ArvinMeritor, Inc. F4Q08 (Quarter End 9/28/08) Earnings Call Transcript

Nov.18.08 | About: Meritor, Inc. (MTOR)

ArvinMeritor, Inc. (ARM) F4Q08 Earnings Call November 18, 2008 9:00 AM ET

Executives

Terry Huch - Senior Director, Investor Relations

Charles G. McClure, Jr. - Chairman of the Board, President, Chief Executive Officer

Jeffrey A. Craig - Chief Financial Officer, Senior Vice President, Acting Controller

Analysts

Brian Johnson - Barclays Capital

John Murphy - Merrill Lynch

Himanshu Patel - J.P. Morgan

Brett Hoselton - KeyBanc Capital Markets

Patrick Archambault - Goldman Sachs

Operator

Welcome to the fiscal year 2008 fourth quarter and full year results conference call. My name is Katie and I’ll be your coordinator for today. At this time all participants will be in a listen-only mode. We will be conducting a question and answer session towards the end of this conference. (Operator Instructions) I would like to now turn the call over to your host for today, Mr. Terry Huch, Senior Director, Investor Relations.

Terry Huch

Welcome to the ArvinMeritor fourth quarter and full year 2008 earnings call. On the call today we have Chip McClure, our Chairman, CEO and President, and Jeff Craig, our CFO. The slides accompanying today’s call are available at arvinmeritor.com. We’ll refer to the slides in our discussions this morning.

The content of this conference call which we’re recording is the property of ArvinMeritor, Inc. It’s protected by US and international copyright law and may not be rebroadcast without the express written consent of ArvinMeritor. We consider your continued participation to be your consent to our recording.

Our discussion will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Let me refer you to slide 2 for a more complete disclosure of the risks that could affect our results. To the extent we refer to any non-GAAP measures in our call you’ll find the reconciliation to GAAP in the slides on our website.

Now I’d like to turn the call over to Chip.

Charles G. McClure, Jr.

I’d like to first take a moment to recognize our team for the outstanding financial performance they delivered in 2008. What I’m most proud of is that we achieved what we set out to do during the year. We had an aggressive strategy in place and our people succeeded in executing on it.

Let’s turn to slide 3 to review some of these accomplishments. As you can see our sales were $7.2 billion, up 11% compared to full fiscal year 2007 which was driven by higher volumes in Europe and South America, gains in market share in certain segments and stronger currencies outside of North America.

Despite difficult industry conditions in the US, our commercial vehicle system sales were up 15%. If you exclude the benefit of the stronger currencies outside of North America, CVS sales improved by 8%. This business group benefited from greater volumes in off-highway, military and after-market units as well as increased revenues in regions outside of North America.

Sales in our light vehicle systems business increased by 5% which was due to foreign exchange. Without the benefit of stronger exchange rates for foreign currency our light vehicle business would have been down by the year by 4% primarily due to lower production in North America.

We’re pleased to report that we were able to meet our most recent full year guidance range of $1.55 to $1.65 before special items. As you read in this morning’s news release, our earnings per share for the full fiscal year 2008 was $1.60 from continuing operations before special items. This is up significantly from the $0.53 reported for full fiscal year 2007 and in spite of severe headwinds in North America as well as unprecedented material cost increases is at the high end of the $1.40 to $1.60 guidance we provided to you at the beginning of the year.

We also ended the year within $10 million of our original cash flow guidance. We achieved $103 million in free cash flow for the fourth quarter. For the full year free cash flow was an outflow of $9 million. This exceeds the most recent cash flow outlook we forecasted for fiscal year 2008 of -$50 million to -$100 million. In the final three quarters of our 2008 fiscal year we made considerable improvements in our progress to convert strong earnings into cash. In addition, free cash flow results were also driven by a number of improvements we made in our working capital.

The results we were able to deliver in 2008 indicate that we have the ability to consistently execute and manage the business more effectively by running leaner operations, producing highly engineered products, and executing and quickly integrating acquisitions into our global operations.

Now let’s turn to slide 4 to review some of our operational highlights for the year. Throughout 2008 CVS achieved record sales in all of the regions outside of North America. We also maintained our focus on growing our CVS off-highway, military and after-market businesses where we also broke sales records this year. We saw our commercial vehicle after-market sales grow by 6% in the US, 30% in Europe, 48% in South America and 49% in Asia Pacific.

We achieved these results both organically as well as through acquisitions. As you know, in 2008 we completed the acquisitions of Mascot and Trucktechnic. These acquisitions support our commercial vehicle after-market strategy to significantly strengthen our remanufacturing capabilities and expand our global reach. The Trucktechnic acquisition in particular represents a major step forward for our European after-market operations allowing us to achieve growth objectives in the geographic areas we serve as well as among our customer base not only in Western and Eastern Europe but also in Africa and South America.

We also experienced tremendous growth in our off-highway and military businesses this year, which I’ll discuss in more detail later.

We improved our operating efficiency by implementing aggressive lean manufacturing initiatives and investing in new high tech production equipment to modernize our plants around the world. We also invested in new inventory and supply chain management systems as well as implemented tighter controls and improved inventory turns.

We’re proud that in an extremely tough environment we successfully executed on our Performance Plus program and reached our 2008 cost savings target of $75 million which will fall directly to the bottom line on an annualized basis.

In 2008 CVS increased its year-over-year EBITDA by 53% which represents a 33% improvement in the EBITDA margin. That is a noteworthy achievement given the environment in which we’re operating.

Finally, as we announced on October 31 we remain focused on separating the light vehicle systems business from our CVS business.

Let’s turn to slide 5. From where we sit in Michigan we are surrounded by an industry that is reeling from a downturn in the economy. It’s clear that conditions could continue to worsen. Given the steps we’ve taken over the last several years as well as the initiatives we’re executing now, we believe that when the global economies and our industry stabilize we’ll be a stronger more focused company.

But to succeed in today’s uncertain global environment requires swift and decisive actions. We’ll continue to be flexible to the ongoing changes in the market and be responsible to our shareholders by being proactive and taking the necessary steps as we have demonstrated in 2008 to adjust, adapt and move quickly.

Given the unpredictability of the future, we’ll remain focused on executing five key priorities in 2009. First, as we announced a few weeks ago we’re implementing a comprehensive restructuring and cost reduction plan. We accelerated a number of our restructuring actions including reducing our global workforce by 1,250 positions and cutting discretionary spending.

We’re moving forward with the second wave of our Performance Plus initiative which is already delivering results. As part of the Performance Plus program we’re constantly evaluating all aspects of our business to implement cost cutting initiatives that make sense as well as deliver results that translate into bottom line improvements. With the declining heavy truck volumes in Europe Performance Plus wave two will clearly focus on responding quickly to the market conditions in that region.

We’ll maintain a key focus on improving our operational performance. We’ll continue our efforts to improve our capacity flexibility, strengthen our global supply chain management organization including implementing a world-class information technology system and drive down our inventory.

Turning to slide 6. As I mentioned earlier we announced a few weeks ago that we’re exploring strategic alternatives for LVS including a potential sale. We continue to believe that completing the separation of the LVS and CVS businesses is in the best interest of our company and our shareholders. After careful review we now believe that selling the LVS business is the best way to maximize its value.

J.P. Morgan is the company’s financial advisor related to the separation of the business. We’re currently in negotiations to sell this business. We’ve decided however that under any agreement we will retain the wheels business. Wheels is a specialized business which is not integrated into our other LVS businesses. At this time we don’t’ believe selling wheels with the rest of LVS is either necessary or in the best interest of our shareholders.

Now let’s move on to slide 7. Our next priority for 2009 is to continue to execute on our strategy to grow aggressively in our most profitable business units such as our commercial vehicle after-market and specialty segments which I’ll discuss in more detail in a minute. Finally we have a renewed focus on innovation, technology and strengthening our product portfolio. As we cut costs we’ll continue to invest in our future and do what’s necessary to improve and grow our business.

In 2009 for example we’re launching new axle products for our customers in North America and Europe that offer superior fuel efficiency, reliability and durability. We’re also developing a new generation drum brake that offers superior stopping ability, a new high performance disk brake, and new advanced drive line products. Our new brake products were designed to improve braking performance and reduce stopping distances for commercial vehicles.

We’re also investing in the development of hybrids and we’re continuing to engineer and develop technologies that will significantly improve fuel efficiency as well as address environmental concerns. We believe our company’s advanced hybrid technology solutions will uniquely position us as one of the global leaders in this important area. We’re making great strides in our efforts to engineer the best products possible for our customers. We developed the first dual mode heavy duty diesel electric drive train for Wal-Mart and our company is part of the hybrid development team for the Unisell all electric vehicle.

We’re excited about these innovations and we’re confident they’ll play an important role in our continued growth and development.

As you can see on slide 8 we’re making progress in a number of key strategic and profitable growth areas. We continue to be successful in strengthening our commercial vehicle after-market business. US revenues for CVA were up 6% in 2008 compared to the same period last year. This is quite an achievement since the US heavy truck replacement part industry was down by 6%.

As I mentioned earlier we’ve been successful in growing this business globally through the two key acquisitions we completed this year. We also achieved our strategic objectives to grow our military divisions with an intent and dedicated focus on customer requirements for our drive train products. The MRAP program which was an important contributor to our 2008 sales and profits will continue to be a success story for us. We ramped up quickly to design and launch new axle integrated systems for the 2007 and 2008 MRAP programs. Now that the vehicles are in the combat zone, they’re requiring significant after-market service.

So while we expect to see a decline in production in these vehicles in 2009, demand for our after-market parts and service will increase which will help us to offset these lower production volumes. We’re also the drive train supplier in Lockheed Martin and BAE’s most recent proposals for the joint light tactical vehicle program. We’ll continue to increase our military business with BAE to supply the FMTV program and with Navistar to supply parts for medium tactical vehicles.

We’re one of the leading supplier companies to continue to be selected to support military vehicle programs. We believe what sets us apart from our competitors is our ability to respond and get products to market quickly. As I said earlier, with the number of MRAP and FMTV vehicles in the field we see this as a huge opportunity to grow our replacement parts and service business going into 2009.

Our commercial vehicle after-market and military strategy has proven to be quite successful and we have every reason to believe that continuing that strategy will position us well for the future.

Let’s turn to slide 9. Looking ahead our guidance assumes that LVS excluding wheels will be treated as discontinued operations in 2009. We expect the global markets to continue to be weak. We don’t believe the North American heavy truck market will bounce back until late 2009 and we expect the medium and heavy truck builds we’ve seen in Europe in recent years to decline. We’re confident the steps we’ve taken and continue to take to better align our resources with the global economic realities will position us to weather the storm.

Based on our assumptions that we’ll see weaker global markets for 2009 we’re being realistic with our guidance. We expect our full year earnings per share from continuing operations before special items to be in the range of $0.80 to $1.00. We anticipate that through strong execution of our 2009 priorities our free cash flow for the fiscal year will be at a break-even level.

We anticipate approximately $80 million in savings in continuing operations associated with the restructuring and cost reduction plan we announced on October 31. Of the $80 million we expect to realize $50 million in variable labor and $30 million in fixed costs. Jay will cover this in more details in a few moments.

We’re focused on delivering the Performance Plus cost savings targets we promised for 2009. Of the $75 million of savings we promised we’d deliver this year, $50 million will be in continuing operations associated with CVS and the wheels business, and we’re forecasting sales in the range of $4.9 billion to $5.2 billion.

Before I turn the call over to Jay, I’d like to reiterate that we set out a number of goals for 2008 which we met and exceeded. I have no doubt that we’ll face ongoing challenges in the year ahead but the initiatives we have in place, the flexibility we’ve shown in adapting to a changing environment and our solid liquidity position will be critical to our ongoing success. We’ve proven that we can meet the challenges head-on and expect that we’ll be resilient in the year ahead.

With that I’d like to now turn the call over to Jay.

Jeffrey A. Craig

On today’s call I’m going to review results for our fiscal fourth quarter very briefly. Then I’ll go into more detail on the full year.

Slide 10 provides our income statement for continuing operations before special items. We earned $0.38 per share which corresponded to the midpoint of our most recent guidance. Our effective tax rate for the quarter was 34% which was a little higher than we expected but pre-tax operating income was strong enough to offset some bad news in taxes. Sales in the quarter were 8% higher than the fourth quarter of last year. On a constant currency basis sales were up 3% due largely to stronger sales in South America, Europe, military and after-market products.

Operating income increased to $52 million compared to $8 million last year which shows the power of the improvements we were able to make in operations. In last year’s fourth quarter we were struggling with operational issues in our truck business in Europe including part shortages, supplier disruptions and inefficiencies in our own plants. This year things were running pretty smoothly despite record volumes. We’ll have a new set of challenges to face as production volumes decline in Europe throughout 2009.

Slide 11 shows EBITDA by segment. CVS earned $98 million of EBITDA in the fourth quarter which is more than double last year’s results. The EBITDA margin for CVS was 8.2%, the best quarterly results in several years. LVS EBITDA was up 46% year-over-year with margins 130 basis points higher than the same period last year. Total EBITDA was $106 million with margins of 6.2%.

Slide 12 shows the income statement for the full year. Gross margin of $653 million was up 31% from 2007. SG&A as a percent of revenue was up 0.2% for the year due to higher compensation and securitization costs. Note that it fell as a percent of revenue and on an absolute basis in the fourth quarter. Equity and earnings of affiliates was up 12% for the year because of our strong performance in Brazil and Eastern Europe.

Interest expense was about $21 million lower than last year due to lower debt balances and interest rates. The tax rate for the year was 26% which was at the high end of our guidance we provided last quarter. This was due to country mix of earnings in Europe which was somewhat different than forecasted. So at the bottom line we earned $1.60 per share before special items.

The special items are detailed in the Appendix and include the noncash tax charges we announced in our press release on October 31. The majority of this charge related to our assumption that earnings in certain overseas affiliates would no longer be indefinitely reinvested. In making this change we used a portion of our US deferred tax assets, meaning that it does not have a cash impact now or in the future. This allows us more flexibility of repatriating earnings in the future.

Other special items were restructuring actions of $14 million after tax and LVS separation costs of $11 million after tax.

Slide 13 shows EBITDA and segment margins for the year. Trailing 12-months EBITDA of $413 million gives us full availability of our revolving credit facilities with a large cushion. Slide 27 in the Appendix details the availability calculation. As Chip reported earlier, CVS EBITDA margins were up 1.8%. I will provide more detail on this improvement a few slides later. LVS margins were a little lower due in part to some of the nonrecurring items we have detailed in previous quarters.

Unallocated corporate costs represent items that we do not believe belong in either business unit, a portion of which are due to IT transition costs that we incurred in 2008.

Slide 14 shows free cash flow for both the quarter and the year. In the first quarter earnings release, we guided to free cash outflow of $75 million to $125 million which we later improved by $25 million. We were ultimately able to whittle that outflow down to $9 million by limiting the working capital build net of off-balance sheet securitization to $100 million. In light of the fact that sales were up by more than $700 million with that first geographic mix, it took a lot of hard work to achieve this.

Kudos go out to our manufacturing, sales and shared services teams for keeping a lid on accounts receivable and inventories in the second half of the year.

We’re also delighted to be able to announce that free cash flow from continuing operations was positive for the year.

One other thing I’ll point out on this slide is that our pension funding was less than our pension expense in 2008. We expect this to be the case again in 2009.

Slide 15 shows the way we were able to recover from where we started in the first quarter of 2008. Cash flow was solidly positive in the second, third and fourth quarters. We do have a significant amount of seasonality in our cash flow pattern and we expect an outflow again in our first fiscal quarter of 2009. However we expect it to be smaller than it was in 2008.

Cash flow in the first quarter of 2009 will include payment for the LVS customer issue we highlighted in the second quarter. The claim is now settled. First quarter cash flow will also include a $28 million payment that represents settlement of a previously-announced retiree health care dispute with the USW.

Slide 16 walks through CVS EBITDA margins from fiscal year 2007 to fiscal year 2008. On this basis, lower production in North America and higher production in Europe essentially offset each other for the year. Other volume and mix were strong contributors representing major growth in our military business and share gains in after-market partially offset by lower trailer sales.

Our cost reduction efforts were a big success for the year improving margins by 1.2% points. Remember also that the segments were bearing a lot of central costs that were not allocated to them last year in the wake of the emissions technology divestiture. The year-over-year comparison otherwise would have been 0.6% of a point more favorable.

I mentioned earlier that total company SG&A was up 0.2% of a point as a percent of revenue. The same is true for CVS. The overhead savings generated by Performance Plus are 0.3% of the 1.2% on this chart. The offsetting additions were 0.5%. Other improvements included after-market pricing, the contributions of Mascot and Trucktechnic, and changes to our employee benefits.

Slide 17 shows how our availability has improved over the last year. As of September 30 we had more than $1.1 billion in available liquidity which consists of approximately $500 million in cash and more than $600 million available under our revolver. You can see on the chart that we have used all of the capacity of our on-balance sheet receivables securitization program in the US because it remains our lowest cost funding source.

I’d like to point out that the receivables from the Detroit Three are not eligible for this securitization program and have been excluded from borrowings under it from some time. We have about $50 million of receivables outstanding from GM and Chrysler in North America. Payment performance has been good up to this point but we’ll continue to monitor it very closely.

In addition to the liquidity shown on this chart we also have unused commitments under our off balance sheet factoring and securitization programs in Europe.

Slide 18 shows the benefits of actions we’ve taken since our fiscal year end to improve geographic flexibility in the way we deploy our cash. At September 30 we had immediate access in the US and Europe to 50% of our cash balance. Since that time overseas affiliates have paid approximately $100 million in dividends and royalties. In addition our subsequent declaration that affiliate earnings would no longer be considered indefinitely reinvested would have made another $50 million available.

The point of these actions was not that we needed the cash in the US although it is sensible to have the funds available where our debt is outstanding; the point was really that we now can seamlessly deploy cash wherever we require it in the world.

Slide 19 shows our debt profile. Other than a $77 million maturity in February we have no term debt coming due before 2012.

The next few slides discuss our outlook for 2009. Slide 20 details the $125 million of incremental restructuring and cost reductions we announced on October 31. The breakdown shown here like all other guidance we are providing today assumes that LVS will be a discontinued operation in 2009 except for our Wheels operations.

$80 million of the $125 million announced savings will be in continuing operations. Of the $80 million, $50 million will be saved in variable labor. When we walk through a comparison of 2009 versus 2008, this will show up as part of the contribution margin in our volume variance.

We’ve compared these new actions to the hundreds of initiatives that we are tracking in Performance Plus and concluded that there were minimal double counts. As a result we’re still confident in achieving $75 million of Performance Plus cost reductions in 2009 compared to 2008, $50 million of which will be in continuing operations. At the bottom you can see that we expect net cost reductions not accounted for in volume to be $80 million for continuing operations.

I know that there are some concerns in the market place about required pension funding in 2009 and I think that slide 28 will alleviate those concerns for ArvinMeritor. We measure our pension on June 30. Negative returns in securities markets since then will not affect our expense or required funding for the 2009 fiscal year. As of June 30 our US qualified plan was fully funded.

Furthermore, although we do not measure the plan at September 30 we do not believe that its funded status deteriorated during the fourth quarter. This is because we have a favorable asset mix that allowed us to outperform equity markets in the quarter. Also as corporate bond spreads widened, the discount rate we use in valuing the liabilities increased.

For 2009 we plan to contribute $28 million to our pension plans worldwide, slightly less than we contributed in 2008. Pension expense will be lower than 2008 by about $13 million.

On slide 22 we look at working capital expectations for 2009. Underlying this chart is our sales guidance of $4.9 billion to $5.2 billion. At the midpoint this level of sales is down about $100 million from 2008 for the businesses we expect to be in continuing operations. This will have a favorable impact on accounts receivable balances. That volume impact will be doubled by the geographic mix as the decline in sales is more than explained by sales in Europe where our customer terms are longer.

On the other hand, the total benefit in accounts receivable will be offset by lower off balance sheet factoring and securitization. Although this wipes out free cash flow benefit as we calculate it, it will be positive to see factoring and securitization balances decline along with the associated costs.

Movements in accounts payable and inventories are expected to offset each other resulting in a neutral year for working capital; however we know it will be a challenge to achieve our targeted reduction in inventories while production volumes are falling so dramatically in Europe. That will require careful management and we believe the new systems we’ve put in place will help us succeed there.

Slide 23 contains our planning assumptions for 2009. Note that these are on a calendar year basis for ease of comparison with other forecasts.

We’re planning for negative GDP growth in both the US and Europe. We believe that GDP contraction of 0.4% in the US is consistent with flat year-over-year production of Class 8 trucks in North America. If economic activity improves sooner than expected, we still could see some effect from a higher 2010 emissions standards but that is not in our plans at this point.

We expect classified 4 through 7 truck production in North America to be down about 8% in 2009. Trailer production is expected to be about equal to the very depressed levels we’re seeing in 2008 although we expect it will be backend loaded. We expect that commercial vehicle after-market industry in North America to be about flat as the affects of higher average fleet age and lower freight tonnage offset each other.

We’re also planning for steel prices to be slightly lower for the calendar year on average. In Europe we see medium and heavy truck builds declining by about 25% to a range of 400,000 to 450,000 vehicles. Truck production in Asia is also on the decline. Our forecast of -15% growth is consistent with forecasts from third party industry consultants. Medium and heavy truck production has been very strong in South America and we see it persisting at roughly today’s levels.

Slide 24 shows the bridge from our 2008 to 2009 earnings per share from continuing operations before special items. 2008 earnings shown here include LVS whereas 2009 forecasts do not. Removing LVS from continuing operations takes away the contribution it was making toward covering corporate costs.

The cost reduction actions taken prior to and announced in our press release two weeks ago are enough to make the removal of LVS from continuing operations EPS neutral but the LVS outlook continues to be weak and may negatively affect our overall financial condition and GAAP results of operations between now and the completion of the sale. At closing we expect to record a significant loss on sales. This will be excluded from continuing operations before special items.

Our expected continuing operations face challenges in 2009 as well. The industry production volumes we looked at on the last slide will have an adverse impact on our earnings per share of about $0.90 to $1.00 compared to 2008. The largest portion of this impact relates to the slowdown in our commercial truck production in Europe which is already underway.

The next slide indicates that our profits will be reduced as earnings outside the US are translated to stronger dollars in 2009 compared to 2008. We expect this to reduce earnings by $0.30 to $0.40 per share.

Next, despite weak industry conditions we continue to make strategic investments in key areas of our business. We plan to invest up to $20 million to execute growth strategies for the after-market and off-highway businesses.

On the next slide we show $0.80 of benefit from net cost reductions. This corresponds to the $80 million of pre-tax savings I outlined on slide 20. I also walked you through the lower pension expense on a previous slide.

We expect our tax rate to be slightly higher in 2009 as a result of our repatriation actions and loss of some tax efficiencies between CVS and LVS. Lastly, we added a $0.10 provision for unforeseen factors in 2009. We thought that was prudent given the unprecedented volatility we’ve seen in macroeconomic assumptions, vehicle volumes and commodity prices as well as other potential risks we may experience throughout the year.

Adding it all up we’re guiding to earnings per share of $0.80 to $1.00 in 2009.

Slide 25 shows some of the specifics behind that EPS guidance. We expect EBITDA to fall in the range of $290 million to $310 million for continuing operations. You can see that other forecast elements on the charge including free cash flow from operations of about break-even.

We are now ready to take your questions so I’ll turn it over to the operator to provide instructions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brian Johnson - Barclays Capital.

Brian Johnson - Barclays Capital

Can you give us a sense of how Performance Plus 2 is dealing with the lower volumes especially in Europe, and in particular are there assumptions you’d baked into Performance Plus that were dependent on a certain level of staffing and volume that would actually result in lower savings, and then how are you offsetting that to keep on the track you’ve outlined?

Charles G. McClure, Jr.

Let me start and I’ll obviously let Jay weigh in a little bit more on the details.

As we kind of indicated, we did at a previous earnings call indicate that our wave two of Performance Plus would focus on Europe and some of that we’re doing with our overhead structure and SG&A as we indicated is one of the pillars that way which is somewhat volume independent, and I think some of what you saw with the actions we even indicated on October 31 are some of the actions we’ve pulled ahead that way.

Secondly, as we look at it in the direct material side, some of that obviously is volume related and with the current downturn it does allow us to better focus resources on that so that if the market does pick back up we’ll see the opportunity that way.

Jeffrey A. Craig

As Chip mentioned we’ve now headquartered wave two of Performance Plus in Europe and Carsten and I are attending monthly meetings there. I would say the first material outcome of that exercise was the announcements we made on October 31. The majority of those cost reductions were actually in Europe and did take our capacity down from a labor perspective almost 20% to 25% just based on those announcements. We’ve taken the cost reduction actions already to be in line with the guidance we provided today so those have already been executed.

We’ve also gone through as I mentioned in my presentation all the Performance Plus initiatives, particularly those that we thought would be volume dependent to make certain that the guidance we provided today on our expected $75 million of savings, $50 million of which will be in continuing operations, that we have assurance that we believe we’ll achieve that number. So we have gone through those issues to look at the ones that might be volume dependent.

Brian Johnson - Barclays Capital

Around page 25, if we want to compare the sales number and EBITDA number to a ’08 as if the LVS ex-Wheels with discontinued ops, what numbers would we be looking at?

Jeffrey A. Craig

We are not providing the LVS guidance today other than to say that we expect that it will be included in discontinued operations when we report our first quarter results.

Brian Johnson - Barclays Capital

We’ll see it for the year then or just for the quarter?

Jeffrey A. Craig

It’s obviously dependent on the progress of our process that we disclosed today of the [inaudible] sale.

Brian Johnson - Barclays Capital

I was actually trying to go back and say is it possible to restate fiscal year ’08 with LVS ex-Wheels as a discontinued operation?

Jeffrey A. Craig

We will in the first quarter have all the historical numbers restated to show CVS and Wheels in continuing operations so we will provide that data.

Brian Johnson - Barclays Capital

So it won’t be in the K; it’ll be in 1Q.

Jeffrey A. Craig

It will not be in the 10K because we did not classify it at 9/30 as a discontinued operation. We’re only able to make that classification for the first quarter.

Operator

Our next question comes from John Murphy - Merrill Lynch.

John Murphy - Merrill Lynch

On the light vehicle systems business what kind of interest you’re getting there? Is it strategic or financial buyers, if there’s the potential to sell this in parts maybe to different strategic suppliers? How’s that process developing, if you can give us any color around that?

Charles G. McClure, Jr.

I obviously can’t give you a lot of detail, and as we just announced back on October 31 we’re continuing strategic alternatives of which we’re just starting that and kind of indicated that the primary path as we indicated today is with a sale. But really what we are looking at is the sale of the complete entity except Wheels going forward and I would envision that obviously as our prime path at this point.

John Murphy - Merrill Lynch

But you’re comfortable putting it in disc ops assuming that you’re going to have it sold within 12 months, right?

Charles G. McClure, Jr.

We are.

John Murphy - Merrill Lynch

Then just touching on the balance sheet as far as factoring, you had $521 million in your factoring facilities at the end of the year. I’m just wondering what that was at the end of the third quarter and what it was at the end of last year.

Jeffrey A. Craig

We’re just pulling that data together. I want to say it was the low $400s at the end of the third quarter 4/10 but we’re just getting that data.

John Murphy - Merrill Lynch

If you would add the year end ’07 also that would be great?

Jeffrey A. Craig

We’re pulling that together.

John Murphy - Merrill Lynch

Chip, can I ask you another question while you’re looking for that Jay?

Charles G. McClure, Jr.

Sure.

John Murphy - Merrill Lynch

As far as the supply base in the commercial vehicle business, tier 2 and 3 suppliers that are supplying in to you, there’s been a lot of news and hubbub about the stress in the tier 2 suppliers on the light vehicle side of the business. How are the commercial vehicle suppliers faring in this kind of environment where volumes are down and they’re really having a tough time? I mean, the market is generally pretty tough right now.

Charles G. McClure, Jr.

Well, there’s no question it’s tough on the commercial vehicle side just like it is on the light vehicle side and as I think was indicated in previous calls, we do have a troubled supplier group.

We actually work with a number of suppliers. We have a fairly robust process as part of our enterprise risk management system to continue to track suppliers. And clearly when I look at it, suppliers both here and North America where the Class 8 market has been down essentially for the last year and a half and then more recently in Europe, suffice it to say we are having to work with several suppliers on both continents to make sure that we can continue to support our customers’ needs in these challenging times. So it’s similar to the light vehicle side. We are seeing some of that on the commercial vehicle side.

I am pleased with what we’re able to do on our manufacturing, our purchasing, our shared services group to make sure that we are being aware of that, reacting to it proactively and if necessary, making sure we’ve got other actions in place to make sure we’ve been able to support our customers going forward.

John Murphy - Merrill Lynch

How many of those suppliers cross over to light vehicle business that might have an impact or be impacted by a GM bankruptcy or slowdown?

Charles G. McClure, Jr.

Actually it’s a fairly small group but we watch that too because when you look at it the kind of production volumes we’re looking at here in the commercial vehicle side rather than measuring it in terms of millions of parts, it tends to be tens to hundreds of thousands of parts. So by and large they tend to be different but there is some crossover and again to the other part of your question, we do continue to follow on the LVS side to make sure that if there’s distress caused by the ongoing challenges on the light vehicle side, if it affects some of those suppliers, we’re factoring that in too.

John Murphy - Merrill Lynch

Lastly, on the GM and Chrysler receivables in North America you mentioned they were about $50 million. It sounds like a pretty small portion of your business. Given the increasing risk there, are you considering shortening terms or trying to collect on that money sooner or going COD just to protect yourselves in the event that there is this cataclysmic event?

Charles G. McClure, Jr.

Clearly what we’re doing is monitoring it very closely and as Jay and I indicated, the amount that we’ve got that way, I’m pleased to say that our past dues are down. We continue to track that, and I’ll also tell you that it’s a pay on time, but as far as anything specific between ourselves and any of our customers, whether it’s on the light vehicle side or the commercial vehicle side, we do have to respect the confidentiality we have between our customers on that.

Jeffrey A. Craig

I have the answer to your previous question on securitization. Actually at this yearend we were at $519 million. At the end of the third quarter we were at $609 million outstanding under those programs. At the end of ’07 we had $282 million outstanding.

A couple of other points I’d make is that of the $519 million at the end of the year $419 million are committed for 364-day facilities. Also the growth you’ve seen from ’07 to ’08 obviously is due to two reasons. One, the growth of our European business where most of these programs reside and also we have some customer sponsored programs that were made available to us in some of the negotiations with those customers.

Operator

Our next question comes from Himanshu Patel - J.P. Morgan.

Himanshu Patel - J.P. Morgan

I’m sorry. I missed an earlier part of the call. On slide 24 is the impact of the businesses that are now going to be discontinued ops, I didn’t notice that in the walk for slide 24. Does that mean they’re basically neutral to earnings?

Jeffrey A. Craig

No, I wouldn’t necessarily imply that. We’re just doing a walk here of what we expect to be included in continuing operations.

Himanshu Patel - J.P. Morgan

But the ’08 starting point does include those businesses?

Jeffrey A. Craig

Yes, the ’08 number includes the entire ArvinMeritor business including the portions of our light vehicle business we expect to be classified in discontinued operations.

Himanshu Patel - J.P. Morgan

And the ’09 does not. So where is the profit impact of that divestiture on the walk?

Jeffrey A. Craig

At this point given where we are in the process of the sale, we are not providing that data today.

Himanshu Patel - J.P. Morgan

Chip, can you give a little bit more color? I know LVS is smaller and smaller for you guys but what’s been happening to production schedules there? It was our understanding that particularly in October it looked like the rate of incoming forward production schedules from carmakers was changing pretty fast. Where are things now? Have they sort of stabilized or are you guys still feeling like the OEMs are still trying to find their way to a bottom?

Charles G. McClure, Jr.

I think it’s safe to say that it still is quite choppy. Really on the two continents, I’ll talk about in particular North America and in Europe, I think there’s been a steady decline over a number of months here in the US, somewhat exacerbated if you will by what took place with the credit crisis. So it’s been fairly weak for a while here in the US.

Quite frankly, in Europe it had been fairly strong up until late September and then literally in the September timeframe it started dropping off fairly precipitously there. So if I look at it, in Europe I think there’s been probably a bigger drop more recently on that just because it was taking place that way.

But in both cases I think that there is still a lot of choppiness that as you had indicated in October we continue to see that in production schedules as we look at November going forward. Suffice it to say that really when you look at Europe in particular I think they’re still trying to go through that adjustment there.

Himanshu Patel - J.P. Morgan

On the steel recovery discussions I know you guys had been making some pretty good progress on that, particularly on the commercial side. What’s the status of those discussions now just given what we’ve seen with spot prices? Have they become more difficult or would you say you still feel pretty confident that whatever you had expected on recoveries a few months ago is still sort of what you’d see now?

Jeffrey A. Craig

Just a couple points I’d make on that. One, you’ll probably notice in our ’08 walk for CBS we do not show steel as a negative item which should indicate we’ve been successful there. We’ve also been successful in our light vehicle side. Obviously with the prices declining now as we stated previously we don’t view this as a profit-making opportunity for us and we’ll be adjusting some of our prices to allow our customers to receive the benefit of declining steel prices. But the main part of our initiative was really to put in a much more rapidly adjusting surcharge process which we are continuing now into the future.

Operator

Our next question comes from Brett Hoselton - KeyBanc Capital Markets.

Brett Hoselton - KeyBanc Capital Markets

Just for clarification. I think this is pretty obvious but it sounds like as far as your earnings per share guidance and to your cash flow guidance you are excluding anything to do with the light vehicle operations with the exception of the Wheels?

Jeffrey A. Craig

That is correct.

Brett Hoselton - KeyBanc Capital Markets

Obviously you’re making some adjustment in your restructuring to account for the variable portion there but what would you say the CVS contribution margins would be given that adjustment?

Jeffrey A. Craig

I’ll have to get back to you on that because the data I have in front of me includes the EBITDA from Wheels and the revenue from our Wheels operations as well. I’ll see if we can compute that and if we can provide it later in the call, I’ll make sure we do that.

Brett Hoselton - KeyBanc Capital Markets

Then as far as the impact of Wheels either this past year or the future year in terms of revenue or earnings, any guidance there?

Jeffrey A. Craig

In terms of revenue I think we previously stated it’s about $300 million. As far as profitability I think what we’ve stated is it’s one of our more profitable businesses particularly to its very favorable footprint with manufacturing facilities in Brazil and Mexico.

Brett Hoselton - KeyBanc Capital Markets

As far as the cash flow guidance, I’m just wondering about some of the components. For example, depreciation and amortization and cap ex for next year? I mean, you’re excluding light vehicles so obviously it’s going to be lower.

Jeffrey A. Craig

We expect cap ex of around $100 million. As far as depreciation, it should be around $90 million.

Brett Hoselton - KeyBanc Capital Markets

Then just a few other components there. As far as the accounts receivable securitization it sounds like you’re essentially assuming that that comes down next year but it’s a wash given working capital. Is that correct?

Jeffrey A. Craig

That’s correct.

Brett Hoselton - KeyBanc Capital Markets

Restructuring expense and restructuring cash flow next year.

Jeffrey A. Craig

Just to make one point on the securitization coming down. Our receivables, corresponding receivables balances come down as well so it’s relatively neutral. The receivables decline obviously in Europe will not be a benefit to us in working capital but it should be neutral.

Brett Hoselton - KeyBanc Capital Markets

Restructuring expense and restructuring cash for 2009?

Jeffrey A. Craig

We have not disclosed that here today for continuing operations and we will update that on our December 9 analyst meeting.

Brett Hoselton - KeyBanc Capital Markets

As far as restructuring expense is concerned, I assume that continues to be excluded from your earnings guidance. Is that correct?

Jeffrey A. Craig

That’s correct.

Operator

Our next question comes from Patrick Archambault - Goldman Sachs.

Patrick Archambault - Goldman Sachs

I just actually wanted to follow up on Himanshu’s question. Can you give us a sense of at least historically on an earnings basis what the impact of the LVS business has been year-to-date or for 2008?

Jeffrey A. Craig

We haven’t disclosed that data in the past relative to segmenting the business the way it’s being segmented currently with Wheels being excluded. At this point in the sale process we will not be providing that data.

Patrick Archambault - Goldman Sachs

Just to sort of follow up on his question, it does seem the way you have the walk set up that it would be that the foregone revenue or foregone profit and whatever unabsorbed overhead impact there is from that, it seems like the way you’ve got it set up in the walk that it would be relatively neutral. Is that completely off base?

Jeffrey A. Craig

No, that’s absolutely correct.

Patrick Archambault - Goldman Sachs

Can you give us a little bit of a sense of how some of the commercial end markets are holding up in emerging markets? I saw that you’ve gone down 15% for Asia, medium and flat for South America. Can you just kind of mark us to market as to how those end markets performed in the quarter and how much downside or upside risk there may be around those?

Charles G. McClure, Jr.

Yes. Let me kind of walk through that. Let me start in Asia and then I’ll move to South America after that and I think we’ve kind of talked a little bit that Eastern Europe as it is part of Europe. We can certainly do that at the end.

If you look at it within Asia Pacific, and really the two major markets we serve are India and China. In India there’s no question there’s been a significant decline if you will in the on-highway market in the last period of time that we’ve seen in our joint venture there and do kind of envision that carrying forward for the next quarter or two. Then obviously looking beyond that for it to start picking back up again that way. But if I look at it on the heavy truck side in India, it’s certainly been down.

If I look at China, actually the majority of our business in China is on the off-highway side and has been going very strong. If you think about that within China, there is still a lot of infrastructure being built as they continue to move westward into China. The most recent thing done by the Central Bank with the capital infusion, I think part of that’ll go toward infrastructure. So for us on the off-highway side in particular we see China with new roads being built as a very positive that way but on the truck side it’s a little bit of wait and see on that one.

If you look at other parts of Asia, they’re essentially holding up better. I think India was the one that probably went the softest that way.

Within South America it continues to be strong on the commercial vehicle side. I know there was some softness on the automotive side and when I say strong I’m essentially saying flat year-over-year that way. In Brazil in particular some of that’s tied to new vehicles being brought on the road, new roads being built and I think the third thing you’re seeing in South America, which our operations are essentially in Brazil, is the export markets which continue to be strong that way. But having said all that we kind of see South America being flat year-over-year that way.

Those are the two main markets and as we said earlier in Europe, Eastern Europe until the credit crunch took place I think was actually holding up very well and I think was a main driver for a lot of the build that we saw within Europe as a total because other parts of Western Europe were going through some of the same things that were in the US. But obviously with what’s happened in credit within the last two months we’ve seen Eastern Europe also go soft right now.

Those are kind of the major markets we look at around the world. Different dynamics in different areas in different markets we serve but we see them either holding their own and as I said in Eastern Europe see continued softness for the next couple quarters.

Patrick Archambault - Goldman Sachs

And specific to Europe, you guys used to talk about layered capacity in the sense that the first 10% to 15% call it might roll off at much lower margins and have much less of a headwind given some of the supply chain constraints there. How should we be thinking about the overall wholistic margin impact from that 25% decline? Would that still be below historical contribution margins in terms of the headwinds just because of some of those supply chain issues?

Jeffrey A. Craig

I believe the 25% reduction, the variable labor component or the cost reduction component was primarily contractually employed labor. So the severance cost was quite diminimus for us as you probably saw in the October 31 release. At that point the margin impact was not as significantly. Clearly if we see a decline that’s larger, it may become more costly for us at that point to eat into more costly layers of capacity.

Charles G. McClure, Jr.

The other thing we should mention when you look at Europe in particular, there are some parts of it as I indicated earlier there was a real rush to get orders in because it was a fairly tight order board earlier this year because volumes were so high. I think we’re actually seeing essentially in this quarter is we still do have some of the OEMs working down their backlog for support either in Eastern or Western Europe. So I think we’re seeing a bit of that anomaly in this quarter that as that backlog gets worked down we may see some of that continued softness going into future quarters.

Operator

Due to time constraints, that is all the time we have for questions. I would now like to turn the call back over to Mr. Terry Huch for closing remarks.

Terry Huch

I would just like to thank you all for joining us today and invite you to call your communications or investor relations contact if you have further questions.

Operator

Ladies and Gentlemen, thank you for your participation in today’s conference call. You may now disconnect. Have a wonderful day.

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