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ArvinMeritor Incorporated Q4 2007 Earnings Call Transcript

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ArvinMeritor Inc. (ARM)

Q4 2007 Earnings Call

November 14, 2007, 09:00 am ET

Executives

Terry Huch - Investor Relations

Chip McClure - Chairman, President and Chief Executive Officer

Jim Donlon - SVP and Chief Financial Officer

Analysts

Peter Nesvold - Bear Stearns

Brian Johnson - Lehman Brothers

Jairam Nathan - Banc of America

John Murphy - Merrill Lynch

Jonathan Steinmetz - Morgan Stanley

Brett Hoselton - KeyBanc Capital Markets

Frank Jarman - Goldman Sachs

Presentation

Operator

Thank you for standing by. And welcome to the ArvinMeritor Fiscal 2007 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions)

I must advice you that this conference is being recorded today, Wednesday, 14 November, 20007.

I would now like to hand the conference over to your speaker, Terry Huch. Please go ahead.

Terry Huch

Thank you, Amy. Good morning everyone and welcome to the ArvinMeritor fourth quarter and full fiscal year 2007 earnings call. On the call today we have Chip McClure, our Chairman and Chief Executive Officer and President, and Jim Donlon, our Chief Financial Officer.

The sides 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 is the property of ArvinMeritor it's protected by US International Copyright Law and may not be rebroadcast without the expressed written consent of ArvinMeritor. We consider your continued participation to be your consent through our recording.

Our discussion will contain certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Let me refer you to slide two in our fourth quarter earnings conference call presentation for a more complete disclosure of the risks that could affect our results.

Now, I'd like to turn the call over to Chip.

Chip McClure

Thank you, Terry and good morning everyone. Thank you for joining us today. First, I'll cover some of the highlights for the year outlined in slides three through eight and then I’ll turn the call over to Jim who will review the details of our financial performance.

As you read in this morning's earnings announcement for fiscal year 2007 we earned $0.53 per share from continuing operations before special items. Despite the solid progress we are making in implementing our strategic initiatives we haven't delivered the financial results that we know a company like ours is capable of achieving.

We recognize issues facing ArvinMeritor and we are working hard to address them. We are in the process of implementing aggressive action that will help us to turn the challenges we are facing into opportunities for the future.

The actions we are taking have just started to hit our bottom line and I believe that we will begin to see more improvement by the end of our fiscal year. We however remain focused on putting capacity in place, improving our profitability and delivering the returns you expect from us going forward.

In the short-term, our results have been negatively impacted by continuing soft truck market in North America, as well as, a truck market that's been going through the roof in Europe.

As we've told you on the last couple of earnings calls the capacity issue in Europe primarily driven by the growth in Eastern Europe, stress our supply chain and increase our costs due to sourcing issues, premium freight and over time.

We are taking actions by making the necessary capacity investments in our equipment and facilities, qualifying new suppliers in Eastern Europe and Asia, and aggressively implementing lean manufacturing programs that will improve the efficiency and robustness of our systems and plans.

We also need to address some of the commercial issues we had with many of our customers. We are pleased that our customers recognize the impact in steel and premium costs are having on us and we are willing to work with us to help find solutions and address these issues.

In the long-term we believe that we are not only -- we will not only benefit from the capacity actions I just described but will continue to benefit from all of the other accomplishments we’ve made during the year.

These include the substantial amount of new business we booked this year including our new joint venture with Chery Motors one of the fastest growing OEMs in China, which is expected to ramp up to $150 million of business for us by 2010 and our higher sales volume in our specialty vehicle segment.

Our CVS specialty group continues to win business for the Mine Resistant Ambush Protected defense program or MRAP, where we supply components for the majority of the units. We expect this area to continue to grow as new awards are announced.

While winning new business in key focus areas we are at the same time refocusing our company and dedicating our resources to our core capabilities. We therefore continue to divest non-core assets. In the third quarter we sold our emission technology business group and in the fourth quarter we sold our European aftermarket exhaust and filters operations.

Throughout 2007, we've continued to rationalize and write size our company by aggressively implementing several restructuring actions and improving our manufacturing footprint around the world.

We saw improvements to our LVS business margins compared to prior years, finishing 2007 with an EBITDA margin of 4%, compared to 3.1% in 2006. As our industry becomes more global joint ventures are becoming very important element of our business strategy.

We'll continue to grow and improve our profitability by entering into additional joint ventures and other cooperative arrangements going forward. We improved our technical capabilities by investing in and expanding our global technical presence.

We announced plans to open a new technical center in Shanghai, China and doubled the number of engineers we have in our technical center in Bangalore, India. We successfully launched our performance plus initiative, which we introduced to you at this time last year.

We've been working hard and I have identified 100s of ideas on how to grow profitably and significantly reduce costs. These ideas have been driven down into the operations and are now in the process of being executed.

We are tracking our progress and as promised, we are on track to generate $75 million in cost savings in 2008 and $150 million in cost savings in 2009. And we cut our pension underfunding by more than half.

Turning to slide four, you can see from this chart we’re continuing to make progress on our strategy to diversify and grow our customer base with non-traditional customers. We have strategically positioned our light vehicle business with minimal exposure to the North American domestic OEMs.

Our total global light vehicle business with General Motors, Ford and Chrysler has gone down from 13% in 2006 to 9% or on a value-added basis 6% in 2007.

Now let's -- turn to slide five, our outlook for our fiscal year 2008 earnings per share before special items is in the range of $1.40 to $1.60, which is unchanged from the guidance we provided to you on October 3rd. While no one can predict what the economy will look like next year, we’ll continue to carefully monitor the fluctuations in the marketplace and make any necessary adjustments to our business as appropriate.

As many of you might already know the Americas Commercial Transportation or ACT, revised the range for its North American truck forecast for 2008 and 2009. Although we have some concerns about the pace of recovery we might experience our outlook for the North American truck market remains unchanged from our prior guidance.

We continue to expect Class 8 truck volumes to reach about 220,000 units in our 2008 fiscal year, however we will be monitoring the situation closely. Jim will take you through the planning assumptions that our forecast is based on later on this call.

We are also working hard on generating cash going forward and we expect that with the aggressive actions we are taking, we will generate positive free cash flow in 2008. Part of the improvement will come from a significant belt type tighten actions we've taken on our SG&A cost for the first half of the year.

As I mentioned earlier, in 2008 we will be seeing results from our performance plus initiatives. It has been one of the most positive cultural transformations in the history of our company. The principles of performance plus have been integrated into the entire organization and have become imbedded in the way we run our operations.

We believe that executing these kinds of initiatives will support our efforts to become a top quartile financial performer in the coming years. We will also be seeing a gradual improvement in our European operations as we gain momentum from our supply chain management and operational improvement efforts.

We will begin to benefit from a significant restructuring actions, we've been implementing. We are on track with closing and consolidating several of our facilities and eliminating up to 2800 positions in North America and Europe.

This restructuring plan will save our company about $130 to $140 million a year by 2012. And we are improving our terms with key customers, suppliers and with our employees through a cooperative initiatives which for example will help us this year by reducing our cost of material such as steal. We successfully worked with our plant employees to win new business awards and improve the competitiveness of our facilities.

Now let's turn to slide six, as you know satisfying customer demand for heavy trucks in Europe has been one of the biggest challenges our company has had to deal with over the last year. We believe with the actions we are taking we will start to see gradual improvement to our financial performance in the seconds half of '08 and into 2009.

We are executing aggressive lean manufacturing initiatives in plants requiring extra attention and bothering our lean efforts in all other global facilities. We are strengthening our relationships with existing suppliers and joint venture suppliers in leading cost competitive countries and qualifying and obtaining new suppliers in Eastern Europe and Asia to help us lower our total cost.

We are leveraging our internal and external capacity in North America; working closely with our customers to optimize production schedules, beginning to make the necessary capital investments to insure we can better manage with the higher capacity and improve our capabilities. And we are continuing to develop our talent base and fill leadership positions with the expertise and skills needed to move our company forward.

Let's turn to slide seven, in an ongoing effort to align capacity with industry conditions we are efficiently utilize assets and improve our manufacturing footprint, we continue to consolidate, downsize, close or cell assets.

As you can see on this slide we've announced six of the 13 plants we said we would close or consolidate as part of our restructuring efforts. These facilities represent both our CVS and LVS businesses and now in Europe and North America.

Turning to slide eight, before I turn the call over to Jim let me talk to you about some of the positive thing we are doing to grow our business. We are announcing today that we are expanding our business into Romaine, we'll be building a new plant there to produce door systems for the growing number of OEMs we are supplying in both eastern and western Europe.

This plant also will support the new business we recently received from Dacia a leading automotive manufacturer in that country. Last week, we announced a major new LVS global contract to supply $4 million window regulators motors annually to Hyundai. We announced last week that we are building a new CVS axle and brake plant in Monterrey, Mexico.

This 400,000 square feet facility will not only support our efforts to reduce cost but it will help us to have the flexibility to meet the higher volumes we are anticipating in North America in 2009. In this last quarter a new venture with TRW was announced to distribute Ride Control Parts to the after market industry in Europe.

This partnership combines the strength of ArvinMeritor engineering and manufacturer competencies and the Gabriel brand name with TRW extensive sales and distribution network.

And finally, we recently received a new business award from international to supply commercial vehicle components for an additional 1000 MRAP units. This continues to be a growing business for us.

Now, I would like to turn the call over to, Jim.

Jim Donlon

Thank you, Chip. I'm going to start with some of the income statement for the third quarter on slide nine and then I'll talk about the full year results. The fourth quarter came in pretty close to the revised guidance that we provided on October 3rd.

We said then that our results in the US would be adversely affected by the slower economy and that our results in Europe would suffer from supply and operational issues related to the continuing high volumes there.

On the revenue line those factors largely offset each other resulting in sales that were about equal to the year ago quarter. Gross margin for the quarter declined by $9 million from there fourth quarter of 2006 to $118 million. SG&A was $40 million higher than last year and I will talk about that in detail on the next chart.

Equity and earnings of affiliates continues to grow. Interest expense was $22 million for the quarter, $6 million lower than last year. Income taxes were a benefit of $5 million for the quarter. And income from continuing operations before special items was a loss of $4 million compared to income of $29 million last year. This resulted in a loss of $0.06 per share.

Slide ten explains the increase in SG&A in the fourth quarter. Initially the magnitude of the increase maybe a surprise but much of it reflects the income statement binning of items that should be familiar to you. The first category is performance plus costs. We've indicated all along that our expected performance plus costs savings to pay for the cost of the program in 2007.

And they did, most of the savings have come through the cost of sales line whereas the program costs hit the SG&A line. The consulting and staffing cost to get the program going were $12 million in the quarter. The consulting engagement and payments are essentially complete, so this amount will not recur into the future.

In addition, we've made some investments in shared services that will help us reduce administrative costs in the future. Up front costs include software requirements and relocation of employees. We've also accelerated the implementation of our lean manufacturing initiatives. This is driving higher efficiency, which reduces our cost of sales.

So in total about $18 million of the increase in SG&A was for performance plus investments that bear fruit in other places in the income statement or overtime as the initiatives mature.

Another similar item is the SG&A cost we incurred to support continuing high customer orders in Europe. In our last presentation, we talked about the impact this was having on our CVS profitability.

In order to limit the exposure to these items, we've had to deploy a lot of resources into the manufacturing and supply chain management efforts. That has required travel over time and outside help, which are reflected in the $10 million increases in SG&A.

Another area of investment in SG&A for future improvements and profitability is the launch of some of the initiatives in the Asia region.

This includes the Shanghai technical center and the initial work on deploying -- on developing our relationship with Chery Motors.

At the same time, we've experienced SG&A increases for restructuring support efforts that are not appropriate to be included in restructuring charges. Higher receivable factors costs, which are partial offset to the decrease in interest expense and unfavorable changes in exchange rates.

For the next few quarters, we would see SG&A in the range of $95 million to $100 million trending down as special task forces can be scaled back.

In our industry group of truck and automotive parts supply the top quartile firms achieve SG&A costs of less than 6% of sales. And we plan to regain that objective very soon in 2008.

Returns -- slide 11 returns to the full income statement but this time for the whole 2007 fiscal year. I won't walk through it all but let me hit some highlights. Even though we are in the midst of a major downturn in commercial truck volumes in North America and even considering the 2006 revenues benefited from record commercial truck volumes, our sales were still higher this year than last.

Stronger currencies outside the US more than accounted for the increase, raising sales by $220 million. But even in the absence of currency movements, strong sales in Europe, South America and Asia were nearly enough to offset the weakness in North America.

For the year, income before income taxes was $56 million. Taxes for the full year were $3 million or 5%. This includes the unfavorable impact of a German tax law change on deferred tax assets.

We had indicated on October 3rd that this would have a one-time impact on our results, which is true. However, we chose not to report it as a special item because it was one of only a number of tax law changes that affected us this year.

At the bottom line, we earned $38 million from continuing operations before special items in 2007 which equates to $0.53 per share:

Slide 12 shows earnings before interest, taxes, depreciation and amortization for our business segments before special items. Our Light Vehicle Systems division was able to increase its EBITDA by 30% compared to last year on flat sales.

The improvement resulted from material savings and other cost savings as well as benefits from prior year restructuring actions. LVS EBITDA margins increased by 0.9 percentage points during the year. This is good progress but we have a long way to go before we will be satisfied.

EBITDA for our commercial vehicle systems division was down 29% from $328 million to $232 million. As we've discussed with you many times, the deterioration was due to unfavorable geographic and vehicle mix and to operational and supply issues in Europe.

EBITDA margins for CVS were 5.5% for the year. This business is capable of converting at stronger levels, which we think our results in 2008 will demonstrate.

Slide 13 shows our cash flow for the quarter and the year. Free cash flow was positive by $178 million for the quarter, more than explained by working capital improvements. Pension and retiree healthcare funding net of expense were a small source of cash for the quarter but a use of $71 million for the year because of contributions to our pension plans.

In our reporting for this quarter, we've adopted FAS 158, which brings the underfunded position of our pension plans on to the balance sheet. Net of other pension changes, this resulted in a $230 million reduction in our book equity.

Reflected in our cash balance but not on the free cash flow slide are proceeds from two of the three emission affiliates that have not closed by the end of the third quarter. We are hopeful that the remaining affiliate transaction will close this quarter.

Slide 14 provides an update to the restructuring plans we detailed for you on May 1st. At that time, we projected restructuring expense for 2007 of $65 million with a cash portion of $50 million.

We booked changes that were slightly greater than the plan due to an additional action to rationalize White-Collar headcount in our European roofs operation. However, cash spending was slightly lower than we had estimated.

We estimate that the annual run rate benefits of the actions we've already implemented are million. I also would like to reiterate on this slide that restructuring is a subset of the broader Performance Plus profit improvement plan.

Restructuring charges arise primarily from employee severance and asset impairments related to plant closures and staff reductions. In addition to these items, Performance Plus cost savings also include non labor overhead reductions, material cost reductions and lean manufacturing savings.

We are on track to the $75 million commitment for 2008. We have implemented the majority of the actions needed to achieve this goal but haven't seen all the full benefits of these actions for two reasons. First, we've had only a partial year benefit in 2007 and, second, savings in the 2007 period were used to offset the cost of launching and staffing the initiative in 2007.

We have implementation plans for remaining ideas, some of which will benefit 2008 by the remaining amount need to do achieve the $75 million mark. These cost savings are an important part of our plan for improved results in 2008.

Slide 15 shows our financial guidance for the year, which as Chip mentioned amounts to $1.40 to $1.60 per share from continuing operations before special items. We are planning for sales $300 million to $500 million, higher in 2008 compared to 2007.

I'll review the economic and industry assumptions that underlie this forecast in a moment. We expect to generate EBITDA of $385 million to 405 million in 2008. After interest expense of about $95 million to $105 million, and taxes in the range of 20% to 24%, our income from continuing operations will be $104 to $118 million.

Chip told that you we expect to generate positive free cash flow in 2008. If you take the EBITDA forecast on this slide and subtract the interest expense of $95 to $105, subtract the taxes of 35, Capital expenditures of $150 to $170, and restructuring cash of about $100, you would get to a number right around zero.

From there, the networking capital improvements should push us into positive territory. Forecasting the direction of the economy and the new vehicle markets is harder than normal right now. So we thought it would be helpful to provide more detail on the planning assumptions that we are using.

Slide 16 shows a number of those metrics. In most cases, what we assumed is pretty close to the middle of what the third party experts are saying. In the US, the last consensus survey of the economists called for GDP growth of 1.8% in the fourth quarter of 2007 and then gradual improvement throughout 2008 for an average of 2.4% in 2008.

We recognize that there are risks to this assumption and we are planning for various scenarios that could be weaker. If the consensus deteriorates significantly, we'll revise our guidance accordingly.

For Light Vehicle sales, our forecast of $16 million units in the US and $17 million in western Europe are consistent with those provided by third party sources. For Class 8 truck production in the US we are forecasting 235,000 to 255,000 units in the calendar year 2008. This is lower than the current consensus of that appears but at the high-end of the revised range provided by ACT.

However the Class 8 production unfolds by quarter is also important and I'll show you a slide on that in just a moment. Our forecast for Class 5 through 7-truck production is about equal to 2007 fiscal year at 180,000 units.

This is on the same basis as the history we provide in our 10-K. Unlike the ACT numbers we excludes specialty from Class 5 through 7-trucks. Our forecast for medium and heavy truck production in Europe is up about 10% from 2007 calendar year. The next three slides provide a deeper dive into the truck volumes in North America.

Slide 17 shows that that we continue to operate in a weak freight environment. We did see a small seasonal up-tick in September. But we continue to expect freight levels to be below trends for sometime to come.

Slide 18 shows the Class 8 truck orders provided by ACT. The report for October was better than expected, which is encouraging. It was the first month since October of last year in which orders have touched the 20,000 levels.

We expect orders to continue to be choppy over the coming months. But we expect to see a gradually improving trend. That gradually improving trend is reflected on our quarterly production forecast shown on slide 19.

We are calling for North American Class 8 production of 45,000 units in the current quarter, which is up about 1,000 units from the production last quarter. From here we build up to normal levels by the middle of the year with the first signs of the pre-buy coming toward the end of 2008.

Our fiscal year forecast is 210,000 to 230,000 units. Our forecast is neither the highest nor the lowest out there right now. It represents the way we expect the industry to unfold but we certainly recognize that there are risks against it.

Until we get better visibility in the direction of the economy and the trucking industry. We are not inclined to revise it. We continue to expect pre-buy levels in 2009 but the forecasted levels of 310,000 for our fiscal year is about 40,000 units lower than what we saw in 2006. ACT is forecasting 329,000 for the 2009 calendar year.

Slide 20 shows our quarterly forecast for medium and heavy truck production in Europe. The first thing you'll notice is much more pronounced seasonality corresponding to the vacation shutdowns in the third calendar quarter.

The other thing you should notice is that we expect production in Europe to continue to grow at double-digit levels over at least the next two fiscal years. As we mentioned on October 3rd, we are making significant capacity investments to be able to meet customer requirements profitably throughout this period and beyond.

With that, let me turn the call back over to Chip for some final points.

Chip McClure

Thank you, Jim. Now let's turn to slide 21. In summary ArvinMeritor is aggressively implementing the right actions to ensure they are going forward the company will be better positioned to deliver value and provide solid returns to our shareholders.

I'm confident that we have the right business plan and we are building the right team to drive our company’s future success.

First we have a winning business strategy including continuing to refocus our business by dedicating our resources to businesses that are core to our operations and offer the most attractive returns.

To that end we divested our RollCoater, light vehicle aftermarket and emissions technology businesses. We are strengthening our product portfolio and our global presence in a market that offer the highest growth opportunities.

Our strategy is based on growing with a purpose and that purpose is to increase our profits and return value to our shareholders. We are also aggressively executing initiatives that will better position of company to capitalize in the upcoming rebound in the North American truck market. As well as benefit from the robust truck market in Europe.

We made strides in improving our global supply chain and we have been making the necessary and much needed investments in our operations so we can successfully manage higher demand and capacity levels in both of these markets.

We have implemented a strategic process that regularly reviews and analyzes our product and business portfolio to achieve our profitable growth objectives. We are aligning with the right customers. Establishing better pricing disciplines and improving our platform mix.

Second, we have been proactive in our efforts to drive performance improvement initiatives throughout the organization and the actions we’ve taken are paying off.

As I mentioned earlier, our Performance Plus program has become part of our culture and has helped us to change the way we operate and drive the improvements we need to reduce costs and increase our profits.

We are also aggressively growing and expanding our presence in the Asia Pacific region. We put a number of manufacturing and engineering facilities as well as a strong management team in place and we established strong joint ventures with Asian companies and with Asian OEMs.

Because of this, I believe we'll become one of the most well positioned suppliers in our peer group to take advantage of the tremendous cost savings opportunities and the rapid growth in that region of the world.

We've rolled out our lean manufacturing initiative we called ArvinMeritor Production System at our plant sites around the world. The Carsten Reinhardt, Philip Martens and Rakesh Sachdev has been strengthening the manufacturing purchasing and Logistics Teams by utilizing their existing talent and bringing onboard additional leaders, who have the expertise and necessary skills to help us drive a continuous improving culture. We will soon begin to see the results of their collaborative efforts and we're counting on them to improve our operating performance.

Third, our company has strong policies to ensure the financial interests of ArvinMeritor's key executives are aligned with its shareowners. Management's compensation has tied to the financial performance of the company. Short-term incentive compensation is measured by EBITDA and cash flow.

And long-term incentive compensation is measured by return on invested capital and the total return to our shareholders relative to our peer group. Our leadership team has strong executive ownership guidelines that must be in here too and our board is composed of nine out of ten independent directors.

Fourth, we continue to focus our attention on maintaining a strong balance sheet. We've reduced our net debt by more than $700 million over last three years and we have no significant maturities due until 2012.

We've also made a lot of progress on reducing our pension obligations. We've reduced the underfunding of pension plans from $659 million to $180 million in the last couple of years.

We've also made strides in decreasing our healthcare costs. We are beginning to see an improvement in our results from the retiring initiatives and the employee customer driven healthcare plans we put in place last year.

And going forward we see a potential opportunity to further address some of our retiring healthcare costs by establishing as we've trust similar to the recent agreements you've heard so much about in our industry.

These are just some of the reasons why ArvinMeritor continues to be a good investment choice. Once we get through this office in the North America truck market, which we estimate will couldn't in the next couple of quarters, we will begin the benefit from rebound in the market.

Truck volumes in Europe will continue to be strong and represent an opportunity for us, especially now that we are making the necessary invests in our operations and are better positioned for growth in our industry in the second half of 2008 and into 2009. And we will also continue to see significant growth in Asia.

By the second half of 2008, every primary market for trucks is expected to be experiencing year-over-year gains at the same time. Our light vehicle business is also well position to increase its earning power going forward. LVS has improved its cost base through restructuring initiatives as well as improving its global supply base and operating processes and LVS is poised to capitalize on growth opportunities in emerging markets and by aligning with market leading OEMs.

Throughout 2008, profit improvements from our cost production and growth action will ramp up to a very meaningful level. And we continue to have the financial flexibility we need to execute these plans.

Now, let's take some questions. Operator? And we can reintroduce to the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Peter Nesvold of Bear Stearns. Please go ahead.

Peter Nesvold - Bear Stearns

Good morning guys.

Chip McClure

Good morning, Peter.

Peter Nesvold - Bear Stearns

I have maybe a little about Europe. You know we've hearing tightness from multiple suppliers in OEMs, just trying to keep pace with demands. Was there anything that you're able to do late in the year that might would show some kind of near-term benefit for instance one -- tier one supplier, I know you didn't take any downtime frame since in August to catch up to the OEM customer. Anything like that you were able to do?

Chip McClure

Yes. Absolutely. Peter, this is Chip, yes, we did the same thing, the August shut down we worked throughout that and that obviously helped with a bit of a buffer there.

I think the second thing is when you look at what Carsten and his teams have done in Europe. I've mentioned a little bit with the ArvinMeritor Production System we are starting to see some of the benefits of the lean manufacturing there.

So I think that was a second thing that we've been able to show improvement essentially in all our facilities there. The third thing is we also as I indicated have started developing new suppliers.

Now obviously with the rapid increase in the volume requirements there was some premium cost to bring this capacity on line and also get the parts to our plant. So those were kind of three, if you -- well, short-term things that I think we will already start seeing the results from.

And obviously, I think the most important thing is from a longer-term perspective is we actually spent a lot as far as investment in future capacity and we are putting that in place as we speak.

Peter Nesvold - Bear Stearns

Working down a -- working through a shutdown, an OEM shutdown makes a lot of sense, I can understand that that could be an immediate benefit, it requalifying suppliers, I mean, that seems like that could take sometime. How, you know, changeable is that, don't you have to do durable testing and get requalified by your OEM customer?

Chip McClure

No. You are absolutely right. You’ve to do that and make sure you have got the right quality in place, so that doesn't come on quickly but even with some of our existing suppliers and I think the other thing, is we work very closely with our customers because again, as you look at it, I think our customers too the significant ramp up with the opening of Eastern Europe more I think caught them by surprise too.

So as we went through the balance of the year we were able to work much closer with them, as far as, schedules also to make sure that we could -- if you would level it out of schedule a bit, so the suppliers we actually looked at, at least initially the once that were already certified suppliers.

But as we look going forward since we’ve indicated in the last couple of calls we do continue to see significant growth increase both next year and the year beyond that we are putting things in place to qualify these new suppliers. So those become more than the medium-term solutions. But it's more of the existing suppliers that we are doing it with.

Peter Nesvold - Bear Stearns

And I didn’t see anything -- forgive me if I overlooked, expectations for segment EBITDA margins in '08. I mean, where do you see commercial vehicle trending versus LVS, LVS has been a pleasant surprise that it's starting to trend up here or continuing to trend up?

Chip McClure

Yes. Obviously, if you look at that in a general sense I think the improvement in LVS has resulted in some of the restructuring that took place in the past and obviously with CVS as the volumes come back on as we are able to get capacity in place in Europe and then with what we expect the increase in volume here in North America, we do anticipate some increase going forward really into the second half of the year.

Peter Nesvold - Bear Stearns

And then last question, when I look at what you've gone through in the last couple of quarters whether it's environment, etcetera execution to some degree. You've had tightness in Europe, you've had a real difficult North America Class 8 market, which is hopefully starts to reverse 12 months out and you are going through some restructuring.

I mean Chip, are you willing at this point to call fourth quarter here an EPS bottom with positive profitability going forward and it sounds like the cash flow versus a big cash flow drain this year at least is break even next year?

Chip McClure

Obviously, as I look at this we do see improvement going forward from this fourth quarter and I think we are doing if you will brick by brick both on the LVS side and CVS side, as far as internal -- as far as, the cost reduction improvements.

I think also as you look at additional volume coming on and then clearly the third part being with the market improving that way. So clearly do see improvement as we go throughout 2008.

Peter Nesvold - Bear Stearns

Okay. Thank you. I'll jump back in queue.

Chip McClure

Thanks, Peter.

Operator

Your next question comes from Brian Johnson of Lehman Brothers. Please go ahead.

Brian Johnson - Lehman Brothers

Two questions, what are you doing any progress on balancing the operational characteristic of the CVS business, so you don't need a Goldy Locks operational environment to make money, you can make money on the down and as well as, the overall in particularly in Europe, when do we see the benefit of these plants closures?

Chip McClure

Brian it is Chip again. And yes, one of the things that we are looking to do as part of our ArvinMeritor production system in addition to the lean implementation is to first right size our manufacturing footprint but then make our manufacturing footprint more flexible so that as we look at different volume increases in different markets.

And you know, we've got to go flexible and we are actually doing some of that now if you will to help support production in Europe with some of the capacity in other parts of the world.

As I look at it going forward and as we do put this additional capacity in place we want to make sure that one it's flexible enough to be able support capacity requirements in any market in the world.

But the second thing and as from a production point of view, I think the other thing from a product point of view is where appropriate and again, we have to be sensitive to customer requirements and market demands in certain, the product requirements in certain geographic markets is to provide that flexibility so that it's, markets go through peaks and troughs and the other markets are going the other way we have the capacity in place to be able to do that on more of a global basis.

So we are doing that, we are seeing a little bit of that now and we envision more of that in the future.

Brian Johnson - Lehman Brothers

Okay. Second question is, could you give more color on LVS in particular why the EBITDA margins went down despite being of course normal seasonality but despite being a decent revenue upturn?

Chip McClure

Well, I think a lot of it you just hit right on Brian is really the seasonality that way. What I really look at, if I look at the full year trends it's clearly heading in the right direction. As you know -- indicated in our comments we still see more opportunity that going forward. So I would really say that a lot of it was just based on the seasonality at this point.

Brian Johnson - Lehman Brothers

Okay. But still versus last quarter last year it's down 170 basis points same quarter '06, is that business mix, is that something going on in apertures?

Chip McClure

Actually I would say that some of it was, as we look at some of the improvements we are making in some of our businesses within the SG&A arena Jim had talked about restructuring and those kind of things. Some of the short-term actually we are doing for the long-term investment opportunity -- return opportunities.

Brian Johnson - Lehman Brothers

Okay. Thanks.

Chip McClure

Yes.

Operator

Your next question comes from Jairam Nathan of Banc of America. Please go ahead.

Jairam Nathan - Banc of America

Thanks. Can you give us an update on your backlog, I think you said $1.2 billion ’07 to ’09 at December of last year, can you update us to that and also you mentioned, can you tell us how much of that hit '07?

Chip McClure

I would just say that, we are not giving out various backlog we have a series of business wins that we've achieved, but we have not been tracking backlog numbers. At one point in time, I believe that we may have commented that there was at that time maybe two at that time, but that's not something that we provide regular guidance on.

Jairam Nathan - Banc of America

Okay. And my next question is on the trailer business. It looks like you have a production estimate of 305,000 units in 2008, that kind of comes to like 25,000 a month and it looks like you are running much lower than that currently. So are you expecting like a big improvement there next year?

Chip McClure

Yes, we are. When you look at it normally trailers and trucks tends to go counter cyclical in some of this and the regional expectation, as we know there was a buy head in 2006 for trucks and probably less trailers being bought that way.

And obviously, it's kind of gone flat this year. So our expectation is, yes it will be going up this next year because there really hasn't been that investment therefore for last couple of years.

Jairam Nathan - Banc of America

Okay. And on the Performance Plus plan, is the kind of, can you -- is there focus more on commercial vehicles. Or is it just kind of, how should we think about that within segments?

Chip McClure

No, Jai it's cross the board. When you look at it, as we talked in the past performance plus the six pillars with three pillars of cost reduction and as an example a part o that on the manufacturing side as far as ArvinMeritor production system, we are putting the lean process in all our plants.

I've been a plants recently in China and in Europe and here in United States and I can tell you that in all the facilities whether it's LVS, CVS or it's here in North America, Europe or Asia Pacific we are putting the same processes in place that way.

On the material optimization side or DMO is refer to it the actions are being done both in the LVS and CVS side to address that and then obviously the overhead being that way.

So the only one, I think is unique to one business unit or the other is the sixth pillar if you will of Performance Plus which on the revenue side is commercial vehicle after market which obviously is specific to CVS but the others are across the board.

Jairam Nathan - Banc of America

All right. Thank you.

Operator

Your next question comes from John Murphy of Merrill Lynch. Please go ahead.

John Murphy - Merrill Lynch

Good morning, guys.

Chip McClure

Good morning, John.

John Murphy - Merrill Lynch

In your position having a high class problem of too much volume and if we think about your forecast for North America in 2008, you know in 210 and 230 sounds like it's probably it might be, I mean a little bit optimistic.

I'm just wondering as we deviate from that forecast on the down side and potentially maybe even optimistically on the upside. How do you think your capacity right now in North America is set up to handle that? I mean clearly, you are looking at lean capacity going forward. But how far long are you in that flexibility in North America specifically?

Chip McClure

Yes. Well, first of all when I look at it, if I go back to one of the slide Jim had quarter-to-quarter, if you look at the first couple of quarters I think we are very much in line with everybody else as far as what's happening in the next couple of quarters. I think the real question, which I think is part of what you are getting to is where it is for Q3 and Q4.

And as we've kind of indicated there's still a lot of uncertainty there and I think we are, kind of right in the middle that way. As you look at the capacity things and we indicated that one of the investments we just announced was in Monterrey, Mexico, which is adding to make sure that we are prepared again within our manufacturing footprint here in North America for the rebound that we do expect in the latter part of next year and into 2009.

So if you look at it short term the next couple of quarters, I think we are very much inline with everybody else that's out there on that. I think there's some question to ask, what's going to happen in Q3 and Q4 and I should mention that we internally continue to develop downsize scenarios to be prepared for any eventuality that may come out.

And then in the meantime looking beyond that for the rebound that is expected the capacity is being put in place and I think the best indication of that is what we just announced in Monterrey, Mexico.

John Murphy - Merrill Lynch

But, Jim you're comfortable with the first quarter at 45,000 units and you feel like you can handle 50% more than that with that capacity without running into premium freight and overtime at this point?

Chip McClure

I am confident with what's taking place in the first quarter, yes.

John Murphy - Merrill Lynch

Okay. And if we think about the Cadence of the $75 billion in cost saves in 2008, what is the Cadence of that? Is it back-end loaded or is it evenly smooth through the year?

Chip McClure

It's smooth all the way through the year and as Jim I think indicated in his comment Cadence it's already been implemented but it's throughout the year.

John Murphy - Merrill Lynch

Great. Thank you very much.

Chip McClure

Okay. Thank you, John.

Operator

Your next question comes from Jonathan Steinmetz from Morgan Stanley. Please go ahead.

Jonathan Steinmetz - Morgan Stanley

Right. Thanks, good morning everyone.

Chip McClure

Good morning, Jonathan.

Jonathan Steinmetz - Morgan Stanley

A couple questions, first, from a macro perspective on the commercial vehicle side in North America are you seeing any increase in sort of the price reduction that your customers are asking for versus where we were a couple of years ago with the strong volumes?

And this is an industry that has not been as notoriously tough for those as the light vehicle side. Just wondering as a customer comes under pressure have you any give -- give any of that back?

Chip McClure

We have not seen any difference and what we have seen in years past and I think the other thing is from our end and again part of the other I have seen a Performance Plus thing is, as we look at our product line profitability, I think we are much more databased on that. So, no, I am not seeing a change in that and I think we have the data now to have the discussion with our customers.

Jonathan Steinmetz - Morgan Stanley

Okay. At this point.

Chip McClure

Okay. North America and in Europe.

Jonathan Steinmetz - Morgan Stanley

Okay. I just want quick housekeeping. Jim, do you have the D&A by segment? I just want to try and get to an EBIT number by segment?

Jim Donlon

We have that, maybe after the call, maybe Terry or I could give you a follow-up.

Jonathan Steinmetz - Morgan Stanley

Okay. I'd appreciate that. Thank you. That's all for today.

Jim Donlon

Thank you.

Operator

Your next question comes from Brett Hoselton of KeyBanc. Please go ahead.

Brett Hoselton - KeyBanc Capital Markets

Good morning, gentlemen.

Chip McClure

Good morning Brett.

Brett Hoselton - KeyBanc Capital Markets

Let's see. I know that the program that you're running, the Performance Plus program that you're running has a number of different steps. I guess, I would call it, an idea generation, implementation, those types of things. I guess what I'm wondering is can you provide some sense of how you're progressing in each of those steps in terms of what you originally anticipated versus what you are seeing, you are able to achieve at this point in time?

Chip McClure

Yes. Brett, this is Chip. You're right. I mean, you look at that we do have the different levels, we track that and we have a very rigorous process as part of our PMO or program management office to track that and as we had indicated there has been hundreds, well more than 1,000 ideas that have been generated and we are now into the stages, now taking it forward to the execution part of that into the business units.

So as we look at that we will continue to generate ideas. We have groups that do that but the more important thing is implementing them and getting them translated to the bottom line. If you look at the various entities as I said before we have three pillars of cost reductions, one is material, one is manufacturing and one is overhead.

If I look at in that order, manufacturing, I think Jim had kind of walked you through some of the manufacturing restructuring that we have done within that and the plant closures and that obviously is probably the longest term one just because as you know to write size your manufacturing footprint and to restructuring plants takes time and we are showing savings from now up to 2012 on that.

The ones that are within manufacturing will show more immediate results, which as I had indicated would envision even in Europe with the leaning manufacturing side, I think that there is, we are already beginning to see some results on that on the lean side.

So on the manufacturing side, lean, we are already started to see improvement, the manufacturing restructuring again is probably the longer term one. On the materials side as we've indicated, that is in process. A number of the items have already been implemented but that will continue throughout this year and into next year and overhead kind of the same way.

Brett Hoselton - KeyBanc Capital Markets

And I apologize, I'm out of the office here so I am going to ask you question that I guess I should know the answer to. But we provided guidance of $1.40 to $1.60 I think it was about a month ago or so, what were your Class 8 heavy truck production expectations in your fiscal year '08 at that time?

Chip McClure

We were on the range, Brett, of -- what we said at that time was an earlier estimate was going to be adjusted downward and what we were looking toward was the $2.35 to $2.55 for the calendar year. But for our fiscal year that represents as I said earlier, about $220 or thereabouts.

Brett Hoselton - KeyBanc Capital Markets

So you only made, I guess, what would be considered -- it sounds like your Class 8 truck production forecast versus where you were a month ago is basically in line with your expectations?

Chip McClure

Yes. We are roughly in that same ballpark of where we were on October 3rd.

Brett Hoselton - KeyBanc Capital Markets

Okay. Thank you so much, gentlemen.

Chip McClure

Okay. Thanks Brett.

Operator

Your next question comes from Frank Jarman of Goldman Sachs.