Aftermarket Technology Corp. Q1 2008 Earnings Call Transcript

Aftermarket Technology Corp. (ATAC)

Q1 2008 Earnings Call

May 14 2008

Executives

Mary Ryan - VP, Communications and IR

Don Johnson - Chairman, President and CEO

Todd Peters - VP and CFO

Analysts

Gary Prestopino - Barrington Research

Bill Dezellem - Tieton Capital Management

Mark Cooper - Wells Capital

Ryan Kelly - Robert W. Baird

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the Aftermarket Technology Corp. First Quarter 2008 Earnings Call and Webcast. Currently all lines are in a listen-only mode. (Operator Instructions). At this time I would like to turn the conference over to your host for today's agenda, Mary Ryan.

Mary Ryan

Good morning. Thank you for joining us. With me today are Don Johnson, our Chairman, President and CEO, and Todd Peters, our CFO. Please turn to slide 2.

Our agenda for today includes a review of our business highlights for the first quarter 2008 presented by Don and a detailed financial review presented by Todd. At the end of Todd's presentation, we will open the floor to a pre-approved list of analysts, money managers, and institutional holders.

Please turn to slide 3. Before we go to the substance of our call today, I would like to point out that many of our comments are considered to be forward-looking statements under the federal securities laws, and as such, you are reminded that forward-looking statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those stated or implied by our comments today. Those risks and uncertainties are fully described in our SEC filings.

Please turn to slide 4. For those of you who are unfamiliar with the ATC story, this slide presents a brief description of each of our businesses.

Please turn to slide 5. At this time, I would like to turn the call over to our Chairman, President and CEO, Don Johnson.

Don Johnson

Thank you, Mary. Good morning. I'd like to thank all of you who have joined us. Today my comments will cover the following topics. First, I'll provide a brief overview of the company's first quarter results. Second, I'll highlight quarter results by business segment. Third, I'll provide a summary of our new business opportunities in each segment. And then finally, I'll provide updated guidance for the full year 2008 and then turn the call over to Todd for more in-depth review of the company's financials.

So to begin, let's turn to slide 6 for a summary of the company's overall performance in the first quarter. I'll begin by saying that clearly our Drivetrain segment experienced a challenging quarter. This performance does not reflect poor execution, rather outside factors we don't control. But at the same time, we have reacted quickly to Drivetrain's lower volumes by reducing both fixed and variable costs in the business.

This quarter's events in the Drivetrain business highlight why Logistics is such an important part of the company, as the weakness in Drivetrain was offset by continued strength in the Logistics segment. The Logistics business continues to provide a significant contribution to the company's growth, profits, and return for shareholders.

With that being said, for the first quarter total revenue for the company decreased 1.4% to $129.5 million from $131.3 million in '07. Income from continuing operations decreased 4.3% to $11.1 million for the first quarter of '08 compared to $11.6 million for the first quarter of '07. This translates to income from continuing operations per diluted share of $0.50 for the first quarter '08 versus $0.53 for the same period in '07.

The company's first quarter '08 revenue and profit from continuing operations were driven by record Logistics revenues and profits. The Logistics outstanding performance was primarily led by the efficient launch and ramp-up of new business programs, continued benefits, a gain from the one-time automotive electronics program, which is now substantially complete, increased volume and favorable mix in the business, and continued cost reductions.

In other important news, we renewed the reverse logistics contract with AT&T, and we are now able to announce the full services contract with AT&T DSL, which was won in late 2007 in conjunction with the Supply Chain Division of Wireless from AT&T. I am very pleased that our services continue to be recognized by our customers, allowing us to expand our relationships and grow with the markets that we serve. I'll provide more color on these later in the call.

In Drivetrain, revenue decreased 28.7% in the first quarter of '08, with segment margins of 5.8%. The revenue and profit reduction reflect the lower volumes and the related contribution margin impacts with Honda, Ford, and Chrysler. Additionally, Drivetrain results include approximately $900,000 in special charges, largely related to the reduction in the salaried workforce due to lower volumes. The NuVinci business is now reflected as a discontinued operation after the recent sell. I'll also have more on these topics a little bit later in the call.

Additionally, during the first quarter, we repurchased $10 million, or about 2%, of the shares outstanding. We invested in facilities, equipment, and working capital to support the launch and new programs and base business growth in the Logistics segment, and we paid off certain year-end accruals, including incentive compensation and income tax payments associated with 2007's strong performance. And finally, we ended the quarter in a net cash position of $19.2 million.

Now that you have the company overview for the quarter, I'll discuss the highlights of the quarter's results by business segment. So to begin with the Logistics segment, please turn to slide 7.

Our Logistics segment continues its momentum and again delivered a record quarter, with net sales of $84.8 million, up 24% from the $68.4 million for the first quarter of '07. This marks our 16th consecutive quarter-over-quarter increase in Logistics revenue.

Logistics segment profit increased 62.8% to a quarterly record of $15.3 million compared to the $9.4 million for the first quarter of last year, with a segment margin of 18% versus 13.7% for the first quarter of '07. Improved margin performance was largely driven by the better-than-expected efficiency in the launch and ramp-up of our expanded programs with TomTom, benefits from the quarter-over-quarter improvement in volume associated with the electronics upgrade program, which is now substantially complete, strong volumes with AT&T and other base business, and continued operational efficiency improvements to deliver cost reductions, partially offset by the loss of the Nokia test and repair business we exited in mid '07. And altogether, we anticipate a higher degree of Logistics costs related to the recently won business.

Our team overall has done a tremendous job of launching and ramping up the new business won in late '07, and coupled with the favorable mix of base business services and operational efficiency improvements, potential '08 operating margin exceeds both our OE estimate and long-term plan targets.

It is clear to me that the process improvements and staff actions implemented in late '06 and during '07 have placed us in a much better position to launch new programs more effectively with high quality and to continue our annual efficiency improvements. I specifically want to compliment our Logistics team on the near-flawless launch and execution of these new programs, exceeding both our customers' expectations and our own for quality and efficiency.

Now let's turn to slide 8 to look at Drivetrain performance. To say the least, it's been a disappointing quarter for our Drivetrain business. For the first quarter, revenue decreased 28.7% to $44.8 million from the $62.8 million last year, and a 16.1% reduction sequentially. Segment profit was $2.6 million compared to $9.6 million for the first quarter of '07.

The decrease in revenue was largely driven by the expected first quarter reduction in demand in the Honda business. During the first quarter of '07, you may recall, we provided support to Honda as we ramped up our production levels related to the extension of warranties for certain vehicles. By comparison, the first quarter of '08, we are experiencing a lower level of warranty volumes, and demand was further impacted by inventory reduction activities in conjunction with Honda's fiscal year end, March 31.

We also experienced unexpected softness with Ford and Chrysler due to inventory actions isolated to one distributor serving both Ford and Chrysler, and to a significantly softer market compared to the market a year ago. Frankly, we have not yet experienced volume increases for the important six-speed Ford and GM transmission programs that we successfully launched last year, while we've seen some volume decay in the older programs we've been serving for years.

On the medium and heavy-duty front, our business with Allison remains stable and continues to perform at expected levels, while our relationship with Borg-Warner is starting slowly, but remains important to our long-term growth prospects.

In February, I advised you that I was hopeful Honda's product and volume allocation decision would be known within known within a 60- to 90-day time frame. Our team and I personally have been in ongoing communication with Honda leadership at multiple levels. Regrettably, I'm unable to provide you with further details at this time while we remain in sensitive discussions with Honda as they continue their consensus-driven process. Based on current information and run rates, and the lack of a Honda decision, we now expect our sales to Honda for 2008 to be approximately $50 million. This estimate is based on previous projections from Honda and is subject to change pending the outcome of their decisions.

In addition to the reduced volume, segment profit was also impacted by approximately $900,000 in special charges, largely related to a salaried workforce reduction made necessary as a result of the weaknesses we are experiencing. Unfortunately, the weakness, as just explained, is the result of a challenged market, and that's not something we can't control. But rest assured, we are not sitting back waiting for our fate to be determined for us, as we responded decisively to first quarter softness. We took painful but necessary and swift actions to reduce our ongoing cost structure related to both fixed and variable costs in the Drivetrain segment.

As a result, 11% of the domestic Drivetrain workforce, including a 15% reduction, or 55 in direct positions, were impacted, mostly late in the quarter, with an annualized savings of approximately $2.5 million. We continue to evaluate additional opportunities to take costs out of the business while maintaining our efforts to rebuild our revenue base in the Drivetrain segment by pursuing growth opportunities in our pipeline.

To conclude the Drivetrain summary, during our year-end 2007 call, we advised you that we were exiting our NuVinci-related business. The last date of production was March 13, and the sell to Fallbrook Technologies closed April 2. For the quarter, we recorded operating losses and exit costs of $2.5 million net of tax. We expect to realize proceeds of approximately $6 million and have reclassified the results of this business to discontinued operations for all periods.

Now to our sales opportunities pipelines for both segments. Please turn to slide 9. As always, I remind you, that as we review our sales opportunities pipelines, these opportunities represent annual revenue for new potential programs being quoted, and they are in various stages of pre-quote, post-quote, customer evaluation, and final negotiations. Quite obviously, these pipelines fluctuate. Each quarter these charts represent a snapshot of the deals that we are currently working on with prospective customers. Historically, our win rates are running about 25% to 30% of the opportunities in Logistics and 10% to 20% of the opportunities in Drivetrain that cycle through our pipelines.

As you can see from the left-hand side of the slide, for the Logistics business, we currently have approximately $79 million of annual revenue sales opportunities across 17 unique customers. Although we've made some progress in reloading the pipeline from the last view provided to you in February, the total opportunities are currently modest compared to past reports, reflecting the positive impact of our significant new business wins in the last six months or so.

Our opportunities pipeline continues to reflect a diversified range of customers and markets, with 46% of the opportunities in high tech, 23% in wireless with carriers, 15% with wireless OEMs, 15% with broadband and cable, and 1% with automotive. Rest assured that our sales team is aggressively pursuing new opportunities in multiple end markets, and we are reloading the pipeline through our extensive participation at industry trade shows that we regularly attend.

We are well positioned to win additional new business based on our industry-leading services and quality and our value proposition to both current and new customers. In first quarter '08, new business wins totaled $44 million in annual revenue once it's fully implemented. The $44 million spans new business wins with existing customers, again attesting to our ability to grow organically.

I would like to provide some highlights of one of our significant new business wins in Logistics from late 2007, which was jointly announced with TomTom at the Las Vegas Consumer Electronics Show in January. This new contract included an expansion of our existing footprint in services to TomTom. Over one year ago, we won the forward, reverse, and test and repair business with TomTom. The late 2007 win includes the packaging of their products for distribution to retailers to provide TomTom with reduced costs and increased flexibility to respond to the ever-changing consumer electronics market.

The first quarter launch and ramp-up of this particular piece of business has gone quicker and more efficiently than we expected due to the process improvements implemented over the past year, but also due to the excellent working relationship with this customer, who ongoing will now be our second largest customer in the Logistics segment.

As I mentioned earlier, I am pleased that we now also extended our reverse services contract for another three years with AT&T. Thus we have now renewed both our AT&T forward and reverse contracts through 2010.

I'm also excited to further clarify the DSL business that we're able to announce today that was included in the new business wins from late 2007. We will work with the Supply Chain Division of Wireless from AT&T, and we will provide all the reverse test and repair services and share the forward services with the DSL U.S. with Wireless from AT&T. This is another example of organic growth made possible by our excellent working relationship and our commitment to do what we say we will do every day, and our ability to remain flexible to our customers' unique needs.

This win is particularly exciting for ATC, as it represents the second win in our targeted broadband and cable market.

Now, looking at the right side of this slide for Drivetrain. We currently have about $225 million in opportunities across 18 unique customers. These opportunities are split 66% related to products in our remanufacturing business for light vehicles and 34% for medium and heavy-duty remanufacturing. Our growth over the past year has been disappointing. We have won nearly every major program that was up for bid in the last 24 months, and we are waiting for the volumes for the programs launched throughout 2007 to grow over time, such as the Ford and GM six-speed transmission programs, and Borg-Warner Turbos as these products increase in the vehicle population. The medium and heavy-duty space continues to be of significant interest to us, and we foresee additional opportunities where we could have a leading edge to win new business.

Despite the disappointing first quarter results for Drivetrain, we believe we are well positioned to win new business, and we are continuing to focus resources on aggressively pursuing new markets, products, and services.

In summary, we remain confident of our chances to land additional new business in 2008 as we continue to load the sales funnel and pursue the new business revenue opportunities in both segments. Our teams are focused on continued growth and diversification of the markets, products and services, and customers we serve.

I'd now like to provide you my wrap-up, so please turn to slide 10. The Logistics segment is off to a record first quarter, contributing to a solid '08 start for the company. Logistics is increasingly important in delivering the revenue and earnings growth for the company. In light of the factors I shared with you today, we are revising our full year revenue guidance for 2008 to $540 million to $595 million from the $550 million to $625 million provided earlier in the year, and increasing our earning guidance per diluted share for continuing operations from $1.60 to $2.00 to $1.70 to $2.05. This revised guidance is possible now that we have a clearer picture on the various efficiency initiatives, program launches, and expected growth for '08.

We expect continued strong revenue growth in our Logistics business, with revenues expected to be in the $340 million to $385 million range, revised from the $330 million to $385 million that we announced in February. This compares favorably to the $294 million in 2007. This range is still based upon varied program implementation and timing and ramp-up assumptions with the significant new business launches, and additional new business wins expected during 2008. We are now able to narrow and refine our guidance ranges slightly based slightly from our February guidance, based on the strong first quarter results and success with our TomTom launch and business ramp-up.

2008 Logistics segment profits are expected to be in the $45 million to $52 million range, up from the February guidance of $34 million to $45 million, based on the strength of our base businesses, continued efficiency improvement, and expected growth.

With the continued profitable growth and diversification of our Logistics business, we are firmly on track to meet and exceed our three-year plan goals.

Looking at the Drivetrain side, our revised revenue guidance for '08 is expected to be in the range of $200 million to $210 million for revenues and is down from our February guidance of $221 million to $237 million. We have softened our '08 expectations based on the first quarter's actual results and now expect Honda revenues to be approximately $50 million. This reflects our current run rate without the influence of a more favorable allocation decision by Honda on the aggressive proposals from ATC.

Our segment profit is revised to $15 million to $19 million, down from the previous range of $22 million to $26 million. The downward revision in Drivetrain revenues and segment profits are driven by lower volumes contemplated with Honda, as I just referenced, and an unanticipated first quarter softness with Ford and Chrysler. On a positive note, we are currently seeing sequential improvement in order activity in April for both Ford and Chrysler.

In February, I advised you that as a part of our longer-term plan for growth in our Drivetrain business, we plan to establish a facility in the Czech Republic. During the first quarter, we signed lease and facility management agreements with a local company to ensure success in opening this new facility. We intend to be operational with a modest facility by the first quarter of '09. We've already seen initial interest from potential Drivetrain and, more recently, Logistics customers in utilizing the capability of this location to serve Europe.

During the balance of the year, our focus will be on successfully launching and ramping up our new business wins on time and on budget, aggressively pursuing new additional business, and in developing markets in both segments to drive growth and diversification and further reducing costs to drive overall improvement.

As we announced in February of '08, the Board of Directors authorized repurchase of up to $50 million of ATC stock during 2008. During the quarter, we repurchased $10 million worth of stock, or about 527,000 shares, representing slightly more than 2% of the shares outstanding. Our guidance contemplates expected completion of the remainder of our stock repurchase plan. We expect free cash flows of about $20 million to $25 million, replacing the required working capital investments for the launch of the significant new business programs expected during 2008.

The objectives of our three-year plan remain unchanged. We expect to continue our leadership in both quality and service and to deliver value to our customers. We expect to continue to pursue our target markets in both segments and further grow and diversify our revenues and cash flow. We will also continue our efforts for operational excellence and improved ROIC. We expect to move towards a $750 million revenue run rate by the end of '010, as explained in our February conference call. This translates to a double-digit three-year CAGR for both revenue and operating income.

In support of that long-term plan, we remain enthusiastic about the strength of our Logistics business and its dramatic effect on the company and shareholders' value, especially measured against return on invested capital profile. If you look at our last 12-month revenue split, as of the end of first quarter '08, Logistics was 59% of the total company revenues.

Looking back two years for more points of reference, at the end of first quarter '07, it was 53% of the total company's revenue, and for the same period in '06, it represented 41%. I also think it is important to point out that our efforts towards diversification in the segment are clearly in evidence. For example, with the solid AT&T growth over the past years, as a customer they represented 62% of the Logistics segment sales this past quarter versus 72% a year ago.

The rapidly growing Logistics business, with this revenue CAGR exceeding 37% since 2003 and its higher ROIC characteristics compared to Drivetrain, continues to change the complexion of our company and the overall ROIC of the company. From a guidance perspective, it is clear that the Logistics segment is now expected to contribute 75% of the company's profitability this year. We have made the necessary investments and supported this growing business, and we expect continued success for it to lead in value creation for the company.

Going forward, we will continue to remain steadfast in execution of our growth and diversification strategy for both business segments. As already evidenced, the possibilities for the Logistics services are increasing, and we foresee plenty of opportunities to capture additional market share in the future.

And that concludes my remarks. I would like to remind you that we'll be hosting the company's first ever Investor Day on June 3 in New York City. We have an exciting agenda planned for you, and I hope that many of you will be able to join us on that very important day.

Now I would like to turn the call over to Todd for more color and details on our first quarter results and our earning guidance. Thank you.

Todd Peters

Thank you, Don. My comments today will cover the following; our consolidated operating results for the three months ended March 31, 2008, our consolidated cash flow and net debt highlights, and updated financial guidance for 2008. Okay, see slide 11.

As Don mentioned, during the three months ended March 31, we concluded that the return on investment potential for the NuVinci CVP project was not sufficient to continue development activities, and we entered into an agreement to sell the project to Fallbrook Technologies. We sold certain tangible and intangible assets for $6 million. As a result, we reclassified the NuVinci project as discontinued operations during the three months ended March 31, 2008.

Please turn to slide 12. Net sales decreased $1.8 million, or 1.4%, to $129.5 million for the three months ended March 31, 2008, from $131.3 million for the three months ended March 31, 2007. This decrease was primarily due to Honda revenues, which were down $12.7 million. The lower volumes are due to, one, higher volume in the first quarter of 2007 believed to be attributable to an extension of warranty coverage on certain models; and two, lower volume in the first quarter of 2008 as Honda reduced inventory in connection with its March 31 fiscal year end.

We had a decline in Nokia revenues due to the termination of a test and repair program in June of 2007. We had scheduled price concessions to certain customers in our Logistics and Drivetrain segments that were granted into national contract renewals, and we had lower volumes of Ford remanufactured transmissions resulting from lower sales over the last several years of new vehicles using transmissions that we remanufacture, resulting in a reduction in the population of Ford vehicles in the zero- to eight-year age category, which category, we believe, drives the majority of demand for our Ford products, coupled with an inventory reduction at a large distributor.

The recently awarded and launched programs for Ford's six-speed transmission have not yet had a significant impact on our revenues. We expect demand for these remanufactured transmissions to grow as these important families of transmissions grow in installed base. We also had lower volumes of Chrysler remanufactured transmissions due to Chrysler's old decision not to use remanufactured transmissions for warranty repairs, generally for model years 2003 and later. This results in one less model year being in our warranty programs each year. The lower volumes were also coupled with an inventory reduction at a large distributor.

The recently awarded modest program for the use of certain remanufactured transmissions for warranties has not yet had an impact on our revenues.

These items were partially offset by the launch and ramp-up of our Logistics programs with TomTom, which include the growth of existing programs launched in '06 and '07 and the impact of a program launched in '08. We had increased volume and favorable mix on our programs with AT&T, which grew 7.2% year-over-year, and we had strength in our other base Logistics programs.

And finally, we did have an increase in sales to GM, primarily from an automotive electronic upgrade program that is substantially complete. Of our net sales for the three months ended March 31, 2008, and 2007, AT&T accounted for 40.6% and 37.3%; Ford accounted for 12.1% and 15.2%; TomTom accounted for 10.7% and 1.3%; and Honda accounted for 9.7% and 17.7%, respectively.

Gross profit increased slightly to $32.3 million for the three months ended March 31, 2008, from $32.2 million for the three months ended March 31, 2007. Additionally, gross profit as a percentage of net sales increased slightly to 24.9% for the three months ended March 31, 2008, from 24.6% for the three months ended March 31, 2007. This increase was primarily due to operating leverage from increased volumes and a favorable mix of services in our Logistics segment, benefits from our ongoing lean and continuous improvement program and other cost reduction initiatives, offset by reduced operating leverage in our Drivetrain segment and scheduled price concessions to certain customers in our Logistics and Drivetrain segments granted in connection with contract renewals.

SG&A expense increased $0.2 million, or 1.5%, to $13.4 million for the three months ended March 31, 2008, from $13.2 million for the three months ended March 31, 2007. The net increase is primarily a result of an increase in costs associated with revenue growth in our Logistics segment, partially offset by benefits from on our ongoing lean and continuous improvement program and other cost reduction initiatives. As a percentage of net sales, SG&A expense increased to 10.3% for the three months ended March 31, 2008, from 10.0% for the three months ended March 31, 2007.

During the three months ended March 31, 2008, we recorded $1 million, or $0.6 million net of tax, of exit, disposal, certain severance, and other charges, which included $800,000 of severance and other costs, primarily related to certain cost reduction activities, and $200,000 of certain legal and other professional fees unrelated to our ongoing operations. There were no similar costs recorded in 2007.

As an ongoing part of our planning process, we continue to look for areas where we can improve our cost structure and better utilize our capacity. Operating income decreased $1.1 million, or 5.8%, to $17.9 million for the three months ended March 31, 2008, from $19 million for the three months ended March 31, 2007. This decrease is primarily the result of the exit, disposal, certain severance and other charges I just discussed. As a percentage of net sales, operating income decreased to 13.8% for the three months ended March 31, 2008, from 14.5% for the three months ended March 31, 2007.

Interest income increased $0.3 million from the prior year comparable quarter. The increase was primarily attributable to higher cash balances invested in cash equivalents during the first three months of '08 as compared to '07. Interest expanse, on the other hand, decreased $0.3 million, as we had a reduction in total debt outstanding.

Income tax expense as a percentage of income from continuing operations increased to 38.8% for the three months ended March 31, 2008, from 37.9% for the three months ended March 31, 2007. This increase is primarily due to the change in mix of our taxable income by state and currently an after-tax loss. Income from continuing operations decreased $0.5 million, or 4.3% to $11.1 million for Q1 2008 from $11.6 million in Q1 2007. Income from continuing operations per diluted share was $0.50 in 2008 as compared to $0.53 in 2007.

During the three months ended March 31, 2008 and '7, we recorded after-tax losses from discontinued operations of $2.5 million and $1.9 million, respectively, primarily due to the NuVinci project. On a pre-tax basis, the loss included $2.4 million of losses from the operations of this project during the three months ended March 31, 2008, along with a charge of $1.7 million related to the exit from this project. This included charges of $1 million for termination of assets, $0.3 million for certain inventory that was deemed not usable by Fallbrook, $0.2 million related to capitalized past development costs, and $0.2 million related to the disposal of certain fixed assets.

Please turn to slide 13. We had total cash and cash equivalents on hand of $19.2 million at March 31, 2008. Net cash used in operating activities from continuing operations was $4.5 million for the three-month period then ended. During the period, we used $20.2 million of cash for our working capital account, including $14.3 million for inventories, primarily related to the launch and ramp-up of new programs, coupled with increased test and repair volume in our Logistics segment. The $6.4 million for accounts receivable, primarily as a result of increased volumes in the Logistics segment, and $1 million for prepaid and other assets. These were partially offset by $1.6 million of net cash provided by accounts payable and accrued expenses, which included the use of approximately $9 million for 2007's incentive compensation program.

Net cash used in investing activities for continuing operations was $6.5 million for the period, which included $4.6 million of capital spending, primarily related to machinery and equipment, new business initiatives, and capacity maintenance efforts, and $1.9 million of net purchases of available-for-sale securities for our nonqualified deferred compensation plan. Net cash used in financing activities of $10 million was primarily related to open market repurchases of our common stock. During the quarter, we repurchased approximately 527,000 shares at an average cost of $18.99.

Our 2008 LTM EBITDA of $88.8 million is 17.7% better than the prior comparable period, primarily due to the strong operating performance of the Logistics segment. We believe that cash on hand, cash flow from operations, existing borrowing capacity is sufficient to fund ongoing operations and capital expenditures.

Please turn to slide 14. Now let's talk about updated guidance for 2008. After considering the operating performance and related developments in the first quarter, we now expect 2008 revenues of approximately $540 million to $595 million. This would represent a 2% to 12% increase over revenues of $529.2 million in 2007. This broad range of revenues is based on the following. Our 2008 Logistics segment revenues are expected to be $340 million to $385 million, which would represent growth of 15% to 30%. At the low end of the range, the revenues include the contribution from the recently awarded business described by Don. The high end of our range reflects the contribution and implementation of near-term opportunity. The growth of our Logistics business is expected to continue to drive improvement in ATC's ROIC, given that the Logistics business segment ROIC historically has been nearly twice that of our Drivetrain business.

Our 2008 Drivetrain segment revenues are expected to be $200 million to $210 million, which would represent a reduction of 10% to 15% over the prior year. A major factor driving the range is the status of the forecasted Honda 2008 revenues, as described by Don, the impact of the softness in Q1 revenue, coupled with a slow ramp-up of recently awarded and launched business to support our longer-term growth expectations.

In terms of profitability, in the Logistics business for 2008, we are expecting segment profit of $45 million to $52 million, which equates to segment margins that would approximate 15% for the balance of the year. This performance would exceed our long-term target range of 12% to 14%. The outstanding performance in the first quarter was enhanced by certain programs and business mix that will not contribute at the same levels over the balance of the year.

In the Drivetrain business for 2008, we are expecting segment profit of $15 million to $19 million. The reduction from previous guidance results from the negative operating leverage from reduced revenue expectations for 2008. In addition to the actions taken late in Q1, our Drivetrain team has developed an additional plan to mitigate the impact of lower revenues in 2008.

We are expecting an effective tax rate of approximately 39% from continuing operations. The increase from the 2007 effective rate of 37.2% results from the change in the Texas tax law, which is impacted us beginning July 1, 2007, and the mix of our U.S. and U.K. income.

Our EPS calculations and projection assume an average of 20.8 million diluted shares. As a result of these factors, we expect to achieve income from continuing operations of $36 million to $42 million, or $1.70 to $2.05 per diluted share from continuing operations.

In terms of cash flow, we expect the following; EBITDA of $76 million to $89 million. Capital spending is forecasted at $20 million to $22 million, which reflects a slightly-than-higher spend to support the new business captured in our Logistics segment, and the investment in the Czech Republic operation for our Drivetrain business. We expect depreciation and amortization of approximately $16 million to $18 million, and our free cash flow is estimated at $20 million to $25 million.

As we look to the balance of 2008, I'd like to update you on the status of the key drivers for sales and earnings that impact our guidance. One, we talked about the successful launch of new business wins in Logistics during '07 and early '08. Through Q1 2008, we are exceeding expectations, and that's shown up in our financial results.

Second, the finalization of 2008 Honda program sourcing allocation. Our guidance has been reduced to reflect a current run rate estimate of $50 million for 2008 pending any other decision by Honda.

Next, we told you we needed to renew the AT&T Mobility reverse contract within expectations. I'm pleased to say that that's done.

Next, we need to continue to convert pipeline opportunities to new business wins in both Logistics and Drivetrain. Well, that's in process, and Don gave you a report on our opportunities there. We need to have continuing achievement of our cost reductions. Year-to-date, we're ahead of plan on Logistics, and we're moving forward with additional [units] in Drivetrain. We told you needed to have a successful exit of the NuVinci business. We believe that's been done.

And then we've added a new item for our 2008 drivers, and that's the implementation of our $50 million stock repurchase program. And during the first quarter, we're on track.

So with that, I would like us to please turn to slide 15, and we are now available to answer any questions.

Questions-and-Answer Session

Operator

Thank you. (Operator Instructions). And we'll go first to Craig Kennison with Robert W. Baird.

Ryan Kelly - Robert W. Baird

Hey, guys. This is actually Ryan for Craig. On the AT&T DSL win, big congratulations. Has that already started to ramp, and do you expect to be fully ramped by the end of '08?

Don Johnson

Right, it's done. Thanks for attending the call. We launched that in late first quarter and ramping it up in second quarter. During the second half of the year, we should get some full run rates. So you won't see a full year of that until '09.

Ryan Kelly - Robert W. Baird

Okay. And then you referenced increased volumes with AT&T. I'm assuming that's on the cell phone side. Was it forward or reverse, and was that related to underlying demand or some kind of change in your renewal?

Don Johnson

We got a pickup in both sides of the business, but remember, traditionally in first quarter we get significant or seasonal change in the test and repair business. That's where most of it was. But we also had a pickup on the forward side as AT&T basically continues to get success in the marketplace.

Ryan Kelly - Robert W. Baird

Great. Also in your presentation, you referenced the efficient launch and ramp-up of the TomTom program. Can you walk us through an example of an initial win, from initial bids to fully ramped, how long it takes, and what it takes operationally for that to happen?

Don Johnson

Sure. For those of you that haven't been around the business for a while, and also to answer Ryan's question, if you look at the sales pipeline and you look at any given set of opportunities in that pipeline, it usually takes us anywhere from four to six months and that's about the quickest we've ever been able to land business, up to 18 to 24 months to land a piece of business.

What I mean by "land" is get agreement by the customer to actually go forward with the deal on a statement of work that we will perform on behalf of a contract. I think you can use the typical time to land the contract, about 12 months.

After you sign the contract, which may take you anywhere from one to three months to sign a contract, once you have secured the win, and ramp-up can be as quick as one or two months. That's about the quickest we've ever done, but it's on a smaller piece of business. The larger pieces of the business, though, typically might run anywhere from three to six months to get fully operational and up and running. And that is also dependent upon how quickly they want to ramp down the previous provider, whether it's a different third-party logistics company or whether it's an internal operation.

Does that answer your question, Ryan?

Ryan Kelly - Robert W. Baird

Absolutely. As it relates to the AT&T DSL business, was that a competitive win, or was all of that done internally (inaudible)?

Don Johnson

It was a competitive win. We had to win the quality and service contest, and we had to win the cost contest. And I'd like to go back to that a little bit. Like I said in my part of the call, is we actually won that in conjunction with the Supply Chain Division of Wireless from AT&T. So we're actually partnering with one of our customers, our longstanding customers, to win that deal with other units within AT&T.

Now, what really brought that on was the fact that we are incredibly flexible to our customers' needs, and we have been over time to AT&T on the Wireless side of the business, and now DSL will get a full taste of our capabilities there. The other thing that helped us win that, obviously, is the fact that they could leverage not only our capabilities within ATC, but also the Supply Chain Division capabilities of Wireless from AT&T. So this is a big win-win for us, us and our customer, our important customer, AT&T. And we look forward to future opportunities going along the same lines.

Ryan Kelly - Robert W. Baird

All right, guys. Final question. On the descriptor problem that you have with the Chrysler and Ford, did you notice that it picked up sequentially? Was it just a timing issue, or was it a kind of long-term expectation changed there?

Don Johnson

Well, that whole issue came about as discussions happened within the OE, between the OE and the distributor. And it's really not right to get into what caused that. But certainly, as something matured and developed in the first quarter, and by the end of the first quarter or the first part of April, we started seeing some recovery from that.

Ryan Kelly - Robert W. Baird

So ultimately, you will get back to normal levels?

Don Johnson

Well, we think so. I mean, the market's still out there, clearly, right? And we knew that the shipper was taking some inventory actions plus some other issues with their OE supplier. So we think that going forward, we have an opportunity to respond back to normal levels.

Ryan Kelly - Robert W. Baird

Okay, great. Thanks a lot, guys.

Operator

We'll take our next question from Gary Prestopino with Barrington Research.

Gary Prestopino - Barrington Research

Good morning, everyone.

Don Johnson

Hi, Gary.

Gary Prestopino - Barrington Research

Todd, there's a couple of things that I missed that you were talking about in terms of some figures. What are the diluted shares outstanding that you said you would average this year?

Todd Peters

20.8 million.

Gary Prestopino - Barrington Research

3.8 million?

Todd Peters

Two-zero-point-eight.

Gary Prestopino - Barrington Research

Two-zero-point-eight. So really, you're assuming that your share repurchase, you're going to repurchase close to 2 million shares. Is that correct?

Todd Peters

Yes. That's what Don said in his comments that our guidance expectation included a successful completion of the $50 million authorization. Through the first quarter we've repurchased 527,000 shares.

Gary Prestopino - Barrington Research

You've done 527,000 shares so far?

Todd Peters

Through Q1 at $10 million.

Gary Prestopino - Barrington Research

Right, and what was the EBITDA range that you said you were looking at this year?

Todd Peters

That's $76 million to $89 million.

Gary Prestopino - Barrington Research

Okay. And again, I apologize for this. I couldn't write fast enough. And then you talked about the percentage of sales growth, I believe, this quarter, that was contributed by various entities. Can you go through that again? I think you said that there was a certain sales growth percentage?

Todd Peters

Yes. Well, in my talk I said that AT&T sales were up 7.2%, specifically. And then I gave percentages by our major customers, percentage of the total for the quarter in '07 and '08. And those are in our 10-Q. I can, if you want to go over that later, we can go over that.

Gary Prestopino - Barrington Research

Yes, you have a point. And then given that, I think in some of your remarks, you said that you had more efficient ramp-up of the new business. But those, you're still expecting these expenses to continue to hit Q2 and Q3? Should we be thinking in terms of that more of these expenses are going to be hitting as you implement this business in the next six months?

Todd Peters

Well, like Don said, we had an efficient ramp-up thus far. Our guidance range would imply that our revenue run rate should climb through the balance of the year, and we're hopeful that we'll continue to have efficient ramp-ups for this. At this point in time, if you look at the significant growth, we're implementing $140 million of new growth year-over-year. We're trying to give you our best look at it at this point in time.

Gary Prestopino - Barrington Research

And given how well you're doing in Logistics, is there a sense that the large operating margin ranges that you guys have held to, that these can be exceeded going forward due to the inherent leverage in the business? Or is that not --?

Todd Peters

Well, we're not. That's only one quarter. We're not prepared to change yet our three-year target range because of the wide mix of business that we not only are implementing today, but we expect in our pipeline, Gary. But we are keeping a close eye on that, and we're pleased with where our success has been over the last six to nine months.

Gary Prestopino - Barrington Research

Okay, and then with this new contract for DSL, are you basically doing the test and repair and the forward logistics for the cable boxes? Is that what you're doing?

Todd Peters

Yes, to support their broadband business. The DSLs for, basically, the cable box business is different.

Gary Prestopino - Barrington Research

Okay. So DSL for the Internet? So that would be what? Modems, thinks like that?

Todd Peters

Modems, that's right. AT&T also has a U-verse initiative that hits the cable space.

Gary Prestopino - Barrington Research

Okay. And then last question, in terms of what's going on in Drivetrain, how good do you feel looking at your projections. Obviously, the U.S. auto industry is having some problems right now. Do you think it gets any worse from here? And you also mentioned you were exploring other opportunities to reduce costs in Drivetrain. Could you talk a little bit about that at this juncture?

Don Johnson

I'll take that, Gary. First of all, if you think about the fact that the new vehicle sales in terms of the soft market are diminishing, but you also have to understand that we serve the vehicle population. So as that impacts that vehicle population over time, it definitely impacts our business, because we serve the aftermarket side with the OE customers that we have.

Now, having said that, the fact that we won the new six-speed programs for Ford and GM, which will be the dominant transmission of the future for them, as that, as those products continue to increase within the vehicle population and mature in the marketplace, we expect the volumes that come out of those programs that were very successfully launched in '07. Subsequently, if you think about the transmissions we provide today that are for some of the older models of transmissions, we expect that to continue to have a gradual decline, as it has over the years.

Additionally, you need to think about the fact that if you look at our pipeline, it's pretty robust, and it also includes further opportunities within not only the light vehicle side of the business, but also being the heavy-duty side. So that the only other question will remain, can we land some of that business? I can tell you that our actions to reduce cost did not affect our resources to go after new business, continuing to drive for penetration and securing those opportunities in that pipeline for both light and the end heavy-duty.

Gary Prestopino - Barrington Research

Okay, thanks.

Operator

(Operator Instructions). We'll go next to Bill Dezellem with Tieton Capital Management.

Bill Dezellem - Tieton Capital Management

Thank you. A couple of questions. First of all, regarding Honda, do we understand correctly that the $50 million that you have in your budget, essentially, that's the low end of the range? From the perspective that the discussions that Honda is having and the considerations that they are making are only for an increase in volumes with ATC as opposed to potentially moving some volumes that you currently have away from you?

Don Johnson

Bill, how are you doing? This is Don. Yes, that's essentially true. If you look at the $50 million we just signaled, it's effectively the run rate plus the current information that we have about the balance of the year based upon their forecast and our expectations of what will happen in that forecast. It does not include any favorable response from a potential decision that would benefit ATC volumes.

Bill Dezellem - Tieton Capital Management

Great. Thank you. And then you had referenced earlier in the call the good return on capital of the Logistics business or division. And in the past, you have also referenced the possibility for that business to make acquisitions, potentially to get into new areas that you are not addressing. And oftentimes acquisitions go hand in hand with a modest to severe deterioration in return on capital, and we have seen that in not only the logistics industry, but many other industries. Would you share your thoughts of balancing the strategy for wanting to make acquisitions to broaden the areas that you serve and yet your desire to maintain a high, or maybe even an improving ROC?

Don Johnson

First of all, when anybody has been around us for a while, and if you take a look at our history, and it's out there for your view, you can see that we've taken charges as we've made decision after reviewing M&A opportunities, not to do them. And frankly, if you'll look at our regimented process, we would like to see an acquisition be accretive, but also the fact that we have pretty high expectations on our return on invested capital, as you just alluded to, and we're not going to make a decision that's going to deteriorate that type of return on invested capital.

Now, having said that, the markets are tough right now. It presents both challenges but also opportunities, ad we continue to comb the opportunities out there from an M&A perspective to look at something that would augment our strategy or help us penetrate any of the markets that we're not in as deeply as we'd like to be.

Bill Dezellem - Tieton Capital Management

And finally, mentioning the economic weakness or the difficult environment, what impact, if any, are you seeing on your existing customers? I mean, clearly, the, and I'm specifically thinking of the Logistics business, just the result from the (inaudible) would indicate that you're not seeing any impact. But is there something going on behind the scenes where the new business wins are masking some challenges that existing customers are seeing with economic weakness?

Don Johnson

This is a two-part question, right? The first part, are we seeing anything with current customers? And no, we haven't. We've shared with you what was happening with AT&T. We've had tremendous success with ramping up and launching new business with TomTom. And now TomTom's going forward to be our second largest customer. So if you look at our current customers, that we're seeing good things happen as opposed to negative things happen.

Now, it's anybody's guess how long that will happen based upon maybe the depth of an economic weakness, right, so it may happen in our prime market. But going forward, if you look at the opportunities, what these people are looking for when they're out providing bid opportunities for logistics providers like ourselves are simply to improve quality and service to get a competitive advantage in the marketplace to serve the market they're serving. But secondly, they're also looking for flexibility and cost reduction in terms of the total supply chain. Not necessarily just the piece that a third party would provide, but how can you improve and optimize the performance of their entire supply chain?

For example, if you look at what we've done with TomTom, and this was publicly announced in January, this opportunity to repackage for TomTom here in the States gives them increased flexibility to improve marketing programs with major retailers. Because in a very quick, short period of time, they can change out the way they package products to support marketing programs going forward with major retailers as the dynamics in the consumer electronics market change, and they change very rapidly, as we all know.

So if you think about a third party and what we offer in ATC LE, our Logistics organization, we'll offer improved quality and service at a reduced cost with the total supply chain performance. So add it again to economic weaknesses, periods of economic weaknesses, what we've seen in the past, and it's been my history after 35 years in this business, is you actually see more people looking for CPLs to actually help them out in terms of reduced costs.

Now, whether that will actually hold true with this period of economic weakness is to be determined, but we're certainly not seeing a deterioration in opportunities. Our pipeline being down is simply the fact that we won a lot of new business in the last six months, and now we're in the process of reloading it, and we're confident we can reload it.

Bill Dezellem - Tieton Capital Management

In theory, that pipeline reload might be more effective, or actually I'll use the term, easier, and use that loosely, but easier in this environment than it would be in a stronger economic environment.

Don Johnson

I think I'll use that with my business development people, if you don't mind.

Bill Dezellem - Tieton Capital Management

Your choice. Thank you.

Don Johnson

Thanks.

Operator

We'll take our next question from Mark Cooper with Wells Capital.

Mark Cooper - Wells Capital

Hi. My question was related to the working capital drawdown in the quarter. If you could remind us why, what your investment in working capital actually is. What is it that you're investing in?

Todd Peters

Oh, yes. I think in my comments, Mark, if you think about our Logistics business being up 25% and you just heard Don describe, I'm going to make it more real. There's $14.3 million just in inventories.

Mark Cooper - Wells Capital

Right, right.

Todd Peters

And a lot of that was to support product and program launches, specifically in the Logistics business.

Mark Cooper - Wells Capital

So you, I guess I wasn't entirely familiar. You're taking the inventory risk in the --?

Todd Peters

No. No, no, no, no. Let's be careful.

Mark Cooper - Wells Capital

Okay.

Todd Peters

Take the example on the consumer electronics, where we're doing the packaging. These are the clamshells, the art cards --

Mark Cooper - Wells Capital

Oh, okay.

Todd Peters

(Inaudible) materials. That's where we have inventory. The actual device is never ours. That's the same in the wireless side of the space. We don't own the phones, but we do buy spare parts and packaging materials.

Mark Cooper - Wells Capital

And how long does it take you, do you anticipate that to work down here?

Todd Peters

Well, if you heard our guidance, and you think about us launching new programs, we're probably going to continue to invest in some working capital as we continue to launch programs. Then the inventory turns into receivables, which is a good thing, and we don't necessarily ever have a receivables issue with kind of the blue chip customers we're serving.

Mark Cooper - Wells Capital

Right.

Todd Peters

The other thing affecting inventories in Q1, quite frankly, was the Drivetrain business, which we expected to bleed off, where we had our finished good sales, as we couldn't exactly match the ramp-down in orders versus production. To your point, the Drivetrain side of the inventory more quickly because of the more steady-state nature of that business, but the Logistics side, we expect that to continue to grow through the balance of the year, getting ready for the holiday season.

Mark Cooper - Wells Capital

Okay. Thank you.

Operator

And it appears we have no further questions at this time. I'd like to turn the call back over to Mr. Johnson for any additional or closing remarks.

Don Johnson

I'd like to say that I think we had a very solid start to 2008 for the company, obviously led by the Logistics business. As you know, we had some challenges on the Drivetrain side of the business, but we didn't sit back. We took very decisive and quick actions to help on the Drivetrain side of the business.

Going forward, we're continuing to drive efficiency improvements that are being harvested both in the Logistics side of the business and the Drivetrain side of the business, and more will follow. We'll also continue to drive for new business wins and launching new businesses very effectively in both segments.

To end this up, what I'd like to do is say, I just want to reiterate that our first ever Investor Day in New York City is on June 3. In that meeting, we're going to have our Board of Directors and also the primary management across all of ATC for you to talk to and listen to, and what they're doing to drive business success and improve value for you, the shareholders and investors. We're really excited about that day. Put it on your calendar, and we hope to see all of you there. Thank you very much for calling in today. Goodbye.

Operator

Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.

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