Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Brett Penzkofer - Senior Director, IR

Chip McClure - Chairman, CEO and President

Jay Craig - CFO

Analysts

Patrick Archambault - Goldman Sachs

Himanshu Patel - JPMorgan

Keith Schicker- Robert W. Baird

Brett Hoselton - KeyBanc

Brian Johnson - Barclays Capital

ArvinMeritor, Inc. (ARM) F2Q10 (Qtr End 03/31/10) Earnings Call May 4, 2010 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 ArvinMeritor, Incorporated earnings conference call. My name is Francine and I am your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

We would now like to turn the presentation over to your host for today’s call, Mr. Brett Penzkofer, Senior Director, Investor Relations. Please proceed, sir.

Brett Penzkofer

Thank you, Francine. Good morning everyone and welcome to the ArvinMeritor second quarter 2010 earnings call. 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 www.arvinmeritor.com. 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 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 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.

Chip McClure

Thank you, Brett and good morning everyone. Now let’s turn to slide three to review some of our second quarter results. We are very pleased with the strong earnings performance reported in the second quarter. We benefited from ongoing strengthening and emerging markets and a slight improvement in commercial vehicle volumes in Europe. We’re proud of the year-over-year improvements we made especially in EBITDA and free cash flow generation. Sales in the second quarter were up $245 million or 25% from the same period last year. We achieved $64 million in EBITDA in the second quarter, double our performance in the same period last year.

Most importantly, we were able to continue our consistent conversion of those earnings to cash. We also saw improvements in our year-over-year adjusted income from continuing operations which was $15 million, up $26 million from last year. We are $0.18 per share from continuing operations in the second quarter which was significantly better than last year when we reported a $0.15 loss.

I'm extremely pleased to report that we generated $45 million in free cash flow this quarter. This is up from an outflow of $138 million in the second quarter of 2009. This represents our fourth consecutive quarter positive cash performance which demonstrates that we’re establishing the necessary discipline in driving cash flow generation.

Now let’s turn to slide four. Some of our year-over-year results, we also experienced sequential improvements this quarter across all of our key financial performance metrics. Sales in the second quarter were $1.2 billion, up $61 million or 5% compared to last quarter. We are beginning to see a good upward sales trend across all our markets.

South America is booming, India is back, China is at record levels, North America is steady and Europe is beginning to turnaround. EBITDA is up 14% quarter-over-quarter as a result of previous cost improvement actions, the benefit of which we continue to maintain. Adjusted income from continuing operations also improved sequentially as to our earnings per share and free cash flow. We expect to maintain steady performance next quarter. We anticipate markets in Europe, South America and Asia-Pacific to continue to strengthen while the North American market may soften in short-term as result of the emission changeover and lower demand for certain military products.

Let’s now turn to slide five. Segment in regional diversity has always been a corner stone of our overall strategic plan, and we are pleased that we continue to benefit in the diversified business and product mix as well as global scale. As shown on this slide, our core business segments are commercial truck, representing 47%, aftermarket and trailer 27% and industrial at 26%. As volumes in Europe began to return to more normalized levels and as our business in Asia-Pac continues to expand, we’ll get close to achieving our goal diversifying our business globally with one-third in Europe, one-third in North America and one-third in the rest of world.

In the first half of this year, our business in the Asia-Pacific region has grown from 10% to 14% of total revenues, and our business in South America has grown from 10% to 13%.

Let’s now turn to slide six to review the trends that experts are forecasting global truck production. As you can see, while North American Class A volumes are expected to remain somewhat flat over the short-term in 2010, longer term forecasting anticipate an increase in demand solely in 2011. Class A production volumes are expected to be approximately 124,000 units for the 2010 calendar year, with forecast is predicting about a 50% rise in volumes in 2011 and a further 35% increase in 2012.

Previous cycles are influenced by pre-buys and new emission requirements. But the upper trend that it expected in 2011 is different. This time, it will be driven by the economy and it did recovers the fleets will need to start with placing and rising vehicles. As you can see by the chart on this page, we are also encouraged by the strong growth that is expected in the Class 47 volumes over the next couple of years in North America.

Today, we are better prepared and well positioned to capitalize in the upturn. The slight upswing when we experienced this year was an excellent pressure test of our ability to successfully manage additional demand without interruptions. Over the last couple of years, we’ve increased our investments in modernize our existing facilities and we opened a state of the art facility in Monterrey, Mexico to ensure will successfully manage the upturn.

We also have in place rigorous processes to ensure the supply chains prepared to support this growth. These processes that were so successfully minimizing supplier disruptions in a downturn have been redirected towards actively managing the upturn. The European truck market is gradually recovering starting with higher volumes in Northern European countries, primarily in Germany, France and Benelux countries. Some of the Southern European countries especially Spain, are still running somewhat behind and continue to show very low volume demand.

Although the economic indicators for Europe continue to show signs of uncertainty, we continue to see slow incremental improvements in our markets there. For example, for the first time in 24 months, March truck registrations in Europe were up 8.8% in the same period last year. However, we are closely monitoring the ongoing volatility in European credit markets and the impact it may have on customers end markets.

Overall, we expect to see an order improvement in the next couple of quarters as our OE customers in this region gain sales for markets outside of Europe primarily from South America. As you can see from the chart on this page, medium and heavy duty truck production in Western Europe is expected to grow by 14% 2010, and approximately 50% and 33% respectively in 2011 and 2012.

We believe we’ll benefit from the strong relationships we have with our European customers. For example, we recently signed a five year contract extension with the Volvo trucks in Europe to supply disc and drum breaks for the medium and heavy duty trucks. And we signed a three-year contract extension with (inaudible) to supply axles for their on-road medium and heavy trucks.

Looking at South America, the growth trend for medium and heavy duty truck production continues to be strong and GDP is expected to grow by about 5% annually through 2015. As shown on the chart, you can see South American volumes are projected to strengthen through 2012. So consistent with our view from last quarter we are seeing our global markets continue to trend upwards and because of our truly global presence, we believe we are well positioned to benefit from the rebound across the globe.

Let’s turn to slide seven, Asia-Pacific which represents 50% of our industrial segment will continue to be a strong contributor in the growth of our company. We are making investments in our highway business in China to address the demand and improve our manufacturing and product capabilities to support one of the largest off highly markets in the world. In our on-highway business we are announcing today our intention to relocate from Wuxi to a new production facility in Nanjing, China. This move will allow us to meet current and future capacity demands.

Also in Nanjing we will be opening our first engineering and technical center in China to serve the regional needs of our customers. We expect the overall on and off highway markets in China to continue to grow and to benefit from the $580 billion government stimulus program that was implemented at the beginning of the financial crisis.

At the BAUMA show a few weeks ago we also launched a new all terrain crane axle produced at our off-highway facility in China. This product which attracted a lot of attention from OE customers from around the world is our first off-highway axle design for the global marketplace. In addition to China, we are also seeing tremendous growth opportunities in India where for example, we are experiencing very solid growth in the commercial on-highway truck market.

As you can see from the chart in this slide, truck production is expected to grow in India by about 4% in 2011 and 12% in 2012. In North America we will continue to benefit from the solid and steady specialty business which serves the bus, coach, fire and emergency segments. However we do see our North American defense business starting to slow down as the US government begins to reduce its requirements for the FMTV. This business has done well for us over the several last few years and has been a big contributor to our performance which helps us in last year’s challenging environment.

The FMTV has been in production for 20 years and has been running at record volumes in recent years to support the increased troop requirements in both Iraq and Afghanistan. This program will continue to be contributor to our business but not at the high volumes we’ve experiencing over the past few years. In fact, we expect to see a considerable drop in the FMTV program as the government transitions its business from OEM to another and decreases its spend on defense program.

Volume levels for this program however are expected to pickup again sometime in 2012. We’ve been working on a number of other defense programs including the new Joint Light Tactical Vehicle or JLTV defense program which is scheduled to replace Humvee in the 2013 or 2014 timeframe. Specific to the JLTV program, in April of this year the prime contractors delivered the demonstration test vehicle to US government and we are pleased to say we are working with two out of the three current companies bidding on this program.

Now let’s turn to slide eight, as you can see here approximately 72% of our global aftermarket and trailer business comes from North America, while freight ton miles in the US hit a low in 2009. We are expecting a steady recovery over the next several years. In addition, trailer production in North America is expected to more than double by 2012. While it is expected that trailer orders will continue to be flat in the third quarter. Our expectation is that we will some growth in the fourth quarter and more steady growth in 2011 and 2012 in both North America and Europe.

Trailer production volumes in North America are likely to reach about 100,000 units by the end of 2010 calendar year up from 80,000 in 2009 and growing to more than 200,000 by 2012. A similar although slower growth rate is anticipated in Europe moving to more than 115,000 units by 2010 from a row of 100,000 in 2009 and reaching more than 145,000 units in 2012. We are also beginning to see signs of increased aftermarket parts and remanufacturing demand in both the Americas and European markets. Incoming orders are up meaningfully from a year ago. Importantly, the after market business is growing significantly outside of North America which historically had been our primary market. Our European truck technique product line which we acquired two years ago has nearly doubled in size since last year. In the second quarter, we saw a 22% increase in sales in European aftermarket business from the same period last year. In fact, April was the best sales month ever for our aftermarket business in Europe. Now, I'd like to turn the call over to Jay.

Jay Craig

Thanks, Chip. As Chip mentioned earlier, we are pleased with the strong financial results accomplished by our global team this quarter. Most importantly, we have become much more consistent in our conversion of earnings to cash which as been a major area of focus throughout the organization. Slide nine compares our fiscal second quarter results to the outlook we provided last quarter. Both sales and adjusted EBITDA exceeded our expectations.

Our adjusted income from continuing operations was $15 million compared to the breakeven levels we reported last quarter. There were $12 million of favorable discreet tax items included in these results and I will speak to them in more detail on slide 11. But overall, the structural cost reduction actions we took last year continued to provide the expected operating leverage on increasing revenue.

We achieved positive free cash flow before factoring and restructuring, a $66 million despite our $33 million of semi annual bond interest payments made during the quarter. Our free cash flow was significantly higher than we expected as we continued to focus on working capital management and we’re partially assisted by the timing of our fiscal talent. Turning to the income statement on slide 10, we are into $0.18 per share of adjusted income from continuing operations in this second quarter. As compared by $0.15 loss for the same period last year. This result excludes $13 million of debt extinguishment losses associated with the tender offer for $175 million of our eight and three quarter percent notes which we completed in March. Also excluded from our adjusted results for two gains, $6 million dollar gain on full payoff of a note receivable that related to our sale of the emissions technologies business in 2007 and an $8 million benefit associated with the reversal of specific tax valuation allowances out the United States.

Second quarter sales were up $245 million year-over-year. On a constant currency basis, second quarter sales were up $182 million or 19% as the truck and industrial markets in Brazil, China and India continue to be very strong for us. And the North American and European markets showed some modest improvement. On the year-over-year basis, SG&A increased from 6.1% of sales to 7.4% in the second quarter.

This was primarily due to the reinstatement of temporary cost reductions, including restoration of salary reductions and cost associated with variable concentration plans. Earnings in our minority owned affiliates were up significantly year-over-year to $11 million with the largest contribution coming from our joint ventures in Brazil, that’s a capitalized on the significant strength in truck and trailer markets in these regions. Again as mentioned earlier, our interest expense of $31 million for the quarter on a GAAP basis includes the extinguishment loss on our successful tender for the eight and three quarter percent notes.

Our effective tax rate once again requires some additional explanation which is summarized on slide 11. As you can see on the first line of the slide, we will remain a tax payer in many other countries such as Brazil where we are not subjected to evaluation allowance. We are currently however unable to realize semi-tax benefit on losses in those jurisdictions which were subject to valuation allowances primarily the United States and Western Europe. We do not expect to be a tax payer in these jurisdictions for sometime when we have returned to profitability which is expected when our end customer markets recover to normal levels of demand. In fact 98% of the approximately $875 million of deferred tax assets expire after 2014 and more of than 80% expire after 2024.

As mentioned earlier in the second quarter, we have recorded net tax benefits of $8 million related to the reversal of certain valuation allowances as well as some additional $12 million benefit primarily due to favorable adjustments associated with certain tax contingencies. These are not however expected to recur next quarter. As discussed earlier, the $8 million benefit was excluded from our adjusted income from continuing operations.

Slide 12 shows second fiscal quarter segment adjusted EBIT and adjusted EBITDA for our core business segments as well as the light vehicle segment. Commercial truck EBITDA and margin performance improved significantly year-over-year. As savings associated with cost and operational improvements allowed us to aggressively convert on the higher volumes experienced in Europe and the Americas. EBITDA margins in the industrial segment declined compared to the same quarter of last year, as the favorable impact of higher sales in Asia-Pacific this quarter was more than offset by the considerable benefit provided by MRAP shipments in the second quarter of 2009.

Aftermarket in trailer EBITDA margins similarly declined year-over-year as higher core aftermarket in trailer sales this quarter were also more than offset by the benefit of MRAP service part sales last year. Light vehicle systems which consist primarily of our body systems operations earned $8 million of EBITDA in the second quarter. The structural cost savings we implemented last year allowed improved conversion on higher volumes in Europe, the Americas and Asia-Pacific. We are actively pursuing our strategy to divest the remaining LVS business and are working with interested parties towards the successful conclusion by the end of the calendar year 2010.

In summary, total EBITDA for the quarter was $64 million up $32 million from last year with margins increasing from 3.3% to 5.3%. Slide 13, displays a sequential EBITDA margin lock for the first fiscal quarter. We continue to expand margins from 4.9% last quarter to 5.3%. In the second quarter, we benefited from increases in North American production as well as market share gains. In addition, higher medium and heavy duty production in Western Europe as well as the 25% quarter-over-quarter increase in South America truck sales provided significant margin improvement benefits. Margins also improved by 30 basis point as a result of our continuing performance plus productivity and cost reduction initiative. In the second quarter we experienced the full quarter effect of the previously announced reinstatement of temporary salary reductions as well as increases in accruals for variable compensation programs as noted on the temporary cost reduction line.

We don’t expect any further margin deterioration on the quarter-over-quarter basis going forward in this area as we believe this temporary cost reduction have reached full restoration levels. Let’s turn to slide 14, as I mentioned last quarter we planned to scorecard our performance towards our goal of converting at a rate of 20% to 25% on incremental revenue until we reach our 10% EBITDA margin target.

Net of the temporary cost reduction I just mentioned, we are pleased to report that we converted that to higher end of our target 25%. We do believe we will be at the lower end of the conversion target next quarter as we experienced a reduction in FMTV military sales which Chip discussed earlier. Turning to slide 15, let’s review free cash flow for the second quarter. We reported positive free cash flow of $45 million which was significantly better than the same quarter last year. This included an inflow from working capital despite an increase in sales during the quarter.

As I mentioned earlier, this was primarily due to cutoff issues associated with our fiscal calendar. Particularly the impact on days payables, which were approximately two days longer than normal as compared to the first quarter when they were three days shorter than normal. In addition, in this quarter we experienced some benefits from the mix of suppliers associated with seasonal product sales who provide longer payment terms. We also benefited in the second quarter from interest proceeds on the emission technologies note receivable mentioned previously. Our flows for the second quarter included decrease borrowings in our off-balance sheet factoring programs as well as payments from previously announced restructuring and trailing matters associated with discontinued operations.

Turning to slide 16, once again we are pleased with the stability of our cash flows quarter-to-quarter. In fact, this is the first time since of June of 2002, we had delivered four consecutive quarters of positive free cash flow. Moving to slide 17, as you know in the second quarter, we completed a number of financing transactions which significantly changed our capital structure and improved our liquidity.

We extended the maturity date of the revolving credit facility to 2014. We issued 20 million shares of common stock, resulting in approximately $200 million of net proceeds, issued $250 million of unsecured debt that matures in 2018 and repurchased a $175 million of existing 2012 unsecured debt. These actions significantly improved the maturity profile of our long term obligations and provided the financial runway for us to execute our gross strategies as a focused commercial vehicles supplier.

We also believe these transactions are all that is necessary from a capital market’s perspective to allow us to reach BB like credit statistics through normal balance sheet management as end markets recover to normal levels of demand. Slide 18 shows our current debt maturity profile. After completing the capital market transactions, we now have a clear runway until for 2015 maturity of $253 million.

Turning to slide 19, we have continued to show progress on improving our liquidity and reducing the debt on our balance sheet. At the end of the second quarter, liquidity increased to $834 million as a result of our continued cash generation and execution of the capital markets transactions. Simultaneously, we have reduced debt to just over $1 billion, the combination of which had significantly strengthened our balance sheet.

On slide 20, you will see our updated 2010 planning assumption. Capital expenditures are unchanged and are expected to remain in the range of $90 million to $110 million including the needs of light vehicle systems. Interest expense is expected to remain in the range of $95 million to $110 million up to the capital markets transactions, as decreased borrowings are expected to offset higher borrowing cost.

Note that we have increased our income tax expense assumption to a range of $50 million to $70 million primarily due to the market strength in Brazil and China, where we remained a tax payer. However, our expectations for cash income taxes are largely unchanged in the range of $30 million to $50 million.

Turning to slide 21, we expect our sales and adjusted EBITDA to be flat in the third quarter relative to the second quarter. Our third quarter adjusted income from continuing operations is expected to be lower than the second quarter as a result of higher expected income tax expense due to the nonrecurring nature of the favorable discreet items realized this quarter. Free cash flow excluding factoring and restructuring is expected to be around breakeven as we believe we will experience greater working capital needs in the third quarter. And lastly we expect free cash flow to be slightly positive.

I’ll now turn the call back over to Chip.

Chip McClure

Thanks, Jay. Before we open the call to your questions, I’d like to reiterate that we are hopeful that the rebound we are beginning to see in many of our markets is a start of a turn around for our industry.

After spending 2009, reacting to the downturn and implementing some very tough cost reductions to get the results we needed to ensure our future, I believe we are now stronger than ever. Our accomplishments in the second quarter underscore the strength of our core business and demonstrated the initiatives would be implemented our working. We have cash flexibility to grow and are well positioned to take forward advantage of a global market as they rebound.

As we look ahead we’ll continue to focus on our priorities we align to you in December and these include a continued focus on cost management. Complete the sale of our light vehicle business which we are looking towards finishing sometime this calendar year. Successful execution during the rebound in our global markets, drive innovation by accelerating new products and advance fuel efficient technologies. Maintain our focus on sustainable profitable growth and continue to strengthen our balance sheet.

As the global markets recover and we leverage the strength of our worldwide operations, we are confident that our business will continue to deliver positive results.

Thank you. Now lets open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Patrick Archambault of Goldman Sachs.

Patrick Archambault - Goldman Sachs

My main question was just on Europe. I was hoping you guys could dwell into sort of what is driving some of the pick up in activity over there. Is it really just the fact that we cut into capacity just too much last year or are you seeing sort of underlying signs of demand as well that are kind of layered on there?

Chip McClure

Patrick this is Chip, I would say it’s probably more the former. If you look back when they did the reduction obviously they reduced inventory significantly to some of the season inventory build but more recently are again we are kind of bifurcated between Northern Europe and Southern Europe. We are seeing some strengthening in Northern Europe and obviously we are filing some of the activities going in Southern Europe. So I think initially it was probably more the inventory build and then some pick up in the market. Then I think the third part in that really is when you look at exports and a lot of the European truck manufacturers have a strong presence primarily in South America. So I would say probably the third part of that is export where they have primarily focus in South America.

Patrick Archambault - Goldman Sachs

And then just on the North America side, I don’t know if you commented on it at the very beginning of the call. Can you tell us what are you guys seeing in terms of freight activity? Obviously we had a very strong March and has that been sort of sustained into April as far as you can tell?

Chip McClure

Yes, we are seeing, I would call it kind of a marginal increase in that so yeah I would say marginally improving but still seeing some incremental increase that way.

Operator

Our next question comes from the line of Himanshu Patel from JPMorgan.

Himanshu Patel - JPMorgan

First just on the aftermarket business it looks like revenues were up but sequentially there was not a lot of profit improvement. Were most of the add backs on temporary cost cuts concentrated at that unit?

Chip McClure

No, actually the temporary add backs were pretty much kind of across the board, when you look at the year-over-year comparison I think probably the big difference is there was a large slug of MRAP orders back year ago in this quarter which is often referred to this you got kind of different time that kind of peaks up and it did peak up last year this time which we are not seeing the same benefit of that at this time. But the other part of your question the temporary increases were essentially across boards through our merit.

Himanshu Patel - JPMorgan

What about sequentially, Chip? The business saw some revenue grow sequentially as well but there wasn’t a whole lot of EBITDA growth sequentially?

Jay Craig

The sales both in aftermarket and the trailer operations in that segment were up slightly sequentially from Q1 to Q2.

Chip McClure

I would say on some of that Himanshu, some of that were actually as I kind of indicated when you look at sales in Europe I think that starting to come back in the aftermarket side. And again we are seeing at both because of the seasonality but also improvement here in North America.

Himanshu Patel - JPMorgan

And then on LVS division Chip, can you give just give us a little bit more color since the last time you spoke on the conference call. I have the discussions with number of potential buyers advanced anymore, have the number of buyers either expanded or potentially being narrowed down. And then maybe one another question for Craig what the pension deficit for the entire company, how much of that is allocated to LVS?

Chip McClure

Let me go inside of LVS and then let Jay kind of talk on the pension and the transaction is continuously indicated before and we are trying to target a transaction, be completed by the close of the calendar year, this year. Books are out, initial bridge are coming in as we speak. I think there is still a great deal of interest out there for either body systems as a whole or in several pieces. So there is a great deal of interest from another potential buyers out there and as I think we said in the last couple of calls, we really got to a point that the cost deteriorate is really the minimum. So we want to make sure that our work is at the proper accordance but with the objective of achieving the best possible outcome for our shareholders, customers and employees. So, we continue to move along and there continuous to be interest out there for us.

Jay Craig

And how much on the pension question, we don’t break out between what is in the truck, what’s allocated to the truck in the light vehicle operations but just to give some color, the majority of it would be associated with commercial vehicle. We do have some European plans that are directly applicable to the light vehicle operations. But the majority of the US application is associated with the truck operations.

Operator

And our next question comes from the line of David Leiker from Robert W Baird.

Keith Schicker- Robert W. Baird

It’s actually Keith Schicker on the line for David. I was wondering, I think last quarter when we talked about the sequential outlook we gave, we discussed pretax income as well as unreasonable to expect that in an environment of flat revenue in adjusted EBITDA. We can do flat pretax income again sequentially?

Jay Craig

I think that’s to be expected probably after pretax. The biggest change as I mentioned in reviewing the slide this just pretax items. So they are below the line items are not expected to repeat in the third quarter. So the after tax number will be then be down because of that.

Keith Schicker- Robert W. Baird

Okay. And then can you just walk me through the rationale and the strategic basis for removing the production facility in China?

Chip McClure

Yeah, actually because one is, for me the capacity; two is, it’s a little further in country a little bit more so obviously it gives us a better access to a number of other but both current and potential customers and; three, it gives us good access for future tactical people both on the manufacturing side and the engineering side.

Keith Schicker- Robert W. Baird

Would you expect any temporary impact on financial results as you’re moving things, how does that going work from business perspective of your company, right now?

Chip McClure

I don’t anticipate anything significant on that. I mean because we’re going to do this in a measured approach, we got people and the good news there is, we got the infrastructure in place that they can be people can move fairly easy that way. So, I do not anticipate a significant impact that way.

Operator

And our next question comes from the line of Brett Hoselton from KeyBanc.

Brett Hoselton - KeyBanc

Let’s say, going back to slide 11, Jay and I was hoping that you could and I apologize I got distracted at this point but can you talk a little bit about what items you do not anticipate occurring in the third quarter versus the second quarter?

Jay Craig

Sure. On chart 11, that would be the third and fourth line from the top. So, the reversal of the valuation allowances and the lines label is other $8 million and $12 million respectively if we do not expect to recur.

Brett Hoselton - KeyBanc

Now in terms of contribution margins, 20% to 25%, we go sequentially forward, I know that you basically said we think we got a 25% contribution margin but we have some of these costs. As we look forward, is your expectation that you are hoping to convert at that 20% to 25% regardless of the additional or any additional cost rolling into the income statement or is there some other cost that you anticipate kind of coming online?

Jay Craig

As I mentioned in the presentation, we think we’ve reached the full run rate on the temporary cost reductions. We should not see any incremental amount coming in, in the future quarters. Now if you recall we did have a place for holder back in the December conference for some additional incremental investments. So, we may see some of that in the future as we go forward but I don’t think that should have a significant impact.

Brett Hoselton - KeyBanc

And then finally commodities cost steel price is seeing some up tick here. What are your thoughts on the impact of commodities going forward? Do you see that’s being a significant headwind, do you see that is something it’s manageable, something you can pass on to your customers. What’s your outlook for commodity cost?

Jay Craig

We surely believe that’s manageable and if we do expect the rapid increases that are being seen in iron ore and scrap metal, it will have some impact on us but just a slight impact and that’s just related to the like effect in terms of us receiving those higher price goods and then passing along those higher prices through our contractual agreements with our end customers.

Operator

Our next question comes from the line of Brian Johnson from Barclays Capital.

Brian Johnson - Barclays Capital

I want to turn to a more strategic topic. Can you give us maybe Chip a summary of the competitive position in some of the more attractive faster growing markets particularly China, India and South America. Both as it relates to the current axle competitors on the light commercial vehicle side entrance coming over from the light vehicle side American axle meant met some initiatives on its call and then just the general attitude of the OEMs towards in-sourcing versus outsourcing as they are looking at a rebalance and continued growth in some of these markets?

Chip Craig

Let me start in Brazil and we did recently just announced additional investment to support MAN down there in a plant Resende which to me is kind of fact to one of your earlier questions asked about the increase in Europe. I think it’s a great indication of this type between European OEMs and the markets in South America; we want three suppliers that are going to the new supplier part that they are setting up there. So as I look at that I think we are very well positioned and the important thing is in all three of these markets I will talk about Brazil and in China; we’ve been in these markets grow long period of time and I mean a matter of decades not just a couple of years.

So I think that does position us well and clearly between our wholly owned facility down in Brazil and our joint venture is down there. We are very well positioned and the great deal of that business is outsourced and we are major producer on that both on the axle side which is in our wholly owned facility and then suspensions and brakes which are in our joint ventures with the Randon group down there. So we are well positioned there and I think the best indication that’s the most recent announcement on what we are able to do support MAN and down in the plant Resende.

If I go to China, our real strength there is in the off-highway side and if you look at that in off-highway we’ve had a very successful operations in Xuzhou with XCMG who is a very significant off-highway producer of equipment over there and that’s been a very successful joint venture and we have mentioned the fact that I think back one or two earnings calls ago we actually are making additional investment in China for additional capacity in the off-highway side because of the continued expansion into Western China. So we are in very good shape in off-highway and on the on-highway side it’s really much of it is very much in source right now.

So kind of similar what we experienced number of years ago in Europe where there kind of go through that evaluation. I think we do envision that will change overtime but right now as I look in China on the on-highway side a lot of that still is in-sourced but we continue to work with a number of the OEMs. I’ll just give you one example, we have announced about a year ago Yutong Bus that we are taking over part of that within there. So on the premium side, we are already making inroads there but clearly when you just look at the pure volume it’s a big opportunity there. A lot of that is in house and we are working with them to demonstrate how it makes sense to outsource it.

If I then move to India, in our plant in Mysore again our facility have been in since the mid-80s. Our joint venture partner there is Bharat Forge, it has been a very successful operation. And majority of the product is Ashok Leyland and Tata, the third major player there being Mahindra and lot of the on-highway business in India is already outsourced and we are major supplier there. So as I look at that I think depending on whether it’s on-highway or off-highway and which region we are I think we are very well positioned that way.

To your second question as far as the competitive landscape vis-à-vis light vehicle versus a commercial vehicle, again we take all competitors very seriously. But I think as I look at that just a fact that we’ve had a long-term position there to understand the markets and to understand customers that demonstrated the capability and demonstrate quite frankly our commitment to those markets I think positions well going forward.

Operator

Ladies and gentlemen that concludes Q&A portion of our presentation. I would now like to turn the call back over to Brett Penzkofer

Brett Penzkofer

Thank you very much for your time this morning. If you have any further questions, please feel free to contact myself or your communications contact. Thank you.

Operator

Ladies and gentlemen, we thank you for you participation in today’s conference. This concludes our presentation, you may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ArvinMeritor, Inc, F2Q10 (Qtr End 03/31/10) Earnings Call Transcript
This Transcript
All Transcripts