ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
Participants
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
Jim Donlon – CFO, ArvinMeritor, Inc.
Ron Tadross – Security Analyst, Banc of America Securities
Jonathan Steinmetz – Security Analyst, Morgan Stanley
Rob Hinchliffe – Security Analyst, UBS
Joe Von Meister – Security Analyst, Jeffries & Company
Chet Luy – Security Analyst, Barclays Capital
Presentation
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
Thank you and good morning. What I’d obviously like to do in the next probably 30
minutes or so is kind of give you a quick overview of ArvinMeritor. I know many of you
were at our analyst day back in December, so I’ll kind of just give a brief version of that,
talk a little bit about kind of the future direction we’re going with the company, and then
as has been requested a number of times, to kind of give you a fairly detailed update on
where we are with Performance Plus, which is what we rolled out back in November.
You’ve seen this slide a number of times, but this essentially gives the background or
the breakout between our two different businesses. As you can see, our light vehicle is
about 53% of our business, and the commercial vehicle side is 47%. That really kind of
reflects the strong ’06 heavy truck market that we did see. And I think as you look at
this slide is with the Asian OEMs, we’ve really grown a lot in the last two years, but only
shows 6% in total. Two years ago was 4%. And the biggest growth that you really see in
that is the heavy truck side with the customer Hino. So I’ll talk a little later about a lot of
the growth opportunities we’ve had there.
From a geographic point of view, we’ve really started splitting this out in the last year,
year-and-a-half to kind of give you the view of where we’re looking at market-wise, and
they’re really the three main markets. And a little later I’ll talk in a little more detail about
our strategy about going to a one-third, one-third, one-third strategy on a geographic
basis.
But as you can see on the left side there with the North American market about 47% of
our business and Europe 38% and Asia Pacific, which we really define as either
business in Asia or business with the Asian OEMs in either North America or Europe,
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
you can see it’s at 15% on a consolidated basis. I know I’ve talked a number of times in
the past when you look at it on an unconsolidated basis, which really incorporates
primarily our joint venture with Sango, our Arvin Sango business, you can see it’s at
about 23% of our business as of 2006.
Last slide for last year is to kind of give you an update on kind of the commitments we
made this past year. If I go back to 2005, these were some of the commitments we
made. As you can see from a sales perspective, we were at the top end of the sales
there. Earnings per share, we exceeded that, and so we get our green checks there.
When I look at operating income, although we did come in at the top end of that range,
give ourselves a yellow because really we didn’t convert on the sales, the increased
sales. We talked a lot about this at the analyst day back in December. And as I go
through Performance Plus, obviously we’ll go into more detail as to some of the action
we’re doing kind of going forward to make sure we can really translate these sales
going forward to the bottom line.
Cash flow clearly came in at the top end, as did the balance sheet improvements. And I
will show you a slide a little later that really shows about the detail that Jim Donlon and
his team have done as far as really trying to improve the balance sheet, paying down
debt, and really strengthening ourselves as we get prepared to enter what I really view
as kind of an interesting time, both in the automotive and heavy truck side of our
business going forward. As I’ve often said, I think the need for a strong balance sheet is
extremely important at this time, so I give ourselves a green check mark for that.
Moving to the future of ArvinMeritor, if you look at this slide you can see on the y-axis,
it’s kind of a margin between below average and above average, and then the growth
low to high. One thing that kind of jumps out at you is our emissions business.
And as you know last year we brought in some new management team, which I’ll talk
about in a moment. But Buddy Wacaser who is heading up our emissions technology
business is really focusing on how we can improve the margins in both the light vehicle
emissions and the commercial vehicle emissions business going forward. We did
announce a fairly significant restructuring program at the last earnings call, about $50
million. Do expect that to take place over the next two to three years, with a one- to two-
year payback on the activities there. But clearly as we see this kind of going from light
vehicle emissions into commercial vehicle emissions, the need to be able to improve
our margins going forward.
Now I want you to look at axles, brakes, and trailers. The growth has not been real
significant and it’s one of the areas that we’re looking at for some significant growth
opportunities as we move into the emerging markets, so you can see that kind of move
that way. And then obviously, as we go forward, as we look at new opportunities to
come into this space in what I’ll refer to as intelligent products, we’ll bring that into the
matrix going forward.
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
From a vision for growth and profitability, as you can see here, first and foremost is we
want to be a global systems leader of products. We do truly have a global footprint, and
part of our strategy is to continue to grow that globally. Second is to make sure we’ve
got a scalable product portfolio. And what I often talk about there is moving from just
commodity products into intelligent products, which really from my perspective requires
additional capabilities in controls and electronics.
The growth opportunities we’re looking at are really in two areas: growing in Asia
Pacific – I showed you the slide earlier as to where we are right now and I’ll share in a
moment kind of where we need to go with that. And the other area we really accelerate
growth is in our commercial vehicle aftermarket business. And in both of these areas,
growth in Asian OEMs business or business in Asia or with commercial vehicle
aftermarket, our real objective is to look to triple sales over the next five years in those
areas. And then obviously the last bullet point says we’re looking for top quartile
performance among our peer companies.
One thing I do want to take a moment to talk about that came out at the analyst meeting
is what our view of an integrated systems leader is and what it is not. And let me start
by saying what it is not, because I know there’s been a lot of discussion back historically
about full service suppliers, outsourcing of the systems engineering on a broader sense
from the OEMs. And my view as we’re defining that as an integrated systems leader,
this is not what it is.
What I really view it as is taking our product portfolio, taking our product knowledge, and
whether it’s in developed markets or developing markets, you can see how we want to
take that forward, get into intelligent products going forward to be able to help in the
mature markets. And then, as importantly, as we get into developing markets, just take
a global perspective as far as products and manufacturing and move into those
products. So hopefully this has clarified some of the things we’ve talked about in the
past as far as what it is and what it is not.
Medium term goals: one-third, one-third, one-third. What I’ve talked about for a while is
we would like to move to the point of view that a third of our business is with Asian
OEMs or in Asia, a third of our business is here in North America, and a third of our
business is in Europe. As I said before, over the next five years we’re looking to triple
our sales in Asia, and we’re also looking to triple our aftermarket business, primarily
commercial vehicle aftermarket.
At the same time, we’re going to look at where we can grow business organically. But
as I said, for several years now, we’re not just looking at growth for growth’s sake.
We’re really looking at growth that’s going to provide the appropriate margins going
forward. As we’ve kind of put out there, we look at our long-term ROIC as being the 13
to 15% range.
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
To talk more specifically about the tripling of business with the Asian OEMs, as I often
say, we are looking to grow business in Asia with Asian OEMs there, or quite frankly,
transplant customers there. And we’re looking to first of all grow that to be able to
support them in the domestic markets, whether it’s China, India, or other parts of
Southeast Asia. Second, we’re then looking to be able to grow that on a regional basis
to be able to allow export of that throughout the region there. And then ultimately we’d
be able to grow that on a global basis for export on a global basis.
At the same time, the other thing we’re looking to do is to grow our transplant business
with Asian OEMs here in North America and in Europe. The most recent examples of
that were our Hyundai business that we launched down in Montgomery, Alabama about
a year ago, and then more recently the Kia business we talked about in Slovakia and
Eastern Europe to grow with them. And obviously, what we’re looking to do is to be a
partner with our Japanese, Korean, and Chinese customers on both a regional and
global basis.
Let me give you a case study of a thing that we’ve just recently launched that kind of
highlights this, and the customer is CIMC. And as you can see here, CIMC is a large
marine container company that decided back in 2002 to get into the trailer business,
and we became their axle supplier for that. And currently they are the number one trailer
manufacturer in China. And for the last three years we’ve been providing axles to them
out of our Frankfort, Kentucky plant, shipping it over to China for their incorporation into
the trailers for the use there, or for trailers they’re shipping back here. And as you can
see, they’re also targeted to become a global manufacturer of trailers, and they’re
probably going to be number one in that market.
About a year ago we started talking with them about how we can better support them in
that region for domestic support, regional exports, and global exports, and we just
recently launched a new plant in Wuxi, which is a couple of hours outside of Shanghai.
And as we speak, we’re launching that plant going forward. The specifics of that plant is
it will be a 300,000 square foot plant, and by the end of this year we’ll have 160
employees in there. When we’re fully ramped up in the trailer business we’ll have over
350 employees there. So it’s been a very successful launch to this point.
It’s been a very successful relationship with the customer. As you look you can see the
strategy to be able to grow with that. We’re already talking to other customers to use
this as another manufacturing base. We have a dozen plants in China already. This is
our newest one. It’s a wholly-owned plant of ours. And what we’re looking to do with that
is to find other products in the commercial vehicle space or the light vehicle space that
we can serve out of this plant going forward. And then obviously, longer term, we also
see some opportunities in the aftermarket side.
So this is kind of an example that I see kind of going forward of how we can grow at our
Asian OEMs to support them in the local markets for regional exports and global
exports. So in addition to looking to grow with Toyota, Honda, Hyundai, Kia and the
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
others here in North America and Europe, this is an example of us being able to grow
with our Chinese OEMs customers, both within the Chinese market and on a global
basis.
Let me now take the balance of the presentation to really kind of give you some more
detail on Performance Plus, which we announced at our earnings call back in November
and talked about in more detail at our analyst meeting in December. And to start with,
really when you look at it, I’m going to walk you through this in a fair amount of detail.
But first and foremost, the industry challenges that we face in our industry clearly are a
reason to change. As I said before, almost 50/50 between heavy truck and light vehicle.
I’ll share with you in a moment kind of our view of what’s happening in the industry in
2007 and going forward. But there’s no question when you look at our market space
and the customers we’re serving right now, to be able to survive and thrive in this
industry, you’ve got to have this kind of program in place.
Second, as I announced back in August of last year, we’ve got a new management
team in place. We’ve got the alignment in place, and I really view them as the agents of
change, and I’ll walk through some of that. Having a strategy going forward to make
sure that we’re clear on what our vision is going forward and how we’re going to get
there. But as importantly, is to make sure you’ve got some tactical successes that are
taking place even this year to make sure you’ve got the momentum going forward. And
as I mentioned earlier, is making sure, especially in the what I refer to as times of
choppy waters, that you’ve got the strong balance sheet and the resources to make
sure you can really put that in place.
So let me start with the industry overview. And the one I know I’ve talked to a number of
you out there before this morning’s presentation is the ’07 downturn. It’s here, it’s
coming, and I’ll talk in a little bit more detail as to what we see as far as volumes that
way, but clearly being driven by the new emissions regulations that went into effect this
month.
Light vehicle systems, and as you know last year with the new organizations change I
split light vehicle systems and emissions technology to make sure we can really focus
on both businesses. Both of those businesses have many of the same type of
challenges and some have unique challenges. If I look at the light vehicle side,
obviously some of our customers here in North America particular are suffering
additional market share erosion. And we need to again be able to support those
customers. But as I showed earlier with the customer diversification, we are very well
diversified, we are not dependent on just one customer. So first of all, I will tell you they
are important customers to us, but at the same token, we are not solely dependent on
them and are looking to diversify that way. Margins within the industry are at not what
they need to be as far as appropriate levels. And then obviously when you look at it on a
global basis, there’s fairly uneven regional growth, some areas high growth, some areas
flat or declining growth.
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
Emissions Technologies is essentially the same thing, with one additional change,
which is commodity cost, and primarily stainless steel. We saw significant ramp-up in
stainless steel cost this past year. We’ve talked a lot about that on several of our
earnings calls. It’s now essentially plateaued, but the important thing is it’s not coming
back down right now. So again, some additional challenges that way.
When I look at Class 8 volumes – and we’ve got this broken down between our fiscal
year and calendar year, and then broken down by quarter – as you can see with our
fiscal year, we are anticipating volumes to be at about 235,000 vehicles. If you drop
down to the bottom you can see on a calendar year basis, most people are predicting it
about 200,000 vehicles for the year, which is down 40-plus percent from 2006. But as
importantly within the years, I think, is to look at it on a quarter basis. And when you
look at it on a quarterly basis, first quarter, which is now completed for us, we saw fairly,
continued fairly strong buy-ahead through the first month, month-and-a-half. It started
getting a little soft in December, but nonetheless we still saw a fairly strong quarter one.
We are seeing some of that continue into quarter two. That’s why we showed a blue box
at 55 and the dotted box at 65, so that actually because there was kind of this build-
ahead of some of the ’06 engines that are still being put into vehicles, we do anticipate
there will still be some fairly strong production volumes to support sales orders from ’06
into the first month or two of this year, and then really start tailing off in the March, April
timeframe. So then you see that flip-flop. That then says in Q3, which is our April, May
June, it drops from 45 down to the 35, so a steeper drop that way. And again, it’s just a
shift quarter to quarter. And then a slight uptick in Q4, but really not starting to pick up
until the second quarter of our fiscal year ’08. So we are anticipating this drop, do see it
coming in the April timeframe, March/April timeframe, and do see it continuing for a
couple of quarters, and then picking up from there.
The other thing I would like to point out with this slide also though is, when you look at
fiscal year ’09, you see a little bit of a different phenomenon. And actually we do see
2008 coming back to the 250,000 range, which is kind of normal volumes for the heavy
truck, and then picking up in 2009 because there is another anticipation of the next
technology requirement for emissions in 2010. So what we’ve got with the dotted box on
the top of that is the anticipation of an additional buy-ahead in the 2009 timeframe
before 2010. So that’s kind of what we see with that, and do anticipate starting to see
the volumes tailing off significantly as we get to the end of this quarter.
This just reflects the light vehicle kind of growth patterns from 2006 to 2012. And bottom
line, when you look at it, you can certainly see that in Europe and The United States,
sales are essentially going to be flat over the next five to six years. And we’ll continue to
see market share shift between customers within that. And the real growth opportunities
are in Eastern Europe and Asia Pacific, which is where we’re spending a lot of our time
focusing it going forward.
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
If I then bring it very specific to this quarter, our quarter one which was just completed,
just to kind of give you some comparisons, a year ago for Q1 ’06 our earnings per share
before special items was 17 cents. If I look at Q1 of ’07, just to kind of give you some
red/green things that have affected that, obviously we had factored in that both for the
quarter and for the year significant production cuts with primarily the domestic Big
Three, which we did indeed see this past quarter. On the flip side, we did see, as I said
before, continued strength, at least for the first month, month-and-a-half on the heavy
truck side as they continued with the buy-ahead going forward with that.
But two other things that we also did see in the first quarter is the fact that we did have
some significant cost tied to a new axle launch that we did in Europe, an ERP launch, to
the tune of about $10 to $12 million. Now that is something that is not recurring, but
nonetheless did occur in the first quarter. And then a second thing that was quite frankly
outside our control is the fact that the Volkswagen plant in Brussels actually went on a
work stoppage that turned into a strike in late November, and has continued through
today, quite frankly, and they’re starting to ramp back up again. But as we look at our
first quarter, the impact of that strike at our customers was about $5 million for the
quarter. And we’re in discussion with Volkswagen right now, and I know they’re trying to
start to ramp back up on that. But nonetheless, these were some impacts affecting our
first quarter.
But if I then jump ahead, and this is a slide we used back in December to kind of set the
groundwork, if you will, for Performance Plus, this was then looking at our EBITDA for
the next three years. I will tell you this is as of December 7th. This does not incorporate
all the impacts of that axle launch that I talked about, and also the strike at the
Volkswagen Brussels plant. But as you can see going forward, certainly not stellar
performance, certainly not acceptable performance, and certainly a main driver for why
we wanted to go forward with Performance Plus.
Moving to the agents of change, I introduced last September a new leadership team,
both on the HR and the finance side with Rob Ostrov and Jay Craig, and then with
Buddy, Phil, and Carsten, who really drive the business going forward. At the November
earnings call then we talked about the Performance Plus, and I will go in a moment in a
little bit more detail to the six pillars of this, but on this slide what I wanted to highlight is
the fact that this is a top-to-bottom type effort throughout the company. And as
importantly, it’s being driven by the officers of the company. A number of those faces
you saw in the previous slide are the ones driving at the steering committee level, and
each of the individual pillars of the Performance Plus.
In addition, when you look at Performance Plus, there’s really two parts of it. This is not
just a cost reduction program. We are into the third year of our restructuring that we
announced two years ago, and that continues to be on track, on budget, and moving
forward with that. As you look at materials, manufacturing, overhead, there’s no
question that is additional cost reduction as I’ll talk about in more detail. But as
importantly, the other three pillars of ER&D, product growth, and aftermarket are growth
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
drivers, and we’re looking to be able to do both of those kind of going forward. So as we
look at that we have the new leaders in place, we have the alignment going forward.
We’ve got top-to-bottom commitment on that. And this is what we’re going to use to
drive the organization going forward.
So let me now move to in more detail to give you a view of all six of these pillars of
performance. And I’ll start with materials. And the materials objective is to look at all
parts of our materials, both direct materials and indirect materials, and find more cost-
effective ways to do that. And primarily what that means in the direct material in
particular is to look to move to more leading cost competitive country sourcing. And the
good news is we’ve been in a lot of these countries for a lot of years, whether it’s in
Mexico, Brazil, Eastern Europe, India, China. We’re not new in those markets, and what
we’ve got to do is accelerate moving product, those products that make sense going
forward into those regions to make sure we can get the most cost effective material
sourcing, and we’re starting to do some of that.
Manufacturing, continuing the restructuring program we started a couple of years ago to
continue to right size our manufacturing footprint. As importantly to look at ways that we
can help to optimize utilization of our assets going forward and our vision is to move
towards what I refer to as an ArvinMeritor production system, a worldwide production
system going forward in all parts of our cost between labor, material, overhead, etc.
Overhead, we’re looking in all the layers of management, we’re looking at span of
control. I’ll share with you in a moment some activities we’ve done with shared services
that a lot of people are doing. We’ve had some good success with that going forward.
But again, to look at the overall overhead of the company going forward to help drive
that.
On the growth side, ER&D, again, like I talked about an ArvinMeritor production system,
want to have an ArvinMeritor product development system going forward. And again,
one of the things we want to look at for that is to come out of here over the next few
years and get five got to have type products. Some really products that our customers
really want on a go forward basis, really start investing in some of the technology, the
innovation, and really get some intelligent products going forward.
Product growth will be driven by this technology, innovation, and also globalization. I
talked earlier about tripling sales in Asia, tripling sales in the aftermarket. As you look at
these last two pillars, we’re really looking for growth opportunities in both of these, as
we grow on a global basis primarily in Asia Pacific, but not solely in Asia Pacific
because I do see growth opportunities both here in the United States and western
Europe, and also growth on the aftermarket side.
To give you some tactical things as to things that have happened already, these are
some examples of actions that are already underway. I’ll share with you on a
subsequent slide some of the category crossovers we’re already seeing and some of
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
the shared services. When I look at reengineering for material savings, we’ve already
started taking some of the products – we actually demonstrated a product with an axle
yoke that actually we were able to take several pounds out of the yoke and it’s several
million dollars in savings just by redesigning it, lightening it, making sure we can do the
right analysis going forward to make sure that we’re optimizing material utilization and
the function of the product going forward.
Rationalizing of our engineering footprint. We often talk about that on the manufacturing
side. We want to do the same thing on the engineering side to make sure that we’ve got
all the various engineering resources around the world kind of focused, a common
product development system kind of going forward.
Remanufacturing, a real growth opportunity I believe that’s going to help us kind of
going forward. We’re beginning to staff it up. We have a plant that has been very
successful with that here in North America and see huge opportunities in that, primarily
in the commercial vehicle space, but a big area of opportunity for us kind of going
forward.
And finally the ET restructuring, which is actually not part of Performance Plus but has
been kept separate. We did take the goodwill impairment charge back in November,
and I did announce the restructuring we’re going through with that, and we’ll continue to
go forward with that. And Buddy and his team are helping to drive that going forward.
Let me talk a little bit about the category crossover and just use a couple of examples.
The solid lined ones refer to steel wheels, which we have been very successful with,
primarily because of our manufacturing footprint, which is in leading cost competitive
countries already, being in Mexico and Brazil. But also because of the fact that we have
invested in product technology to help differentiate the product. So that product has
been very successful for us in the light vehicle space. And what we’re now moving to do
is to move that into the medium- and heavy-duty space. We do have a new order that
will be coming out of Mexico for 19½-inch wheels that we will be providing for class five
to seven trucks. And I would envision very quickly to be able to move up to 22½-inch
wheels to be able to do that across the entire spectrum from light vehicle to heavy
vehicles kind of going forward. So that’s one that clearly helped from a crossover point
of view.
The other one we talk about a lot is emission. We started with emissions technologies a
number of years ago. Last year we launched our commercial vehicles emissions
business in Europe. And as we speak, we’re launching that here in North America.
We’ve had a very good launch with that, and that’s another example of category
crossover.
The other two with dotted lines are then saying, “Okay, are there things we can do from
a drive axle point of view in the commercial vehicle side to the light vehicle side?” We
won’t rule it out. If I look at aperture type of products going from light vehicle to heavy
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
vehicle, even though there are different volume considerations, won’t rule it out. And as
you can see at the bottom, what we’re really driving forward toward is more of a
boundary-less organization to be able to cross these products, make them scalable
throughout the product range to meet our customer’s needs.
Shared services, we did launch a program this past year with HTL. You can see it was a
fairly small embryonic stage on that with 20 positions that moved to India. It was very
successful. You can see the activities we’re going to continue to do. And again,
because we have a strong presence with a number of plants already in India, some that
go back to the mid-‘80s and some to the early-‘60s, we have been in India for a long
period of time including in Chennai. So we’ve been able to grow that going forward and
do see being able to ramp it up on a fairly significant basis in the area of receivables,
payrolls, and benefits going forward.
And then finally, we look at new customers. This is in addition to the customers that
we’ve had for a number of years, the Nissans, the Toyotas of the world. These are just
new customers in the last two years we’ve kind of brought on, whether it’s Hino on the
heavy truck side or CIMC that I talked about before, or the Korean or Chinese
customers that as we look to grow with them, either here in North America, Europe, or
in China, again, a recognition of our focus on growing with our Asian OEMs going
forward and see some great success with that.
And then finally, moving to the balance sheet, and this is a slide that I’ve shared with
you before, and I just want to highlight the upper left chart and the lower right chart.
When you look at the upper left chart, this past year we reduced our net debt by over
$500 million. And as importantly in the last three years, we’ve cut our net debt almost in
half. And then if you go down to the lower right hand side of that, in the last two years
our term debt that was due in the next five years has been reduced by over 90%. So
from almost a billion dollars of debt that was due over the next couple of years, we now
down to $93 million dollars of debt, and we don’t have any significant debt maturing till
2012 and ‘16 and ‘26.
So we’ve talked about the last year or two, in this industry in particular, very strong
feeling and a compliment to Jim and his team, is we’ve had to focus on making sure that
we can pay down our debt, have a strong balance sheet, and to make sure that, one,
we can weather the downturn of the 2007 truck market and, two, to continue to weather
the choppy waters in the automotive industry, primarily in the domestic area, and at the
same time, give us the resources kind of going forward to make sure we can implement
the various programs to both focus the company and to grow the company going
forward.
And then very quickly, the divestitures, which have been a big part of the cash we’ve
generated from that, primarily in the light vehicle aftermarket. And essentially you can
say by and large that has been completed. There are a couple that are in process. And
we’ve also got the off highway brakes. And as I mentioned back in November, MSSC
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ArvinMeritor, Inc. Presentation at the
2007 Auto Analysts of New York Conference
8:45 a.m., Wednesday, January 10, 2007
suspension joint venture is currently under review. But nonetheless, this has been a
major source of revenue for us and has certainly helped us kind of going forward to be
able to generate the cash to help strengthen the balance sheet.
So to kind of wrap up as you look at this within Performance Plus when we rolled it out
in November, it was no question that as we go forward in ’07 the challenge that exists
within our industries are there, and to be able to survive and thrive in that we need to
make sure we’ve got the program in place. I believe we’ve got the program in place with
Performance Plus. Part of it is a continuation of what we announced two years ago as
far as continuing to refocus the business. Part of it is also kind of going the next days to
find ways to grow the business with new got to have products, intelligent products
growing globally and growing in the aftermarket business.
We now have a management team in place that’s aligned. And I will tell you, the
excitement within our company as far as this Performance Plus as far as taking our best
and brightest to drive it has been very successful that way. The strategy is there to drive
that, I think the actions that are underway have certainly provided the momentum. As I
said before, you also need to make sure you’ve got the balance sheet to support that.
And this is my last slide before I open to Q&A, is given that EBITDA projection that we
had that I showed earlier in the presentation, what I’ve now done is overlay on top of
that what we view as kind of the improvements on top of what we had in our base plan
that I believe will result from this Performance Plus program. And essentially it’s $75
million in 2008, and $150 million in 2009. Really I’m not adding in 2007 because this is
the year beginning the investment and one starts to see the return going forward in
2008 and 2009. So my intent kind of going forward is to keep you advised of that as we
go through our quarterly earnings calls. I guess bottom line is more to come. And at this
point, what I’d like to do is open it up to any questions you may have. I’ll take the
question over here.
Question & Answer Session
Ron Tadross – Security Analyst, Banc of America Securities
Thanks, Chip. Ron Tadross from Banc of America. Could you just talk to us a little bit
about the Delphi and Visteon business that you’re being asked to quote on, and if you’re
being asked to quote on it I guess specially in the emissions area?
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
Yeah, and we have been asked to quote on some of that business. And again, there’s
been some of that business that we’ve said no to, some of that business we’ve quoted
on, some of that we have been awarded. But again, as I said, we have with Jim a
process as far as putting in product line profitability, we have looked at some of that,
some we’ve quoted on, some quite frankly we’ve passed on. And that business that we
have been awarded is business that has the kind of margins that will meet our kind of
financial thresholds going forward.
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So there is some of that. I can’t really talk in detail about it today, but can certainly tell
you that we have been asked to quote on some of that, and would envision in the future
we would have some of that, but really would be doing that if the margins are
appropriate to us.
Ron Tadross – Security Analyst, Banc of America Securities
Is it a significant opportunity?
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
The question is, “Is it a significant opportunity?” I believe volume-wise the answer is
yes. As you look at it, again from a margin perspective, we just want to make sure it’s
got the appropriate margins going forward. So yes, it is an opportunity. I’ll take the
question there.
Jonathan Steinmetz – Security Analyst, Morgan Stanley
Thanks. Jonathan Steinmetz with Morgan Stanley. I just wanted to follow up on a
comment on slide 20 on the European axle launch. I just want to make sure I
understand correctly. Is that 10 million incremental launch cost greater than what you
said at the analyst day about a month ago or so? And if I’m correct on that, I’m just
wondering logistically what happened there, if you could just describe a little bit about
what led to that cost?
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
Yeah. And a good portion of that is incremental through that. And essentially what
happened with that is there were two things going on at the time. We were going
through a launch and we anticipate some of the launch cost, so some of it was a
product launch and some of it quite frankly was an ERP or our new IT system launch
going forward with that. And some of that was unanticipated. So I think part of it was
anticipated, included in what we talked about last month and some was not. And it was
both on the product launch side and the IT side. I don’t know if that’s the answer to your
question or not Jonathan.
Jonathan Steinmetz – Security Analyst, Morgan Stanley
I’m sorry, on the ERP side, can you just give a little detail on what exactly happened,
what did that lead to or was it just axles putting in systems cost? Or something that was
the result of the ERP system in terms of having more procurement costs or something
like that?
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
Yeah. And actually what it was is this is a, the ERP system right now, part of what we’re
moving toward is getting down to common ERP systems. And if you look at our history,
because we’ve been involved in a number of different either acquisitions, mergers,
ventures or whatever, we have a number of ERP systems. And part of what we’re trying
to do is move to a common ERP system. So quite frankly, some of it was the cost of
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8:45 a.m., Wednesday, January 10, 2007
implementing it. I will also tell you, some of it was the cost of not implementing it as
efficiently as I would have liked to have done with that. So I think it was a combination
too. The cost of implementing it, we knew what that was. But if I look at some of the, if
you will, the implementation effectiveness and how quickly we were able to implement
it, it didn’t occur as quickly as I would have liked to have had it, and that’s part of what
we’re reflecting in the cost there.
Jonathan Steinmetz – Security Analyst, Morgan Stanley
Okay. Thank you.
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
Yeah. I think there’s a question. Oh, I’m sorry. Go ahead.
Rob Hinchliffe – Security Analyst, UBS
Hi. Good morning. Rob Hinchliffe at UBS. I’m curious about the full-year guidance that
you had. You talked about it looks like $15 million in new cost in the first quarter. So
how much can Performance Plus help you out in the second half? And at what point or
how much cushion is in your full year guidance right now so that you’re not talking about
that in this presentation?
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
Yeah, right. And what I’d like to do on that, Rob, is kind of somewhat defer to the
earnings call, because right now we’re going through that, and that’s exactly the
question I’m asking internally is how much of that can we offset kind of going forward to
kind of understand that. And my view would be I’d be able to give you more detail on
that when we get to the earnings call at the end of the month.
And really what I’m looking at is exactly what you’re saying is saying okay, we do have
a number of actions already underway with Performance Plus. I’m very pleased with the
performance to this point on Performance Plus. The question I’m challenging the team
right now is are there enough offsets in there kind of going forward to make sure that
we’re still comfortable with that for the year, and we’ll plan to come back to you at the
end of the month on that.
Rob Hinchliffe – Security Analyst, UBS
Thanks.
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
Actually I’m not ignoring everybody over here, but there’s a question over here then.
Yeah.
Joe Von Meister – Security Analyst, Jeffries & Company
I have a mic.
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
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ArvinMeritor, Inc. Presentation at the
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Okay. You have the podium then.
Joe Von Meister – Security Analyst, Jeffries & Company
This is Joe Von Meister from Jeffries & Company. Can you estimate for us the revenue
impact from the Class 8 truck downturn expected in 2007? And then what do you expect
the contribution margin on that downturn to be? And that would be net of new business
that you’ve got coming on.
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
What I may do is actually ask Jim if he could kind of address that on both parts.
Jim Donlon – CFO, ArvinMeritor, Inc.
Sure. I’d be happy to. Overall, our business for the North American side for our axle
side is about $900 million. And as we are projecting for our fiscal year, you saw on the
chart, about a 1/3 reduction on our fiscal year effect. So that would be about $300
million of revenue impact from the downturn.
We generally use a contribution margin that’s on about 15 to 20%, somewhere in that
range. So we’ve been looking at the operating profit effect of that downturn would be
somewhere on the order of $45 to $60 million, which we have been for quite some
period of time working on in other parts of the business that can come in and
compensate for that downshift. And those four pillars are our aftermarket business, our
specialty business, our trailers business, and this is a year where our heavy truck
emission business is changing from being a cost start up to being a profitable running
business. So we have four areas that are compensating for the downturn on the brakes
and the axle business in North America.
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
I’m told there’s time for one more question. We’ll just take a question over there.
Chet Luy – Security Analyst, Barclays Capital
Yeah, good morning. Chet Luy from Barclays Capital. How should we look at free cash
flow for fiscal ’07 net of all the restructuring cash outlay?
Chip McClure – Chairman, CEO and President, ArvinMeritor, Inc.
Jim, if I could defer to you on that.
Jim Donlon – CFO, ArvinMeritor, Inc.
We have our projection. This last year we had a good year of free cash flow. It was
about $280 million positive free cash flow for the year. Some of that brought about by
operating earnings, some of that brought about by working capital improvements, and
some of that brought about by a program that we have in place that is the sale of our
receivables in the European market. These are true sale of receivables and factoring,
not ones like here, securitization in the U.S.
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ArvinMeritor, Inc. Presentation at the
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So three elements of it. For this next year, we see that the free cash flow forecast
generally on the range of about $100 million or so for the year, and that’s again made
up of the three pieces. We will have some boost to the working capital by the downturn
that occurs in the business, and we will have our improvement program for operations
at about a flat level for the amount of that we would do of the sale of our receivables in
Europe. So about 100 for this next year is roughly our order of magnitude. It is quite
uneven by quarter, so it does not just flow evenly through the quarters, but that’s the
rough estimate for the full year.
Chet Luy – Security Analyst, Barclays Capital
Yeah. What role would the restructuring cash outlays play in that $100 million?
Jim Donlon – CFO, ArvinMeritor, Inc.
For this year, there’s a relatively small amount. We are finishing on a program that we
had started about two years ago and there’s a small amount of cash that is going out for
that, I’d say on the order of 20 or so for the old program. And for the new program that
was announced for the mission technologies, there’s a small amount of this year, I’d say
on the order of $10 to $15 million in this year’s numbers.
END
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