ArvinMeritor Inc. F4Q09 (Qtr End 09/30/2009) Earnings Call Transcript

| About: Meritor, Inc. (MTOR)

ArvinMeritor Inc. (ARM) F4Q09 Earnings Call November 10, 2009 9:00 AM ET


Brett Penzkofer – Senior Director, Investor Relations

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

Jeffrey A. Craig – Chief Financial Officer


Brian Johnson – Barclays Capital

Derrick Wenger – Jefferies and Company

Patrick Archambault – Goldman Sachs

Brett Hoselston – Keybanc Capital Markets


Welcome to the fourth quarter 2009 ArvinMeritor Earnings conference call. (Operator Instructions) I would like to now turn the call over to Mr. Brett Penzkofer, Senior Director of Investor Relations.

Brett Penzkofer

On the call today we have Chip McClure our Chairman, CEO and President and Jay Craig our CFO. The slides accompanying today's call are available at We'll refer to the slides in our discussion this morning. The content of this conference call, which we are recording, is the property of ArvinMeritor Incorporated. It's protected by U.S. 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 may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Let me refer you to slide two 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 will 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.

As we reflect back on 2009, we'll always remember it as one of the most challenging years we've experienced in our history. The dramatic decline in volumes driven by a collapse in both the automotive and trucking industries, as well as in the credit markets, meant that we had to act quickly and readjust our business both financially and operationally. We made drastic changes to how we ran our business and we implemented rigorous cost cutting initiatives throughout the year.

The decisions we made were tough and sometimes very unpopular. But the steps we took were necessary and we're seeing them payoff. I'm proud of the many accomplishments we made during the year despite the challenges we faced. And I'm especially proud that even amidst of all the difficulties we never lost sight of our overarching strategy to transform the company with a focus on the global commercial vehicle and industrial markets.

We could not have done this, however, without the support of our global workforce. Our people made a lot of sacrifices throughout the year and it was because of their perseverance, commitment and dedication that we were able to deliver on our 2009 priorities while simultaneously managing the company through a global recession. We're now a leaner more efficient company and we're well positioned for growth.

Now, let's turn to slide three to review the financial highlights of our fourth quarter and full year 2009. I'm going to review fourth quarter results with you and Jay will cover our 2009 full fiscal year in a few minutes. We're pleased with our fourth quarter performance. Our total sales for the quarter were $984 million, which is up approximately 4% from our third quarter, but down from $1.5 billion or 36% from the fourth quarter of last year.

Given the extraordinary circumstances of the past year, we're not surprised by these year-over-year sales results. We believe that the sales increase reflected in our fourth quarter, however, may indicate that we're beginning to see signs that the worst is over.

We're especially pleased with our EBITDA performance that we've been able to achieve throughout the year despite the deterioration of the global markets we serve. In the fourth quarter, EBITDA was $40 million up $12 million or 43% quarter-over-quarter. The EBITDA improvement is a direct result of the aggressive cost improvements we implemented through restructuring, planned operations and material performance.

We're also beginning to see a slight improvement in our pre-tax income and achieving a positive result this quarter of $2 million. We reported a net loss of $20 million or $0.28 per share from continuing operations before special items in the fourth quarter. This compares to the $26 million or $0.35 per share we earned in the same period last year.

We're again especially proud of our cash flow performance. We continue to generate positive free cash flow quarter-over-quarter because of the outstanding job that our people have done to improve working capital by controlling inventory and reducing past due receivables.

For the second consecutive quarter, we reported positive free cash flow generating $22 million in the quarter compared to $73 million in the last quarter and $103 million from the same period last year. We're pleased with our continued ability to generate cash, which again results from the significant improvements we've made to our operations, as well as reducing our overall structural costs.

Let's now review some of our 2009 business highlights by turning to slide four. As I mentioned earlier, I'm very proud of how quickly our people adapted to the downturn in our global markets last year. It was through the aggressive cost cutting initiatives we implemented, as well as the tremendous performance we achieved in working capital, that we were able to successfully manage through this unprecedented challenging time.

Of course, we also benefited from the significant cost cutting measures we identified and implemented since we first launched our Performance Plus program in 2007. I'll cover these savings in more detail in a few minutes.

Even as our markets collapsed last year, we remain committed to continue to invest in our future by making investments in engineering, research and development, and the necessary capital expenditures to maintain our high quality standards. During the year, we began production of our state of the art facility in Monterrey, Mexico and we expanded our engineering and technical capabilities in India.

We're also very encouraged by the number of new business wins we've been awarded from our commercial truck and specialty customers this year. These contracts are just another step in securing our long-term prosperity. I'll discuss some of these new contracts on the next slide.

We recently announced the completion of the sale of our light vehicle wheels business and that we've substantially completed the divestiture of the light vehicle chassis business. In light of the harsh economic realities we faced, we're please with our efforts to comply with our debt covenants and maintain adequate liquidity throughout the year.

In September, we announced that we entered into a new two-year U.S. receivable securitization agreement and in October we renewed our French factoring and Swedish securitization programs with Nordea Bank. We believe that these actions have put us in a position to be in compliance with our financial covenants through the remaining term of the facility.

We're continuing to work hard to sustain our momentum and although the road ahead remains uncertain, we believe we put the right things in place to benefit from the improving conditions we're beginning to see in our global markets.

Now let's turn to slide five. As I mentioned earlier, we're pleased with the significant new business wins in 2009. As we announced earlier this year, we signed a long-term supply contract for standard position on medium and heavy duty applications with Navistar. This new business significantly increases our market share with Navistar in North America.

In addition, we expanded our business with longstanding customers, such as Diamond Trucks North America. Earlier in the year we executed a multi-year agreement to supply them with axles, brakes and drivelines. Geographic growth and diversity is critical to our success. And in the fourth quarter we began production at our previously signed strategic supply agreement with [Utang Group] to supply drive chain components for busses and coaches in China.

Also, as part of this partnership, we and [Utang] will sell and distribute standard aftermarket service parts. This partnership provides us with the opportunity to expand our commercial vehicle aftermarket business in the Asia Pacific region.

We also expanded our aftermarket remanufacturing sales to new OEM customers and independent distributors this year through truck technique in Europe and Mascot in North America. This supports our strategy to increase our customer base and significantly grow our aftermarket business globally.

Our military business also continues to be a strong contributor. We began production of our Navistar MXT for the British Ministry of Defense last quarter. We've also commenced on delivering our advanced independent suspension systems to Lockheed Martin and BAE Systems in support of the military's technology, development and demonstration phase of the Joint Light Tactical Vehicle program. We believe our new business wins demonstrates our customers continued confidence in our products and our engineering and technology capability.

Let's turn to slide six. Throughout 2009 we were laser focused on expense management and streamlining our business with the goal of driving profitable growth. While keeping this focus we continued to invest in new products and advance technologies primarily in the areas of drive train efficiency and vehicle dynamics.

In 2009, we introduced the Meritor Dual-Mode Class 8 Hybrid demonstrator vehicle, which is a revolutionary technology development targeted specifically at line haul truck applications. We believe this technology will improve fuel efficiency by 15% or more. We developed an all new family of off highway single reduction planetary axles, as well as a new family of off highway brakes leveraging our core engineering capabilities.

We expanded Meritor's tactics high mobility independent suspension product line, which features best in class mobility and enhances a performance of military vehicles in extreme common environments. This product is available with active ride height controls and semi-active damping. We launched a Meritor MXL extended lube drive-line providing our customers with reduced maintenance costs and longer service interval.

We introduced our new platinum shield technology offering best in class brake corrosion resistance and we're currently testing our new Meritor Q Plus drum brake with fleet customers to meet new stopping distance regulations.

Last but not least, we're also moving toward our strategy to strengthen our electronics and controls capabilities. In support of this effort, we recently combined our commercial vehicle electronics and LVS Smart Systems advanced technology grooves. We'll now be able to better optimize our advance fuel efficiency and mobility engineering capabilities.

Moving on to slide seven. Throughout the year we made substantial progress on our transformation. With limited resources and cash to invest, we decided to concentrate on our core business. Our strategy, plain and simple, is to have a keen focus on enhancing more attractive targeted growth opportunities with higher margins, and we believe the direction we're taking is right on track.

As you can see from the charts on this page, we moved from a 69% light vehicle business in 2003 to a 25% light vehicle business today. As you know, we've accomplished a great deal of a divestiture of most of the LVS business and we're moving forward to become 100% focused on the commercial vehicle and industrial markets.

Since we first set out on this transformation in 2004, we've sold our light vehicle aftermarket, emissions technologies, and wheels businesses. In addition, we've essentially completed the process of divesting most of the light vehicle chassis business, which should help us improve our overall profitability and eliminate future cash burn that resulted from this organization.

Since we determined to exit chassis, we've completed a sale of our ownership interest stake in Gabriel De Venezuela, sold Gabriel Ride Control North America and we recently announced that we completed the sale of our stake in our Meritor's suspensions systems company joint venture.

The small remaining chassis businesses are operating near breakeven. These businesses primarily support the LVS suspension module assembly operations of the United States, as well certain European operations. U.S. module assembly operations are expected to continue through the term of existing supply contracts, which end in March 2010 and December 2011. At that time, the operations will cease, will be transitioned to other suppliers. We also have a small shock absorber operation in Europe and we're working on improving this business for an eventual exit.

At the same time that we've been focusing on divesting our light vehicle businesses, our core businesses have been undergoing their own transformation. As part of our ongoing Performance Plus enhancement initiative, CVS has continued to sharpen its focus on engineering and technology, product growth, and our aftermarket business. This team has continued to execute on its strategy to strengthen and invest in the growth of our most profitable businesses, such as off highway, military and aftermarket, as well as in the Asia Pacific region.

Let's now turn to slide eight. As I mentioned, we're extremely pleased with the progress we're making in our transformation. Of course our exit from the light vehicle business has been challenging in light of the weak credit markets and the overall global recession. As you can see from this chart, we hit significantly headwinds during 2009 experiencing collapse in all of our markets around the world.

To offset the declining markets we proactively took swift and decisive actions by implementing aggressive cost cutting initiatives. Working to our advantage was the fact that we'd already begun this process early in 2007 with our Performance Plus cost improvement initiatives. By being proactive and starting early preparing our company for risks, we cut $75 million out of our structural costs before we were hit by the drastic downturn in 2009.

We also benefited from the additional actions we quickly implemented to adapt to the changing market conditions by implementing workforce reductions, reducing pay and benefits on a temporary basis, improving working capital, controlling inventory, reducing past due receivables and achieving record labor, burden and material performance despite lower vibes.

We're pleased to announce that we're planning to reinstate our people's pay now that we're seeing a slight upturn in our global markets and we've achieved our targeted cost reductions. We've streamlined our core commercial and industrial business by eliminating approximately $195 million of total costs for our fiscal year. What's important to note, however, is that we've taken about $136 million of our overall structural costs on run rate basis.

Turning to slide nine. Now that we divested most of light vehicle businesses and our transformation is solidly underway, we've revised our reporting segments. In place of our two previous operating segments, LVS and CVS, we'll now report through the following four segments within continuing operations, commercial truck, industrial, aftermarket and trailer, and light vehicle systems. We refer to the first three segments as our core business.

As you saw in our news release this morning, we're pleased to announce that these three segments will be led by Carsten Reinhardt who is also elected by our Board of Directors to the new position of ArvinMeritor's Chief Operating Officer. The board also elected two new executive officers. Tim Bowes, who was appointed Vice President and President of the company's Industrial group, and Joe Mejaly, Vice President and President of our Aftermarket & Trailer businesses.

You can read the description of each of these segments in the slide, as well as in our 10-K, which we expect to file later this week. But what's important to note is our company has a highly knowledgeable experienced and proven engineering and technical team and we're leveraging that expertise through all of our core business segments.

As we shift to this new reporting structure, I'd like to briefly outline some of high level strategic growth initiatives in each of these segments. Our key goal is to invest and focus on growing product segments in our core businesses that offer favorable margins and the highest returns.

In the commercial truck segment, our strategy is to grow this business by further expanding our global brake leadership position, investing in advance technologies that will improve fuel efficiency and vehicle safety, and strengthening our electronics and controls capabilities. We'll also be focusing on growing our commercial truck share in markets we serve, primarily expanding our customer base in regions outside of North America.

In the industrial segment, we'll focus on successfully growing our global off highway, industrial and defense businesses by expanding our product portfolio and customer base, growing market share on Asia Pacific and investing in new engineering and technology capabilities in China and India.

With the aftermarket and trailer segment we'll concentrate on growth by further expanding our product portfolio in our remanufacturing business, capturing additional opportunities in emerging markets primarily in the brick countries, and continuing to expand our global distribution network and systems infrastructure.

For the light vehicle systems segment, our plans are to continue to evaluate alternatives and how best exit the remaining LVS businesses. At the same time we remain committed to making the necessary investments to support the need and requirements of our light vehicle customers.

Now turning to slide ten, as you can see from this slide we have essentially completed all of the goals we set out to achieve in 2009. First, with the acceleration of our restructuring and other cost reduction initiatives, as I pointed out earlier, we achieved a cost savings of $195 million in our core businesses which helped us offset some of the impact from the weak global economies.

Second, we continue to make improvements to our overall operations which positioned us well for growth. We reduced our labor and burden, reduced inventory, and continued to focus on direct material optimization activities. Third, as I mentioned earlier, we made tremendous progress toward divesting our light vehicle business. After all of the LVS divestitures, we have reduced that business segment to 25% of the company's total sales.

Fourth, we continue to grow in our high margin market segments, such as expanding our aftermarket portfolio for commercial vehicles, including adding remanufactured Allison Automatic Transmissions, and winning new military contracts with BAE Systems, Lockheed Martin, and Navistar. And fifth, we continue to invest in engineering, research and development to ensure that we have the right products and advanced technologies to meet our customer's needs in the future.

Despite the downturn in 2009, we maintained similar levels of ER&D and CapEx spending when compared to 2008. Now, I'd like to turn the call over to Jay.

Jeffrey A. Craig

I'll start out today with a detailed recap of our fourth quarter results and then review our full year results. Slide 11 compares our fiscal fourth quarter results from continuing operations to the guidance we had previously given you for the quarter, as well as the recast fiscal third quarter results. As you can see in the far right column, compared to our previous outlook we performed by accomplishing stronger revenue, higher earnings, and positive free cash flow.

EBITDA before special items increased 43% sequentially to $40 million or 4% of additional revenue. We delivered these results despite the fact that strong positive earnings associated with the wheels business are now reported in discontinued operations. Free cash flow was a positive $22 million, and if you exclude factoring and restructuring it would have been a positive $48 million. We are encouraged by our ability to convert earnings to cash without significant help from working capital this quarter.

Slide 12 provides our income statement for continuing operations before special items. We lost $0.28 per share, which was in line with our most recent qualitative guidance. The special item adjustments are detailed in the appendix and include non-cash tax charges of $25 million resulting from one-time adjustments, as well as some restructuring expenses.

On a constant currency basis, sales were down year-over-year by 31% due to the effects of the global downturn or markets in Europe, North and South America, and India. This is a stark comparison to the record volumes experienced in Europe and South America during 2008. Nevertheless, we achieved positive income before taxes in the fourth quarter.

SG&A decreased by 34% year-over-year, which is relatively consistent with the percentage decrease of revenue as we realized significant savings from cost cutting actions implemented earlier in the year. On a year-over-year basis, fourth quarter equity and earnings of affiliates showed resilience, especially in Brazil. Our effective tax rate requires some additional explanation.

Slide 13 breaks out the significant items affecting our fourth quarter tax rate. You may recall that we previously recorded a substantial charge in our first fiscal quarter to establish valuation allowances against U.S. and selected Western European deferred tax assets. As a result, we are currently unable to realize any benefit on losses in those jurisdictions. However, we've remained a taxpayer in the majority of countries which are not subject to valuation allowances, such as Brazil.

The good news is that we would expect any future income in jurisdictions with valuation allowances to be earned tax free. In addition, we had $6 million of year end adjustments which flowed through the fourth quarter results, the majority of which related to changes in tax contingencies.

Slide 14 shows earnings before interest, taxes, depreciation, and amortization by segment. As Chip mentioned earlier, we changed our reporting segments and will be referring to our commercial truck, industrial, aftermarket and trailer, and light vehicle system segments going forward.

Commercial truck will consist primarily of our European, North and South American OE commercial vehicle businesses, was above EBITDA breakeven in the fourth quarter. This was largely due to the overall market decreases mentioned previously offset by the considerable cost and operational improvements we achieved during the year.

The industrial segment, consisting primarily of our former specialty business specifically off highway, military, construction, bus and coach, and fire and emergency, as well as all of our Asia-Pacific operations, had 33% lower EBITDA compared to the same quarter last year. This resulted primarily from fiscal 2008 benefits of the M-Rap Program which declined as the year progressed.

In the near-term, military production will include supplying components for the family of medium tactical vehicles, as well as a number of smaller programs with our key military customers. Aftermarket and trailer EBITDA was down 50% year-over-year as a result of a 28% reduction of revenue, as well as the mix impact of reduced military spare parts orders.

Light vehicle systems, consisting primarily of the body systems business as well as the remaining chassis businesses, was EBITDA breakeven in the fourth quarter. This is the second consecutive quarter that body systems has achieved breakeven results, quite an accomplishment by our leadership team in Europe given the August holiday shutdown periods.

This gives us the confidence that the cost to carry the LVS business is manageable while we evaluate alternatives for the divestiture of body systems. This process could extend until the end of 2010 or beyond. We are evaluating various alternatives for the disposal of the body systems business, all of which appear to result in negative cash outflow.

It has become clear to us that the costs related to some of these alternatives could be substantial. We continue to evaluate all of them and will be updating our risk factor in the 10-K to reflect this. Like all the previous difficult divestitures we have had, we will do our best to achieve the most economical and successful outcome for our shareholders, customers and employees.

Total EBITDA was $40 million with margins of 4.1%. Slide 15 shows the income statement for the full year. Gross margin was down 46% reflecting operating leverage as sales decreased partially offset by cost savings in material, labor and burden. On a full year basis, we have reduced SG&A from $401 million last year to $282 million this year. Interest expense was $6 million higher primarily as a result of increased borrowings.

So on the bottom line we lost $1.32 per share before special items. These special items are detailed in the appendix and include asset impairments and the previously discussed significant non-cash tax charges taken primarily in the first quarter. Other special items included restructuring actions of $68 million after-tax, and LVS separation costs of $9 million after-tax.

Slide 16 shows EBITDA and segment margins for the year. Total EBITDA was $116 million with margins of 2.8%. Recall that the unallocated corporate costs in 2008 related primarily to the planned separation of light vehicle systems.

Slide 17 shows free cash flow for both the quarter and the full year. Free cash flow was $22 million for the fourth quarter, which exceeds our previous guidance. We are pleased to have delivered positive free cash flow for the entire second half of the year, especially in light of the continued pay down of the off balance sheet securitization and factoring balances as revenues in Europe decreased.

We accomplished this primarily through rigorous management of working capital while continuing to make strategic capital and engineering investments to support our growth initiative and to position ourselves to benefit from global market recoveries.

We continue to improve inventory management and in the fourth quarter achieved our highest level of inventory turns of the year, even at these reduced levels of revenue. In addition, we continued to reduce our past due receivables and have achieved what we believe are world-class levels of performance around 5.4% globally and 3.6% in North America. Congratulations to our manufacturing, sales, information systems and shared services teams for the significant accomplishments in these areas.

On a full year basis, free cash flow before factoring and restructuring was a negative $101 million. Slide 18 plots total EBITDA margins from the fiscal third quarter to the fourth. Recall that we previously reported total EBITDA margin of 3.3% for the third quarter. If you take out the positive contribution associated with wheels, the adjusted EBITDA margin for the third quarter was 3% in line with our previous guidance.

European production was lower in the fourth quarter due to the July shutdowns and the normal August holiday period which reduced fourth quarter EBITDA margin by 1%. North and South America each showed volume improvements and positively contributed to our margin this quarter. The effects of Performance Plus programs, as well as the other significant cost reductions taken this year, added 1.6% to our fourth quarter EBITDA margin and this more than offset the reductions seen in Europe.

Let's turn to slide 19. Since the beginning of this calendar year we have steadily increased our liquidity position while simultaneously reducing our net debt, including the debt-like off balance sheet factoring and securitization programs. As of September 30, we achieved our highest quarter end level of liquidity for the fiscal year at more than $700 million. Liquidity for the fourth quarter consisted of approximately $95 million in cash and more than $600 million undrawn under our revolver.

In addition to the liquidity shown in this chart, we have renewed the 364-day French factoring and Swedish off balance sheet securitization program with Nordea. Therefore, we continue to have unused commitments under our off balance sheet factoring and securitization programs in Europe subject to availability based on production levels going forward.

Slide 20 describes our current pension and retiring medical status. Like all other U.S. industrial companies, our U.S. and global pension plans were under funded at our September 30 measurement date due to the market declines in corporate bond spreads, which determine our discount rate, as well as decreases in asset returns over the past year.

We expect $13 million of additional pension expense in fiscal 2010. In order to improve our pension position, we are planning $47 million of global pension contributions for 2010. OPEB contributions in 2009 included a one-time retiring medical settlement of $28 million, which was paid in our first fiscal quarter. The ongoing contributions, however, are expected to remain flat at $47 million in 2010.

Slide 21 contains some key planning assumptions for fiscal year 2010. Combined total capital expenditures for our core business and light vehicle systems are expected to be in the range of $90 million to $110 million. Interest expense is expected to be in the range of $95 million to $110 million next year as approximately $10 million of additional non-cash expense is anticipated due to the required adoption of accounting changes relating to our convertible securities.

It would not be useful for us to provide a tax rate estimate for next year due to the effects of valuation allowances on the mix of income. Therefore, we are providing expected income tax expense before special items ranging from $40 million to $60 million. We expect $25 million to $50 million of cash income taxes to be paid in 2010.

On slide 22, we provide our outlook for the first quarter of 2010. While we do have good visibility regarding orders and production approximately four months out, the second half of the year remains somewhat unknown. In the near-term we continue to see considerable strength in North American orders due to what appears to be pre-buy activity, and the Chinese, Brazilian and Indian markets appear to be well on their way to a solid recovery.

As a result we expect first quarter sales to be higher than fourth quarter. We are expecting strong conversion on this revenue. Therefore, EBITDA before special items is expected to exceed our fourth quarter results. We expect continued success in converting these earnings to cash and expect total free cash flow for the first quarter to be around breakeven. This includes favorability resulting from expected factoring balance increases in line with increased European productions.

I will now turn the call back over to Chip.

Charles G. McClure, Jr.

On slide 23 you'll see the process we've defined and the specific initiatives to improve our ability to execute well through the cycle. During the past year and a half, we've strengthened our operations, supply chain and purchasing team with new leaders and new information systems. The result is a highly collaborative, cross-functional solution that begins and ends with the customer.

The first step in the process is to improve our visibility. To do that, we're collaborating with our customers to increase our transparency into their volume and mix and expectations, while at the same time monitoring industry forecasts. We then use advanced IT systems to interpret forecast data and product mix predictions so we can optimize the information we provide to our suppliers.

We're also working more closely than ever with our supply base to ensure that they have the information they need and the resources available to manage both up and down cycles. Our supplier risk management process has been in effect for some time and has been very effective in helping us to avoid or minimize costs due to financial or material issues with certain suppliers.

And across our manufacturing base we're constantly evaluating our footprint, driving our lean production system and focusing CapEx on core processes like gearing in actual housings that increase our flexibility and responsiveness. The objective of this process is to meet our customer's delivery expectations with zero interruptions while at the same time eliminating premium costs and maintaining our high quality standards.

As we see markets in China, India and South America recovering and volumes in North America increasing due to a 2010 emission change, we're confident that the process we put in place will enable us to more efficiently execute through the cycles.

In closing, on slide 24 I want to review our 2010 priorities. Looking ahead to 2010 we remain focused on many of the things that have helped us get to where we are today. We'll concentrate on rigorous cost management to realize improved operating leverage, continue our transformation to focus the company on global commercial vehicle and industrial markets, successfully execute the anticipated upturn as global markets recover, drive innovation by accelerating new products and advance fuel efficient technologies, maintain our focus on sustainable, profitable growth, and continue to strengthen the balance sheet.

Now let's take some questions.

Question-and-Answer Session


(Operator Instructions.) Your first question comes from Brian Johnson – Barclays Capital.

Brian Johnson – Barclays Capital

Congratulations to Carsten on his big move. With your new segment structure a couple of things. One, how does it tie back to the aspirations you had for CVS margin in the low teens as we think about each of the segments now that we see very good profitability in industrial and challenge profitability in commercial?

Charles G. McClure

I'll start and I'll kind of throw it over to Jay to get into kind of the details. But obviously as we move forward this is the continued transformation of the company to the commercial vehicle side. As we look at that right now as you look at the margins, I think it's safe to say on the commercial truck side a lot of that is in markets that have been down significantly for quite a long period of time, specifically the North American and European markets.

And as we look at the other industrial and the aftermarket in trailers, part of it we kind of move forward to future EBITDA targets is to really make sure we've got the proper focus across those products. So as I look at it specifically in the commercial truck side, I think it's somewhat driven because of the volumes you're seeing in the European and North American markets.

Jeffrey A. Craig

I would just add to what Chip stated obviously the industrial and aftermarket trailer business we think are fairly well situated to reap our long-term EBITDA margin targets. But as you look at the commercial vehicle OE business, the North American market has been down here for almost three years, so there's difficult historical comparison.

And as you recall, we have done some restructuring of the North American business, opened a new Mexican manufacturing facility, and if you look at our CapEx for this year and the previous year, invested significant capital into upgrading our plants, both in North America and Europe. And I would also just mention that we've previously stated that the European business was a struggle for us and even at peak volumes, although it was turning around.

We knew we had quite a bit of work to do behind the scenes to improve that business, we've continued to do that, most recently over the last 12 months moving the Performance Plus oversight office to our European headquarters, and aggressively focused on improving the margins in that business over the last year. So we know the target that we've set out externally and we're continuing to think to make very strong forward progress.

Brian Johnson – Barclays Capital

So should we be thinking about commercial truck as a low teens business in an EBITDA cycle production environment in North America and Europe?

Jeffrey A. Craig

I would say, Brian, we don't have clear line of sight to EBITDA margins quite that strong at this point. I think the one thing I would – our target was always driven around the three segments on a combined basis. And with companies like ours where there's a lot of leverage given from the industrial – from the commercial OE business into the industrial and aftermarket business, we tend to focus a lot on full channel profitability as well.

Obviously, being strong in OE markets gives us the right to play. For example, in the aftermarket business both in North America and Europe and beginning in South America and China. So sometimes it's difficult to get all of the true cost accounting allocations on a full channel profitability basis.

Brian Johnson – Barclays Capital

So can we think about this quarters European and North America truck build rates as the breakeven point for the new commercial truck on the segment? And if so, what's then the likely incremental margin either on a per unit or a percentage basis going forward?

Jeffrey A. Craig

I think that's a fair assessment. We were on the positive side of – slightly positive side to breakeven this quarter. So I think that's a fair assessment that you've made.

Brian Johnson – Barclays Capital

Just one final question, what is the submitted cash restructuring expense in your [inaudible] business, and how much of the potential cash issue around divesting it is that driving?

Jeffrey A. Craig

I think if you're referring to the comments I made on the cost of the divestiture, is that what you're referring to, Brian?

Brian Johnson – Barclays Capital


Jeffrey A. Craig

I think we're still dimensioning that and, as I mentioned, we'll have more information in our K. But we just wanted to communicate that although we have this business to breakeven and the cost to carry, so to say, for us as we evaluate and work through any disposition we think was very manageable, that we do see there'll be some cash outflow associated with this.

And as you go through any modeling like this, certain scenarios we play out it could be significant. But we do feel we have the good option of time working for us right now a bit because we have reduced the cost to carry. If you recall, this business was significant negative EBITDA in the past and we've gotten it to breakeven and that has allowed us to be somewhat of a patient seller or a disposer of this business.

Charles G. McClure, Jr.

Brian, this is Chip, two other things to add to that. One, as Jay said if you look at the performance the last couple quarters I think we've been able to get it up to that breakeven level. And if you look historically some of the other businesses we've divested, such as our light vehicle aftermarket and chassis business, we do kind of look at these and really look at what's the best approach to take on a case-by-case basis to look at that kind of going forward that's for the best for our shareholders kind of going forward.

So as we look at this as Jay has said, we have the time to do the proper analysis, we will do the proper analysis, I think hopefully history has demonstrated the fact that as we've done this with some of the past ones we certainly feel we've done the right decisions kind of going forward from the short list perspective.


Your next question comes from Derrick Wenger – Jefferies and Company.

Derrick Wenger – Jeffries & Company

Three questions if I could. What is the total size of the bank facilities right now and with the letter credits and the availability?

Jeffrey A. Craig

Well, the total size of the bank facilities, there are several. We have a revolving credit facility, which is $700 million. We obviously, as we stated previously, lost Lehman's commitment in that facility almost a year ago, which reduced that by $34 million so where at $666 million, and then we have the U.S. securitization facility, which is $125 million. But again, the availability to us of that facility varies by the amounts of receivables generated in the U.S.

Derrick Wenger – Jeffries & Company

Right so what are the LOCs against the $666 million facility, and what's the availability?

Jeffrey A. Craig

We have LCs of $27 million at the end of the quarter and we have outstanding borrowings under the facility at the end of the quarter of $28 million.

Derrick Wenger – Jeffries & Company

Is the balance completely available?

Jeffrey A. Craig

It is available to us on every day of the year except for the four quarter end date when we have restrictions due to the covenant calculation. We cleared that by a very large margin this quarter, and in our 10-K will be as in the past disclosing the fee ratio of compliance.

Derrick Wenger – Jeffries & Company

Okay so there's $611 million available?

Jeffrey A. Craig

As of today we said today that's correct.

Derrick Wenger – Jeffries & Company

But what about quarter end?

Jeffrey A. Craig

Obviously, we have intra-quarter movements and the demands on borrowing in LC.

Derrick Wenger – Jeffries & Company

What was available at quarter end or at year end?

Jeffrey A. Craig

Again, we'll be disclosing that as a ratio in the 10-K.

Derrick Wenger – Jeffries & Company

Okay and then restructuring cost that are known for the fiscal year '09, '10 coming and how are those kind of spread out?

Jeffrey A. Craig

In 2010, we're still developing that so I don't – and a part of that is how our strategy on body systems plays out. In 2009, the total restructuring for the year, as far as in cash flow, was $53 million for the year. But again, in 2010 we're still developing that.

Derrick Wenger – Jeffries & Company

Okay and I think you mentioned it, but why is the interest expense projected to rise here?

Jeffrey A. Craig

It's because there was an accounting change – method of accounting change that had an impact on our convertible securities. And how you compute the imputed interest expense or implied interest expense embedded in those securities and that will increase our non-cash interest expense for 2010 by $10 million. So you'll start to see on future calls like this a reconciling item on our cash flow statement for the year we expect will be about $10 million.

Derrick Wenger – Jeffries & Company

Okay and can we put that kind of pro rata over the four quarters?

Jeffrey A. Craig

I think that would be a fair thing to do, although from a cash perspective remember our interest payments are made semi-annually on that [instance].

Derrick Wenger – Jeffries & Co.

Right, but we could spread the $95 million to $110 million over the four quarters on accrual base?

Jeffrey A. Craig

That's correct.


Your next question comes from Patrick Archambault – Goldman Sachs

Patrick Archambault – Goldman Sachs

I just wanted a little bit more clarity on just the tax implication. I understand we've all seen companies with really high tax when they're not [inaudible] and having to pay tax in other jurisdictions where they don't have the same kind of accounting for NOLs and that sort of stuff. But I guess it just seems like your tax bill was several hundred percent when you think about going from positive [inaudible] of 2 million to a net loss.

And it also seems that in your guidance you would be sort of expecting something like that too. If you get consensus pre-tax expectations of about [33 million] and your guidance for income tax expense is $40 million to $60 million, which would really imply that either the street is too low or that earnings are going to be negative despite general expectations that things are improving.

And so I just wanted to A, sort of get a better sense of what's going on. Are there additional allotment evaluation actions that you're anticipating that are included here. And I guess am I thinking about it the right way in terms of the implications for earnings in 2010?

Jeffrey A. Craig

Obviously the slide 13 we added, we knew this was a complicated subject for us to lower our expectation for people externally. It was very complicated. The attempt to add that chart was to provide the additional color that I think you're asking for. And if you look at slide 13, the income tax on entities that are not subject to evaluation allowance is at an effective rate of 32.4%, so I think pretty consistent with what people would expect on a statutory basis.

And then unfortunately we have valuation allowances for most of the countries we operate in Europe and the United States, so a large portion of our business where we have generated losses during this year. The good news with that is as those businesses return to profitability, which we do see sometime in the foreseeable future, we will be realizing those earnings tax free. But in the interim, I think we'll continue to provide a chart like this to help people interpret what our tax situation is.

And really this quarter it was driven by many of the emerging markets are coming back very aggressively so we're strongly profitable in those markets where we do have to provide and pay income taxes really, as I said just a moment ago, very close to the statutory rates. And we're just now getting over breakeven in the U.S. market, and so it's probably a bit of time before we become a taxpayer which will be shielded by those NOLs.

Patrick Archambault – Goldman Sachs

I guess the implications are there for that kind of a, I guess, diversification and profitability to sort of be sustained at least through the better part of next year just given the tax guidance.

Jeffrey A. Craig

That's correct. I think that's a fair assumption of what we try to do by providing the guidance was to help people understand what we expect in terms of dollars of tax, because we thought the effective rate was just relatively difficult to use in modeling.

Patrick Archambault – Goldman Sachs

Just a little bit on restructuring, I know you haven't really provided guidance on it for 2010, but I was looking for at least a little bit more help in how to frame it. It seems like when you look at some of the run rates you've provided, there may be some benefit to annualizing some of the actions you've done in the later part of the year, so that's good. But then you talked about putting some of the temporary cost cuts back in as things improve. So can you just help us get a better sense of how we should think about the cost opportunity here?

Jeffrey A. Craig

I think our hesitancy in giving numerical guidance like we did in the four other categories we did for the year relative to restructuring is we do think on the core business, so the three segments in CVS are restructuring, will be down for this year. But as we have spoken to, we're still assessing various alternatives for body, and as we further evaluate those there could be additional restructuring that we think is required in that business. So as we move on further in the year, we may be able to provide clarity around that.

Patrick Archambault – Goldman Sachs

But how about just in your core businesses? I mean, is it fair to say that there's some cost performance given the actions that you've done that's going to be sustained into 2010 that's material or should we be thinking about that being offset by some of the SG&A costs coming back as volumes recover?

Jeffrey A. Craig

One of Chip's previous charts we addressed what costs we think cost reductions stick within the business and what may come added back in terms of restoration of salaries and hopefully performance that meets our internal plans of repaying incentive compensation. That was laid out in chart eight I think on the table on the lower left side. Included in those structural cost reductions would be the benefit from the restructuring actions that we've taken both this year and in previous years.

Patrick Archambault – Goldman Sachs

But I guess I'm just still trying to get a better understanding. It looks like the run rate of course is higher than what you've done, so if you just did nothing you would still have some 40-odd million of a tailwind from structural cost reductions. But then, I guess asking it a different way, how much of the 48 million that you did in last year would come back in, would it be all? Could we be thinking about restructuring being sort of a net neutral next year or might it be less than that?

Jeffrey A. Craig

I think it's probably most dependent on volumes. I would say we feel internally comfortable with our plans that we've laid out internally in 2010. But if volumes come back as we're seeing in the first quarter, if that continues on into future quarters a lot of those temporary reductions could be lost as we're adding workers back into the hourly workforce. We're having to incur higher incentive comp accruals for our profit sharing plans. So I think it really is dependent on what we see in the volumes throughout the market.

Charles G. McClure, Jr.

If you remember back at the beginning of the year and obviously in response to the economic questions taking place, there were some temporary things we put in place as far as salary reductions, benefit reductions, and some other things that we did. As I kind of indicated in my comments, we'll look to restore some of those.

The structural cost reductions on that slide eight are that ones that, as we look at it, kind of sticky if you will and stay there. But some of the others, as Jay had said, is dependent on volume and some of the others, as we indicated early on in the year, were indeed temporary to make sure that we could work through this economic crisis. And as we kind of go forward into 2010, we look for kind of a reinstatement of those things. So it's really that top line would be the one that we would see that would kind of be maintained longer term.

Patrick Archambault – Goldman Sachs

Last real quick one, if I may. I didn't see it anywhere, forgive me if I missed it, but would the production volumes for European and then Class 8 that are underpinning your first quarter guidance?

Charles G. McClure, Jr.

First of all, as I look at the first quarter, I think if you look at the Class 8 orders that came out in October that were north of 20,000 units, I think we certainly see that there's going to be a bit of a pre-buy there that is taking place before the new emissions regulation. That's here in North America it's going to take place. And do envision that through the balance of this calendar quarter and perhaps even into early next year and it will kind of be readjustment that way.

So that's what we're kind of seeing and it's kind of the underpinnings, if you will, for here in North America. And as Jay said, beyond four months it's still somewhat unclear here. We're really kind of looking at the second half of next year for that, again, depending on what happens in the economy here. In Europe, we are starting to see a slow gradual increase or rebound. There's no question it was a significant drop off and it'll take a while to come back.

So that one I would say is kind of a slow rebounding as we kind of indicated I think the bottom has been passed and just kind of a slow gradual increase. Nothing driving it like the technology here vis-à-vis the emissions regulation that occurs in 2010. So it's just kind of a slow gradual increase there is what we see in Europe.


Your next question comes from Brett Hoselston – Keybanc.

Brett Hoselston – Keybanc Capital Markets

LVS, sounds like the chassis are our remaining operations – excuse me, the remaining operations look like they breakeven at this point in time. Free cash flow positive, neutral at this point?

Jeffrey A. Craig

We have seen some positive benefits from the run off from working capital, but I would say barring that it's roughly neutral to slightly negative.

Brett Hoselston – Keybanc Capital Markets

What's left at this point in time? I mean it looks like annualized you've got about $1.2 billion in sales, obviously affected by production. And as you break that down, I know you did quickly earlier, but as you break that down into large chunks what's left at this point in time?

Jeffrey A. Craig

It's really three components and I'm going to list them in the order of significance. It's our body system business that would be the vast majority of the business and they represent roughly 75% to 85% of the total business.

And then there is some remaining chassis businesses here in North America that we had an agreement with the OE that they provide parts for on a just-in-time basis. That we would run out those contracts to the end of the agreement, one of which ends in the spring of this year and one about 12 months after that. And then the last piece is a small shock absorber business in Europe. So those are the three components.

Brett Hoselston – Keybanc Capital Markets

Where we're at, particularly the body business I would say your largest chunk, where are we at in the divesture process. Have we distributed books on it? Are there indications of interest? Where we at and kind of what are your expectations in terms of timeframe? Is this a fixed 12-month process or could it take longer? Your thoughts there.

Charles G. McClure, Jr.

Well first of all, Brett, it's very early in the process and there is a great deal of interest out there from a number of different parties on that. We're also in discussion with our customers on that to be very transparent on that. So, that is very early in that. We are evaluating all different options and being very open on that. From a timing perspective, as Jay kind of indicated in his comments, that I think the good news is we've gotten that to where its got minimal impact to the companies and we can take the time to make the right economic decisions.

So we're going to take the right steady approach on this going forward on that and really haven't set a defined time on it, we do expect it'll go through much of 2010 and perhaps even beyond that. But again as we look at that what we want to do is to make sure that we factor in the considerations from our customers end, our employees end, and obviously the shareholders end to make sure that we make the right decision going forward on that.

Brett Hoselston – Keybanc Capital Markets

Jay, as you look at the EBITDA outlook for the company, it looks as though you're basically suggesting that its going to improve and, therefore, the covenant outlook should improve in a commensurate manner. Is that a fair assessment? Is there anything else in there that you see that might mix that up a little bit?

Jeffrey A. Craig

No, I think that's a very fair assessment and I think we believe that we should remain in compliance for the remainder of the life of that facility.

Brett Hoselston – Keybanc Capital Markets

Chip, I think we're fairly well aware that the North American market seems to be improving somewhat, a little bit of pre-buy possibly. But as you look out at the European market and particularly with your primary customer [revolver], what are you thoughts at this point in time? Do you feel like you're confidently at the bottom here and starting to see improvement? Do you still feel somewhat uncertain? What are your thoughts?

Charles G. McClure, Jr.

I think we're at the bottom and starting to come out. What can't be projected is how quickly we'll come out. There's no question it was significant drop in a very short period of time. I think the bottom has been found and it's kind of moving forward. We are seeing different signs that different economies in Europe are starting to pick up, albeit slowly. I know one of the other factors is there's still some stimulus package going on kind of country by country that are driving some of that.

We're also seeing some other things within the economy of different countries over there that are moving up, but I need to continue to emphasize, yes, bottom has been found. We probably passed bottom, but it will be kind of a slow ride up from here throughout Europe kind of going forward.

Brett Hoselston – Keybanc Capital Markets

Then finally, Jay, you've made some forecasts in terms of tax expense and cash taxes for 2010 and knowing the complexity of tax accounting, that's pretty bold. And so I'm wondering how confident are you in your income tax and cash income tax outlook? It seems as though, from my perspective and I'm not saying this to offend you, but there are so many moving parts with this tax accounting. I'm wondering do you think you have a high degree of confidence that those numbers are actually going to be correct or would you say that's just your best shot at this point in time?

Jeffrey A. Craig

I would say we're fairly confident or we would have not put them out as guidance. I mean like any guidance it can be adjusted in the future, but the cash and the accrual taxes are really being generated by some operations outside the U.S. in growth markets that have held very steady from probably about six months now.

So, and as we look out to those countries, we felt fairly confident to provide guidance within a range. I mean those ranges are still somewhat large, but we just thought people were having such great difficulty in determining what our future tax expense would be. We just thought it would be extremely helpful to kind of provide people what we see going forward.


At this time, I would like to hand the call back over to Mr. Brett Penzkofer for closing remarks.

Brett Penzkofer

I'd like to thank everyone for joining the call today and invite you to follow up on any further questions you may have with your communications or investor relations contact. Thank you.


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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