Nov 14, 2007
Executives
Terry Huch - Investor Relations Chip McClure - Chairman, President and Chief ExecutiveOfficer Jim Donlon - SVP and Chief Financial Officer
Analysts
Peter Nesvold - Bear Stearns Brian Johnson - Lehman Brothers Jairam Nathan - Banc of America John Murphy - Merrill Lynch Jonathan Steinmetz - Morgan Stanley Brett Hoselton - KeyBanc Capital Markets Frank Jarman - Goldman Sachs
Operator
Thank you for standing by. And welcome to the ArvinMeritorFiscal 2007 Fourth Quarter Earnings Conference Call.
At this time, allparticipants are in a listen-only mode. There will be a presentation followedby a question-and-answer session.
(Operator Instructions) I must advice you that this conference is being recordedtoday, Wednesday, 14 November, 20007. I would now like to hand the conference over to yourspeaker, Terry Huch.
Please go ahead.
Terry Huch
Thank you, Amy. Good morning everyone and welcome to theArvinMeritor fourth quarter and full fiscal year 2007 earnings call.
On thecall today we have Chip McClure, our Chairman and Chief Executive Officer andPresident, and Jim Donlon, our Chief Financial Officer. The sides accompanying today's call are available at www.arvinmeritor.com, we'll refer tothe slides in our discussion this morning.
The content of this conference callis the property of ArvinMeritor it's protected by US International CopyrightLaw and may not be rebroadcast without the expressed written consent ofArvinMeritor. We consider your continued participation to be your consentthrough our recording.
Our discussion will contain certain forward-lookingstatements as defined in the Private Securities Litigation Reform Act of 1995.Let me refer you to slide two in our fourth quarter earnings conference callpresentation for a more complete disclosure of the risks that could affect ourresults. Now, I'd like to turn the call over to Chip.
Chip McClure
Thank you, Terry and good morning everyone. Thank you forjoining us today.
First, I'll cover some of the highlights for the yearoutlined in slides three through eight and then I’ll turn the call over to Jimwho will review the details of our financial performance. As you read in this morning's earnings announcement forfiscal year 2007 we earned $0.53 per share from continuing operations beforespecial items.
Despite the solid progress we are making in implementing ourstrategic initiatives we haven't delivered the financial results that we know acompany like ours is capable of achieving. We recognize issues facing ArvinMeritor and we are workinghard to address them.
We are in the process of implementing aggressive actionthat will help us to turn the challenges we are facing into opportunities forthe future. The actions we are taking have just started to hit ourbottom line and I believe that we will begin to see more improvement by the endof our fiscal year.
We however remain focused on putting capacity in place,improving our profitability and delivering the returns you expect from us goingforward. In the short-term, our results have been negatively impactedby continuing soft truck market in North America, as well as, a truck marketthat's been going through the roof in Europe.
As we've told you on the last couple of earnings calls thecapacity issue in Europe primarily driven by the growth in Eastern Europe,stress our supply chain and increase our costs due to sourcing issues, premiumfreight and over time. We are taking actions by making the necessary capacityinvestments in our equipment and facilities, qualifying new suppliers inEastern Europe and Asia, and aggressively implementing lean manufacturingprograms that will improve the efficiency and robustness of our systems andplans.
We also need to address some of the commercial issues we hadwith many of our customers. We are pleased that our customers recognize the impactin steel and premium costs are having on us and we are willing to work with usto help find solutions and address these issues.
In the long-term we believe that we are not only -- we willnot only benefit from the capacity actions I just described but will continueto benefit from all of the other accomplishments we’ve made during the year. These include the substantial amount of new business webooked this year including our new joint venture with Chery Motors one of thefastest growing OEMs in China, which is expected to ramp up to $150 million ofbusiness for us by 2010 and our higher sales volume in our specialty vehiclesegment.
Our CVS specialty group continues to win business for theMine Resistant Ambush Protected defense program or MRAP, where we supplycomponents for the majority of the units. We expect this area to continue togrow as new awards are announced.
While winning new business in key focus areas we are at thesame time refocusing our company and dedicating our resources to our corecapabilities. We therefore continue to divest non-core assets.
In the thirdquarter we sold our emission technology business group and in the fourthquarter we sold our European aftermarket exhaust and filters operations. Throughout 2007, we've continued to rationalize and writesize our company by aggressively implementing several restructuring actions andimproving our manufacturing footprint around the world.
We saw improvements to our LVS business margins compared toprior years, finishing 2007 with an EBITDA margin of 4%, compared to 3.1% in2006. As our industry becomes more global joint ventures are becoming veryimportant element of our business strategy.
We'll continue to grow and improve our profitability byentering into additional joint ventures and other cooperative arrangementsgoing forward. We improved our technical capabilities by investing in andexpanding our global technical presence.
We announced plans to open a new technical center inShanghai, China and doubled the number of engineers we have in our technicalcenter in Bangalore, India. We successfully launched our performance plusinitiative, which we introduced to you at this time last year.
We've been working hard and I have identified 100s of ideason how to grow profitably and significantly reduce costs. These ideas have beendriven down into the operations and are now in the process of being executed.
We are tracking our progress and as promised, we are ontrack to generate $75 million in cost savings in 2008 and $150 million in costsavings in 2009. And we cut our pension underfunding by more than half.
Turning to slide four, you can see from this chart we’recontinuing to make progress on our strategy to diversify and grow our customerbase with non-traditional customers. We have strategically positioned our lightvehicle business with minimal exposure to the North American domestic OEMs.
Our total global light vehicle business with General Motors,Ford and Chrysler has gone down from 13% in 2006 to 9% or on a value-addedbasis 6% in 2007. Now let's -- turn to slide five, our outlook for our fiscalyear 2008 earnings per share before special items is in the range of $1.40 to$1.60, which is unchanged from the guidance we provided to you on October 3rd.While no one can predict what the economy will look like next year, we’llcontinue to carefully monitor the fluctuations in the marketplace and make anynecessary adjustments to our business as appropriate.
As many of you might already know the Americas CommercialTransportation or ACT, revised the range for its North American truck forecastfor 2008 and 2009. Although we have some concerns about the pace of recovery wemight experience our outlook for the North American truck market remainsunchanged from our prior guidance.
We continue to expect Class 8 truck volumes to reach about220,000 units in our 2008 fiscal year, however we will be monitoring thesituation closely. Jim will take you through the planning assumptions that ourforecast is based on later on this call.
We are also working hard on generating cash going forwardand we expect that with the aggressive actions we are taking, we will generatepositive free cash flow in 2008. Part of the improvement will come from asignificant belt type tighten actions we've taken on our SG&A cost for thefirst half of the year.
As I mentioned earlier, in 2008 we will be seeing resultsfrom our performance plus initiatives. It has been one of the most positivecultural transformations in the history of our company.
The principles ofperformance plus have been integrated into the entire organization and havebecome imbedded in the way we run our operations. We believe that executing these kinds of initiatives willsupport our efforts to become a top quartile financial performer in the comingyears.
We will also be seeing a gradual improvement in our European operationsas we gain momentum from our supply chain management and operationalimprovement efforts. We will begin to benefit from a significant restructuringactions, we've been implementing.
We are on track with closing andconsolidating several of our facilities and eliminating up to 2800 positions inNorth America and Europe. This restructuring plan will save our company about $130 to$140 million a year by 2012.
And we are improving our terms with key customers,suppliers and with our employees through a cooperative initiatives which forexample will help us this year by reducing our cost of material such as steal.We successfully worked with our plant employees to win new business awards andimprove the competitiveness of our facilities. Now let's turn to slide six, as you know satisfying customerdemand for heavy trucks in Europe has been one of the biggest challenges ourcompany has had to deal with over the last year.
We believe with the actions weare taking we will start to see gradual improvement to our financialperformance in the seconds half of '08 and into 2009. We are executing aggressive lean manufacturing initiativesin plants requiring extra attention and bothering our lean efforts in all otherglobal facilities.
We are strengthening our relationships with existingsuppliers and joint venture suppliers in leading cost competitive countries andqualifying and obtaining new suppliers in Eastern Europe and Asia to help uslower our total cost. We are leveraging our internal and external capacity inNorth America; working closely with our customers to optimize productionschedules, beginning to make the necessary capital investments to insure we canbetter manage with the higher capacity and improve our capabilities.
And we arecontinuing to develop our talent base and fill leadership positions with theexpertise and skills needed to move our company forward. Let's turn to slide seven, in an ongoing effort to aligncapacity with industry conditions we are efficiently utilize assets and improveour manufacturing footprint, we continue to consolidate, downsize, close orcell assets.
As you can see on this slide we've announced six of the 13plants we said we would close or consolidate as part of our restructuringefforts. These facilities represent both our CVS and LVS businesses and now inEurope and North America.
Turning to slide eight, before I turn the call over to Jimlet me talk to you about some of the positive thing we are doing to grow ourbusiness. We are announcing today that we are expanding our business intoRomaine, we'll be building a new plant there to produce door systems for thegrowing number of OEMs we are supplying in both eastern and western Europe.
This plant also will support the new business we recentlyreceived from Dacia a leading automotive manufacturer in that country. Lastweek, we announced a major new LVS global contract to supply $4 million windowregulators motors annually to Hyundai.
We announced last week that we arebuilding a new CVS axle and brake plant in Monterrey, Mexico. This 400,000 square feet facility will not only support ourefforts to reduce cost but it will help us to have the flexibility to meet thehigher volumes we are anticipating in North America in 2009.
In this lastquarter a new venture with TRW was announced to distribute Ride Control Partsto the after market industry in Europe. This partnership combines the strength of ArvinMeritorengineering and manufacturer competencies and the Gabriel brand name with TRWextensive sales and distribution network.
And finally, we recently received a new business award frominternational to supply commercial vehicle components for an additional 1000MRAP units. This continues to be a growing business for us.
Now, I would like to turn the call over to, Jim.
Jim Donlon
Thank you, Chip. I'm going to start with some of the incomestatement for the third quarter on slide nine and then I'll talk about the fullyear results.
The fourth quarter came in pretty close to the revised guidancethat we provided on October 3rd. We said then that our results in the US would be adverselyaffected by the slower economy and that our results in Europe would suffer fromsupply and operational issues related to the continuing high volumes there.
On the revenue line those factors largely offset each otherresulting in sales that were about equal to the year ago quarter. Gross marginfor the quarter declined by $9 million from there fourth quarter of 2006 to$118 million.
SG&A was $40 million higher than last year and I will talkabout that in detail on the next chart. Equity and earnings of affiliates continues to grow.Interest expense was $22 million for the quarter, $6 million lower than lastyear.
Income taxes were a benefit of $5 million for the quarter. And incomefrom continuing operations before special items was a loss of $4 millioncompared to income of $29 million last year.
This resulted in a loss of $0.06per share. Slide ten explains the increase in SG&A in the fourthquarter.
Initially the magnitude of the increase maybe a surprise but much ofit reflects the income statement binning of items that should be familiar toyou. The first category is performance plus costs.
We've indicated all alongthat our expected performance plus costs savings to pay for the cost of theprogram in 2007. And they did, most of the savings have come through the costof sales line whereas the program costs hit the SG&A line.
The consultingand staffing cost to get the program going were $12 million in the quarter. Theconsulting engagement and payments are essentially complete, so this amountwill not recur into the future.
In addition, we've made some investments in shared servicesthat will help us reduce administrative costs in the future. Up front costsinclude software requirements and relocation of employees.
We've alsoaccelerated the implementation of our lean manufacturing initiatives. This isdriving higher efficiency, which reduces our cost of sales.
So in total about $18 million of the increase in SG&Awas for performance plus investments that bear fruit in other places in theincome statement or overtime as the initiatives mature. Another similar item is the SG&A cost we incurred to supportcontinuing high customer orders in Europe.
In our last presentation, we talkedabout the impact this was having on our CVS profitability. In order to limit the exposure to these items, we've had todeploy a lot of resources into the manufacturing and supply chain managementefforts.
That has required travel over time and outside help, which arereflected in the $10 million increases in SG&A. Another area of investment in SG&A for futureimprovements and profitability is the launch of some of the initiatives in theAsia region.
This includes the Shanghai technical center and the initialwork on deploying -- on developing our relationship with Chery Motors. At the same time, we've experienced SG&A increases forrestructuring support efforts that are not appropriate to be included inrestructuring charges.
Higher receivable factors costs, which are partialoffset to the decrease in interest expense and unfavorable changes in exchangerates. For the next few quarters, we would see SG&A in therange of $95 million to $100 million trending down as special task forces canbe scaled back.
In our industry group of truck and automotive parts supplythe top quartile firms achieve SG&A costs of less than 6% of sales. And weplan to regain that objective very soon in 2008.
Returns -- slide 11 returns to the full income statement butthis time for the whole 2007 fiscal year. I won't walk through it all but letme hit some highlights.
Even though we are in the midst of a major downturn incommercial truck volumes in North America and even considering the 2006revenues benefited from record commercial truck volumes, our sales were stillhigher this year than last. Stronger currencies outside the US more than accounted forthe increase, raising sales by $220 million.
But even in the absence ofcurrency movements, strong sales in Europe, South America and Asia were nearlyenough to offset the weakness in North America. For the year, income before income taxes was $56 million.Taxes for the full year were $3 million or 5%.
This includes the unfavorableimpact of a German tax law change on deferred tax assets. We had indicated on October 3rd that this would have aone-time impact on our results, which is true.
However, we chose not to reportit as a special item because it was one of only a number of tax law changesthat affected us this year. At the bottom line, we earned $38 million from continuingoperations before special items in 2007 which equates to $0.53 per share: Slide 12 shows earnings before interest, taxes, depreciationand amortization for our business segments before special items.
Our LightVehicle Systems division was able to increase its EBITDA by 30% compared tolast year on flat sales. The improvement resulted from material savings and other costsavings as well as benefits from prior year restructuring actions.
LVS EBITDAmargins increased by 0.9 percentage points during the year. This is goodprogress but we have a long way to go before we will be satisfied.
EBITDA for our commercial vehicle systems division was down29% from $328 million to $232 million. As we've discussed with you many times,the deterioration was due to unfavorable geographic and vehicle mix and tooperational and supply issues in Europe.
EBITDA margins for CVS were 5.5% for the year. This businessis capable of converting at stronger levels, which we think our results in 2008will demonstrate.
Slide 13 shows our cash flow for the quarter and the year.Free cash flow was positive by $178 million for the quarter, more than explainedby working capital improvements. Pension and retiree healthcare funding net ofexpense were a small source of cash for the quarter but a use of $71 millionfor the year because of contributions to our pension plans.
In our reporting for this quarter, we've adopted FAS 158,which brings the underfunded position of our pension plans on to the balancesheet. Net of other pension changes, this resulted in a $230 million reductionin our book equity.
Reflected in our cash balance but not on the free cash flowslide are proceeds from two of the three emission affiliates that have notclosed by the end of the third quarter. We are hopeful that the remainingaffiliate transaction will close this quarter.
Slide 14 provides an update to the restructuring plans wedetailed for you on May 1st. At that time, we projected restructuring expensefor 2007 of $65 million with a cash portion of $50 million.
We booked changes that were slightly greater than the plandue to an additional action to rationalize White-Collar headcount in ourEuropean roofs operation. However, cash spending was slightly lower than we hadestimated.
We estimate that the annual run rate benefits of the actionswe've already implemented are million. I also would like to reiterate on thisslide that restructuring is a subset of the broader Performance Plus profitimprovement plan.
Restructuring charges arise primarily from employeeseverance and asset impairments related to plant closures and staff reductions.In addition to these items, Performance Plus cost savings also include nonlabor overhead reductions, material cost reductions and lean manufacturingsavings. We are on track to the $75 million commitment for 2008.
Wehave implemented the majority of the actions needed to achieve this goal buthaven't seen all the full benefits of these actions for two reasons. First,we've had only a partial year benefit in 2007 and, second, savings in the 2007period were used to offset the cost of launching and staffing the initiative in2007.
We have implementation plans for remaining ideas, some ofwhich will benefit 2008 by the remaining amount need to do achieve the $75million mark. These cost savings are an important part of our plan for improvedresults in 2008.
Slide 15 shows our financial guidance for the year, which asChip mentioned amounts to $1.40 to $1.60 per share from continuing operationsbefore special items. We are planning for sales $300 million to $500 million,higher in 2008 compared to 2007.
I'll review the economic and industry assumptions thatunderlie this forecast in a moment. We expect to generate EBITDA of $385million to 405 million in 2008.
After interest expense of about $95 million to$105 million, and taxes in the range of 20% to 24%, our income from continuingoperations will be $104 to $118 million. Chip told that you we expect to generate positive free cashflow in 2008.
If you take the EBITDA forecast on this slide and subtract theinterest expense of $95 to $105, subtract the taxes of 35, Capital expendituresof $150 to $170, and restructuring cash of about $100, you would get to anumber right around zero. From there, the networking capital improvements should pushus into positive territory.
Forecasting the direction of the economy and thenew vehicle markets is harder than normal right now. So we thought it would behelpful to provide more detail on the planning assumptions that we are using.
Slide 16 shows a number of those metrics. In most cases,what we assumed is pretty close to the middle of what the third party expertsare saying.
In the US, the last consensus survey of the economists called forGDP growth of 1.8% in the fourth quarter of 2007 and then gradual improvementthroughout 2008 for an average of 2.4% in 2008. We recognize that there are risks to this assumption and weare planning for various scenarios that could be weaker.
If the consensusdeteriorates significantly, we'll revise our guidance accordingly. For Light Vehicle sales, our forecast of $16 million unitsin the US and $17 million in western Europe are consistent with those providedby third party sources.
For Class 8 truck production in the US we areforecasting 235,000 to 255,000 units in the calendar year 2008. This is lowerthan the current consensus of that appears but at the high-end of the revisedrange provided by ACT.
However the Class 8 production unfolds by quarter is alsoimportant and I'll show you a slide on that in just a moment. Our forecast forClass 5 through 7-truck production is about equal to 2007 fiscal year at 180,000units.
This is on the same basis as the history we provide in our10-K. Unlike the ACT numbers we excludes specialty from Class 5 through7-trucks.
Our forecast for medium and heavy truck production in Europe is upabout 10% from 2007 calendar year. The next three slides provide a deeper diveinto the truck volumes in North America.
Slide 17 shows that that we continue to operate in a weakfreight environment. We did see a small seasonal up-tick in September.
But wecontinue to expect freight levels to be below trends for sometime to come. Slide 18 shows the Class 8 truck orders provided by ACT.
Thereport for October was better than expected, which is encouraging. It was thefirst month since October of last year in which orders have touched the 20,000levels.
We expect orders to continue to be choppy over the comingmonths. But we expect to see a gradually improving trend.
That graduallyimproving trend is reflected on our quarterly production forecast shown onslide 19. We are calling for North American Class 8 production of45,000 units in the current quarter, which is up about 1,000 units from theproduction last quarter.
From here we build up to normal levels by the middleof the year with the first signs of the pre-buy coming toward the end of 2008. Our fiscal year forecast is 210,000 to 230,000 units.
Ourforecast is neither the highest nor the lowest out there right now. Itrepresents the way we expect the industry to unfold but we certainly recognizethat there are risks against it.
Until we get better visibility in the direction of theeconomy and the trucking industry. We are not inclined to revise it.
Wecontinue to expect pre-buy levels in 2009 but the forecasted levels of 310,000for our fiscal year is about 40,000 units lower than what we saw in 2006. ACTis forecasting 329,000 for the 2009 calendar year.
Slide 20 shows our quarterly forecast for medium and heavytruck production in Europe. The first thing you'll notice is much morepronounced seasonality corresponding to the vacation shutdowns in the thirdcalendar quarter.
The other thing you should notice is that we expectproduction in Europe to continue to grow at double-digit levels over at leastthe next two fiscal years. As we mentioned on October 3rd, we are makingsignificant capacity investments to be able to meet customer requirementsprofitably throughout this period and beyond.
With that, let me turn the call back over to Chip for somefinal points.
Chip McClure
Thank you, Jim. Now let's turn to slide 21.
In summary ArvinMeritoris aggressively implementing the right actions to ensure they are going forwardthe company will be better positioned to deliver value and provide solidreturns to our shareholders. I'm confident that we have the right business plan and weare building the right team to drive our company’s future success.
First we have a winning business strategy includingcontinuing to refocus our business by dedicating our resources to businessesthat are core to our operations and offer the most attractive returns. To that end we divested our RollCoater, light vehicleaftermarket and emissions technology businesses.
We are strengthening ourproduct portfolio and our global presence in a market that offer the highestgrowth opportunities. Our strategy is based on growing with a purpose and thatpurpose is to increase our profits and return value to our shareholders.
We arealso aggressively executing initiatives that will better position of company tocapitalize in the upcoming rebound in the North American truck market. As wellas benefit from the robust truck market in Europe.
We made strides in improving our global supply chain and wehave been making the necessary and much needed investments in our operations sowe can successfully manage higher demand and capacity levels in both of thesemarkets. We have implemented a strategic process that regularlyreviews and analyzes our product and business portfolio to achieve ourprofitable growth objectives.
We are aligning with the right customers.Establishing better pricing disciplines and improving our platform mix. Second, we have been proactive in our efforts to driveperformance improvement initiatives throughout the organization and the actionswe’ve taken are paying off.
As I mentioned earlier, our Performance Plus program hasbecome part of our culture and has helped us to change the way we operate anddrive the improvements we need to reduce costs and increase our profits. We are also aggressively growing and expanding our presencein the Asia Pacific region.
We put a number of manufacturing and engineeringfacilities as well as a strong management team in place and we establishedstrong joint ventures with Asian companies and with Asian OEMs. Because of this, I believe we'll become one of the most wellpositioned suppliers in our peer group to take advantage of the tremendous costsavings opportunities and the rapid growth in that region of the world.
We've rolled out our lean manufacturing initiative we calledArvinMeritor Production System at our plant sites around the world. The CarstenReinhardt, Philip Martens and Rakesh Sachdev has been strengthening themanufacturing purchasing and Logistics Teams by utilizing their existing talentand bringing onboard additional leaders, who have the expertise and necessaryskills to help us drive a continuous improving culture.
We will soon begin tosee the results of their collaborative efforts and we're counting on them toimprove our operating performance. Third, our company has strong policies to ensure thefinancial interests of ArvinMeritor's key executives are aligned with itsshareowners.
Management's compensation has tied to the financial performance ofthe company. Short-term incentive compensation is measured by EBITDA and cashflow.
And long-term incentive compensation is measured by returnon invested capital and the total return to our shareholders relative to ourpeer group. Our leadership team has strong executive ownership guidelines thatmust be in here too and our board is composed of nine out of ten independentdirectors.
Fourth, we continue to focus our attention on maintaining astrong balance sheet. We've reduced our net debt by more than $700 million overlast three years and we have no significant maturities due until 2012.
We've also made a lot of progress on reducing our pensionobligations. We've reduced the underfunding of pension plans from $659 millionto $180 million in the last couple of years.
We've also made strides in decreasing our healthcare costs.We are beginning to see an improvement in our results from the retiringinitiatives and the employee customer driven healthcare plans we put in placelast year. And going forward we see a potential opportunity to furtheraddress some of our retiring healthcare costs by establishing as we've trustsimilar to the recent agreements you've heard so much about in our industry.
These are just some of the reasons why ArvinMeritorcontinues to be a good investment choice. Once we get through this office inthe North America truck market, which we estimate will couldn't in the nextcouple of quarters, we will begin the benefit from rebound in the market.
Truck volumes in Europe will continue to be strong andrepresent an opportunity for us, especially now that we are making the necessaryinvests in our operations and are better positioned for growth in our industryin the second half of 2008 and into 2009. And we will also continue to seesignificant growth in Asia.
By the second half of 2008, every primary market for trucksis expected to be experiencing year-over-year gains at the same time. Our lightvehicle business is also well position to increase its earning power goingforward.
LVS has improved its cost base through restructuring initiatives aswell as improving its global supply base and operating processes and LVS ispoised to capitalize on growth opportunities in emerging markets and byaligning with market leading OEMs. Throughout 2008, profit improvements from our costproduction and growth action will ramp up to a very meaningful level.
And wecontinue to have the financial flexibility we need to execute these plans. Now, let's take some questions.
Operator? And we canreintroduce to the Q&A session.
Operator
(Operator Instructions) Your first question comes from PeterNesvold of Bear Stearns. Please go ahead.
Peter Nesvold - Bear Stearns
Good morning guys.
Chip McClure
Good morning, Peter.
Peter Nesvold - Bear Stearns
I have maybe a little about Europe. You know we've hearingtightness from multiple suppliers in OEMs, just trying to keep pace withdemands.
Was there anything that you're able to do late in the year that mightwould show some kind of near-term benefit for instance one -- tier onesupplier, I know you didn't take any downtime frame since in August to catch upto the OEM customer. Anything like that you were able to do?
Chip McClure
Yes. Absolutely.
Peter, this is Chip, yes, we did the samething, the August shut down we worked throughout that and that obviously helpedwith a bit of a buffer there. I think the second thing is when you look at what Carstenand his teams have done in Europe.
I've mentioned a little bit with theArvinMeritor Production System we are starting to see some of the benefits ofthe lean manufacturing there. So I think that was a second thing that we've been able toshow improvement essentially in all our facilities there.
The third thing is wealso as I indicated have started developing new suppliers. Now obviously with the rapid increase in the volumerequirements there was some premium cost to bring this capacity on line andalso get the parts to our plant.
So those were kind of three, if you -- well,short-term things that I think we will already start seeing the results from. And obviously, I think the most important thing is from alonger-term perspective is we actually spent a lot as far as investment infuture capacity and we are putting that in place as we speak.
Peter Nesvold - Bear Stearns
Working down a -- working through a shutdown, an OEMshutdown makes a lot of sense, I can understand that that could be an immediatebenefit, it requalifying suppliers, I mean, that seems like that could takesometime. How, you know, changeable is that, don't you have to do durabletesting and get requalified by your OEM customer?
Chip McClure
No. You are absolutely right.
You’ve to do that and makesure you have got the right quality in place, so that doesn't come on quicklybut even with some of our existing suppliers and I think the other thing, is wework very closely with our customers because again, as you look at it, I thinkour customers too the significant ramp up with the opening of Eastern Europemore I think caught them by surprise too. So as we went through the balance of the year we were ableto work much closer with them, as far as, schedules also to make sure that wecould -- if you would level it out of schedule a bit, so the suppliers weactually looked at, at least initially the once that were already certifiedsuppliers.
But as we look going forward since we’ve indicated in thelast couple of calls we do continue to see significant growth increase bothnext year and the year beyond that we are putting things in place to qualifythese new suppliers. So those become more than the medium-term solutions.
Butit's more of the existing suppliers that we are doing it with.
Peter Nesvold - Bear Stearns
And I didn’t see anything -- forgive me if I overlooked,expectations for segment EBITDA margins in '08. I mean, where do you seecommercial vehicle trending versus LVS, LVS has been a pleasant surprise thatit's starting to trend up here or continuing to trend up?
Chip McClure
Yes. Obviously, if you look at that in a general sense Ithink the improvement in LVS has resulted in some of the restructuring thattook place in the past and obviously with CVS as the volumes come back on as weare able to get capacity in place in Europe and then with what we expect theincrease in volume here in North America, we do anticipate some increase going forwardreally into the second half of the year.
Peter Nesvold - Bear Stearns
And then last question, when I look at what you've gonethrough in the last couple of quarters whether it's environment, etceteraexecution to some degree. You've had tightness in Europe, you've had a realdifficult North America Class 8 market, which is hopefully starts to reverse 12months out and you are going through some restructuring.
I mean Chip, are you willing at this point to call fourthquarter here an EPS bottom with positive profitability going forward and itsounds like the cash flow versus a big cash flow drain this year at least isbreak even next year?
Chip McClure
Obviously, as I look at this we do see improvement goingforward from this fourth quarter and I think we are doing if you will brick bybrick both on the LVS side and CVS side, as far as internal -- as far as, thecost reduction improvements. I think also as you look at additional volume coming on andthen clearly the third part being with the market improving that way.
Soclearly do see improvement as we go throughout 2008.
Peter Nesvold - Bear Stearns
Okay. Thank you.
I'll jump back in queue.
Chip McClure
Thanks, Peter.
Operator
Your next question comes from Brian Johnson of LehmanBrothers. Please go ahead.
Brian Johnson - Lehman Brothers
Two questions, what are you doing any progress on balancingthe operational characteristic of the CVS business, so you don't need a GoldyLocks operational environment to make money, you can make money on the down andas well as, the overall in particularly in Europe, when do we see the benefitof these plants closures?
Chip McClure
Brian it is Chip again. And yes, one of the things that weare looking to do as part of our ArvinMeritor production system in addition tothe lean implementation is to first right size our manufacturing footprint butthen make our manufacturing footprint more flexible so that as we look atdifferent volume increases in different markets.
And you know, we've got to go flexible and we are actuallydoing some of that now if you will to help support production in Europe withsome of the capacity in other parts of the world. As I look at it going forward and as we do put thisadditional capacity in place we want to make sure that one it's flexible enoughto be able support capacity requirements in any market in the world.
But the second thing and as from a production point of view,I think the other thing from a product point of view is where appropriate andagain, we have to be sensitive to customer requirements and market demands incertain, the product requirements in certain geographic markets is to providethat flexibility so that it's, markets go through peaks and troughs and theother markets are going the other way we have the capacity in place to be ableto do that on more of a global basis. So we are doing that, we are seeing a little bit of that nowand we envision more of that in the future.
Brian Johnson - Lehman Brothers
Okay. Second question is, could you give more color on LVSin particular why the EBITDA margins went down despite being of course normalseasonality but despite being a decent revenue upturn?
Chip McClure
Well, I think a lot of it you just hit right on Brian isreally the seasonality that way. What I really look at, if I look at the fullyear trends it's clearly heading in the right direction.
As you know --indicated in our comments we still see more opportunity that going forward. SoI would really say that a lot of it was just based on the seasonality at thispoint.
Brian Johnson - Lehman Brothers
Okay. But still versus last quarter last year it's down 170basis points same quarter '06, is that business mix, is that something going onin apertures?
Chip McClure
Actually I would say that some of it was, as we look at someof the improvements we are making in some of our businesses within the SG&Aarena Jim had talked about restructuring and those kind of things. Some of theshort-term actually we are doing for the long-term investment opportunity --return opportunities.
Brian Johnson - Lehman Brothers
Okay. Thanks.
Chip McClure
Yes.
Operator
Your next question comes from Jairam Nathan of Banc ofAmerica. Please go ahead.
Jairam Nathan - Banc of America
Thanks. Can you give us an update on your backlog, I thinkyou said $1.2 billion ’07 to ’09 at December of last year, can you update us tothat and also you mentioned, can you tell us how much of that hit '07?
Chip McClure
I would just say that, we are not giving out various backlogwe have a series of business wins that we've achieved, but we have not beentracking backlog numbers. At one point in time, I believe that we may havecommented that there was at that time maybe two at that time, but that's notsomething that we provide regular guidance on.
Jairam Nathan - Banc of America
Okay. And my next question is on the trailer business.
Itlooks like you have a production estimate of 305,000 units in 2008, that kindof comes to like 25,000 a month and it looks like you are running much lowerthan that currently. So are you expecting like a big improvement there nextyear?
Chip McClure
Yes, we are. When you look at it normally trailers andtrucks tends to go counter cyclical in some of this and the regionalexpectation, as we know there was a buy head in 2006 for trucks and probablyless trailers being bought that way.
And obviously, it's kind of gone flat this year. So ourexpectation is, yes it will be going up this next year because there reallyhasn't been that investment therefore for last couple of years.
Jairam Nathan - Banc of America
Okay. And on the Performance Plus plan, is the kind of, canyou -- is there focus more on commercial vehicles.
Or is it just kind of, howshould we think about that within segments?
Chip McClure
No, Jai it's cross the board. When you look at it, as wetalked in the past performance plus the six pillars with three pillars of costreduction and as an example a part o that on the manufacturing side as far asArvinMeritor production system, we are putting the lean process in all ourplants.
I've been a plants recently in China and in Europe and herein United States and I can tell you that in all the facilities whether it'sLVS, CVS or it's here in North America, Europe or Asia Pacific we are puttingthe same processes in place that way. On the material optimization side or DMO is refer to it theactions are being done both in the LVS and CVS side to address that and thenobviously the overhead being that way.
So the only one, I think is unique to one business unit orthe other is the sixth pillar if you will of Performance Plus which on therevenue side is commercial vehicle after market which obviously is specific toCVS but the others are across the board.
Jairam Nathan - Banc of America
All right. Thank you.
Operator
Your next question comes from John Murphy of Merrill Lynch.Please go ahead.
John Murphy - Merrill Lynch
Good morning, guys.
Chip McClure
Good morning, John.
John Murphy - Merrill Lynch
In your position having a high class problem of too muchvolume and if we think about your forecast for North America in 2008, you knowin 210 and 230 sounds like it's probably it might be, I mean a little bitoptimistic. I'm just wondering as we deviate from that forecast on thedown side and potentially maybe even optimistically on the upside.
How do youthink your capacity right now in North America is set up to handle that? I meanclearly, you are looking at lean capacity going forward.
But how far long areyou in that flexibility in North America specifically?
Chip McClure
Yes. Well, first of all when I look at it, if I go back toone of the slide Jim had quarter-to-quarter, if you look at the first couple ofquarters I think we are very much in line with everybody else as far as what'shappening in the next couple of quarters.
I think the real question, which Ithink is part of what you are getting to is where it is for Q3 and Q4. And as we've kind of indicated there's still a lot ofuncertainty there and I think we are, kind of right in the middle that way.
Asyou look at the capacity things and we indicated that one of the investments wejust announced was in Monterrey, Mexico, which is adding to make sure that weare prepared again within our manufacturing footprint here in North America forthe rebound that we do expect in the latter part of next year and into 2009. So if you look at it short term the next couple of quarters,I think we are very much inline with everybody else that's out there on that.
Ithink there's some question to ask, what's going to happen in Q3 and Q4 and Ishould mention that we internally continue to develop downsize scenarios to beprepared for any eventuality that may come out. And then in the meantime looking beyond that for the reboundthat is expected the capacity is being put in place and I think the bestindication of that is what we just announced in Monterrey, Mexico.
John Murphy - Merrill Lynch
But, Jim you're comfortable with the first quarter at 45,000units and you feel like you can handle 50% more than that with that capacitywithout running into premium freight and overtime at this point?
Chip McClure
I am confident with what's taking place in the firstquarter, yes.
John Murphy - Merrill Lynch
Okay. And if we think about the Cadence of the $75 billionin cost saves in 2008, what is the Cadence of that?
Is it back-end loaded or isit evenly smooth through the year?
Chip McClure
It's smooth all the way through the year and as Jim I thinkindicated in his comment Cadence it's already been implemented but it'sthroughout the year.
John Murphy - Merrill Lynch
Great. Thank you very much.
Chip McClure
Okay. Thank you, John.
Operator
Your next question comes from Jonathan Steinmetz from MorganStanley. Please go ahead.
Jonathan Steinmetz - Morgan Stanley
Right. Thanks, good morning everyone.
Chip McClure
Good morning, Jonathan.
Jonathan Steinmetz - Morgan Stanley
A couple questions, first, from a macro perspective on thecommercial vehicle side in North America are you seeing any increase in sort ofthe price reduction that your customers are asking for versus where we were acouple of years ago with the strong volumes? And this is an industry that has not been as notoriouslytough for those as the light vehicle side.
Just wondering as a customer comesunder pressure have you any give -- give any of that back?
Chip McClure
We have not seen any difference and what we have seen inyears past and I think the other thing is from our end and again part of theother I have seen a Performance Plus thing is, as we look at our product lineprofitability, I think we are much more databased on that. So, no, I am notseeing a change in that and I think we have the data now to have the discussionwith our customers.
Jonathan Steinmetz - Morgan Stanley
Okay. At this point.
Chip McClure
Okay. North America and in Europe.
Jonathan Steinmetz - Morgan Stanley
Okay. I just want quick housekeeping.
Jim, do you have theD&A by segment? I just want to try and get to an EBIT number by segment?
Jim Donlon
We have that, maybe after the call, maybe Terry or I couldgive you a follow-up.
Jonathan Steinmetz - Morgan Stanley
Okay. I'd appreciate that.
Thank you. That's all for today.
Jim Donlon
Thank you.
Operator
Your next question comes from Brett Hoselton of KeyBanc.Please go ahead.
Brett Hoselton - KeyBanc Capital Markets
Good morning, gentlemen.
Chip McClure
Good morning Brett.
Brett Hoselton - KeyBanc Capital Markets
Let's see. I know that the program that you're running, thePerformance Plus program that you're running has a number of different steps.
Iguess, I would call it, an idea generation, implementation, those types ofthings. I guess what I'm wondering is can you provide some sense of how you'reprogressing in each of those steps in terms of what you originally anticipatedversus what you are seeing, you are able to achieve at this point in time?
Chip McClure
Yes. Brett, this is Chip.
You're right. I mean, you look atthat we do have the different levels, we track that and we have a very rigorousprocess as part of our PMO or program management office to track that and as wehad indicated there has been hundreds, well more than 1,000 ideas that havebeen generated and we are now into the stages, now taking it forward to theexecution part of that into the business units.
So as we look at that we will continue to generate ideas. Wehave groups that do that but the more important thing is implementing them andgetting them translated to the bottom line.
If you look at the various entitiesas I said before we have three pillars of cost reductions, one is material, oneis manufacturing and one is overhead. If I look at in that order, manufacturing, I think Jim hadkind of walked you through some of the manufacturing restructuring that we havedone within that and the plant closures and that obviously is probably thelongest term one just because as you know to write size your manufacturingfootprint and to restructuring plants takes time and we are showing savingsfrom now up to 2012 on that.
The ones that are within manufacturing will show moreimmediate results, which as I had indicated would envision even in Europe withthe leaning manufacturing side, I think that there is, we are already beginningto see some results on that on the lean side. So on the manufacturing side, lean, we are already startedto see improvement, the manufacturing restructuring again is probably thelonger term one.
On the materials side as we've indicated, that is in process.A number of the items have already been implemented but that will continuethroughout this year and into next year and overhead kind of the same way.
Brett Hoselton - KeyBanc Capital Markets
And I apologize, I'm out of the office here so I am going toask you question that I guess I should know the answer to. But we providedguidance of $1.40 to $1.60 I think it was about a month ago or so, what wereyour Class 8 heavy truck production expectations in your fiscal year '08 atthat time?
Chip McClure
We were on the range, Brett, of -- what we said at that timewas an earlier estimate was going to be adjusted downward and what we werelooking toward was the $2.35 to $2.55 for the calendar year. But for our fiscalyear that represents as I said earlier, about $220 or thereabouts.
Brett Hoselton - KeyBanc Capital Markets
So you only made, I guess, what would be considered -- itsounds like your Class 8 truck production forecast versus where you were amonth ago is basically in line with your expectations?
Chip McClure
Yes. We are roughly in that same ballpark of where we wereon October 3rd.
Brett Hoselton - KeyBanc Capital Markets
Okay. Thank you so much, gentlemen.
Chip McClure
Okay. Thanks Brett.
Operator
Your next question comes from Frank Jarman of Goldman Sachs.
Frank Jarman - Goldman Sachs
Thanks guys. Just a couple of follow-up questions on thefree cash flow.
You know pension and medical contributions net of expense wasnegative $71 million this year. For FY08 what should I think about that shakingout towards?
Chip McClure
Because we are in much better position now on our pensions,we are now looking for a lower amount for 2008 and we would actually bethinking of it equal to or maybe even slightly lower than what the expenselevel would be for 2008.
Frank Jarman - Goldman Sachs
Okay. And then in terms of the EBITDA guidance that you guysgave, the $385 to $405, does that include a certain amount from equity andearnings of affiliates?
Chip McClure
Yes, it does.
Frank Jarman - Goldman Sachs
Okay. How much, should I just sort of straight line what youdid in FY07 of about $34 million?
Chip McClure
I would say plus or minus a little bit. We have several ofthe affiliates that are doing well and I actually think that there will beactually a little bit more income from the affiliates as we go towards nextyear, but I don't say that it would be a huge change.
Also we have to take out the minority interest for ones thatare on a different line. So we have to kind of take both into account at thesame time.
Frank Jarman - Goldman Sachs
Got it. Then…
Chip McClure
But they are all doing quite well.
Frank Jarman - Goldman Sachs
Yes. And then I guess just one other question on the freecash flow.
You talked about our working capital should be a positive. You knowif I include that pension and medical and even if it's maybe a little bit of alower contribution and also this equity and earnings of affiliates, it lookslike working capitals going to have to be pretty positive to get you guys backto sort of free cash flow positive.
Is that, means numbers, it looks like it's going to be atleast $100 million positive, is that a number that you're comfortable with?
Chip McClure
From our perspective we are not looking at it to be thathigh a level. We are expecting some increases, some improvements as youconstantly work on working capital.
But we are not up at the range of roughly$100. But we do expect some positive improvements.
I would say maybe on theorder of one-third or half of that.
Frank Jarman - Goldman Sachs
Okay. And then just last question I had is.
It's on theincome statement. Yes, you guys did a good job of giving us a walk on theSG&A special items from a year ago to 4Q this year.
On the income statement, I noticed you called out $14million of other items, which are product disruptions, supplierreorganizations, environmental remediation, severance and other, is there anyway you could just give me a little bit more color there in terms of flushingout that $14 million number?
Chip McClure
I'm not sure I'm tracking with you on the 14. So I don'twant to respond to something I'm not quite sure of here.
Frank Jarman - Goldman Sachs
Okay. It's in the total EBITDA before special items, $49million reconciliation to the income from continuing operations of $23 million-- negative $23 million.
Yes, this other with the footnote.
Chip McClure
We are looking for that page.
Frank Jarman - Goldman Sachs
Towards the end of the press release.
Chip McClure
Yes. Okay.
I think I know which one you're referring to. It'sabout on the order of half of that is various tax stuff and on the order ofhalf of it was supplier bankruptcy stuff.
Frank Jarman - Goldman Sachs
Okay. And what was on the first half.
I'm sorry. Imisunderstood you.
Chip McClure
You're asking about the $14 on the page there?
Frank Jarman - Goldman Sachs
Yes.
Chip McClure
Okay. That includes product disruption, supplierreorganizations, environmental remediation, severance and other and I'm sayingthat included in that is about, half of that had to do with supplierreorganizations and disruptions caused by that supplier reorganization and theother half of it came from the other items there.
Frank Jarman - Goldman Sachs
Okay. Great.
That's all I had. Thanks, guys.
Chip McClure
All right. Thank you for everyone's questions.
We've reachedthe top of the hour and we welcome your calls to follow-up. And this is the endof the call.
You can disconnect at this time. Thank you.
Operator
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