assumption would be that you'd be planning to refinance that debt versus having the affiliate take it on its balance sheet. Is that the right way to interpret that?

Daniel A. Ninivaggi

Yes. I mean, the backstop is there just to provide the backstop. It's not the primary strategy. We think we have a view on the market. We think there'll be plenty of opportunity to refinance. We're not overly concerned about rates. And our primary focus, obviously, would be to finance as a market deal.

Operator

Your next question comes from the line of Bret Jordan representing BB&T Capital Markets.

Bret David Jordan - BB&T Capital Markets, Research Division

This question is, I guess, mostly for Dan, and just sort of given the transition in your seat and your new perspective. If we look at North American whole, and I think this goes back a little bit to the first question, is it primarily Friction? I think if we go back a year or so, there were conference calls talking about differentiating Friction, but that seems to have been market that sort of migrated to direct import for a lot of your retailers. Is that sort of the product category you're focusing on for '14? And then, I guess, sort of a follow-up question, I think if we went back a ways, there was talk that, certainly, Federal-Mogul was pushing back a little bit on the extended terms that were being requested by a fair amount of the retail distribution, and whether that pushback on extended terms is costing any market share incrementally.

Daniel A. Ninivaggi

Yes. So I'd say most of the decline, or most of the challenge, is Friction and wipers, Friction being the larger product category, so that's been, obviously, the bigger focus. And so, as I mentioned earlier, part of that is manufacturing footprint and cost structure, product differentiation. There's been a lot of money invested in new product technology and innovation there. We think we can rebuild that and that the Wagner TQ brands really do matter. So we'll rebuild it, and I think we're well along the way of doing that. In terms of pushing back on payment terms, no, I don't think that's resulted in the loss of any significant amount of business. The way we look at it is everything is on the table. We're okay with payment terms depending on the relationship with and the overall book of business and profitability of that business with any particular customer. We're happy to support customers who support us. We're not happy to support customers who don't support us. That's the bottom line. So I think where we're competitive and where our products are strong, we continue to see strong sales. Where we're less competitive, where there's less product differentiation, we've got work to do, but we're focused on it.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay. And then one sort of follow-up question on wipers. I mean, it seems like that's a category that surprisingly has had a fair amount of intellectual property casework done around it. Are there issues sort of emerging that there's more of a battle over the technology and there's an incremental R&D spend required for products going into the aftermarket so they don't infringe on original developers' rights?

Daniel A. Ninivaggi

Well, our General Counsel is sitting here, and he could probably answer that question better than I can. There is technology in wipers. There is litigation going on among different manufacturers of wipers. It's a surprisingly complex product. So we're investing in it like any other product category. We want to stay at the leading edge of the technology and the innovation. We have a number of patents in that category. Frankly, it's slipped somewhat in terms of our market share. Some of that is cost related, some of it is other stuff, but we're focused on that as well.

Operator

Your next question comes from the line of Harpreet Anand, representing Oakhill Advisors.

Harpreet Anand

I wanted to go back to the aftermarket, in particular in North America, as one of the callers had touched on. Can you talk a little bit about the pressures that you do expect to face as your customers consolidate more and there's been relatively not as robust an aftermarket environment?

Daniel A. Ninivaggi

Rainer is starting to feel a little bit neglected here with the questions. I hope somebody could come in with a good Powertrain question, since they did have a very solid quarter and solid year. Listen, there -- obviously, that consolidation means there are fewer customers with more share. Those customers, in some cases, are very good customers, and we want to support them, and we feel there are ways to work with them. The other side of the traditional channel, the wholesale channel, we want to support those guys as well. And in many cases, our brands and our capabilities have even more value to those customers than they do to the larger customers. And I'm talking to each one of them to find out ways in which we can be a better partner, not just a supplier, not just a widget maker, but a partner on delivery, on service, as I mentioned earlier, on category management. And I think there's a really good role for us to play there, well beyond just a traditional supplier. So that is an area that we're spending a lot of time on. In terms of overall margin pressure, look, as I said earlier, if you've got the best products, the best technology, innovation, broad coverage, and you can deliver it at a fair price, you're going to do well with all the customers. And in the categories where we have that, we're seeing very solid results. In categories where we've slipped, we're not. It's a competitive business like any other business, and so we've got work to do on our side. And I know you didn't specifically ask this, but Asia and Europe, again, we have a very substantial business in Europe. Now, with Honeywell, it will be even larger. Great opportunity to improve the performance of that business. And in Asia -- I mean, in China, our sales are $75 million. They're tiny relative to the market potential out there. So even though we talk a lot about North America, we're focused on other areas of the world as well.

Operator

Your next question comes from the line of Frank Longobardi, representing Alcentra New York, LLC.

Frank Longobardi

I just had a question on cash flow and, in particular, restructuring -- cash restructuring cost. So in this quarter, the $20 million of restructuring, was that all cash?

Rajesh K. Shah

No. That was only a provision that was recorded.

Frank Longobardi

Okay. So how much in cash went out the door this quarter? And how much -- I think, in the last call, it was mentioned maybe another $60 million for 2014. Does that sound about right?

Rajesh K. Shah

We had said that -- do you have the numbers right now?

Unknown Executive

$9 million went out of the door this quarter in terms of restructuring payments.

Frank Longobardi

Okay. And you're still kind of sticking...

Unknown Executive

Out.

Frank Longobardi

I'm sorry?

Unknown Executive

It's still kind of out. We took a charge of $20 million, and $9 million went out of the door.

Frank Longobardi

That's fine. Okay, that's for the fourth quarter. And can you just remind me what the full year 2013 cash outflows for restructuring were?

Rajesh K. Shah

$15 million.

Frank Longobardi

15, 1-5?

Rajesh K. Shah

2013, 1-5, yes, full year cash outflow. And we recorded $39 million.

Frank Longobardi

And what do you expect for 2014? Can you disclose that?

Rajesh K. Shah

We don't really give forward guidance. But as we said, and part of it is related to the fact that several of these things are complicated restructurings involving Europe and workers' council, as I mentioned. And also, we really don't know the exact timing. But our best guidance, as I said, is that we will complete the bulk of the program, we think, in 2014 and by completion [ph] cash payment as well. There will be a little overlap or a tail in 2015. We think -- but we are on track generally. And as I said, we are starting to see some of the favorable margin impacts of that as well.

Frank Longobardi

Okay. Maybe my notes are wrong. I think in the last call, you might have said there's $60 million of additional charges expected for restructuring programs, and I don't know if that included the $20 million you had this quarter. But does that still seem like the right ballpark?

Rajesh K. Shah

Remember, we said the full year charge was $37 million. You're just taking the $20 million for this year. We started this program that we gave guidance off on $80 million. And today, I said we see it at about $73 million. We started this program in the first quarter of this year. But I would not automatically add the full $37 million, either, because there's a little -- some slop-over from our 2012 program. But you get an idea of the range.

Operator

With no further questions at this time, I would now like to turn the call back to Jim Burke for closing remarks.

Jim Burke

Thank you for dialing in to today's call. We look forward to speaking with you again in April when we announce our first quarter results. You may now disconnect.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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