Federal-Mogul (NASDAQ:FDML) Q2 2011 Earnings Call July 28, 2011 9:00 AM ET
David Pouliot - Director of Investor Relations
Alan Haughie - Chief Financial Officer, Senior Vice President and Member of the Strategy Board
José Alapont - Chief Executive Officer, President and Director
Brian Sponheimer - Gabelli & Company, Inc.
Patrick Archambault - Goldman Sachs Group Inc.
Anthony Cristello - BB&T Capital Markets
Good day, ladies and gentlemen, and welcome to the Federal-Mogul Corporation's Second Quarter 2011 Earnings Conference Call. My name is Tom, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to Mr. Steve (sic) [David] Pouliot, Director of Investor Relations. Please proceed.
Thank you, Tom. Good morning, and thank you, everyone, for joining Federal-Mogul's Q2 2011 Earnings Conference Call.
Before we begin, I would like to refer you to the company's Safe Harbor statement shown on this page of the presentation and included in the earnings press release we filed this morning. Please consider my reference to this statement as notification of the applicability of these Safe Harbor provisions to today's call and the documents referenced during the call.
Please turn to the agenda slide. Mr. Alapont will begin this morning's call by providing a brief overview of some important financial and operating results for the second quarter of 2011. Following this overview, Alan Haughie will cover the detailed quarterly company and business segment financial results. We will finish with closing remarks and then open up the call for your Q&A. Mr. Alapont?
Thank you, David, and good morning, everyone. Federal-Mogul had a very solid second quarter and continues to perform well with a strongly increasing customer demand for our leading technology and innovation in all vehicle market segments. This is our ninth consecutive quarter of profitable results, and once again, our results compare profitably to expectations. Second quarter sales increased by $202 million or 13% to $1.8 billion as compared with the second quarter last year.
Our original equipment sales grew 23%, driven by market share gains for original equipment business units, increased volumes from global market demand, together with stronger euro. The original equipment sales were up 14% in constant dollars, led by sales increase of 13% in U.S. and Canada, 15% in Europe, 23% in BRIC, with especially strong growth in China, 19% and India, 28%. The original equipment sales represent 66% of Federal-Mogul's total sales in the quarter.
Our total aftermarket sales in the second quarter declined by 3% or 7% in constant dollar basis, driven mainly by the U.S. market, which accounts for 60% of our total aftermarket sales. The aftermarket sales activity in developing markets continues to grow rapidly. For example, China was up 21%, and India increased 26%. Federal-Mogul's aftermarket sales in Europe, China, India and the other markets now represents 40% of the Federal-Mogul's global aftermarket sales.
During the second quarter, our solid gross margin was near $300 million. And we drove the SG&A expenses to 9.6% of sales, our best level ever. Our improvement in SG&A was achieved in spite of continued strong investment for new product research and development to enhance our leading technology and innovation portfolio.
Federal-Mogul had solid operational EBITDA of $200 million, driven by stronger volumes and market share gains in all regions, combined with a high operating efficiency throughout the company global business.
In the second quarter of this year, we implemented additional effective actions that enabled the company to fully offset adverse material cost index through supplier negotiations, additional operating efficiency and customer price recoveries.
Net income was strong and very favorable within the second quarter at $64 million or at $0.64 earnings per share, which is 31% greater than our net income in the same period last year. Net income as a percentage of sales was 3.6%, which was the highest than any other quarter since the second in 2008.
Cash flow was positive at $22 million compared with the $6 million on the second quarter last year and consistent with prior quarters. Our liquidity remains very strong at $1.6 billion with more than $1 billion in cash.
Please turn to Slide 5. Federal-Mogul's sustainable global profitable growth is based on customer, region, market and product diversification. The company sales are well distributed among their operating units with original equipment sales representing about 65% of the company and aftermarket sales around 35%. Global sales in the last 12 months were $6.7 million, a growth of 12%.
Federal-Mogul has leading market positions in Europe and in U.S., representing about 80% of the total sales. And the Federal-Mogul sales are growing rapidly in the BRIC markets, up 27% on the last-12-months basis, with China up 26% and India, 22%.
The company's growth is driven by our leading technology and innovation in car vehicle and powertrain technologies. Federal-Mogul helps its customers to meet and exceed regulatory and market differentiation challenges to improve fuel economy, reduce emissions and enhance vehicle safety.
Federal-Mogul products are on more than 300 vehicle platforms and 700 powertrains, with no single customer representing more than 5% of sales. Our financial performance and working capital management produces solid cash generation and a strong liquidity, enabling the company to invest in organic growth or to make strategic acquisitions.
Now I will turn the call over to Alan Haughie, our Chief Financial Officer, for further details on the second quarter.
Thank you, José Maria. This morning, I will cover Federal-Mogul's second quarter financial highlights, including a review of the sales and EBITDA performance of our full business segments. The full details of our financial results for the second quarter are included in our Form 10-Q, which will be filed with the SEC later today.
Now please turn to Slide 7 for more details on our second quarter performance. Sales rose to $1.8 billion, representing an increase of $202 million or 13%. In constant dollar terms, sales increased by $104 million or 6%. OE sales grew by 23% or 14% in constant dollar terms, and the aftermarket decreased by 3% or 7% in constant dollars.
Gross margin increased by $25 million to $299 million, an increase of 9%. As a percentage of sales, gross margin fell by 0.6 point, reflecting product mix shifts as well as the continuing costs of globally expanding the business in all regions, partly offset by lower depreciation charges. Importantly, the company was able to fully recover underlying material cost increases through price escalators, supplier negotiations and customer price recoveries.
In constant dollars, SG&A expense actually decreased by $3 million, although the impact of exchange movements has caused the reported SG&A to increase by $4 million. As a percentage of sales, we've improved to a record level of 9.6%, improving by one full point versus last year. As a result, our operating margin, being the difference between the gross margin and SG&A, increased by $21 million or by 20%, reaching 7% of sales compared to 6.6% of sales last year.
Pre-tax income is $82 million compared to $68 million last year, an improvement of $14 million or 21% mainly due to the improved operating margin. Income tax expense remained similar to last year, and therefore, net income increased by $15 million or 31% to $64 million.
EBITDA reached $200 million for the quarter. The reduction in EBITDA as a percent of sales is the direct result of the factors discussed above. And cash flow for the quarter was an inflow of $22 million, an increase of $16 million versus 2010, which will be covered in more depth in a few moments.
On Slide 8, we have a reconciliation of our profit measure, operational EBITDA, to our net income per period. As already discussed, we realized EBITDA of $200 million in the second quarter of 2011 compared to $199 million a year ago. Depreciation charges decreased this quarter versus last year.
As a reminder, when the company emerged from bankruptcy at the end of 2007, as part of a mandatory fresh start reporting, many assets were assigned increased values and useful lives of 3 years. These assets, therefore, became fully depreciated at the end of 2010.
The other components of the EBITDA-to-net-income reconciliation remained largely unchanged from the last year.
On Slide 9, we provide a summary of the second quarter consolidated cash flow. In the second quarter of 2011, we consumed $71 million of working capital versus $62 million consumed in 2010. And this is largely due to rapid sales growth in both periods.
Although the working capital consumption in both periods is similar, embedded in the accounts receivable movement of this year is almost $70 million of cash inflow from the sale of accounts receivable in North America.
We also increased inventory by $69 million in the quarter in support of new program launches and increasing global revenues. As a result, cash provided from operating activities remained consistent at almost $100 million in both years.
The company also increased capital spending by $25 million over the same period last year, a significant portion of which is to support current and future global sales growth.
Included in other investing in the second quarter of 2010 is payment for the acquisition of the Daros Group of $39 million. So the cash inflow for this quarter of $22 million is an increase of $16 million versus the same period of last year.
Slide 10 represents the year-over-year roll forward of our second quarter sales and EBITDA. The light blue bar on the foot of the page walk [ph] sales from last year to this year, and the waterfall above it represents the associated EBITDA impacts. This chart also illustrates how we separate the impacts of volume, pricing, exchange, and so forth.
Now with regard to sales. We attribute $87 million of sale gross -- sales growth, sorry, to market factors and new business wins. Of this amount, $96 million is due to increased demand, before market share gains that is, for the company's OE products and the automotive, light, medium and heavy-duty commercial vehicle markets. This represents growth of 9% against a relatively flat global market.
On top of this 9% growth, market share gains represent sales growth of a further 3%. This OE growth was partially offset by decreased demand in the aftermarket, representing a decline of 7%, although aftermarket sales have grown in all regions outside of the U.S.
However, year-over-year pricing, including the impact of material cost escalators, was favorable by $9 million. The remainder of the sales movement is exchange of $98 million and the year-over-year impact of the Daros acquisition of $8 million.
Now turning to EBITDA. Unfavorable product mix, including the fact that F-M's growth was predominantly in its OE business, created unfavorable year-over-year mix. So the overall impact of the volume changes is a slight reduction in EBITDA of $2 million.
The increase in raw material costs was limited to just $1 million through effective global supply chain management and supplier negotiations. And therefore, pricing and material costs in the aggregate increased EBITDA by $8 million, and this is true for both OE and aftermarket segments.
We improved productivity by $13 million, but this was offset by labor and benefits cost inflation of $17 million. And as a result of these items, EBITDA increased slightly to $200 million versus last year.
Page 11 introduces our review of business segment performance for the second quarter, which focuses on the comparison and trends in sales and operational EBITDA.
Turning now to Slide 12. The format adopted for the business segment discussions will be to cover the second quarter sales performance compared to last year on the left side of the page. The right-hand side of the page will cover the second quarter EBITDA results compared to last year. And in order to highlight trends in the earnings power of the segments, we've also included a comparison to the first quarter of this year.
Starting with Powertrain Energy, our largest business segment serving the OE market and representing 50% of our OE sales. The significant items in the second quarter comparison include a 31% sales increase or 21% in constant dollar terms, including volume and market share gains in all regions, with BRIC countries up by 28%.
On the right-hand side, EBITDA increased by $18 million, of which $17 million is due to volume and market share gains. And although material costs increased by $2 million year-over-year, they were more than offset by customer price increases of $8 million. As shown in the chart, sales in EBITDA grew versus the first quarter, both in absolute dollar terms and in EBITDA as a percentage of sales, as this segment continues to convert increased market share in new business into increased EBITDA.
The next slide, 13, provides an overview of our Powertrain Sealing and Bearings segment. Sales highlights include a 20% sales increase or 12% in constant dollars due to volume and market share gains in all regions, with sales in BRIC countries up by 7%. On the right-hand side, EBITDA increased by a net $4 million, with $3 million due to volume and market share gains. Increases in customer pricing improved EBITDA by $5 million, and this was partially offset by labor inflation and exchange [indiscernible].
And again, as shown on the chart below, Powertrain Sealing and Bearings also continues to grow sales and EBITDA in absolute dollar terms and as a percentage of sales compared to Q1.
The next slide, #14, provides an overview of our Vehicle Safety and Protection segment. Highlights include a 12% sales increase or 3% in constant dollars, mainly due to global volume and market share increases, with sales in BRIC countries up by 19%. This division is the only one having any sizable impact in the quarter from the tsunami with the lost sales of about $9 million, and the impacted operation is now returning to normal operating levels.
On the right side of the chart, EBITDA decreased by $6 million, with $4 million due to material cost increases alone. However, as shown, VSP also improved sales and EBITDA in absolute dollar and margin terms versus the first quarter.
And finally, the global aftermarket segment on Page 15. First, in reference to the sales on the left side of the page, sales declined by 3% or by 7% in constant dollars compared to last year mainly as a result of a 12% decrease in the U.S., driven largely by a change in product mix.
The company continues to transition its business model to derive profitable growth from both premium and private label offerings, and we have a trend of sales and margin improvement in the U.S. throughout 2011. Further, the aftermarket continues to grow in all other global regions. For example, sales in Asia grew by 22%, with the largest increases seen in China and India at 21% and 26%, respectively. We continue to develop in these emerging markets.
The global vehicle parc is expected to grow to 1.2 billion vehicles by 2015, driven largely by emerging market vehicle parc growth of 75% during that period.
On the right-hand side, EBITDA decreased by $20 million, again, due to decreases in volumes in the U.S. combined with unfavorable product mix. However, despite this decline, the aftermarket has improved sales and EBITDA in absolute dollar terms as well as EBITDA as a percentage of sales compared to the first quarter. And furthermore, margins in the U.S. have continued to improve since the fourth quarter of 2010.
Now please turn to Slide 16 for more details on our first half earnings performance, which demonstrates the second quarter shows continuous improvement on the first quarter results. Sales exceeded $3.5 billion, an increase of $437 million or 14%. In constant dollar terms, this represents an increase of 10%. The gross margin improvement of $50 million or 9% represents a conversion of the incremental sales at an 11% rate.
With SG&A expenses reduced by $3 million in the prior year or 1.6 percentage points on sales, our operating margin for the half year was improved by $53 million or 30% to $228 million. Operating margin as a percent of sales has increased 6.5% compared to 5.7% one year ago.
Other income has improved by $10 million, largely due to the non-recurrence of the currency loss recorded in the first quarter of 2010 related to the devaluation of the Venezuelan bolivar.
Net income attributable to Federal-Mogul of $115 million for the period represents a $52 million or 83% increase from the net income in the first half of 2010, a very healthy conversion to net income of 12% on the incremental sales.
EBITDA improved by almost 12% to $378 million from $337 million in the first half of 2010. And finally, the first half cash outflow of $87 million compares an inflow of $42 million last year, reflecting increased investment in global growth.
On Slide 17, we have a reconciliation of our profit measure, operational EBITDA, to our net income for the half year. We realized EBITDA of $378 million in the first half of 2011 compared to $337 million last year. And in terms of reconciling from EBITDA to net income, the items are exactly the same as discussed for the second quarter.
And finally, on Slide 18, we provide a summary of the first half consolidated cash flow. Cash consumed by working capital of $120 million was similar to last year, reflecting both the favorable impact of accounts receivable factoring in the second quarter and the adverse cash impact of increases in inventory over the last 6 months.
The difference in other assets and liabilities is largely due to timing differences for a number of generally routine items, the major ones being the timing of dividends from non-consolidated joint ventures of about $24 million, high aftermarket rebates of $18 million as a result of aftermarket growth in the fourth quarter of last year and higher pension contributions of $9 million. The change in cash from investing activities is mainly due to the increase in capital spending of $79 million, partly offset by the acquisition of the Daros Group in 2010.
Cash flow from operations and investing activities was a net outflow of $87 million compared to an inflow of $42 million in the prior year. And this leaves us with strong liquidity of $1.6 billion, including $1 billion of cash.
And now, I will turn the call back over to Jose Maria for final comments before the Q&A.
Thank you, Alan. In closing, Federal-Mogul is delivering sustainable global profitable growth. And our performance in the second quarter of 2011 further demonstrates the company's capability to drive additional sales growth while managing cost challenges to deliver solid profitability.
Sales were stronger in all original equipment business segments with balanced regional sales results against our outperforming the other underlying markets. Federal-Mogul's sales growth was very strong in the BRIC markets, up 22% overall, with sales in China up 20% and India, 28%.
The company has continued to implement process improvements that drive efficiency, operating performances, as demonstrated by our low SG&A at 9.6% of sales. Our effective actions to offset the challenges of higher raw material cost in several areas has delivered cost reductions from suppliers, improved manufacturing efficiency and customer price recovery.
Gross margin and EBITDA were very solid in the quarter and were up versus second quarter last year. And net income increased significantly on a year-over-year basis, increasing by 31% to $64 million. We generated positive cash flow and continue to reinforce our liquidity of $1.6 billion, with $1 billion in cash and $0.5 billion unused revolver.
Now we are ready to take your questions about the company and quarter. Operator, please give instructions for the Q&A.
[Operator Instructions] And your first question comes from the line of Patrick Archambault with Goldman Sachs.
Patrick Archambault - Goldman Sachs Group Inc.
One of the -- I guess, a couple of questions on the walk slide on Slide 10. You did -- in terms of the material recoveries that you had of $8 million, is that $8 million -- is that something that is sort of just ongoing with the rate of business that you have on a quarterly basis? Or is there any kind of a lumpiness to those recoveries, i.e. can we sort of expect that number to continue to be in a kind of a similar positive in subsequent quarters just based on the escalators that you have in your contract? Or might that be lower or different in subsequent quarters?
Thanks, Pat. And this is, I think, one of the fundamental questions that the whole industry is facing a challenge. You know our records very well, because you have been following us. We have a very strong track record to have been green that means positive, all of the previous years between material cost and pricing. This year, like is normal, the pricing of the material -- the material cost went up from the beginning of the year mostly across all materials, and we started our negotiations, both with suppliers, customers and our technology poll[ph] and operating changes to overcome that. The first quarter, we were not yet in green. Now we are solid in green. And the way this operates is that all the agreement that we've got, both with supplier and customers, stay across the rest of the year. And if anything, it will be even stronger in third and fourth, because it will be full implemented, while some of them in the second quarter was just partially implemented between April, May and June. Then the very straight answer to your question: yes, we are proven again that because the strength that we have on market shares, leading technology and innovation, et cetera, we have managed once more again to compensate for the material cost increase that is out of our influence. How sustainable is that? It is sustainable, because it has been included in the new pricing, and second, because we have practically material escalators across the majority of the customers and in the most influential materials for us.
Patrick Archambault - Goldman Sachs Group Inc.
Great. That's very helpful. I guess my other question is just on mix. Forgive me if you said this already, but did -- is the mix headwind that you guys are experiencing, is it both in aftermarket and on the OE side? Or is it primarily in aftermarket? And I guess when do you start perhaps kind of hitting -- running into some easier comps? Because I know that the rotation to sort of down-market started happening last year.
Correct. Then let me answer very straight to the question and then expand from there. It is affecting the aftermarket, not the OE. Let me take -- normally, first, I take OE and then aftermarket. Let's reverse this, and you fit it right. The aftermarket movements are -- were very, very clear in North America. It does not affect the rest of the worldwide markets -- in North America, to trend more to a different balance between premium brands and middle range and entry. As we indicated about a year ago, we put in place -- in fact, we launched it officially in November in Vegas and in September, October in Europe in Automechanika. That was the formal implementation. This is the second quarter. That means it's still prior to that implementation of the model, and the convention says we need to compare quarter-to-quarter. That is what we are saying here on the mix. What we have, as we all said, and that was in the part of the presentation of Alan, is that for fourth, first, second, we have seen a clear progress both in volumes, sales and what answer your question, in profitability. And the margins are going up in North America within the new strategy. That means the mix, we start turning it around. Regarding the original equipment, as you noticed, we are growing much faster, quarter-after-quarter, than the market: the second quarter due mainly to the 8% down impact of Asia Pacific, slowing down China, tsunami in Japan. Then for the first time in a while, we see the second quarter 2011 around 2% lower production of sales than the previous year. Despite that, we are, in original equipment, 23% up and close[ph] than those 14% And as you could see, very strong across all markets, whether it's, say, 13%, 15% in Europe; and then 23% in the BRIC; 19%, China; 26%, India. In those markets, the content of the vehicles is different, but today, the BRIC markets are running with very strong profitabilities. Therefore, the mix has a natural impact on the content but not in the profitability. We are managing to have a strong profitability. That is what you -- you are going to see these transitions, but the reference to the mix, it affects mainly the aftermarket and within aftermarket, the North American market, the U.S. market. Europe and Asia Pacific, we keep growing and making more profit in the mix.
Patrick Archambault - Goldman Sachs Group Inc.
Okay. Yes. That's helpful. The last question I had was just on the cash flow on Slide 18. There was obviously a pretty big step-up in inventories. You might have said that already, but is this kind of as a result of your investment in kind of adding that more-value ends to the aftermarket in terms of branching out your SKUs? And if so -- maybe just trying to get an understanding of why that's gone up. And then has that played itself out? Is that something that should be relatively stable as we go into the back half? Or is that going to continue to be a use?
The increase that you have seen has 2 sources, but let me answer first the end of your question. We are already stabilized. And you are going to see progressive decrease in inventories, because the 2 elements that has created this -- and I will take it in the order of your question -- is first, the global aftermarket has become global. If you track us back only 5 or 6 years, you will see that the real majority of our business was North American business. Today, we retain that business. The level of business in North America remains very, very healthy and wealthy, but Europe and emerging countries, it counts already for 40%. That, together with the launch of the new business model towards the end of last year for middle range and entry products, has created a new supply line chain pipeline that we need to fulfill. And there is more transit now of products between Asia Pacific, Europe and North America, but that has been stabilized. The second thing is -- that I mentioned before, I don't need to repeat -- our consistent -- there is some growth globally on original equipment. That means we are launching new programs constantly, and you know that that requires stockpiling to launch, job one and then normalize. Then I think you have seen now already what we consider to be the normalization. And from now we will apply our normal operating efficiencies to improve both the inventory and with that, the operating cost.
Your next question comes from the line of Tony Cristello with BB&T.
Anthony Cristello - BB&T Capital Markets
The first question I had, I just want follow up on the aftermarket side of things. As you progress in sort of your strategy here, what are some of the benchmarks or goals that you set to know that you're reaching the progress or you're on track for what you're trying to accomplish here? I mean, it's almost as if your -- you have a well-developed brand already, and you're trying to introduce a new almost category, if you will. I'm just trying to understand how you're grading yourself on the progress.
We -- I would like -- since Tony, I think you were -- when Pat was asking the question, I build on the answer that I gave to him, because your question is like an extension of that. Then first of all, it's clear that while we have a globally similar type of original equipment strategy in the aftermarket, the markets itself are behaving and demanding different things: U.S. or North America, Europe and Asia Pacific, Europe and Asia Pacific being much, much closer in the model. Let's concentrate on the fact that the aftermarket for us out of North America, that means Europe and emerging markets and the rest of the world, is doing very well. It's growing very fast, and it's becoming very, very profitable. In North America, we have recognized that there is this movement to different mix between premium brands and private label that, by the way, hardly exist at all in Europe. In Europe, it's more between original equipment and branded. Here, we have branded with premium, private label and then you have another level of category that is called entry products. Then we -- and we discussed that even with you on a more detailed basis, I remember, last year. We introduced that in Automechanika, September, October and November, Vegas. The convention still is to compare quarter-to-quarter. Then this quarter, it was still out of our model in last year. What we see is that on the premium brands, we remained the market leaders in North America. And if you have noticed, we have put price increases in the market this year. That means we are confident that still, there is a very important strong market share that's driven by premium brands, and that we are strengthening. What you said is what translate of what we are doing. We are creating a new leadership for the company into the private label, and that takes time and effort. And we said that that was going to show progress, and we are confirming. And that is why we end the presentation, we give you on the top quarter-to-quarter and in the bottom, a chart showing progressive quarters. What we have now start seeing very clear is that the customers welcome us to stay market leaders on the premium brands, which not always in the past they wanted us to be market leaders in the premium brands and also market leaders into the private labels. But now, they are very interested in a Federal-Mogul that is also a market leader in the private label. Why? Because we can develop and support their business in a very competitive way. That is what we see the progress. The mix still keeps playing a role, but that is the model that we have proven to be successful in progressive quarters and you are going to sit through. The outcome of the market is positive. What we obviously cannot change is what -- is the market realities. You have North America go into that model and reviewing, time after time, the terms, which is not a real subject in the rest of the world. Then what we have done is to identify the market realities in U.S. and to act accordingly. The results are positive in the last couple of quarters, and hopefully, we are going to see the same thing in the coming quarters.
Anthony Cristello - BB&T Capital Markets
Do you think that the switch or the change in North America to wanting more of a private or a second-tier brand is really a function of what's going on with the do-it-yourself side of the business driving a lot of that demand and should -- and at whatever point, the economy then shifts back, I mean, to less of that, where DIY trends begin to decelerate and you have maybe a shift back more toward vehicle repair, new vehicles and such? Does that -- what happens to that new line of business that you've implemented? I guess I'm just wondering is you adapting quickly to a permanent structural change in the industry. Or are you adapting quickly to an operating environment that we're seeing today here in North America that's isolated because of this macro environment we're in?
I will not get into the political implications of the question, but I'm sure you will get answers from -- hopefully, from the government at the right time. But one thing is clear. We have, from the recession in 2009, built a very strong, very efficient flexible operating model. Then to your question is this change is permanent, market will stay, but we are flexible to adapt to market requirements. This situation is very, very unique in the U.S., mainly because despite the fact that we get out of recession, the employment never came back in the way that was expected. Maybe because the unemployment give you do-it-yourself versus "do it for me." It is obvious that the professional jobber in a garage knows the difference in performance, in functionality and in durability between a premium brand and a private label or an entry product. And he knows that you are saving cents to spend dollars, because mostly across, without any exception, the labor cost is much higher than the savings between a premium brand and a private label. That can be shown at any given time. However, if there is more do-it-yourself because a given social environment in a given country, it's obvious that the balance between premium and middle range or entry is going to change. What we see in Europe is not only in the auto industry, but it goes across all the consumables and the premium things. I'm sure, if you was -- have been in the automotive and within automotive, an expert in aftermarket, you will be into hotels, restaurants or consumable goods. You will see that the percentage of premium brands sold in Europe or the percentage of premium restaurant customers is much higher than in the States because the recovery and the outcome of the recession, people have gone back to their standards of expenditure. In the States, it's not the case. It's not up to us to resolve that, but it's up to us to put the right model. Then we are going to remain very flexible. Where we have put the middle range model is in place, and it's very successful, and it's proven in that last quarters since we implement it. Can the market back to ask a little less of private label and more of premium? Well, we hope that everybody will come back, because that is better products for the consumer, better profitable for the distributors, our customers and for us, and we will move in that direction. But if the market stays in the current trend, we will remain leaders in the current trend. And we are flexible to move in the direction that the market will evolve.
Anthony Cristello - BB&T Capital Markets
That's very helpful. And maybe if I can have one more question on the Slide 10, where you just referenced the productivity of $13 million and the labor inflation of $17 million. I'm wondering if at some point, the labor inflation -- as you make investments in personnel and everything globally, at some point, does that flatten out? And then do you see an -- actually, an acceleration on the productivity side? Is there some inflection point that we will see at some point where you see that to coupling of the two2?
I'm glad, Tony, that you picked that one, and Pat picked the material cost and pricing, which saves that question for you I suppose. Yes, what happened here is in certain has certain parallelism with material cost and pricing. The synchronicity of the negotiations between material cost, price and productivity and labor inflation is not parallel. And what has happened is yes, we created of productivity, but there are 2 elements. You saw how fast consistently we are growing in the OE, and that has, let's call it, an impact on productivity, because we need to launch new programs and to do a number of things globally that, as I said, has an impact on productivity. And at the same time, the labor and negotiations across take also certain time. But all that has been -- we are at the end of second quarter and it has been stabilized even before the end of the second quarter. Then the same, as I said, for material cost and prices, the same as I said for inventories. This -- you have seen now the progress of the actions. And the third and the fourth quarter, just by nature of the actions that you take at the beginning of the year, that means through first and second quarter, then the third and fourth quarter takes full profit, full advantage of those actions. And again, once more, we have a very strong proven record to have done that, quarter after quarter and year after year, to become green, both material cost versus pricing and productivity versus labor and inflation.
Your next question comes from the line of Brian Sponheimer with Gabelli & Company.
Brian Sponheimer - Gabelli & Company, Inc.
I wanted to jump over the commercial vehicle side now. We've heard from some OEMs this week about some supply constraints within the commercial vehicle market in North America. First, I'm wondering whether you had any inventory buildup there, just on some deliveries that should have gone out in 2Q but have to be pushed into 3Q or 4Q; and secondly, whether you feel that this is something that is going to take a couple of quarters to work itself out.
Well, first of all, I mentioned it in one question from Pat. The markets, globally, have been now moving in such a way that you need to do some stockpiling if you are going to launch new programs and if you are globalizing your products. In the case of the commercial vehicles, as you know, both in North America and in Europe, the growth on the month of June -- that is where you hear the comments from one particular, probably a bigger manufacturer in North America -- and in the quarter, in general, has been very strong. Then if some suppliers have had a very lean side or had a second- or third-tier supplier base that is not reliable, that is what is affecting. As you know, the quarter looks fairly strong for all the other industries still but especially for commercial vehicles, and that is where I think it's very important to do what we have done in the past and showed to you previously to have a base that is very diversified. Because then you're going to have ups and downs, but if you have both the customer base diversified and your manufacturing base as we have 1/3, 1/3, 1/3 of a continents, you are not vulnerable, because you can react in a very flexible way. And that is what we have done. Now I understand the background of your question, because when you look into the quarter, the growth of commercial vehicles is strongly much higher than passenger cars then some suppliers could be really having some issues. Federal-Mogul, we have delivered very well. You see our numbers and know we are very, very strong. And I think the reason is because the global strength of the company makes us much stronger in front of the sharp movements of the markets versus other companies that are more localized in one region or the other.
Brian Sponheimer - Gabelli & Company, Inc.
Right. I apologize if my question came off wrong. Actually, I think your OE volumes were excellent during the quarter. The reason why I was asking the question, there's been supply constraint from axle and chassis products. And I was curious whether we can potentially see a benefit for you in the back half of the year because of this, because clearly, Federal-Mogul has done a nice job with their own supply for the first half of the year.
Thank you for the added comment, Brian. The market share increases that we are stating that we are getting across all products and commercial vehicles, which -- the first part of my life I was in passenger cars, but it happened by chance that my last responsibility in a company was in a commercial vehicle company. The commercial vehicles, the importance when they have such a sharp growth is that you are talking about real business. Because while a passenger car, a potential owner kind of wait because has another car, commercial vehicles is to run your business. And therefore, in our case, where we are getting very strong for market share is that not only we have the technologies, but as you have pointed to in your question, we know how to deal with strong increases in the market. And when that happens, we are capable to supply. Then the answer to your question is yes, it has been an advantage for us in cases like this, what happened in Asia Pacific, to be the kind of supplier that when the others have problems, we can step in and help the customer. And then what that turns in is into customer recognition. And if not immediately, through the time, you get market share, and you get more business from the customer. Then definitely that -- I'm not saying that our success is based on somebody else challenges. But yes, definitely we are benefiting, and we will keep benefiting in the second half of the year.
Brian Sponheimer - Gabelli & Company, Inc.
Okay. And if I may ask one more, if, to the extent that you can, update us on the relationship with Lazard right now. Are they still under contract with Federal-Mogul? And how should we think about the relationship going forward?
I'm going to -- I know today for companies, where we were wanting to help one another. Then I'm going to help you, because probably, you didn't read the full press release. What we said is the conclusion that we came in the company with the Board of Directors and -- is that we announced today that we have determined, based upon the previous announcement that we did, to review strategical alternatives. We have done so and without ruling out other opportunities that may present themselves, we intend, at the present time, to concentrate primarily on organic growth and because we have so much potential to develop globally the business on strategic acquisitions. Beyond that, we need to keep the rules then.
And there are no further questions. I will turn the call back over to David Pouliot for any closing remarks.
Thanks, Tom. Once again, we'd like to thank you for joining our Q2 conference call, and we look to having you participate in our third quarter call in October.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.
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