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Accuride Corporation (NYSE:ACW)

Q4 2007 Earnings Call

February 28, 2008 11:00 am ET

Executives

David Armstrong - SVP and CFO

John Murphy - President and CEO

Analysts

Ryan Brickman - Bear Stearns

Sarah Thompson - Lehman Brothers

Chris Knoll - Credit Suisse

John Sykes - Nomura

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2007 Accuride Corp. Earnings Call. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. David Armstrong, Senior Vice President and Chief Financial Officer. Please proceed, sir.

David Armstrong

Thank you. Good morning, everyone. Welcome to Accuride's fourth quarter 2007 earnings conference call. With me today is Accuride's President and CEO, John Murphy. Today, we're going to try something a little bit different. We have prepared a web-based live presentation to accompany our presentation this morning. The presentation can be accessed on our website, which is www.accuridecorp.com under investor information.

And under that section there is a link to the webcast in the upper right-hand portion of the page. Now my understanding, again, have a little patience with us, this is the first time we're going through this. My understanding is that each caller will be responsible for turning their own page and so we will give the appropriate cues as we go along.

So if we could turn to the agenda slide. On today's call, John will present a review of the fourth quarter operational highlights. He'll then address a high-level review of some of the financial highlights, and then present our outlook for 2008. And I'll follow with a deeper, detailed review of the Company's fourth quarter in 2007 year-end financial results. And then we'll open the line up for questions. A couple of administrative items. If you could turn to our forward-looking statement slide.

First, financial information that we release this morning, includes our GAAP results for the fourth quarter for both this year and last year, as well as non-GAAP information that we believe is useful in evaluating the Company's operating performance, namely adjusted EBITDA. As required by Reg. G, we have in our earnings release provided a reconciliation and also in the presentation of non-GAAP information, we'll be discussing today, to the closest GAAP equivalent results. And the information on these reconciliations can also be found in the press release and on our website.

Second, I'd like to remind listeners that comments made during the course of this call will contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Statements made in the course of this conference call to state the Company's or management's intentions, expectations, or predictions of the future are forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements as contained, from time to time, in the Company's SEC filings. With that, it's my pleasure to turn the call over to John.

John Murphy

Thank you, Dave. We're now on slide four, which is entitled Fourth Quarter Operational Highlights.

First, as some of you know, we did achieve a successful credit agreement amendment in the fourth quarter that was completed in December of 2007. We have negotiated new covenants that we believe will provide ample room through 2008. This was done, as has been the typical case recently, in difficult market conditions. And that was priced at LIBOR plus 350, which was an increase to us. But looking back, is probably not bad given the fact that the markets are still extremely difficult.

Secondly, we did complete the steel wheel restructuring that had been in progress during the year. That was a very well-managed program by our Senior Vice President of the wheel business, Leigh Wright. We expect now full benefits in 2008 of that program in the area of $10 million on a year-over-year basis. And although there were some recent structuring charges, most of which were non-cash in 2007, we do not expect additional write-off in 2008.

We also experienced, late in the year, a need to implement a lockout at our Rockford, Illinois facility. We had a contract that expired November 17th. And unfortunately, we were unable to come to an agreement, despite the fact that that was an improvement in terms for the Union. The Union management did not even take it to the Union representation.

On November 18th, we implemented a lockout to protect the supply of product to our customers and secure the facility. At this point, we do have contract workers in place being supervised by Accuride management. We are making timely shipments to the customers and do not expect supply disruptions. We do continue to negotiate in good faith.

And in the fourth quarter, our EBITDA was adjusted by about $2 million to reflect the increased cost associated with this, which was a cash cost to the Company. However, we're in the process of reducing that as the productivity of the contractor workers improves. And we would expect to neutralize that impact as we move forward.

In terms of the management team, some executive appointments are listed here. Ed Gulda, who is coming with a wealth of experience, particularly in the wheel end side of the business to help establish a fundamental and improved competitive position for our Brillion and Gunite businesses. Leigh Wright, I mentioned earlier, who was promoted to have overall responsibility for our wheel business.

A recent addition, Jim Maniatis, who comes as Vice President of Human Resources who takes the place of Robin Hamme, who will be retiring shortly. Rick Schomer, who is not on this list, came to us in the latter part of the year. He has been with us almost six months now as a Senior Vice President of Sales and Marketing.

So we've had a number of changes at the top level of the Company, including my own transition and that of Dave Armstrong. But I think the important point to share with you here is that I believe we're very close now to having the right executive management team in place and we should expect momentum in terms of operational improvement and strategic execution. Moving to the next slide, slide five. Some fourth quarter financial highlights.

First, at the top of the page, you can see for yourself, the North American commercial vehicle production. Obviously, very disappointing numbers. Significant declines year-over-year as well as quarter-over-quarter relative to 2006. To some degree, this was anticipated, but I think, particularly, the continued weakness in the fourth quarter was not the original prediction as we went into 2007. So some degree expected, but I would say, disappointing as we look back at that.

As we look at the consolidated results that are derivative, obviously, of the production figures, you can see that our sales were down sharply in both quarter four and for the year. A couple points here. I think, one, overall, you can see that that revenue decline was reasonably consistent with the production decline. And again, although a negative situation, our revenue decline is consistent with the production decline and implies stable overall market shares for the Company. We do expect to improve those shares in certain of our business units, but I think that's consistent with the industry.

Another item that I want to point out, you can see under the label of Incremental Loss In Line With Guidance. After excluding certain one-time events, both our quarter four incremental loss of 27.2% and the overall 2007 incremental EBITDA loss of 27.5% were in line with our guidance, which we've been consistent with throughout the year of 25% to 31%.

Moving on to the 2008 guidance. You can see, first of all, that the adjusted EBITDA is the range of $100 million to $125 million is rather wide. The free cash flow of $5 million to $15 million might be counterintuitive or expectation to some. I noticed some of the analysts assumed it would be the same as this year. But I want to point out quickly that 2008 implies still a ramp-up of production in the second half of the year and some meaningful working capital reinvestment, whereas actually we had a working capital gain in 2007. That accounts for the large majority of the change in free cash flow year-over-year.

I do want to hasten to point out that we intend to do better than that. Dave Armstrong leads an internal team, which is driven top down as well as bottom up to try to maximize the cash flow potential in all areas that include interest expense, tax, inventories, accounts receivable, payables and the like. So we're very much focused on that.

Hand in glove with that rather wide range, you see a rather wide range in the production estimates. We think we've largely covered the various pundits estimates, including some of our major customers, the major outside analysts, including ACT and Global Insights. You can see the range is rather wide. What does that tell us. I think, it should be no surprise, it's a very uncertain general economic environment in North America is what is driving this. It is not really an industry-specific issue, as much as a general economic issue of uncertainty.

We have seen, incidentally, some fundamentals that are improving, although it may be too soon to tell how dramatic that improvement will be. But we've had four months of fairly solid orders for Class 8 over 20,000 units. And we have, we think, bottomed out on the freight situation and so forth. But again, still significant economic uncertainty driving that.

As far as management actions, we don't intend to become a victim of the economy. We believe, we have significant organic revenue growth prospects in the near term as well as longer term. Internally, we're targeting for a 6% or more organic growth rate in 2008. We believe that will come from the OE and trailer side as well as adjacent markets and a very significant focus on the after market. And I do want to point out that even though much of this is not yet steeped into our numbers, we have been gaining a substantial new business as we left the fourth quarter. And so that bodes well for 2008.

Some of you saw the press release of Great Dane, where we won their forged aluminum wheel business as the standard supplier. And we have other examples of that, which we aren't necessarily able to share by name. But we have been winning business. And I'm personally optimistic that we will continue to gain business, build our relationships and brands further with our customers and have a significant opportunity over time to double or more our after-market penetration.

Our internal performance, even though in line with maybe general incremental expectations, is not adequate, particularly in the component side of the business. And that's something that we're going to focus on very carefully and significantly in 2008 and beyond. But there's opportunity there.

We're certainly not at all complacent about the current performance levels, nor are we dismissing all the issues related to the business and the industry as volume related. So we have opportunity for improvement there. And I've spoken about cash flow management. So those are my comments. And with that, I'll pass it over again to Dave Armstrong, who'll give you a little more detail on some of the comparisons.

David Armstrong

Thanks, John. If we could turn to slide seven, which is entitled Q4 2007 vs. Q4 2006, I'll walk through some of the financial issues in a little more detail. On a year-over-year comparison, Q4 sales were down $122.9 million from the $344.9 million that we had prior year.

And the drop in sales was principally driven by the significant drop in industry build. In addition, you'll remember that last year in Q4 2006, we did receive a $10.4 million payment from the pricing dispute we have with one of our customers and that did not reoccur in Q4 2007. And so that, skews the comparison somewhat.

Gross profit margin in the fourth quarter, 9.3% of net sales compared to 13.3% in Q4 2006. Adjusted EBITDA was $17.7 million compared to the $58.4 million in Q4 2006. And margin was 7.9% and that decreased from 16.9% from 2006. Year-over-year margin comparisons was clearly impacted by the loss of industry volume previously mentioned along with the Ford issue, with a customer issue that I just mentioned.

In Q4, the tax expenses is a little counterintuitive, since we had a tax loss income or a taxable loss on our income level. But the tax expense was $4.8 million. And there's a couple of reasons for that, mostly due to foreign tax issues that impacted us during the quarter.

And the most dramatic of these was in Mexico. During the fourth quarter, we restructured our operations in Mexico, created a new maquiladora arrangement. And as part of this transaction, we transferred a significant amount of cash and assets, including inventory and equipment to the U.S. parent. And the transfer of these assets caused us to incur one-time non-cash tax charge of approximately $3 million.

Going forward, we estimate that new Maquila structure will save us about $3 million a year in Mexican cash taxes, plus alleviate problems of excess cash build-up in foreign jurisdictions. So very positive on that program. It did, again, skew the net loss number in quarter four. Year-over-year, quarter four had a overall net loss of $10.4 million or negative $0.29 per share, compared to the $65.1 million or $0.41 in Q4 2006. And obviously, this was significantly affected by that additional tax expense that I just discussed.

Can we move to the next slide, a Q3 vs. Q4 comparison. We have sales that increased about $2 million, which is a very good thing. We typically see lower sales in the fourth quarter due to seasonality and the lower number of build days. So we were pleased with the increase in sales, which was mostly due to increased sales in the after-market with some of the programs that John has emphasized.

Gross profit improved $7.3 million from $13.3 million to $20.6 million. And gross profit did benefit from $3.2 million gain from some insurance proceeds that we received in our aluminum wheel operations, as well as the improved performance and mix. EBITDA improved $4 million from quarter three. And the improvement in EBITDA was principally due to the improved performance and mix. So we had higher after-market sales and then we had better performance as John talked about.

As you recall, on our third quarter call, we talked a little bit about the disappointing performance that we had in some of plants and part of this was due to the short-term notice that we received on multiple shut downs at the OEs and that was not much of a factor in the fourth quarter for us. So this increase in profitability is a reflection of positive actions taken to reverse performance slide, plus our increased focus on our after-market sale.

We move to the next slide and look at our full year situation. Total 2007 revenue decreased $28% to $1 billion from $1.4 billion in 2006. And again, John walked through the decrease in volume that we have of Class 8 of about 44%, 22% in Class 5 through 7 and 23% in trailer builds.

Gross profit decreased $110.4 million to $86.5 million for the year ended December 31, 2007, from $196.9 million for 2006. Again, this was mostly volume related along with some operating inefficiencies relating to the low production volume. Gross profit as a percentage of sales dropped from 14% to 8.5%. And in addition to volume related matters, we also had a few one-time items that impacted our gross margins, which would include the following.

We had about $12.8 million of non-cash accelerated depreciation related to the equipment serving the light wheel business in London, Ontario facility mostly. We had $15.4 million of restructuring charges related to personnel reduction at our London, Ontario facility and a post-employment benefit curtailment charge at our Erie facility.

$2.1 million of costs related to the labor dispute that John talked about. And about $4.1 million of Canadian dollar exchange rate that was unfavorable versus prior year. Adjusted EBITDA decreased year-over-year from $217 million to $108.9 million. The EBITDA margins dropped to 10.7% versus the 15.4% in 2006. And again, highly related to the volume issues and foreign exchange issues that we previously discussed.

Overall, in 2007, we had a net loss of $8.6 million or negative $0.25 per share, compared to a net income of $65 million and $1.88 per share in 2006. And certainly, the net loss was affected by the one-time items that most of which I've discussed above. But we've also provided in the Appendix to this presentation, a more detailed list that shows about $0.39 per share of one-time items that affected us this year.

Operating expenses in 2007 increased $3.4 million to $56.9 million, due mostly to an increase in our 123R share-based compensation expense. That was about $1.3 million. Start-up costs at the Anniston, Alabama facility of $1.4 million. And intangible asset impairment of $1.1 million reported in our components segment. And about $0.5 million of cost related to our secondary offering in 2007.

If you turn to the next slide, which discusses our 2007 free cash flow. On a GAAP basis, cash from operations for the fourth quarter was $56 million and $82.9 million for the year. Capital spending was $11.3 million for the fourth quarter and $36.5 million for the year. Free cash flow in the fourth quarter was a robust $44.7 million and gave us a $46.4 million for the full year free cash flow.

Now, this amount does pale in comparison to the $108.8 million free cash flow we generated in 2006, but we believe that it's very respectable given the EBITDA for the year. It's somewhat higher than anticipated. And that was mainly due to a few one-time items, some insurance proceeds and some tax refunds that were higher than anticipated. And we also benefited from a working capital shift due to the lower sales, which John discussed.

Depreciation and amortization was $14.2 million in the fourth quarter of (inaudible) year. That's higher than our normal run rate depreciation. And if you recall, that does include accelerated depreciation of about $12.8 million. Net interest expense in the quarter increased to $13.4 million from the $12.7 million in the fourth quarter last year. It was mainly due we had an increase in rates year-over-year. And the inclusion of $1.6 million of fees from our recent amendment to the credit facilities.

Year-over-year, we had a decrease in interest expense from $50.9 million to $48.3 million. And that's basically due to the reduction in the debt levels we did pay down (inaudible) during 2007.

We move to the next slide. Our total debt at the end of the year was $572.7 million, left cash of $90.9 million, gave us a net debt position $481.8 million. And this is a reduction of $44.6 million of net debt during the quarter and a $50.7 million, actually, reduction for the year.

Our $125 million revolver remains undrawn, giving a total liquidity of $215.9 million in yearend. And we ended the year with a net debt to EBITDA leverage ratio of 4.9 times. Past taxes in 2007 of about $2.1 million. And the overall effective tax rate for the year was 26%. And this is certainly an aberration from the normal range. However, it was skewed due principally to the tax law situation coupled with some tax issues that we previously discussed.

Next slide goes into our 2008 guidance. And John previously discussed EBITDA guidance of $100 million to $125 million and free cash flow $5 million to $15 million. Let me add additional color to some of these numbers. We anticipate net interest expense to be approximately $42.5 million for the year. Capital expenditures to be between $35 million and $40 million. Depreciation should be about $42 million. And amortization will be around $5.5 million for the year. The effective tax rate should be between 37% and 38% with tax cash taxes of between $5 million and $10 million.

The reduction in year-over-year cash flow consists of a couple things. One, the working capital issue, but also the non-recurrence of the one-time items that I mentioned previously. We typically do not give quarterly guidance. However, as a general guideline, you should know that we anticipate a ramp-up of volume throughout the year so that the first quarter will be somewhat flat with subsequent quarters increasing in volume as we go into the second half of the year.

At this time, I'd like to turn the call over to Annie for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

And your first question comes from the line of Peter Nesvold with Bear Stearns. Please proceed.

Ryan Brickman - Bear Stearns

Hi, this is [Ryan Brickman] for Peter Nesvold.

David Armstrong

Hi, Ryan.

Ryan Brickman - Bear Stearns

Can you talk a little bit about progression of cash flow throughout the year?

John Murphy

Of 2007?

Ryan Brickman - Bear Stearns

Yes. And into '08, if you can?

David Armstrong

Well, we can certainly talk about 2007. If you look back on our other calls, most of the cash flow occurred in the fourth quarter, which is not uncommon. Fourth quarter is typically a large cash flow quarter for us. As far as looking forward into 2008, for as long as I can remember, the first quarter has always been a use of cash, because of bond payments, bonus payments, pension, etc., etc. I would anticipate that will be the same. And then, we'll increase throughout the year with again a larger piece coming at the end of the year.

Ryan Brickman - Bear Stearns

Okay. Thanks. And you're guiding for 2008 North America Class 8 builds of [1.9 to 2.25] and ACT, I think, right now is at about [2.24] and you discussed some of the reasoning behind it. But given the last couple of months, what are your thoughts as to there being a potential upside to your estimates today in terms of Class 8 builds in North America?

John Murphy

Yes. That's a tough one to call, just because of the, I think, the volatility associated with the estimation of the general economy, Ryan. I think, what we'd have to look for to see that substance to upgrade those forecasts would be a continued upward order trend. I mentioned that we've seen four months of fairly solid orders. I think, we would need to see some sustainability of that and some of the other fundamentals continuing to improve, such as freight and so forth.

Ryan Brickman - Bear Stearns

Okay. Thanks. And if we were to see some of those developments and there were to be some upside in Class 8, does that drive cash flow higher? Or is that lost more to say a working capital build?

John Murphy

No, it definitely -- although we invest, let's just say, 10% of a sales increase, roughly, in working capital, yes, it would have a very beneficial effect if we were able to raise that. Although, there would be some investment there as well.

David Armstrong

Right, but it also is going to be a timing issue, Ryan. Obviously, if we had a large sales that picked up in the fourth quarter, we might not realize the cash on that until the following year.

Ryan Brickman - Bear Stearns

Okay. Thanks. I appreciate that. As far as the 2008 EBITDA guidance, you described it, the covenants being an ample cushion. But does this put them at risk at all in 2008?

John Murphy

The range we're putting there does not.

Ryan Brickman - Bear Stearns

Does not. Okay. And then, last question. What are you seeing in terms of steel and aluminum prices out there? Iron ore, in particular, is really skyrocketing. Are you hedged for this? And if so, how -- for how long are you hedged? And what kind of earnings sensitivity can you give regarding things such as steel and aluminum pricing?

David Armstrong

Steel -- let's talk with -- talk about aluminum first, I guess. We are partially hedged through the first half of the year. We are not in a hedge position for the last half of the year. So we continue to watch that. As we talked in the past, we do have provisions in our contracts that allow for some pass through based on a look-back period that tracks through the index. And so, I think that's -- we'll certainly watch and monitor that. If there are opportunities to do some additional hedging for the second half, we'll opportunistically certainly be watching that very closely.

From a steel plant situation. We have a number of contracts for a lot of the steel that we have in our wheel plants in U.S. and Canada. The contracts should help us significantly, whether the increase in steel -- we do anticipate an increase in steel later this year. We are not under contract in our Mexican facility. So there could be a little bumpier ride there if steel down there increases -- the contract down there is based on an index. So overall, that's something we're clearly monitoring. And I think, the two things we have going for us are contract provisions with our suppliers and on the other side contract provisions with our customers that allow for some pass through of that.

John Murphy

The only point I would add is on the aluminum side, there have been some outages -- unplanned outages at some of the smelters and I think the expectation is once those get rectified we would expect to see some decreases in aluminum pricing as we move forward. And I think Dave's point come to a conclusion that overall, we're better positioned to mitigate raw material costs than we were in the prior years when we had those tremendous spikes in commodity prices, which had not been seen before and it pretty much caught everyone off guard. And we were in a catch-up mode in that time frame. I think, we're better positioned to avoid significant margin erosion if they rise significantly.

Ryan Brickman - Bear Stearns

Right. Okay. Thank you, John. Thanks, Dave.

John Murphy

Your welcome, Ryan.

Operator

And your next question comes form the line of Sarah Thompson with Lehman. Please proceed.

Sarah Thompson - Lehman Brothers

Hi, thanks for the slides there. They're really helpful. Question on your 2008 guidance and I think you answered a little bit of it, but I was just hoping for some more detail. If I look at 2007 and your expectations for 2008 and I take the midpoint of all of those ranges, it's obviously below what we saw in terms of production rates for 2007. And I think, your first quarter 2007 numbers would have benefited just from the carryover of the production from 2006.

John Murphy

Right.

Sarah Thompson - Lehman Brothers

So I'm having a hard time understanding some of your EBITDA guidance. I'm assuming you're going to tell me that it's market share wins and after-market growth. But I was hoping you could put some more numbers around those.

John Murphy

Yes, Sarah, I think that's right. What I had indicated -- your analysis is correct by the way, I think, on quarter one, in particular. From our viewpoint, however, we looked at this flattish to down scenario and basically said, we're not going accept -- call it just a status quo performance. So we have targeted generally three times or more revenue growth relative to GDP. And of course, as GDP has fallen, we've not relaxed that. So we're looking at 6% organic growth coming from the sources I mentioned earlier. And you're right, after-market is an important piece of that. The example of Great Dane.

We have other wins in not only the trailer business, but other areas. So we're confident that we're going to outperform, therefore, gaining share in 2008. And that revenue effect will drive EBITDA growth. And then, I think, in addition to that, I mentioned, we're not satisfied with some of the performance levels in our business units and those are planned for improvement as well. So it's revenue growth, which translates to bottom line impact, as well as EBITDA growth through operating performance improvement.

Sarah Thompson - Lehman Brothers

Is it possible for you to breakout, cause, I think, you said your after-market had grown in the fourth quarter, what the percentage growth was in the fourth quarter? Or what you're looking for in 2008? So we can separate that out.

John Murphy

Not in detail, but I can tell you this. The first look we have is basically that in the fourth quarter, we picked up annualized business probably in the neighborhood of $50 million of new business, which is obviously not reflected in that rather modest increase over quarter three, even though it's seasonally more significant than Dave indicated. So that indicates that the run rate of that new business is meaningful. And that's just something we intend to build on. So that will be a significant down payment on that 6%, but there's more to be done in that area.

Sarah Thompson - Lehman Brothers

Okay. Great. That's all I have. Thanks for the help.

John Murphy

Thank you.

Operator

And your next question comes from the line of Adam Plissner with Credit Suisse. Please proceed.

Chris Knoll - Credit Suisse

Hey, guys. It's [Chris Knoll] for Adam Plissner.

John Murphy

Hi, Chris.

Chris Knoll - Credit Suisse

Hi, how you doing. Based on your EBITDA and cash flow guidance for '08, it looks like you'll have around a 25% cushion under your new leverage covenant at the end of year about 4.3 times. Is that based on a really strong back half or are we going to sit around that 25% cushion throughout the year?

David Armstrong

Well, I think, the back half is going to be -- we're anticipating the increase in sales, certainly, in the latter part of the year. I'm not sure, I quite follow your question.

Chris Knoll - Credit Suisse

I guess what I'm trying to get at is the 25% cushion that I see at the end, you're well within those -- the new covenants that you've gotten by the end of the year. But are we going to be a lot closer in your planning process, I'm sure you had that scheduled out.

John Murphy

Well, our expectation is that quarter one will be the weakest quarter in terms of earnings. And then, it will start improving throughout the year. So I guess, we'll have to see how that plays out, but, Chris, but our expectation is that, hopefully, we'll -- if forecasts are within our range that we'll have a reasonable cushion throughout '08.

David Armstrong

Yes. I mean give you some idea here. We do have a 25% cushion in our plan in the first quarter. And we see that increasing to above 30% in the following quarters.

Chris Knoll - Credit Suisse

Okay. So I had been planning for like the second quarter to be the low tick, just due to the comps that are rolling off and coming on. Is that still -- I think that makes sense with the -- what you were looking for in your leverage target. Is that still in agreement? You said, the first quarter would be lowest, but -- is that right?

David Armstrong

Right, yes. In our current plans, the first quarter is the lowest.

Chris Knoll - Credit Suisse

Excellent. Okay. That's all I had. Thank you.

David Armstrong

You bet.

Operator

(Operator Instructions)

And your next question comes from the line of John Sykes with Nomura. Please proceed.

John Sykes - Nomura

Yes. Hi. Good morning.

John Murphy

Good morning, John.

John Sykes - Nomura

How you doing?

John Murphy

Good, thanks.

John Sykes - Nomura

Just more on the -- obviously, the first quarter, I'm assuming you're expecting to be free cash flow negative. But will that be the highest quarter, where you're free cash flow negative?

David Armstrong

Yes.

John Murphy

Yes, our expectation.

John Sykes - Nomura

Okay. And then, just with the cash. Any -- are you just maintaining that level of cash to maintain liquidity during the downturn period? Or are you planning on paying down debt or anything like that?

David Armstrong

Yes. A little of both. But I think, in 2008, we plan to pay down another about $40 million.

John Sykes - Nomura

Okay. And then, the last question. What percentage of your business now is driven by the military or military-related business?

John Murphy

Unfortunately, too little. It's probably in the 1.0%, 1.5% area.

John Sykes - Nomura

Okay.

John Murphy

So that's the bad news. I think the good news is, we're seeing opportunity well beyond what has been our historical presence. And it's been a modest penetration in steel wheels. We're now seeing opportunities for other things. We're talking with Oshkosh, Spartan, about a variety of other business opportunities that affect other business units and other potential new products. So over time, we see that as a sizable niche opportunity, maybe in the $100 million to $200 million area. Nothing like that, of course, is reflected in any of the organic growth measures that I've provided, very just modest incremental expectations today. But we are looking at it in a comprehensive way as part of our business strategy.

John Sykes - Nomura

Yes, just recognizing that this would be hypothetical, but would the margins on that military business or the business initiatives you're talking about, would those margins be consistent with your existing margins? Or would they be -- would you expect those would be better?

John Murphy

We'd expect them to be substantially higher. And I think you bring up a good point that I won't dwell on, but I will mention. Generally speaking, we're very much focused on driving the higher value added applications in our business. And of course, that's -- would be the mindset we would have when we go to the military, more of a niche approach as opposed to a commodity products with some price downs, etc. So that's true, John, not only of the military approach, but in other business segments.

And we think there's a real opportunity to enhance margins over time, again, as we move to more highly-value added. An example would be, today, we make wheels, we make brake hubs and drums. Over time, our vision is, we may be able to develop a more highly-engineered wheel-end system, which again would give us a strategic and competitive advantage, but also because of the nature of that, would be more valued, meaning customers would be willing to pay more for those applications versus a non-integrated, just a set of component parts that are more commodity-like.

John Sykes - Nomura

Just a question. Can you combine the wheel, the brakes and the hubs -- maybe not the brakes, but can you combine that into like one product?

John Murphy

Well, that's exactly what I was alluding to. We haven't yet perfected that as an offering to our customers. It's being intently focused on now as a potential. Again, to have an integrated and engineered system that would include, as you indicated, the wheel, the brake, hub, drum, caliper, slack adjusters -- the various components necessary to provide the complete package to our customer. Where today, they assemble it based on dealing with maybe multiple producers. So the integration of that -- the warranting of it, etc. is not as beneficial to them. So we're working with our customers today, looking at that

I'm not here to make an announcement that three months from now we'll have that solved, but that's the intent of focusing on the higher value added, the more highly engineered that I'm referring to. So we are working on that. And you're exactly right. That's how we would approach it.

John Sykes - Nomura

I'm not going to belabor this too much longer. It seems like if you could that would be like one -- wouldn't be one casting or one mold --wouldn't that save you a lot on production cost as well?

John Murphy

I don't think it would come quite the way you're thinking about it as just say, one lump of a part. It would be more the -- like I say, the highly-engineered specifications and integration so that the system performed much more cohesively and effectively and again, eliminated other issues of trying to integrate various components from various suppliers. If that makes sense.

John Sykes - Nomura

I got you, yes. And then, just the last part of this. What percentage of the business is driven by the ag?

John Murphy

This side, we'd have to say, negligible. We are looking at that adjacency, however, in several of our businesses. For example, the seating business. We see opportunity there. We also see opportunity in things like mass transit and so forth. So I think, you're bringing up some good strategic points here of examples of adjacencies that can lead us into higher value added applications or niches that aren't as, I'd say, price intensive as certain of the commodity of components segment.

John Sykes - Nomura

Okay. All right. Thanks a lot. I appreciate it.

John Murphy

You're welcome.

David Armstrong

If there's no other questions, we'd like to thank everyone for joining us. As a reminder, we will have a booth at the Mid-America Truck Show, which is Thursday, March 27th to Saturday, March 29th in Louisville, Kentucky. We'll be rolling out a number of exciting programs at the convention there. And would invite all to swing by our booth. And hope to see you there. Thank you very much.

John Murphy

And one last point. Hopefully, we got a positive comment, I think, from Sarah Thompson on this, the new format. But we would just ask any of you, if you've got any suggestions or what your thoughts were, we'd appreciate that. This is designed for you, not us. And so we're interested in your feedback and any suggestions to make this a more valuable session for you. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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