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Executives

Terry Huch - Director of IR

Chip McClure - Chairman, CEO and President

Jim Donlon - CFO

Analysts

Jonathan Steinmetz - Morgan Stanley

Brian Johnson - Lehman Brothers

Brett Hoselton - KeyBanc Capital Market.

David Leiker - Robert W. Baird

Douglas Carlson - Banc of America

Rob Hinchliffe - UBS

Peter Nesvold - Bear Stearns

ArvinMeritor Inc. (ARM) F1Q08 (Qtr End 12/30/07) Earnings Call January 29, 2008 9:00 AM ET

Operator

Good day ladies and gentlemen, and welcome to the First Quarter 2008 ArvinMeritor Earnings Conference call. My name is Lacy and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to our host for today’s call, Mr. Terry Huch, Director Investor Relations. Please proceed.

Terry Huch

Thank you, Lacy. Good morning everyone, and welcome to the ArvinMeritor first quarter 2008 earnings call. On the call today we have Chip McClure, our Chairman, CEO and President, and Jim Donlon, or CFO. The slides accompanying today's call are available at www.arvinmeritor.com. We will refer to the slides in our discussion this morning.

The content of this call which we are recording is the property of ArvinMeritor. It is protected by US 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 2 for a more complete disclosure of the risks that could affect our results. To the extent we refer to any non-GAAP measures in our call, you 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 Terry. And good morning everyone. Before we turn to the presentation, I want to take a minute to talk about the current environment and the conditions under which we are operating.

As everyone knows, North American heavy duty Class 8 truck markets continue to be in the midst of a downturn. It’s a downturn we anticipated. However, conditions are being exacerbated by scheduling fluctuations by our customers. We are fully focused on managing the issues as prudently as we can and we are taking proactive measures to mitigate the impact from this after market.

In times like these there are often issues that lie outside of our control and we are clearly feeling the effects of these. We are taking aggressive actions to manage the issues we can and focus on improving our operational and financial performance. As I will discuss in greater detail a bit later, while we are expecting some of the trends in the US to continue in to the second half of the year, we will move ahead with our global strategies and our Performance Plus program will help us offset any future impact.

Now let's turn to slide 3, and review some of the highlights in the first quarter. As you read in this morning's news release, we earned $0.08 per share in the first quarter from continuing operation before special items. Our sales from continued operations were $1.7 billion, up $95 million year-over-year, despite a weekend history in a slowing US economy.

We attribute this growth to a strong demand for our commercial vehicle and light vehicle products outside of the US, as well as currency exchange rates that favorably impacted our total revenue. As you know, we are focusing significant time and resources on our operation globally. These efforts, combined with our strengthened global management teams, will continue to help us buffer the weaknesses we are seeing in the US.

Despite the Commercial Vehicle Class 8 volumes being down more than 50% in North America, we demonstrated stronger operating performance through a relentless focus on improving our manufacturing compatibilities, reducing material cost, and improving our pricing with many of our customers. The actions we have implemented, particularly in Europe, are gaining traction and driving improved EBITDA and margins.

For example, the margins on our Commercial Vehicle business are moving in the right direction. CVS EBITDA margins increased to 6.6% from 6% a year ago. We are beginning to see the results of the aggressive and proven actions the CVS team has been executing, to the bottom line.

We have also been successful in our strategy to grow the company in higher margin segments. We have three key opportunities in this area: First, to grow our commercial vehicle aftermarket business; second, to grow with Asian OEMs around the world; and third to grow our commercial vehicle specialty business.

As we look to capitalize in these opportunities, we strengthened our CVA business this quarter by announcing the acquisition of Mascot Truck Parts, a major Canadian remanufacturer of transmissions, drive axle carriers, steering gears, and drivelines. This acquisition not only expands our customer base, logistic centers and distribution network across North America, but it also brings a strong brand name to our CVA portfolio of products.

We have also been successful in our efforts to grow our CVA business globally. We are experiencing significant growth in Europe, increasing our year-over-year CVA sales by nearly 20%. And in the first quarter, our CVA business in South America was up 50%, compared to the first quarter of last year. As part of our commercial vehicle aftermarket growth strategy, we're announcing today that we will be expanding our presence in Eastern Europe by opening a CVA facility in Moscow this year.

As I mentioned earlier, we are focused on our strategy to diversify our customer base, and grow our presence in Asia and with Asian OEMs. We continue to make progress in this area. Our Light Vehicle Systems business recently won new business awards with Hyundai, which I'll cover in more detail later on in the call.

In addition to our strategic operations and growth initiative, we've taken a pro-active approach to managing our financial obligations. Over the last couple of years we have been focused on strengthening our balance sheet. We are addressing our pension and healthcare liabilities.

We have retimed our debt terms, and have no significant maturities due until 2012. And we recently amended our company's senior secured credit facility, which offers us greater flexibility and access to increased liquidity.

Most importantly, these actions strengthen our ability to withstand potential weaknesses in some of our global markets. Having sufficient liquidity and being ready for a wide variety of economic scenarios has been, and continues to be a high priority for this management team.

Now let's turn to slide 4, to review our outlook for 2008: For the full year 2008, we anticipate earnings per share of $1.40 to $1.60 for special items. This guidance is unchanged from what we provided back on December 11 at our Analyst Day in New York. We are still on track to achieve the Performance Plus cost reductions we promised of $75 million this year. I'll cover this in more detail in a few minutes.

To the continued strong growth on our LVS and CVS businesses, outside of the US and favorable foreign exchange moments, we have raised our global sales forecast to the range of $6.9 billion to $7.1 billion. We benefited from strong heavy and medium duty truck and light vehicle volumes in Europe and South America, and we expect this trend to carry on in the near-term.

As you can see, global growth has helped support ArvinMeritor, during a time when the industry in North America is facing significant challenges. Success in all markets around the world is also critical to our continued success as a company. With that in mind, we made a number of working capital investments to support our growth outside of North America. We also had to make additional investments to support the required growth of our suppliers. As a result, we have revised our full year 2008 cash flow guidance from slightly positive, to a negative $75 million to $125 million. Jim will cover this in more detail later on in the call.

Now we turn to slide 5. In our last call, I covered some of the actions we have been taking to manage the heavy truck capacity issues we are experiencing in Europe. I am proud to report that the CVS team has stepped up to the challenge. The team has been unyielding in its efforts to turn the situation around and improve the financial performance from its operation.

As I mentioned earlier, we are starting to see some traction from their hard work, and it is beginning to show in our CVS margins. We are extremely aggressive in our goal to improve our manufacturing capabilities around the world. Since manufacturing is one of our core competencies, it's critical that it would be become best-in-class.

You can see by the positive movement in the green boxes on this slide that we have made tremendous progress on the actions we have been executing since December 11. While many challenges remain, we believe the steps we are taking will position us to manage the significant market changes in our industry.

We have implemented new systems and processes to improve discipline across the organization. This action also helps enhance our ability to plan and forecast, thereby improving our readiness to manage capacity level.

We have made significant progress with our aggressive efforts to drive lean manufacturing initiatives, part of what we call the ArvinMeritor Production System, through all of our plants.

These efforts have already begun to improve productivity, drive higher efficiency, and improve our overall performance. As I mentioned earlier, we are investing the necessary capital in our operations. Our goal here is to support the growth, manage to higher capacity levels, and improve our capabilities outside of North America, as well as within North America, when the heavy truck market rebounds.

We are also proud of the progress we have made to strengthen our global talent base. We are confident that we are now obtaining and developing the right people, resources and skill sets to deliver significant operational improvement and a solid return to our shareowners.

We have experts focused on improving our operations, purchasing organization, supply chain management program, and manufacturing engineering capabilities. Our global ArvinMeritor team is trying to turn this ship around, and we are seeing the results of their efforts here at the bottom line.

On slide 6, we highlighted the progress we are making in our Performance Plus initiatives. We have now completed our first fiscal quarter in year two of our Performance Plus transformations. Based on the actions we have implemented and the success we are seeing, we have greater confidence in our ability to achieve the $75 million in cost savings during this year, with the majority coming in the second half of 2008. This chart outlines how we're going to reach our goal.

Performance Plus has aggressive internal targets of achieving $232 million in cost savings actions by the end of fiscal year 2008. By the end of the first quarter, the Performance Plus team has implemented actions that will save $58 million per year, going forward.

In addition, in January we are scheduled to implement more than $20 million of additional annual savings represented by the white dot on this chart. Given the progress to-date in our current projections we believe that we can exceed the gross savings target of $115 million. This will allow us to compensate for known risks, customer pricing, and un-recovered raw material economy.

Now let's turn to slide 7. I would like to take a moment to walk you through some of the highlights impacting our CVS margins in the first quarter of this year, versus the first quarter of last year.

While our work isn't done we are pleased with the overall operating improvements we're seeing in our CVS business in Europe. The actions our CVS team implemented throughout the year contributed to improvement in EBITDA margins, achieving 6.6% in our first quarter, up from 6% from the same period last year.

As you know, we are negatively impacted by the North American truck and trailer downturn. Class 8 alone was down about 50% in the quarter. This lowered our CVS margins by 3.5 percentage points. This was slightly offset by higher Class 5 - 8 production volumes in Europe, improving the CVS margins by 1.4 percentage points.

We also made improvements to and resolved some of the supply and operational issues we were experiencing in Europe, and we are better managing the higher than anticipated capacity levels.

These improvements increased our CVS EBITDA margins by 2.0 percentage points. As you can see on this slide the CVS margins also benefited from the Performance Plus and other cost savings initiatives we implemented throughout the year, including certain changes to several of our employee benefit policies. These initiatives increased EBITDA margins by 1.9 percentage points.

Over time, we believe we will see continued margin improvements in our business, especially with the focus our team has on improving the operations, customer pricing, and terms.

Based on our view of the industry, we believe the first half of the year is going to continue to be tough for the heavy truck market, especially in North America. We are forecasting an improving trend as we move forward into the rest of the year.

Now, let's turn to slide 8, and walk through the EBITDA margins for our light vehicle business group, which has decreased from 3.1% in the first quarter of 2007 to 2.1 % in the first quarter of 2008.

As many of you know, most of our LVS business is outside the US. This geographic diversity and customer mix will help us weather the storm in the North American market. Our LVS business benefited from strong performance in its global market.

In the first quarter, sales in Europe were up 12% and up 35% in South America, compared to the first quarter of last year. This contributed 1.5 percentage points to its EBITDA margin. Performance Plus and other savings added 1.1 percentage points. These savings are primarily from improvement in material costs, remanufacturing initiatives and labor and burden improvements.

Unfortunately, we needed to increase reserves associated with a legal and commercial issue with one of our customers, which reduced margins by 1.7 percentage points. LVS margins were negatively impacted by some other costs, such as restructuring.

With the aggressive cost reduction and growth initiatives the LVS team is implementing, we believe we'll see improvements to the EBITDA margins by the end of the year.

Let’s turn to slide 9. We're continuing to be successful on our strategy to grow in Asia and with Asian OEMs. We won three major awards from Hyundai in the last two months. Beginning in 2010, LVS will supply more than 4 million window regulator motors a year for several of Hyundai's future vehicles worldwide.

And for the Hyundai Sonata, LVS recently won two new contracts, to supply an innovative plastic door module, which will replace the current steel version offering the customer a 25% rate reduction advantage and second, a next generation Hyundai global door latch. Both of these products will be manufactured in North America, with an expected annual volume of more than 700,000 units.

Turning to slide 10, I'd like to take a minute to discuss how we are managing our business to best position the company to drive profitable and sustainable growth. We will continue to take aggressive actions to manage our expenses and invest in our core franchise. But I do not want anyone to underestimate that there are still issues affecting the business that lie outside of our control.

We are focused on implementing strategies that will enable ArvinMeritor to come out of the downturn and a stronger position to grow. We have been preparing and are implementing several cost saving initiatives through our Performance Plus program. So, we will remain flexible and can make the necessary adjustments to our business as market conditions change.

As part of our expense management program, we implemented a net higher increase, but we will continue to recruit talent for critical positions necessary to run our business. We put in place tighter control on discretionary spending.

We are also accelerating the turnaround actions for challenged businesses, consolidating certain administrative and engineering functions to eliminate redundancies, reduce costs, continue to close and consolidate certain facilities, and consolidating our purchases efforts.

We are negotiating towards new customer agreements that would allow us to share with our customers to more of the rising commodity costs we are seeing; working toward labor agreements to improve our competitiveness; delaying the timing and amount of annual manner of raises, based on the company's financial performance; and finally, addressing the structure of pensions and retiree healthcare.

At the same time, we continue to invest prudently in the organic growth of our company. Over the past several months, we have announced four new plants in leading cost competitive countries including China, India, Romania and Mexico. We expanded our off-highway natural product offerings in China and India; growing South America to several significant businesses wins in Venezuela; launched and expanded technical and engineering centers in Asia; made capacity investments to support key customers in Europe; and invested in the growth of our Commercial Vehicle Aftermarket business.

As you can see, we have a number of initiatives underway. We are also carefully monitoring what the economy is doing. We believe the actions we are taking, coupled with the experienced management team we have in place, will help us manage through the downturn. As everyone prepares for possible recession, we will continue to manage our business carefully.

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

Jim Donlon

Thank you, Chip. Slide 11 shows our income statement for the first quarter before special items. For the first quarter, the only special item is restructuring. This quarter we recorded $10 million of expense for previously announced restructuring actions. You may also note that there were four non-recurring items in the quarter, which are shown on slide 18. But those amounts have been included in the result we are showing you today.

As Chip said earlier, sales were up by $95 million. On a constant currency basis, sales were about flat, with lower sales in North America, offset by higher sales in Europe, Asia and South America. In the first quarter, 60% of our sales were outside of North America. When you look at gross margins, operating income or EBIT, conversion was better than the same quarter last year.

As you saw in the margin walks that we took you through, the improvement in conversion was primarily due to Performance Plus cost reductions and smaller net reductions for non-recurring items than we experienced last year.

SG&A cost were $92 million, last quarter SG&A was up about $40 million year-to-year, and we explained much of the increase related to Performance Plus cost that were offset in the cost of sales line, as well as cost to meet the exceptional demand we were seeing in Europe. We projected that SG&A in the upcoming quarters would be in the range of $95 million to $100 million, and trending down. Our cost came in a little lower than we had forecast, and about $20 million lower than the last quarter.

But they are still up year-over-year, so we have some more work to do. On balance though, I would say that the extra effort we put in to Performance Plus, European operational improvements, and growth initiatives is paying off in tangibles ways. We just need to find ways to do it more efficiently, as we go forward.

Equity and earnings of affiliates was $11 million, compared to $7 million last year. Chip has emphasized to you in the past the importance of JVs in our global strategy. The improvement this quarter was due primarily to strength of our JVs in South America.

Our income before income taxes was up 47%, compared to last year. Our tax rate for the quarter was almost 60% due to non-recurring charges. We have not adjusted our results for the non-recurring items this quarter, except for restructuring. The high rate this quarter relates to the write-down of deferred tax assets for some jurisdictions that have lowered their tax rates. We had a similar item last quarter for a different jurisdiction.

The high rate this quarter also reflects settlement of a tax matter dating back to before the merger of Arvin and Meritor. So, our income from continuing operations before special items was $6 million or $0.08 per share.

Slide 12 is our segment EBITDA chart. We've already gone thorough the CVS and LVS margins in detail, so I'll just mention one item on this slide. Last year, we did not allocate the overhead cost that had previously been carried by the Emission Technologies group to the remaining segments. This year the remaining costs are fully absorbed in the margins of CVS and LVS.

Barring those extra costs and in spite of the lingering downturn in North American volumes, CVS margins were up. LVS margins would have been up as well, if not for the reserve related to the legal and commercial issue. In total, I believe the profitability is on-track with our plan.

Slide 13 shows that unfortunately cash flow is not on tract to the plan we had laid out, which is why we've lowered our guidance to our cash outflow for the year. When you look at slide 13, the issue becomes clear. Working capital is absorbing cash flow.

I will dedicate the next slide to working capital. On this slide, I want to indicate that some of the performance working capital increases are addressed with off-balance sheet factoring and securitization.

Because we have a mismatch between receivables and payables in Europe, we have increased our factoring efforts there, including some programs that are customer-sponsored. I would also indicate that the performance working capital and factoring charges over the last six months are just about balanced, and a net change of $20 million.

We have talked in the past about a pending true-up of working capital from the Emissions Technologies transaction. That is not included in this quarter, but has subsequently been completed in January. You will see the positive effect of that true-up in our cash flow next quarter.

Slide 14 talks about the increase in working capital we saw in the quarter. I want to say upfront, that the increase includes some conscious investments to support growth and it includes some areas, where we need to accelerate our efforts in order to earn the right to continue to invest.

Our inventory on the balance sheet increased by $28 million during the quarter, but $11 million of that was due to the acquisition of Mascot. Accounts receivable on the balance sheet changed by only $10 million, but if you take out the effect of factoring and securitization, they were up by $104 million. This is largely explained by the regional sales mix with higher sales in Europe, where receivable terms are longer. Also, at the end of the calendar year, we had some customer issues that were resolved just after the beginning of the new quarter.

Accounts payable decreased by $226 million. In the quarter, we paid some vendors more expeditiously than we had in the past, trying to balance our needs with theirs. In some cases we made early payments to support distressed vendors, because we found it was more cost-effective than the alternative. These factors were on top of normal seasonality in our payables. Our plants stopped receiving material around the middle of the month, but we keep paying bills from prior months.

Slide 15 shows our financial guidance for the year, which we are maintaining at the $1.40 to $1.60 per share from continuing operations before special items. We have raised our sales forecast range by $150 million, compared to our last report. A portion of this is currency-related. Regrettably it doesn't translate into higher EBITDA, as our profitability is not evenly balanced among the regions.

Despite our unusually high tax rate in the first quarter, we are holding the full year effective tax rate at a range of 20% to 24%, as we expect some compensating items in later quarters.

At the bottom of this chart, we show our new cash flow guidance of negative $75 million to $125 million. At the midpoint, this is down more than $100 million from our pervious guidance. We have lowered it, due to higher sales outside of North America, and in recognition of our more precise vendor payment patterns going forward.

Over the longer term, there are big gains to be achieved in working capital, as our performance criteria has a long way to go to accomplish top quartile, or best-in-class levels. In the near-term, however, our focus is towards the initiatives that Chip discussed earlier, and other operational metrics such as quality, delivery, and plant productivity.

On slide 16, I would just like to briefly reiterate the planning assumptions that we have reviewed with you at the Auto Show conference in Dearborn. For GDP growth we tied at the consensus estimates. In this case the blue-chip consensus was published on January 10th, and we had calls for growth of 2.2% in the US and 1.9% in Western Europe.

We know there are dissenting views on this, and we believe that there are some real risks to our business associated with weaker economic growth. But industry production forecasts have some insulating factors that may provide some support.

In North America, the light vehicle OEMs have shown a propensity to sustain production levels through incentives, which has dampened variability over the last decade. Our sales forecast is already down more than a 0.5 million units from 2007. With slower growth or even a mild recession, sales may not have that much further to fall.

On the heavy truck side there are some signs that conditions are firming. Freight tonnage as reported by ATA rose by 1.4% year-over-year in December, after rising 3.5% in November.

The December reading was the highest since January of 2006. Recently other market participants have reiterated production forecasts in line with ours. Many of the fleets were sent out last year by finding that it is time to replace their oldest trucks, in order to keep operating costs down.

Several of you may have seen December trailer orders released yesterday by ACT. They were very weak at 12,400. If orders do not accelerate soon, then we will revise our trailer forecast lower for the calendar year.

And in Europe, our commercial truck OE customers believe that there was unmet demand in 2007 that could offset a mild decline in economic growth. Light vehicle production in Europe may be more of a risk, particularly considering that we have a higher share there.

If the US economy slips into recession, we will also face the risk that commercial vehicle after market sales could decline. We are pleased to report that our global after market sales continued to grow last quarter, and we continue to do all we can to position our CVA business for further profitable growth.

On balance, this page contains more risks than opportunities. We are making contingency plans in case these risks materialize. We are also creating some of our own opportunities through execution of Performance Plus, tighter controls of discretionary costs, and other strategies that Chip took you through.

Now let's take some questions.

Question-and-Answer-Session

Operator

(Operator Instructions). And our first question will come from the line of Jonathan Steinmetz with Morgan Stanley. Please proceed.

Jonathan Steinmetz - Morgan Stanley

Great, thanks. Good morning everyone.

Jim Donlon

Good morning Jonathan.

Jonathan Steinmetz - Morgan Stanley

Just a few follow-up questions here on the cash flow, specifically on the payables on slide 14. Could you go into a little bit more detail, you listed four factors here. Which was the largest in terms of the drain, and can you be a little bit more specific about some of these payments that distress suppliers cost you?

Jim Donlon

Well, I would just mostly say that the biggest factor overall Jonathan, is more expeditious rate of dealing with our payables than was our previous practice. We've been working on some service centers and some collection of various activities from individual plants into better servicing center. And as we have done that, we find that we are paying at a more expeditious rate than we previously had before.

Jonathan Steinmetz - Morgan Stanley

And the reason you made that change and is that desirable?

Jim Donlon

It's difficult from a cash flow standpoint, but it is appropriate for interaction with our suppliers and our vendors and over the term, we will get to a better cost situation for ArvinMeritor with the bringing together of our efforts from individual plants into service centers.

Jonathan Steinmetz - Morgan Stanley

Okay. Do you get better [returns] in terms of pricing for doing that then?

Jim Donlon

As we would reduce variability with the supply community overtime, that may be possible, but in the short term, that's not something that is an immediate driving factor.

Jonathan Steinmetz - Morgan Stanley

Okay. And do you have any specific number on what the payments that the distressed suppliers cost you?

Jim Donlon

We won't say. It's a significant double-digit number, but we won't go into a specific numbers. It was significant.

Jonathan Steinmetz - Morgan Stanley

Okay, two other quick questions. One, how much you gave a walk on the LVS side with the 0.5 from Europe and South America as a benefit, can you just comment on between those two reasons with South America especially important. And then secondly on LVS, you also talked about a legal or commercial dispute. Can you just clarify those about $10 million, what exactly was that?

Chip McClure

Yeah, let me kind of walk through the second one first and I'll let Jim kind of go through these volume mix in a moment. But if I look at the customer dispute, it was actually one that, one of our customers back in 2006 decided to go forward with a field service campaign, which affected about 750,000 vehicles. They actually did file suit and we actually booked to reserve of about $11 million back in 2006. And again, as we move forward to look to solve these both on legal and commercial basis went ahead and booked an additional $9 million reserve, which takes it up to $20 million for this situation.

Jonathan Steinmetz - Morgan Stanley

And what was the part that related to or the type of component at least?

Chip McClure

I don't think we really give out the details on that Jonathan, but it was, as you can tell it was just on the light vehicle side.

Jonathan Steinmetz - Morgan Stanley

Okay and on the South America?

Jim Donlon

On South America, what I would share with you is that volumes were up about 20% in South America and on Europe, things were up about 10%. So, we had a big pick up in both regions. Our business in Europe is, of course much more significant than in South America. So on balance, about evenly split with one being a higher percentage increase and the other one being on a larger base.

Jonathan Steinmetz - Morgan Stanley

Thank you very much.

Jim Donlon

Okay. Thank you, Jonathan.

Operator

And our next question will come from the line of Brian Johnson with Lehman Brothers. Please proceed.

Brian Johnson - Lehman Brothers

Yes. Could you give us some color on aftermarket and its contribution to CVS in the quarter in terms of the revenue growth and in particular what kind of revenue did Mascot bring in?

Chip McClure

Well, actually, I will start in reverse and then I can let Jim kind of give you a little bit more detail. Mascot really was an acquisition, we just completed in December. So, really it just very small, I mean, really very negligible if you look at the fiscal quarter obviously on a go forward basis we see that as a bolt-on acquisition. I think it is really going to help us in the remanufacturing as I kind of indicated. The remanufacturing is one of the corner stones on the commercial vehicle aftermarket. I do envision that will help to better position us not only in remanufacturing in general but as I indicated the Mascot name is a well recognized name in that arena. So I think it will help us as we look to continue to grow our commercial vehicle aftermarket business.

Jim Donlon

Okay overall for aftermarket, I would just comment that here in North America, the sales levels were about even with last year but what we are finding is some big opportunities as we go out to Europe and out into Asia and South America. So our growth profile is now on the world markets while the North American market held about steady.

Brian Johnson - Lehman Brothers

And of the 29% of segment revenue from the presentation pie chart that is specialty in aftermarket, what’s roughly the geographic split within that slice of the pie?

Chip McClure

That is mostly a North American piece of the pie. Most of our specialty business is here in North America and at this point most of our aftermarket business is North America where looking to grow both of them globally but at this point it's mostly a North American slice of pie.

Brian Johnson - Lehman Brothers

Okay thanks.

Operator

And our next question will comes from the line Brett Hoselton with KeyBanc Capital Market. Please proceed.

Brett Hoselton - KeyBanc Capital Market

Good morning gentlemen, how are you today?

Chip McClure

Very good. Yourself Brett?

Brett Hoselton - KeyBanc Capital Market

I am doing great. I got to go back to Jonathans question here, because I am asking myself. Jim, you are one of sharpest CFOs I’ll just say in the automotive industry and obviously with that, I know you could go beyond but where is the return on investment capital for this decision or is that not one?

Jim Donlon

There will be one out overtime, Brett. I guess you are referring to the one of investing into working capital?

Brett Hoselton - KeyBanc Capital Market

Yeah, you are excluding out payment terms and so on and so forth.

Jim Donlon

And what we are looking at is that, as we can work through and get into a better steady pattern with our suppliers and our vendors that can open the door for us out overtime for some new commercial arrangements with them. And so it's an investment that we're making now, that we believe will bring the return at a later point in time, and this is a particularly tough time where in the supply community where by working with our suppliers right now, it's particularly important for them, and it will bring us some good features for the future.

Brett Hoselton - KeyBanc Capital Market

Okay, so placing that into my universal translator, I'm hearing you say that you think you can win more business in the future by treating your suppliers better today.

Jim Donlon

More business, better terms, better arrangements with them, just an overall better supply-customer relationship that we'll -- if we address this at this point in time.

Brett Hoselton - KeyBanc Capital Market

Yeah. Is this a kind of one-time issue in the quarter, or are we going to see the same thing in the second and third quarter, or fourth quarter and obviously this is all embedded into your cash flow, if that is correct?

Jim Donlon

Yes. We are seeing the biggest effect right now, and what we believe is that as we go out through the year, as you could tell, we did not adjust the guidance by this amount. So, we believe that there can be some adjustments as we go out through the year. We will be continuing to pay in a more expeditious rate, but there is also some benefits that we can achieve out later in the year. I would also comment to you that, that there have been some developments of new suppliers that have gone on in Europe and in Asia and this will bring us better prices and better terms out overtime.

Brett Hoselton - KeyBanc Capital Market

Okay. The Performance Plus initiative Chip, I see your chart here that says, you are pretty much on target so on and so forth. What I'm wondering is, in my mind you have restructuring initiatives, stuff about your spending cash, and the non-restructuring stuff. I'm wondering can you give me a sense of, if you were to break this chart into restructuring and non-restructuring, would you be essentially on track on both of them, would you be a little bit ahead on one, a little bit behind than the other. How should I think about that?

Chip McClure

Well actually, if you remember, when I first rolled this out, there were six pillars of Performance Plus. And as I look at that the ones that are going to be the longer term one, will be the restructuring one. So, those I wouldn't expect as much of those to be in this year, some of that I think we've indicated don't even complete until 2010, 2011 and 2012.

The ones that are more immediate ones would be in the area of overhead and would be in the material side of that. And that's clearly what's you are seeing a lot there and that's not to say that there are on several the restructuring ones, that we did announce, such as the Brussels one last year and more recently Frankfurt, Germany that are being rolled into there now.

So, there is some of that in the restructuring side in this chart that we presented today, but obviously more that I would say as far as the more immediate payback would be in the area of overhead and direct material optimization material cost reductions.

Brett Hoselton - KeyBanc Capital Market

Okay. Remanufacturing, you’ve got a lousy reputation on the street. Why you guys are getting in to it?

Chip McClure

Well, actually when you look at those that have been very successful at it. If you can manage it right and remanufacturing is a unique industry. And you got to understand, things like core inventories and that type of things. But those that actually do well at it are very successful at it. And I think what you're referring to is, there have been historically a lot of the multi-type shops and as we see this kind of consolidation in that, I think it was probably best demonstrated in the engine remanufacturing side for years.

We've had very successful remanufacturing business in Plainfield, Indiana on the brakes and driveline remanufacturing. So, we've had good success at it. Those that we have focused on it, as I'd indicated in the engine side, we have been successful at it. It’s obviously some others that have had difficulties, but in our case, we've been successful at it with a facility in Plainfield, Indiana and do envision that as part of the cornerstone. For the growth in the Commercial Vehicle Aftermarket is the remanufacturing and we do see a lot of opportunity there.

I will tell you, as you look at it primarily in the commercial vehicle, I should also mention, primarily in the commercial vehicle side. In the commercial vehicle side, the second, third and sometimes fourth owners, remanufacturing products become a very important pipeline of aftermarket parts for them. So, we see that both from our experience in our one facility and watching in the industry see it as a good opportunity.

Brett Hoselton - KeyBanc Capital Market

The legal and commercial had 1.7% reduction so on and so forth, the $9 million. Is that a one-time or do you think, I mean, do you think, you've got covered at this point in time?

Chip McClure

Well, we feel that and obviously we are on discussion with our customer right now. We feel it is resolvable. So, I think, we've booked. We feel we have all the proper reserves at this point and feel that we can go forward and get this resolved, but I need to call that out.

Brett Hoselton - KeyBanc Capital Market

Okay. And one more and I'll let it go. European CVS, I mean, feel free to pass on this Chip. How do I as an outsider interpret, how much of a price increase you got from your customers in Europe?

Chip McClure

Well actually when you look at it, it’s difficult to segment that out. And let me just give you, as I indicated in previous discussions, it's really several different parts, one is going to be material cost. second is premium costs that we've indicated that we are doing to support that, and third is just in the base cost. So really beyond that, I really can't go into detail, but as I can tell you with a number of different customers, we continue to look at it in those categories, and referring in that way, part of which you also look at. There are a lot of different customers, not just truck customers for axles, but a lot of trailer customers and quite frankly, as I indicated in my comments, we're growing in the aftermarket side albeit still a small segment over there.

So when you look at it in a broader sense you've got to look at not just the truck OEMs, the trailer OEMs, but also the aftermarket side. Now, obviously overlaid on that and I think Carsten back at our analyst day, indicated some of that. We've also got the operational improvements that we starting to see flow-through on the lean side. So in addition to it, it is not all pricing. Obviously our obligation is we've also get to make sure we are improving our costs and, as we indicated with some of the metrics that we use within our plants, and indicated at the analyst day, we are seeing better margins as result of our focus in the lean in the overall, all matter of production system.

Brett Hoselton - KeyBanc Capital Market

Thanks very much, gentleman.

Operator

And our next question will come from the line of David Leiker with Robert W. Baird. Please proceed.

David Leiker - Robert W. Baird

Good morning.

Chip McClure

Good morning David.

David Leiker - Robert W. Baird

As we have this working capital item, what should we expect going forward on a normal level? Just kind of transition to something that we should expect next several years to be normal or is this temporary thing that gets some folks over the hump?

Jim Donlon

This is more of a temporary thing, we're getting over here, and now it will flow into a normal pattern as we go forward. As a matter of fact, I would say because of some of the difficulties of this quarter, this quarter might be even a little bit more than what we would see in the normal situation.

So we've made some adjustments. Those will now stay with us, we'll go forward with them, and if anything some of the special items we did this quarter will work back in our favors as we go out through the rest of the year. So it's transitional.

David Leiker - Robert W. Baird

Okay. I don't think I have heard you quantify the size of this order that you have from Hyundai across these various products, can you put a number on that?

Chip McClure

I don't think we do that except for the volumes looking at that, and really all I can do is give you the number of units looking at this point.

David Leiker - Robert W. Baird

Okay, what was the number Jim at the end of the quarter that sold and factored receivables, the balance at the end of the quarter?

Jim Donlon

Just one second, I'm pulling that up here. It's the increase that we had during the quarter was about $1.15, but I don't have that level that brought in to, I'm getting that just one second. About 400.

David Leiker - Robert W. Baird

400? That's great. And if we look at the Performance Plus, it seems as though, if you finish this $20 million in the actions here on an annualized run rate, you're pushing $80 million, you’ve got more than half of the year or less to go through that. Is there a timing issue that the actions going forward are going to be less than what we have seen here at the beginning or are you running ahead of a $75 million number for this year?

Chip McClure

No. I think it's safe to say it's probably a bit more than later, and obviously we laid that out in the chart. We're trying to giving you both our internal targets, what we've got the implementation plans from. What we refer to is idea generation all the way through implementation is $197 million, with near run rate of $115 million. So, clearly what we want to trying to do is to continue to give you visibility to that, and as you indicated, you're right David, four months into it, we feel good about the progress at this point, and obviously want to accept the external target of 75, as you can see from the chart, there is opportunity above that.

David Leiker - Robert W. Baird

Right.

Chip McClure

But I also indicated, we need to also recognize that part of that needs to be there if you were to offset the uncertainties in the market and material economic pressures and price down to it. So, we're trying to factor all that in there. So yes, and I look at it as a gross numbers, your statement is correct. We're quite frankly on track, we feel good about the progress, but we can't ignore the items or issues that occur in our industry, such as material economics, price down detractors. So we are looking to do that, and clearly want to make sure we can meet or exceed that target.

David Leiker - Robert W. Baird

So, as we enter that, that you will need some other Performance Plus savings to offset these other items that you had traditionally kind of find of ways of growing the business to offset.

Chip McClure

Well the answer is yes. As you know, in this business both the LVS and CVS side, the expectations from our customers continue to be cost competitive on a global basis. And as we indicated when we have rolled this out, Performance Plus as a transformational program that we going through and as part of that, we do look for the Performance Plus to indeed help offset some of that.

David Leiker - Robert W. Baird

And the last thing here. Just curious have you done any sensitivity analysis on our guidance. You are going to a 2.2% GDP number for the year to get your number. That was off by 50 basis points. Then how much of an impact on EPS do you think that might have, that may help equal?

Jim Donlon

We've showed at a prior point in time here; let me pull that up here. Some work that we did about the sensitivity and I'm believing, it was back at our Analyst Day, where we showed that if truck volumes came in down a bit, and there would be a $12 million impact, [Class 8] it came in at a 198,000 would be a $12 million impact, medium duty and trailer and aftermarket would be another $12 million impact.

We also showed at that time various efforts that we had underway to try and be able to compensate, so that we could still hit within our range. So, I think, the answer is, we've done our sensitivities and they would show that we could have a downward slide of $25 million or thereabout and we have our eyeball set on something that we would try and do to try and compensate and still comeback in the range.

David Leiker - Robert W. Baird

Great, thanks. We will go and take that out of your analyst, your slides from that day. But thank you very much.

Chip McClure

Okay.

Operator

And our next question will come from the line of Douglas Carlson with Banc of America. Please proceed.

Douglas Carlson - Banc of America

Hey, guys, thanks. My first question is on the slide 7 your Class 5-8 production helped EBITDA by 1.4 percentage points. Can you interpret that the European businesses is capturing the volume and fix some of the capacity constraints there? And I guess, how far along are you on the improvement capacity there? there may be a problem?

Chip McClure

Yeah. The answer is yes. I think, it does reflect it that way. If you could go back to slide 5 for a moment and then I will come back to answer in more detail. Slide 5 kind of indicates a lot of things we have been doing in Europe to address that. We kind of presented this at the December 11th Analyst Day and as you can tell at the lighter green, which shows the improvements kind of across the board that was seeing to address that.

If then go back to Slide 7, Yes, as you look at that , I think a lot of the issues, now I will tell you not all the issues. We will continue to still have some premium cost but far less premium cost and we have had historically last year. So I think we are bringing that down. The other thing that we had indicated back in December is that we are also making additional capacity investment in Europe. A lot of that doesn't come online towards second half with fiscal year-so.

So as you look at it from Slide 5, you can see the details we have done from as far as lean manufacturing etcetera. Coming to Slide 7, so yes we are seeing the improvement, although we’re still having some premium cost to make sure we support our customers. And then finally as we look at it the second half of this year a lot of the additional capacity that we began making investments on at the end of the year will start coming online to further address, to be able to support the customers in Europe.

Douglas Carlson - Banc of America

Did the cash flow look now that it's lower, have any impact on the capacity you are looking to do in the second half? You got enough cash with that?

Jim Donlon

Yes we do. We are of course scrutinizing our CapEx plans very carefully, but at this point our liquidity position is excellent, and we have the funds with which to invest if the projects are good payouts.

Chip McClure

And I should mention all these CapEx that I kind of indicated have already been factored into some of this as we look at the guidance is going forward.

Douglas Carlson - Banc of America

Okay and then there is a quick follow-up here on this Emissions Technology true-up which I guess will be a working capital item next quarter. I don’t think you gave size on that. Is that meaningful?

Jim Donlon

It's significant. It's on the order of -- it's just under $30 million.

Douglas Carlson - Banc of America

Okay. And finally you address this, I think in Detroit, there are some questions around an [Opec] deal, and you're looking at your various alternatives, one of them maybe in some type of VEBA. Is there any more discussion on that, any update there?

Chip McClure

I would just say we're continuing to work on that, we would like to accomplish something there, and we are establishing the baseline material from which we can go forward. It would be a good deal for ArvinMeritor and a good a deal for the counterparty UAW, so we're working toward accomplishing that when we can.

Douglas Carlson - Banc of America

Great. Thanks, guys. I appreciate it.

Operator

And we have time for one more question. Our last question will come from the line of Rob Hinchliffe with UBS. Please proceed.

Rob Hinchliffe - UBS

Thanks, good morning.

Chip McClure

Good morning, Rob.

Rob Hinchliffe - UBS

I have a few questions. In CVS this 3.5% negative margin impact from lower North American volume, I guess without that, implies margins would have been over 10%, so a couple of questions there.

One, is there anything structurally different that will prevent you from recapturing that 3.5% in volumes return, and then also is that margin impact based on using the Mexican plant, the new Mexican plant that you are building, or is it based on the cost associated with your US plants, one of which is targeted for closure?

Chip McClure

Let me take on the first part, then I'll let Jim kind of address the second one, but as you look at the production volumes, actually the production volume decrease in North America really pertains to both truck and trailer, and as Jim had indicated, we continually follow both. I think as we had indicated that at the Analyst Meeting here at Dearborn a couple weeks ago, that Class 8 orders again had another month, and December it was above 20,000 units, so we are guardedly optimistic. But obviously, you've got to look at the timing on those orders of the Class 8 trucks when they occur. But we’d start to see a little bit of return there, and obviously on the other side we are watching very closely what happened to the trailer side on that. So as you look at that that minus 3.5 percentage points, that really is looking a production volume reductions in both the truck and trailer side.

Rob Hinchliffe - UBS

Did you break it Chip in the impact from each?

Chip McClure

We have not. No, it just on a geographic basis.

Rob Hinchliffe - UBS

Okay.

Jim Donlon

At overall I would just say that this has been based on our current operating pattern that does not include the Mexican plant at point, it's something that will come online and help us in 2009. But in this figure and in this calculation it is working from our current operations.

Rob Hinchliffe - UBS

Okay. And then, you mentioned on one of the slides about working with customers on commodity prices. Can you talk about the impact, what the incremental impact in '08 looks to be as a result of the higher commodity cost?

Jim Donlon

Rob it's kind of difficult, we have individual arrangements with each of our different customers about this, and I think it's probably better that I do not go into too much detail here. There maybe another time we could cover something, but at this point in time as we cover this with our individual customers it's a pretty sensitive topic.

Rob Hinchliffe - UBS

Okay and then one real quick housekeeping one. These items of non-recurring nature that are included in the results, the $1.40 to $1.60 includes the change in employee benefit policies and the legal issue and all that, right?

Jim Donlon

Yes, it does.

Rob Hinchliffe - UBS

Okay. Thanks everybody.

Chip McClure

Okay, thank you Rob.

Operator

Ladies and gentlemen, It looks like we have time for one last question that is going to come from the line of Peter Nesvold. Please proceed.

Peter Nesvold - Bear Stearns

Thanks for first letting me in there at the end. Quick question also on slide 7, when I look at the North America OE production volume being at 3.5% headwind year-over-year, I mean, I guess I do have discussion I had sometimes when companies have declining cash flow and improving GAAP results, but I am really struck with the fact that your CVS EBITDA margins are 60 basis points higher year-over-year despite the 30% decline in Class 8 build.

As to what I understand is the 3.5 percentage point headwind, as we progress through the year based ACTs numbers which are lower than yours, but even then based on ACT’s were growing by calendar third quarter. So is it fair to expect that as we exit calendar 2008, that 3.5 percentage point headwind is at least zero, if not slightly positive?

Jim Donlon

The only thing I commented on Peter, is that this was analysis that was done on the first quarter of this year compared to first quarter of last year. And last year the volume rack up was up to almost 90,000 for the Class 8. So I think as we go through this year I don't think with ACT we get back up to a 90,000 quarter. So I don't think we will recapture all of this 3.5 as we go through this year, but will get some part of it and then at some future point if volumes were to be at 90,000 again then we'd have a good shot at that 3.5.

Peter Nesvold - Bear Stearns

But I've seen over the last year I mean at 90,000 units you normally make a lot of money on the incremental volume.

Jim Donlon

That is good memory. We did have a lot of costs for what we've called high volume penalties, and Carsten and his team have been working for nearly a year now on the preparation towards being able to handle the next upturn without all those high volume penalties. One item that will help of course is the New Mexico plant, but we think for the future we can recover better than what we had the last time around.

Peter Nesvold - Bear Stearns

Okay then last quick question on this slide and I am done. If I look at the European improvement and I look at slide 7 versus slide 5, it looks like a lot of the European improvement by the time we exited the quarter was in place, a little bit to go still, but most of those were in place at the end of the quarter. I am curious how much of it actually impacted the quarterly result itself. So how much momentum do you have going in to fiscal second quarter, might I see even more improvement in fiscal second quarter in Europe versus what you show here in slide 7.

Jim Donlon

I would say that we picked up some of it during the quarter. And therefore the run-rate by the end of the quarter would be an improvement and we would expect that we would get that for the full amount of the second quarter. There is still some significant amount of expediting costs that were going on to try and keep up with the production, and as Chip pointed out the capacity actions don't really come on until later in the year. So I would say

So I would say something slightly better than our first quarter for the second quarter because of the actions that occurred during the quarter, but the big pick up, the big rest of it doesn't come until till late into the second half of the year.

Peter Nesvold - Bear Stearns

Thanks again for the time.

Jim Donlon

Peter, thank you, and have a good day.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

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Source: ArvinMeritor F1Q08 (Qtr End 12/30/07) Earnings Call Transcript
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