Federal-Mogul's CEO Discusses Q4 2011 Results - Earnings Call Transcript

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Federal-Mogul Corporation (NASDAQ:FDML) Q4 2011 Earnings Call February 28, 2012 10:00 AM ET


Jose Maria Alapont - President and CEO

Alan Haughie - SVP & CFO

David Pouliot - Director IR


Patrick Archambault - Goldman Sachs

Brian Sponheimer - Gabelli


Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Federal-Mogul Corporation Earnings Conference Call. My name is Anne, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. [Operator Instructions]

I would now like to turn the presentation over to Mr. David Pouliot, Director of Investor Relations. Please proceed, sir.

David Pouliot

Thank you, operator. Good morning, and thanks to all of you for joining Federal-Mogul's Fourth Quarter and Full Year 2011 Earnings Conference Call. Before I begin I would like to refer you to the company's Safe Harbor statement shown on this page of the presentation and included in the earnings press release filed this morning. Please consider my reference to 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 the company's record sales and strong operating results for the fourth quarter and full year 2011. Following this overview, Alan Haughie will cover the detailed quarterly company and business segment financial results along with a recap of our full year financial performance. We will finish with closing remarks and then open up the call for your Q&A.

Mr. Alapont?

Jose Maria Alapont

Thank you, David. Good morning, everyone. Federal-Mogul's performance in the fourth quarter and for 2011 was strong as we drove increased profitability on record revenue levels. Sales continued strong on the fourth quarter due to the demand for our leading technology and innovation as the automakers maintained high global production. Our total sales in the quarter were up 5% with OE sales up 8% in constant dollar basis.

For the full year, total sales were up 11% at record levels. OE sales were as well at record level of $4.6 billion, up 18% versus a global market growth rate of 5%. We performed significantly above market growth rates in all regions and our growth in emerging markets during 2011 has further diversified our revenue base, with sales in China up 24% and in India 22%.

Sales outside the US and in Europe now account for 90% of the revenue. The company also experienced a strong aftermarket growth with the BRIC up 10%, China 18% up, India 12%. And Europe had a good growth of 6% with North America gaining momentum as a result of the several strategies to be discussed later on.

Full year operating margin and EBITDA remained strong on the year and we experienced significant increase in demand in our global operations. Operating margin improved by $76 million or 24% to 5.8% of sales and EBITDA increased to $702 million or 10.2% of sales. Our performance demonstrates the company's ability to generate greater revenue and profitability through higher operating and SG&A efficiency while also offsetting costs associated with higher volumes and material price increases.

During 2011, we introduced products in more than 100 new customer programs with more than 20 of those programs in China and India. We expect this strong pace to continue for the coming years due to increased global customer demand for our leading technology and innovation to meet (inaudible) requirements combined with (other) industry expansion.

In response to this growth, Federal-Mogul in 2011 invested $348 million to increase manufacturing capacity in existent and greenfield sites drive higher operational efficiency and develop and launch new technology with customers. This is (inaudible) the investment of two years ago.

Let's move to Page 5. Federal-Mogul sales in 2011 as I said were a record level of $6.9 billion. Gross margin improved by $81 million or 8% more than $1 billion. Operating margin was up by 0.6% to 5.8%. SG&A was an all-time low at 10% of sales and EBITDA increased to $702 million, up $31 million versus the previous year.

Federal-Mogul recorded a net loss in the fourth quarter of $239 million and a $90 million net loss for the full year reflecting a Q4 2011 impairment charge of $304 million, primarily due to a difference in the evaluation on selected product lines versus the value established in 2007 and at the time of the Fresh-Start reporting in connection with the Federal-Mogul Chapter 11.

The company's 2011 annual goodwill analysis indicate a decline in the fair value of selected product lines that have been impacted by factor in the US aftermarket. The company believes, however, that increases in its other reporting units such as powertrain, would largely offset the decline. But United States GAAP rules do not permit the recognition of gains in the value of one of the reporting units to offset impairment charges in another reporting unit.

When eliminating the impact of the goodwill impairment, adjusted net income was up for 2011 by $69 million to $203 million and the fourth quarter adjusted net income was $51 million, up from the $38 million in the fourth quarter of last year.

Thermal continues to transform its business to include a broader global portfolio of innovative leading products with higher technology content that improve fuel economy, reduce emissions and enhance vehicle safety. The company believes that this transformation a fundamental part of our sustainable global profitable growth strategy has and will continue to improve operating performance thereby increasing the company's fair value and overall shareholders' value.

Thermal invested strongly in CapEx during (mutual) record volumes requiring increased capacity, operational efficiency improvements and to fill the technology pipeline with products that customers are demanding. I will provide an overview on our 2011 technology development in a moment.

In summary, our performance remained strong in the quarter and full year while we invested in technology and customer programs to support the robust industry volume growth for the present and foreseeable future.

Let's move to Page 6. Federal-Mogul is unique in its excellent business segment, geographic and market diversification. We are one of the few leading suppliers who serve both the OE and the aftermarket in the automotive, commercial and industrial markets. Our global and regional diversification means that we are providing customer solutions leading products and services with world class value in every region of the world.

The original equipment portion of this business represents 66% in 2011, while the global aftermarket was 34%. US and Canada represent 38% and 43% was from Europe. The BRIC markets and the rest of the world were 90% of the total sales.

Regarding market diversification, 72% of our business is in light vehicles, 17% in commercial vehicles and 10% in the energy, industrial and transport markets, which includes air space, power generation and commercial shipping and other industries.

Moving to Page 7. The company's 2011 global original equipment record sales growth of 18% in light and commercial vehicle market shows the strong demand for Federal-Mogul leading technology and innovation. The company original equipment business had record global growth with our US sales up 14%, Europe up 18% and the BRIC markets up 26% versus the previous year with China revenue up 25%, India 26%, Russia 93% and Brazil 8%.

Federal-Mogul original equipment revenue in 2011 grew significantly faster than the market world rate in all the major markets. Nearly half of the capital investment mentioned previously was focused on key developing markets where our growth rates continued to be well above the market rate. We continue to develop greenfield sites for manufacturing and engineering in a strong growth market. The investment will for the future continue to support Federal-Mogul proven track record to grow at rates greater than the markets as customers choose our leading technologies to meet global standards for performance, fuel economy, emissions, vehicle safety and convenience.

As I mentioned before Federal-Mogul in 2011 launched more than 100 major programs with customers around the world. 20% of these program launches were in China and India. As a result of these interactions Federal-Mogul increased its market share with leading global automakers as well as with local Chinese, Indian and Russian customers in several key technology area. And the demand for our technological innovation continues to be very strong.

Federal-Mogul DuraBowl piston technology is now in the market on the high output engines of leading global customers and we are experiencing a strong demand to expand capacity and applications for this innovative aluminum piston technology. We have a similar competitive advantage in the steel piston technology for commercial vehicles and have launched in 2011 additional customer engine programs using our well-known Monosteel pistons.

Federal-Mogul LKZ ring technology has become the leading technology in the industry for superior (oil) control for fuel efficiency and emission reductions. And is just another example from Federal-Mogul's strong portfolio of piston ring technologies for all engine sizes. IROX engine bearings were launched on several new engines during the year and we continued to win new business with automotive customers because the IROX bearing's outstanding durability even in high specific output and hybrid applications.

The company also developed a leading position in the Dynamic Seals market and we continued to launch new programs during the year especially with our MicroTorq shock seal product line. Federal-Mogul is clearly a leader but not only in powertrain technologies but also in friction materials with a new generation of friction formulations for light and commercial vehicles launching several new programs in 2011.

We also recently have launched new customer programs for our innovative (inaudible) electric fuel pump and the new pump design offer 20 times the durability of conventional (inaudible) type pumps used on Class A trucks, agricultural, mining and other heavy duty engine applications.

Federal-Mogul has also launched lighting programs and we are the market leader for motorcycle front and rear lighting models. If we go to Page 9, we would like to share with you several innovative technologies that Federal-Mogul introduced to the automotive, commercial and energy, industrial and transport markets during the year.

The technology content in these products is increasing, which translates to increased revenue opportunities for the Federal-Mogul as well as competitive areas for our competition. A great example is our Advanced Corona Ignition System, which can enable a significant improvement in fuel economy on the order of 10% or more. Customers are extremely excited about the potential for delivering even more fuel efficiency and lower emissions from gasoline engines at a better cost than other competing fuel economy improvements technologies.

We are currently in development with nine global vehicle manufacturers and we expect to move from development to mainstream application with several of these leading customers in the near-term for both carryover in existing and new powertrains (in design).

We are also launching new Eco-Friction Low Copper Ceramic and (inaudible) brake pads formulated to meet future environmental legislation. This (greener) brake formulation is becoming a global requirement and our development programs are on global scale. We also launched new interior lighting technologies including our touch free interior lighting, which operates with a simple wave of your hand for greater convenience and less driver distraction.

Crushshield for our system protection business is the most recent example of shielding design to help customers to meet requirements for system integrity in electrical vehicles and hybrid applications. Federal-Mogul energy, industrial and transport business also launched new technologies in 2011 including our line on Oilwell Cementing and Sealing products that leverages Federal-Mogul extensive capability in (inaudible) injection molding.

Federal-Mogul was awarded in 2011 386 new patents bringing our total since 2005 to well above 2,500 patents. This accomplishment is clear evidence of the sophistication and excellence with our extensive pipeline of leading technologies to address fuel economy, emission reductions, vehicle safety and convenience.

On Page 10, I would like to talk about how our aftermarket business remains a primary strategic focus for Federal-Mogul. During 2011 we drove strong growth in the regional and developing markets where the automotive aftermarket continues to grow. We improve our aftermarket revenue in Europe by 6%, China up 18%, India up 12%. Federal-Mogul in North America continued to build market momentum as a result of the strong support of our premium brands, introduction of extensive mid-range product portfolio and new products to expand application coverage.

Federal-Mogul raised the bar for aftermarket brake performance with its new ThermoQuiet ceramic brake pads and launched new product lines such as Champion branded filtration, wipers and performance additives during the year. To support our global aftermarket business, we are developing best-cost sources which meet Federal-Mogul rigorous performance and quality standards so that we can deliver top quality and product performance at competitive and profitable cost in both mature and fast growing markets.

In North America we realigned our distribution and our customer strategies to enhance our operating efficiency and support revenue growth in the region. We are leveraging recent investment in our central distribution centers and have closed two local distribution centers during the year while improving customer service and satisfaction with better supply chain management.

We have also realigned our sales structure and we are introducing a new web-based tools for sales management to drive further efficiency and customer visibility for our broad portfolio and world class product availability.

Now, I will turn the presentation over Alan for additional details about the quarter and the full year results.

Alan Haughie

Thank you, Jose Maria. This morning I will cover Federal-Mogul's fourth quarter and full year financial highlights including a review of the sales and EBITDA performance of our four business segments. The full details of our financial results for 2011 are included in our Form 10-K, which will be filed with the SEC later today.

Now please turn to Slide 12 for more details of our fourth quarter earnings performance. Sales rose to almost $1.7 billion representing an increase of $66 million or 4%. In constant dollar terms sales increased by $85 million or 5%, with OE sales, which represents 66% of the company's sales growing by 8% and global aftermarket sales remaining flat.

Gross margin increased by $7 million to $247 million, a conversion of 11% on the increased sales. As a percentage of sales gross margin fell by 2/10 of a point reflecting product mix shifts, the continuing costs of globally expanding the business in all regions partly offset by lower depreciation charges. Consistent with prior quarters the company was able to more than recover underlying material cost increases through price escalators, supplier negotiations and customer price recoveries.

SG&A decreased by $1 million versus last year and therefore as a percentage of sales, improved by 5/10 of a point and the company continues to control functional costs during this period of growth. Our operating margin being the difference between the gross margin and SG&A improved by 11% or $8 million to $80 million reaching 4.8% of sales compared to 4.5% last year.

However, we recorded a net loss of $239 million in the fourth quarter due to a noncash impairment charge of $304 million primarily reflecting a change in the valuation of goodwill on selected product lines versus the values established at the time of Fresh-Start reporting in connection with the company's emergence from Chapter 11. A number of aftermarket product lines have been negatively impacted by a shift in the customer and product mix driven by economic and consumer affordability challenges in the United States.

The rules governing the accounting for goodwill require the recording of an impairment under these circumstances but do not allow for recognition of increased value in other business lines as the company realigns its footprint and portfolio. And in fact this change reflects how Federal-Mogul's overall global business has shifted to a mix of higher technology products.

Adjusted net income, which is simply GAAP net income without the curtailment gains and impairment charges increased $13 million to $51 million. EBITDA was $158 million for the quarter, a decrease of $12 million from last year as will be discussed in more detail later in the presentation.

On Slide 13, we have a reconciliation of our profit measure, operational EBITDA to our net income for the period. We have also presented the reconciliation to adjusted net income at the foot of the page. As just mentioned, we realized EBITDA of $158 million in the fourth quarter of 2011 compared to $170 million last year. 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 three years.

These assets therefore became fully depreciated at the end of 2010. And given their noncash nature, we naturally excluded the impairment charges from EBITDA. The other components of the EBITDA to net income reconciliation remain largely unchanged from last year.

Slide 14 represents the year-over-year roll forward of our fourth quarter sales and EBITDA. The light blue bar along the foot of the page walks 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 $71 million of sales growth to new business wins net of volume changes. The company experienced $66 million in OE market share gains and spread equally between North America, Europe and Asia. Aftermarket sales increased by $12 million from market share gains the majority of which occurred in North America. But this was partially offset by lower volumes of approximately $7 million. In total, this $71 million represents year-over-year growth of about 4% on the 2010 sales base. Year-over-year pricing including the impact of material cost escalators was favorable by $12 million. And the remainder of the sales movement is primarily exchange.

Now turning to EBITDA, the net impact of volume and market share gains was negative for the quarter. However, if we break this down between the two components negative EBITDA from volume and mix slightly offset EBITDA from market share gains. In fact market share gains converted at a healthy 24% on the improved sales.

The increase in raw material costs was more than offset by price increases and customer price escalators with a net increase to EBITDA of $3 million. EBITDA was hit by $14 million from labor and benefits cost inflation and as a result of these items, EBITDA decreased to $158 million versus $170 million last year.

Page 15 introduces our review of business segment performance for the fourth quarter and full year 2011, which focuses on the comparison and trends in sales and operational EBITDA.

Turning now to Slide 16. The format adopted for the business segment discussions will be to cover the full year sales and EBITDA performance compared to 2010 on the left side of the page. The right side of the page covering the fourth quarter. And consistent with the last quarter in order to highlight the evolution of our segment performance we have also included a chart comparing the fourth quarter of 2011 to the fourth quarter performance of the previous two years.

Starting with Powertrain Energy, our largest business segment serving the OE market and representing 50% of our OE sales. The significant items in the 2011 full year comparison include a 20% constant dollar sales increase including volume and market share gains in all regions with sales in the US and Canada up 21%, Europe up 19% and BRIC countries up by 30%.

For the full year sales in the rest of the world are equal to those in the US and Canada for this segment, both at 21% of PTE revenue reflecting our successful growth strategy in emerging markets. EBITDA increased by $47 million or 16% of which $66 million is due to volume and market share gains. And once again we successfully offset material cost increases with customer pricing netting $3 million in EBITDA improvement. Labor inflation and our continued investment in R&D and new product launches were partially offset by a positive exchange in carryover acquisition impact resulting in a reduction of $22 million.

The main items for the fourth quarter include a 12% constant dollar sales increase including net volume and market share gains in all regions and as shown in the chart sales and EBITDA continue to grow from 2009 and 2010 levels.

The next slide, #17 provides an overview of our Powertrain Sealing and Bearings segment. The significant items in the 2011 full year comparison include a 12% constant dollar sales increase due to volume and market share gains in all regions, with sales in the US and Canada up 7%, Europe up 14% and the rest of the world up 20%. EBITDA increased by $20 million, a 12% conversion on the increased sales with EBITDA margin improving by 3/10 of a point.

Customer pricing offset material cost increases by $12 million with the remainder being the impact of volume increases net of productivity exchange and other. Highlights for the fourth quarter include a 9% constant dollar sales increase with market share gains in all regions and EBITDA improved slightly as a result of the same basic drivers as for the full year. As shown on the chart below, this segment continues to grow sales and EBITDA in absolute dollar terms from the fourth quarter of 2009 and 2010 levels.

The next slide, 18, provides and overview of our Vehicle Safety and Protection segment. Full year 2011 highlights include a 5% constant dollar sales increase mainly due to global market share gains and strong volume increases with the US up 14% and BRIC countries up 12%. EBITDA decreased by $22 million primarily due to increases in the cost of steel and many of the other diverse materials specific to the products within this segment.

However, productivity improvements were sufficient to offset labor inflation and global development costs including the continued operational transformation required for the introduction of the mid-grade and private label product lines manufactured for the aftermarket. Highlights of the fourth quarter include flat sales in constant dollars, an EBITDA decrease of $4 million caused by negative product mix impacts and rising material costs.

These impacts were partially offset by productivity improvements of $3 million and as shown in the chart at the bottom of the page, sales and EBITDA remained relatively flat in the fourth quarter of 2011 versus the prior two years.

And finally, the Global Aftermarket segment on Page 19. First, in reference to the full year performance on the left side of the page sales were basically flat compared to last year. New product launches and market share gains in the US and Europe were balanced by decreased volumes in the US. However, EBITDA decreased by $35 million to $257 million, the majority of which relates to decreased volume and mix in the US and Canada. Our outsourcing strategy enabled us to offset customer price-downs of $12 million with cost savings on bought-in product of $25 million.

Highlights for the fourth quarter include flat sales in constant dollars and an improving trend compared to prior years in the US and Canada. In fact we ended the year just flat to the same point last year in the US, a significant improvement on the second and third quarter comparisons. And this is evidence that our position in the US market is beginning to stabilize. EBITDA decreased by $11 million due to unfavorable product mix. Significant year-over-year progress continues with the resourcing of parts and production resulting in a $9 million improvement in material costs, which more than offset the impact of customer price reductions.

Aftermarket sales on a global basis is stable. Declines in the US and Canada as a result of economic issues and other current consumer spending habits are slowly reversing as evidenced by the sales increase this quarter versus the fourth quarter in the prior two years. And as shown by the light blue bars in the chart in the fourth quarter of 2011 sales in the US and Canada improved slightly versus the same period in 2010 and by 10% versus the same period in 2009.

And globally the company continues its growth strategy in emerging markets. Fourth quarter sales in 2011 were 5% higher in the rest of the world in the fourth quarter of 2010 and 13% higher in the fourth quarter of 2009. The change in EBITDA dollars reflects the transitioning product mix offering introduced in order to capture the growing mid-grade and private label markets.

Now please turn to Slide 20 for more details on our full year earnings performance. Sales reached over $6.9 billion driven by strong growth in OE sales in excess of the global market. Sales increased by $691 million or 11%. In constant dollar terms this represents an increase of 8%. OE sales grew by 18% or 14% in constant dollars and global aftermarket sales as stated previously were basically flat.

The gross margin improvement of $81 million represents a 12% conversion on incremental sales. SG&A expenses increased by $5 million from the prior year. But this includes $14 million from negative currency movements. Therefore in constant dollar terms we reduced SG&A by $9 million while increasing sales by $534 million. This is evidence that the company continues to control general administration costs in support of increased spending on R&D and the global market expansion.

As a percentage of sales SG&A improved by one whole point to 10%. Our operating margin for the year improved by 24% or $76 million to $399 million compared to $323 million last year. As a percentage of sales operating margin has increased to 5.8% of sales from 5.2%. In 2010 the company recognized noncash curtailment gains from the elimination of certain retiree healthcare benefits of $29 million. The impact in 2011 was just $1 million for the year.

For the full year the net loss attributable to Federal-Mogul was $90 million driven by the impairment charge previously discussed. However, after adjusting for the curtailment gain in 2010 and the impairment charges adjusted net income improved by $69 million or 52%, a healthy conversion to adjusted net income of 10% on the incremental sales. EBITDA improved to $702 million from $671 million last year.

On Slide 21, we have a reconciliation of our profit measure, operational EBITDA to our net income for 2011. We realized EBITDA of $702 million compared to $671 million last year. In terms of reconciling from EBITDA to net income the items are exactly the same as discussed for the fourth quarter. Again at the foot of the page we have shown a reconciliation to adjusted net income, which is merely GAAP net income before the OPEB curtailment gain and impairment charges.

Slide 22 represents the year-over-year roll forward of our 2011 sales and EBITDA. Now with regard to sales, we attribute $492 million of sales growth to market factors and new business wins. Of this amount, $332 million is due to increased demand before market share gains for the company's OE products in the automotive, light, medium and heavy duty commercial vehicle markets as a result of regional increases in vehicle production.

This represents year-over-year growth of about 8% on the 2010 OE sales base. On top of this 8% growth market share gains represents sales growth of a further 5% or $182 million. And in fact our global OE sales growth from volume increases and market share gains of $514 million exceeded the growth attributable to increased global vehicle production alone. However, with respect to the aftermarket, the volume declines in the US offset the impact of growth in Europe and the rest of the world by a negative $22 million.

But as discussed earlier we have gained significant market momentum in the US in the fourth quarter. The year-over-year pricing including the impact of material cost escalators was favorable by $25 million with $37 million in OE price increases offset by price decreases in the aftermarket of $12 million. The remainder of the sales movement is exchange rate impacts of $157 million and the carryover impact of the Daros acquisition in 2010 of $17 million.

Now turning to EBITDA, the net impact of the OE volume and market share increases was about $80 million or a healthy 16% conversion on the related OE sales increases previously described. This was offset by a decrease in EBITDA of $43 million due to the significant mix shift and volume declines occurring in the aftermarket. The increases in raw material costs were almost entirely offset by price increases and customer price escalators with a net decrease to EBITDA of just $1 million.

We improved productivity by $34 million but this was offset by labor and benefits cost inflation of $60 million. EBITDA increased from currency and other items by $21 million. However, as a result of all of these items EBITDA increased $702 million versus $671 million last year.

And finally on Slide 23, we provide a summary of the full year consolidated cash flow. Cash flow from operations and investing activities was a net outflow of $115 million compared to a net inflow of $121 million in the prior year. This essentially reflects the company's investment in current and future growth. We have consumed $190 million in working capital and invested $348 million in capital projects necessary to support both current and future sales.

We continue to support increasing demand with the highest quality and delivery performance for our portfolio of leading technology products. This leaves us with strong liquidity of $1.5 billion comprising $1 billion of cash and $0.50 billion in undrawn revolver.

And now I will turn the call back over to Jose Maria for final comments before the Q&A.

Jose Maria Alapont

Thank you. Before we open up for question-and-answers, I would like to share with you how we see the markets and why we believe Federal-Mogul is well positioned for the future.

As you can see on this slide, Page 24, we expect another strong year in 2012 with growth in almost all major markets with exception of Europe, where we still expect Federal-Mogul to continue to grow market share on the basis of customers' preference for our leading technologies and innovations and continue to perform above the market.

To respond to customer and regulatory demands, global vehicle manufacturers are expected to continue to increase spending on technology to improve fuel economy and reduce emissions and enhance vehicle safety. And Federal-Mogul is a recognized market leader in all these areas. Increasing industry volumes make growth in emerging markets and Federal-Mogul's leading technology and innovation in core products that address the specific customer and regulatory and market requirements provides very favorable opportunities for the company now and in the future.

Market growth is forecasted to increase more than 25 million units with sales growing to 108 million in 2016. And we expect to keep our revenue growth levels above the market growth rates as we have been doing.

Let's move to Page 25. As you can see here major drivers for Federal-Mogul global aftermarket business are the number of vehicles in the Car Parc and the average age of the vehicle. Polk, a market data provider recently released their latest survey noting that the average age of new vehicle ownership is almost six years and the average age of the used vehicle ownership is slightly above four years. Both an all-time high for the US market. They also reported that the average age of vehicles on the road today in the United States is 10.8 years.

As consumers hold onto their vehicles longer they require more of our broad portfolio of products to maintain and service their vehicles. Additionally as you can see from the trend in all markets as shown on this chart we are expecting to benefit from exceptionally strong demand in the coming years. Global production and sales volumes are increasing and the new vehicle entering the Car Parc are a net addition in many developing markets like China, India, Russia and Brazil. Our global footprint technology and innovation together with our leading aftermarket brands and world class products and services position us really well for this growth.

Let's move to Page 26. Federal-Mogul is prepared to capitalize on the strong market growth expected to continue through to 2016 and beyond. There are several major growth drivers for Federal-Mogul over the next years. The first driver is market expansion brought on by the recovery of the mature markets as well as a substantial growth on the BRIC markets. We see a forecasted compound annual growth rate of 7% over the next five years to 108 million vehicles per year. With mature and BRIC markets driving the total Car Parc to over 1.2 billion vehicles by 2016.

The second driver during this period is the onset of new regulations with tougher fuel economy emissions and vehicle safety requirements for vehicles both in mature and in BRIC markets. Implementation of regulations in BRIC nations is fast approaching the level used in mature markets and the rate of adoption of new regulations and technologies is increasing. This trend is further strengthened by the higher customer demand for more technology for fuel economy due to the projected higher oil prices, environmental concerns and vehicle makers demand for product differentiation.

These major growth drivers add up to a great opportunity for Federal-Mogul because we have the technology portfolio. We have the leading aftermarket brands. We have the global (inaudible) persons and we have the market position to drive sustainable global profitable growth well into the future as demonstrated by our performance.

In summary, Page 27, Federal-Mogul's strong performance for fourth quarter and throughout 2011 is shown by our accomplishments. The company sales were at record levels of $6.9 billion, an increase of 11% with OE sales increase at record of $4.6 billion and growth above market's rate in all regions. Our global aftermarket sales remain stable supported by strong growth in the BRIC and Europe with rebounding momentum from strategic actions in North America.

2011 operating margins improved to 5.8% of sales, up 0.6% from the previous year. We achieved our best ever level of SG&A at 10% of sales, a full percentage point improvement versus 2010 and our EBITDA of $702 million or 10.2% of sales represents $31 million increase from the previous year. Federal-Mogul's adjusted net income was $203 million, up $69 million from 2010 with adjusted earnings per share of $2.04. We continue to make significant capital investments to improve capacity and efficiency of our operations so we can support new global customer vehicle programs around the world with Federal-Mogul prepared to capitalize on the strong market growth and demand for leading technologies.

Our record for strong growth, margin improvement, solid performance and considerable cash position provides a positive outlook for Federal-Mogul to continue to deliver sustainable global profitable growth. Thank you for your attention. And, operator, please open the call for question-and-answers.

Question-and-Answer Session


[Operator Instructions] And our first question comes from the line of Patrick Archambault with Goldman Sachs. Please proceed.

Patrick Archambault

Hi. Good morning.

Jose Maria Alapont

Good morning.

Alan Haughie

Good morning, Pat.

Patrick Archambault

So I guess a bit of an open-ended question to start off with. It seems like going through the segment results your variable cost control seems to be in pretty good shape. It seems like in I think two of the three OE driven segments your pricing was exceeding raw materials. And then in aftermarket, unless I'm sort of misinterpreting this, your portfolio changes seem to be keeping your costs ahead of price downs. So it sounds like that’s ticked and tied. I guess I my question is more just on the productivity and investment side, which seems to still be weighing on incremental margins. I'm assuming that what you guys call productivity includes engineering and stuff like that. Can you tell us a little bit about how those costs are likely to trend into the next couple of years and when you'll be able to sort of see that be a source of leverage as well?

Jose Maria Alapont

We have been as you know performing strong on productivity and your question is I think an important one on why 2011 we see a slightly lower productivity. The reason is that when you consider the major transformation that we have done in the company, moving about 25 manufacturing, 25% of our manufacturing from well established manufacturing base in North America and Europe to new emerging countries - China, India, Russia, South America.

That requires not only an effort on investment as you heard, which now is normalizing but also it's a challenge on the fact that we are doing two things simultaneously. One, we have restructured the company. Closed 33 plants. Bring the activity into the emerging market, but at the same time we have launched more than 100 new programs, 20% as you heard over in China and India this year. And we have done it with the latest technologies. That is why we think is really a (paying) strategy, which of course has an impact on a given moment on things like productivity because we are not serving the global market with the leading technologies only for North America and Europe. But we are doing as well from China, the India, the Russia, et cetera.

To launch all these new plants, all this new technology and as you saw we are taking market share not only for western but as well for local Chinese, Indians, Russian, that obviously is a major, major effort and yes, we need to make the same progress with these new plants in China and in India and in Russia in terms of productivity. And there is where you are feeling this delta and we are very confident. We have done it across US. We have done it across Europe. We have done it through areas like Mexico. It's in Europe now. We are progressing and we are progressing partially into as well these new emerging markets. You know that we have a very, very low activity, only five years ago. We have built from basically $25 million revenue to $0.5 billion in the last six years. That is why we feel encouraged that productivity will keep performance strong this year, 2012 and in the coming future because we are becoming more solid into those areas of development in these emerging markets.

Patrick Archambault

Okay. So if I were to just kind of try and sort of seize on the main points, I guess the launches may not ramp up as quickly as they did this year and then also you're investments in emerging markets is becoming more seasoned. Is that kind of the right way to think about it?

Jose Maria Alapont

Absolutely. And to give an example. If you look into – let's start and after a couple of examples to be coherent with the time but a plant like (inaudible), six years ago was a very, very small plant that we will not even talk about. Today when the third phase is finished it will be probably one of the largest if not the largest piston plant for us and one of the largest in the whole industry.

The same thing is happening in 2005 the revenue of friction materials in (inaudible) was around $1.3 million. Today we have two plants, one fully new, one across the street with the other at full capacity and that is heading to be one of the largest (inaudible) on friction materials again in our (inaudible). And I can go on and on with examples of the same for rings, for bearings, that we have localized materials et cetera. And yes, you're absolutely right. We are becoming now solid and performing in all these markets on top of gaining market share and launching new products.

Patrick Archambault

Okay. Great. And another two quick ones if I may. On the walk that you had for the fourth quarter EBITDA, the reason the $71 million sales improvement is kind of net neutral or slightly negative from a conversion rate, we went through that quickly. That was most mix. Is that correct?

Jose Maria Alapont

That's correct.

Patrick Archambault

Okay. That was my question but it sounds like I cut you off there.

Jose Maria Alapont

No. What I said is that (inaudible) and to observe, related with your first and second question that the converting that we have been sharing with you for OE was for the full year around 16%. The converting for the fourth quarter is around 24%. Then you can see that the coherence of what have told you about the progress we are doing with productivity.

Patrick Archambault

And then finally for me, can you just remind us of who your biggest customers are in Europe? It sounds like you've clearly significantly outgrown the market. I mean I guess a lot of that is new business but are you more weighted – I would imagine like to luxury and premium than some of the other brands. Maybe you can just give us a little snapshot of that.

Jose Maria Alapont

That we can give you as much detail as you want. But it's interesting that we were reviewing the data and Steve Bowers last week was telling us that always under 5%. Because you know we are so strong market leader that we – none of these customers represent more than 5%. And there are a lot of customers that are between this let's say 4% and 5%. But he said now we have a new largest customer worldwide and it's Volkswagen and I was pleased to hear this week that Volkswagen has reported record numbers.

Then Volkswagen with Audi, we put all together, very strong and Audi is doing great. Mercedes comes like number two with BMW and then we have the general list, GM, Ford and as well the French and Italian. But, yes, we are a very high performance technology type and we are very strongly present. You can not, to give you and idea, out of the 10 best powertrains that goes to premium vehicles, a very large part, we are present in all of them. In all of them. Then, yes, we are very strong on luxury or what you say premium vehicles but as well we are in the high volume in that. But that is what combine our position with somebody like Volkswagen. But then you have following Mercedes or BMW and Audi.

Patrick Archambault

Okay. Terrific. Thank you very much, guys.

Jose Maria Alapont

Thank you, Pat.


And our next question comes from the line of Brian Sponheimer with Gabelli. Please proceed.

Jose Maria Alapont

Hi, Brian.

Brian Sponheimer

Hi. Good morning. How are you? Got a couple of questions here. First, just want to dig a little bit more into how you see the US aftermarket shaping up in 2012 given where you are in your own product cadence and what we will likely see as some high gas prices coming in and affecting consumers throughout the year. How confident are you and I guess how far through your product alignment are you where you're essentially able to cover the market should there be a further turn to the value oriented products? And also regarding this distribution footprint, should we expect that there will be further realignments throughout the year or do you think you've identified what you need to as far as from a cost cutting standpoint?

Jose Maria Alapont

Let's just start with the market. When we – in the industry with some estimations during the previous period that we were heading about the (inaudible) I think everybody thought that it was one of those estimates not to be seen. But I can tell you here in Michigan we have stopped – I think people have stopped pulling out the number for – that together with the Polk report that I was mentioning, a 10.8 already today, 10.8 years average per vehicle in the States. I think that our decision a year ago to put in place a strategy that was not making that choice between premium brands or mid-grade entry product and entry product – it was to say we need to serve both and we need to be leading in both.

In one we are already. And we are strengthening and we are putting more product in the portfolio. In the other what we are doing is developing. In that sense, in one hand, the market seems to be going into the right direction because sales in OE keeps going up and I'll be pacing those expectations and in the other hand because of the economic situation and because the oil prices, it seems that the customers are holding not only housing but as well vehicles longer and longer.

Now that works in our favor because that means more maintenance and our product (inaudible) and also because the second part of the strategy because we without waiting for the markets or the customers demand and we went into this transformation of the business, which naturally has an investment cost. And at the same time it has a challenge in between. But the fact is that we have seen the results. You heard us saying that the fourth quarter has been going in the right direction and what is more important are our transformation process as well into the fact of bringing more competitive products from that sources and manufacturing more and more and more aftermarket products in best cost sources whether it's Asia Pacific, China, India, Mexico, et cetera. All that will support efficiently and successfully our strategy.

Regarding restructuring, well in fact this is what we're reporting for this year, but we have been doing this since the last five years just taking the opportunity of the improvements in supply chain management and the new web technology that we have invested in our IT to have a much better consolidated distribution of products. Then what you are going to see and we are there practically is to have a West Coast, a Midwest and an East-Midwest and East type of center of distribution. And that is where we have come now. And that is working quite well. And also as you notice we have restructured the sales model in North America with more web management tools et cetera to make it more efficient. These two things work quite well together.

Brian Sponheimer

Okay. Great. Thank you. Just one more if I can. Just talking about cash flow, and you still have free cash for 2012 and potentially 2013. You had about $100 million bump up in underfunded liabilities on your post retirement liabilities, and you've got a significant slug of debt that comes due at the end of 2014. Just how are you thinking about your balance sheet for 2012 potentially regarding refinancing, cash into pensions, et cetera?

Jose Maria Alapont

Well first of all, the two subjects are different. Regarding refinancing, I don't think that you will see much about this year. But comes towards the second part of next year, then we will start looking thoroughly to it because the first two-thirds of the debt are due for the 2014 and one-third of the debt that is like – it's more less two-thirds, one-third and one-third of the debt is for 2015.

And regarding the pension that is an (inaudible) that we'll look through the year and we will keep all of you properly informed with a given level of funding (inaudible).

Brian Sponheimer


Jose Maria Alapont

The debt, I don't think that we will look very much into that until some time second half of next year.

Brian Sponheimer

Okay. You had some major growth initiatives this year from a CapEx perspective, is this CapEx level something that we're likely to see going forward?

Jose Maria Alapont

Well if you look, I'm sure that you have (inaudible) because you are one of the ones following us and if not I'm sure that we can take you through but what you need is if you take 2007 and 2008 except the last quarter where the normal grow in years, then you will see that we were north of 300, 320. Then if you extrapolate 2010 that we need to tie the belt for obvious reasons from (inaudible) and cash and you put 348, you will see that that is quite normal trend with 2007 and 2008. And I think I said it in my comment that is normalized. You should not expect the same sort of CapEx growth in 2012 regarding 2011 like you see 2011 versus 2010. 2010 and 2009 should be considered like two years that were not part of the normal trend of our CapEx. I think at 348 we are normalizing our CapEx.

Brian Sponheimer

All right. Great. Thank you so much.

Jose Maria Alapont

Thank you. Thank you very much, Brian.


Ladies and gentlemen, with no further questions. This concludes today's question-and-answer session. I would now like to turn the call back over Mr. David Pouliot, for closing remarks.

David Pouliot

Once again we'd like to thank you for joining our Q4 and full year 2011 conference call. And we look forward to your participation in our Q1 2012 call sometime in April. Thank you.


Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect.

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