1. FINAL TRANSCRIPT ARM - ArvinMeritor, Inc. LVS Spin-Off
Update Event Date/Time: May. 28. 2008 / 8:00AM ET
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2. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM - ArvinMeritor,
Inc. LVS Spin-Off Update CORPORATE PARTICIPANTS Terry Huch
ArvinMeritor - Director of IR Jay Craig ArvinMeritor - CFO Jim
Donlon ArvinMeritor - Designated CFO for Arvin Innovation Mary
Lehmann ArvinMeritor - SVP, Strategic Initiatives, and Treasurer
CONFERENCE CALL PARTICIPANTS John Murphy Merrill Lynch - Analyst
Chester Luy Barclays Capital - Analyst Jeff Bennett Dow Jones -
Media Brian Johnson Lehman Brothers - Analyst Douglas Karson Banc
of America - Analyst Ryan Beene Crain's Detroit Business - Media
Himanshu Patel JPMorgan - Analyst Sarah Thompson Lehman Brothers -
Analyst Jon Leisinger Sankaty Advisors - Analyst PRESENTATION
Operator Good day, ladies and gentlemen, and welcome to the
ArvinMeritor LVS spin-off update conference call. My name is Lacey
and I'll be your coordinator for today. At this time all
participants are in a listen-only mode. We will be facilitating a
question-and-answer session towards the end of this conference.
(OPERATOR INSTRUCTIONS). As a reminder, this conference is being
recorded for replay purposes. I would now like to turn the
presentation over to your host for today's call, Mr. Terry Huch,
Director of Investor Relations. Please proceed. Terry Huch -
ArvinMeritor - Director of IR Thank you, Lacey. Good morning,
everyone, and welcome to the Light Vehicle Systems spin-off update
call. We expect this call to last about 45 minutes. On the call
today we have Jay Craig, our CFO; Jim Donlon, the designated CFO
for Arvin Innovation; and Mary Lehmann, Senior Vice President,
Strategic Initiatives, and Treasurer. www.streetevents.com Contact
Us 1 2008 Thomson Financial. Republished with permission. No part
of this publication may be reproduced or transmitted in any form or
by any means without the prior written consent of Thomson
Financial.
3. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM - ArvinMeritor,
Inc. LVS Spin-Off Update The slides accompanying today's call are
available at www.ArvinMeritor.com. We'll refer to the slides in our
discussion this morning. The content of this conference call which
we're recording is the property of ArvinMeritor Inc., is protected
by U.S. and international copyright law, and may not be rebroadcast
without the express written consent of ArvinMeritor. We consider
your continued participation to be your consent to our recording.
Our discussion may contain forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. Let me refer
you to slide 2 for a more complete disclosure of the risks that
could affect our results. To the extent we refer to any non-GAAP
measures in our call, you'll find the reconciliation to GAAP in the
slides on our website. Now I'd like to turn the call over to Jay.
Jay Craig - ArvinMeritor - CFO Thank you, Terry. As many of you
know, we filed a Form 10 for Arvin Innovation this morning. The
Form 10 process is an ongoing one, so we expect there to be
amendments to the document we filed today until it becomes
effective. But today's filing is an important step in the process.
We believe it communicates how we can execute the spin-off in a way
that will give our shareholders two strong companies that are both
positioned to succeed and have the capital resources required to
execute their strategies. Beginning with the slide 4, I'm going to
start today by briefly reminding everyone of the motivation for the
spin-off and how it will be executed. This management team has been
working over several years to optimize the Company's business
structure. The spin-off of our Light Vehicle Systems business is
another major step forward in that transformation. In addition to
creating a new company with the focus, clarity and investing
priorities to be a leader in body and chassis systems for light
vehicles, the spin-off also positions the remaining company as a
worldwide leader in commercial vehicle drivetrain and braking
systems. We believe this transaction will be helpful in our
customer relationships and will allow the full value of both
businesses to be reflected in their respective share prices. Slide
5 shows the previously announced terms of the spin-off. We expect
to dividend all the shares of Arvin Innovation to existing
shareholders of ArvinMeritor on the spin-off date, which we expect
to occur within the next 12 months. Jim and Mary will now take you
through the positioning of Arvin Innovation and the current plan
for its capital structure. I will then come back to discuss our
outlook for the year before we open it up for questions. Jim? Jim
Donlon - ArvinMeritor - Designated CFO for Arvin Innovation Thank
you, Jay. I've been involved in decision-making for LVS over the
three years as CFO of ArvinMeritor. Now I've had three weeks to
drill further into various aspects of the business at LVS in more
detail as a member of its leadership team. What I have found over
that time makes me even more excited about the future for Arvin
Innovation. We showed slide 6 on May 6th, when we announced the
spin-off. The intention was to articulate the reasons you and other
investors should be enthusiastic about becoming a shareholder in
Arvin Innovation. This slide says that over 60% of our light
vehicle value added revenues were outside of North America in 2007.
For the first half of this year I'll tell you that that number is
68% outside of North America and 78% outside of the United States.
And many of the new programs on the next page are concentrated in
high-growth areas of the world which will continue to improve our
geographic mix. This slide also mentions LVS Global Manufacturing
which is expanding low-cost country footprint. With the
restructuring actions that are already underway our roofs business
and our wheels business will have 100% of their manufacturing
capacity in low-cost countries including China, India, Mexico,
Brazil and Slovakia. Our doors business isn't far behind and we're
making strides in other chassis products as well with new launches
in China in particular. www.streetevents.com Contact Us 2 2008
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4. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM - ArvinMeritor,
Inc. LVS Spin-Off Update The management team at LVS is also a
strength. Over the last several weeks I've begun working with the
directors and the managers and supervisors deeper in the
organization and I'll tell you that Phil has done a very good job
of staffing the functional areas and business units within LVS with
strong directors and managers to execute the vision. I've been
particularly impressed with the restructuring efforts that our
manufacturing executives are leading and the way the sales
leadership team has been able to organize for profitable growth.
Slide 7 shows business the existing team has been able to win in
order to grow profitably. Based on our current industry assumptions
our revenue forecast grows by 7 to 10% per year over the next two
years and that's assuming today's currency exchange rates. Most of
the growth comes from new program launches and 95% of those
programs have already been awarded to us. This is a faster launch
cadence than LVS has had over the last two years. One of the key
business drivers that Chip and I focused on from a corporate
perspective over the last three years has been avoiding growth that
is not accompanied by acceptable returns. I think that took some
reorientation in the way we do business and it probably has had a
lot to do with the slower growth rate in the recent history. As
Phil has built his team over the last year and a half they have
found ways to win new business at our targeted return on investment
capital. And the last bullet on the slide points out some of the
upcoming launches -- those back-fill outgoing programs where our
margins have been poor. So we not only achieved our growth
initiative, but we also improved program mix. Slide 8 shows Arvin
Innovation's scale in the context of some comparable companies. The
key takeaway is that the Company will have sufficient scale to
compete effectively. As you look to the right of Arvin Innovation's
position two other things become apparent. The first is that the
level of scale needed to compete effectively is a function of how
tightly a supplier is able to define its market segments. The
second point is that companies with unique value added products are
better positioned to compete regardless of their size. The LVS team
has emphasized more intelligent engineered systems in its product
creation efforts over the last two years and you'll start to see
more of those products contributing to financial performance as we
go forward. The next to slide, slide 9, shows our key competitors
by product group. If you just counted the number of boxes and
number of names in each box you would conclude that our suspension
systems and modules face the most competitive pressure-- and I
think you'd be right. That is an area where it is particularly
important to differentiate ourselves through smarter products and
that is a key area of focus for us. So now that I've given you a
little more background on Arvin Innovation's business let me take
you through some of the information we're providing in the Form 10
filing. On slide 10 we've laid out the adjustments to EBITDA shown
in the Form 10 including a GAAP adjustment required to report LVS
on a stand-alone basis and preliminary pro forma adjustments. For
ease of comparison to our prior presentations we've started with
LVS segment EBITDA before special items for the first half of our
fiscal year. If you look at our charts for the first and second
quarters you will see segment results for LVS of $12 million and
$24 million respectively, for a total of $36 million before special
items. This corresponded to total segment EBITDA of $21 million
including restructuring charge of a negative $15 million.
Throughout the Form 10 you see segment EBITDA of $20 million for
LVS for the first half which you can see in the third column of
this chart. The $1 million difference versus the GAAP segment
results we have shown previously arises because of some pension and
minority interest expense that was previously carried in our
corporate expenses. www.streetevents.com Contact Us 3 2008 Thomson
Financial. Republished with permission. No part of this publication
may be reproduced or transmitted in any form or by any means
without the prior written consent of Thomson Financial.
5. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM - ArvinMeritor,
Inc. LVS Spin-Off Update In the fourth column we adjust that number
for the new conditions for Arvin Innovation. First, the new company
will no longer be serviced by ArvinMeritor's corporate staff, so we
back out the central costs that have been allocated to LVS in the
past. However, Arvin Innovation will need to perform most of those
functions for itself in the future, so we've added back our
estimate of those stand-alone costs. The net of the two is an
improvement of $3 million reflecting our plans to run a very lean
corporate staff at the new company. Finally, we adjust for costs
related to pension, OPEB and other liabilities that will be
transferred to Arvin Innovation in conjunction with the spin. Mary
will discuss these liabilities in the context of the capitalization
of both companies in a few minutes. The net of the adjustments says
that if LVS had been a stand-alone company with the same
liabilities its adjusted EBITDA for the first half of the year
would have been lower by $7 million. However, interest expense
would also have been lower than a proportional share of
ArvinMeritor's because some of the transferred liabilities can be
viewed as a substitute for debt financing. Slide 11 does not
include the pro forma adjustments I just took you through. It is a
slide we included in the second-quarter earnings call to make it
easier to see the progress LVS has been making in its underlying
business. Some of the progress has been hidden by one-timers such
as settlements of long-standing disputes. After netting out items
like this the ongoing EBITDA performance of LVS segment improved by
$9 million in the first half of 2008 compared to the first half of
2007. What I'd like to do now is turn the call over to Mary to
review the capital structure that we have outlined in the Form 10.
Mary Lehmann - ArvinMeritor - SVP, Strategic Initiatives, and
Treasurer Thank you, Jim. When we announced the spin-off on May 6th
we told you that we would lay out a responsible capital structure
that would not overburden one company relative to the other. I
believe that we have accomplished that. As slide 12 shows, our
capital plan calls for Arvin Innovation to launch with $100 million
of cash representing $50 million to fund the day-to-day operations
of the Company and $50 million to cover certain near-term current
liabilities that will be present at the time of the spin. Our
funding plan includes $200 million to $250 million of borrowing
arrangements at launch of which we expect $125 million to be drawn.
If we did the spin today those borrowing arrangements probably
would predominantly take the form of asset based bank facilities;
their final form will depend on conditions in the credit markets at
the time of the spin. With $125 million of debt at launch Arvin
Innovation will have only $25 million of net debt and a manageable
level of interest expense. Because this will be a
disproportionately low debt position compared to ArvinMeritor,
Arvin Innovation will also take on certain liabilities that are not
directly related to its ongoing business. I will walk-through these
in detail on the next slide. The end result will be a net unfunded
position of pension and retiree healthcare of $209 million and an
additional $32 million of other net liabilities transferred from
the parent. When we consider that ArvinMeritor today has almost
$600 million of unfunded retiree healthcare liability, in addition
to some underfunding of its pension obligations, the burden on
Arvin Innovation's looks reasonable to us. And when its debt is
funded, Arvin Innovation will be in a position to make a cash
payment back to ArvinMeritor which will help keep leverage down for
the remaining company. In total we expect all these actions to
result in a comparable credit profile for the two companies. Slide
13 provides details on the net liabilities that will be transferred
to Arvin Innovation. If you would like to look at the assets and
liabilities separately, those are shown in the appendix on slide
18. Before the spin LVS had $152 million of unfunded pension and
retiree healthcare liabilities; this is based on the last
measurement date which was June 30, 2007. We will have another
measurement at June 30, 2008 and these estimates will need to be
updated accordingly. www.streetevents.com Contact Us 4 2008 Thomson
Financial. Republished with permission. No part of this publication
may be reproduced or transmitted in any form or by any means
without the prior written consent of Thomson Financial.
6. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM - ArvinMeritor,
Inc. LVS Spin-Off Update As part of the spin ArvinMeritor will
transfer $57 million of net pension and OPEB liabilities to Arvin
Innovation. These relate primarily to retirees that do not fit in
either LVS or CVS today primarily as a result of prior
dispositions. Arvin Innovation will also assume responsibility for
the asbestos liability resulting in the transfer of $50 million in
liabilities and a corresponding $44 million in assets. In addition,
$14 million of environmental liabilities and $12 million of net
liability for other employee matters will be transferred. The right
hand column shows the effect that all of this will have on the
income statement, which is consistent with the EBITDA walk that Jim
provided. The Form 10 pro forma financial information is based on
this plan, which we believe is viable and robust to changes in
market conditions. If the financial markets move in a direction
that increases the options available to us we may consider
launching Arvin Innovation with more debt and fewer transferred
liabilities than what you see reflected here. But even with no
improvement in the financial markets we believe we have a plan that
accomplishes everything we set out to do. And as the next slide,
which is slide 14, shows, we think it accomplishes those things
without raising leverage at ArvinMeritor above today's level. As of
March 31st, ArvinMeritor had debt of $1.3 billion and trailing
12-month EBITDA of $318 million for a simple debt to EBITDA ratio
of 4.1 times. Of course we have a significant amount of cash on the
balance sheet as well, but I will leave that out of the analysis.
Debt will be reduced as a result of the spin on ArvinMeritor. We
expect a cash payment from Arvin Innovation which we plan to use
for that purpose. As you know, we cannot pay down our public bonds
maturing after 2011 without a credit line waiver, but we can reduce
short-term borrowings, most notably in the form of onbalance sheet
securitization. We also have a maturity of $77 million in February
of next year that the cash payment could help to finance. In
addition to some reduction in debt we are expecting a considerable
improvement in trailing 12-month EBITDA. Before the spin-off and
corresponding pro forma adjustments, our 2008 fiscal year guidance
is for $390 million to $410 million of EBITDA. The improvement
compared to today's trailing 12 months reflects much stronger
operating performance in the third and fourth fiscal quarters. The
improvement will be measured against the comparable levels from
last year when we had weak operational performance. As a result we
believe our leverage is at a high point today and we intend to
manage it at today's level or lower through the spin. And with
operating performance continuing to improve and the North American
truck market coming back, as well as lower expenses for the
transferred liabilities, we should be able to lower leverage
meaningfully over the next 12 to 18 months. Now I'd like to turn
the call back over to Jay to wrap up. Jay? Jay Craig - ArvinMeritor
- CFO Thanks, Mary and Jim. I'd like to reiterate what Mary said
regarding our debt to EBITDA ratio. This management team intends to
maintain it at today's level or lower through the spin then
continue reducing it thereafter. We expect continued traction from
our cost reduction and lean initiatives as well as improving market
conditions ahead of the 2010 U.S. emissions change in the heavy
truck industry. I'd like to finish by reviewing our planning
assumptions and guidance. Since the last time we reviewed our
planning assumptions a month ago the outlook for light vehicle
sales in North America has gotten more tenuous. We are holding our
assumption at 15.2 million units for now, but may have to revise
the downward in the future. As Jim told you earlier, only 22% of
our LVS value added sales are in the U.S. market, so we are less
exposed to this tenuous position. We have shown European sales as
yellow for several months now, but still haven't seen enough
evidence to take our forecast down. I'll also mention that the
models we are on are outperforming the market in Europe, so that's
helpful. www.streetevents.com Contact Us 5 2008 Thomson Financial.
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reproduced or transmitted in any form or by any means without the
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7. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM - ArvinMeritor,
Inc. LVS Spin-Off Update We are holding our Class 8 truck
production forecast at 220,000 to 240,000 units for the calendar
year. The last monthly data points for orders and freight tonnage
were both revised upward. Freight is now up year-over-year in each
of the last six months. As you know, our forecast does assume
gradual improvement from the levels we saw in the first half of our
fiscal year. Our other assumptions are unchanged from the previous
outlook. Slide 16 reviews our financial guidance; this also is
unchanged from our previous update. It shows that -- the EBITDA
range of $390 million to $410 million that Mary mentioned, as well
as our full year EPS guidance of $1.40 to $1.60 per share. We feel
very confident in our ability to achieve or beat these levels. We
have covered a lot of material today and know that there is a lot
more to be covered from the Form 10 we filed this morning, so we'd
really to focus the Q&A session on the spin-off and its
implications. With that in mind let's take some questions.
QUESTIONS AND ANSWERS Operator (OPERATOR INSTRUCTIONS). John
Murphy, Merrill Lynch. John Murphy - Merrill Lynch - Analyst Good
morning. On slide 9 you have the major systems or segments that
you're operating in. I was just wondering if you could just run
through these and just let us know which ones you think are core
and what you might be a consolidator in, which ones you think you
really have a real technology lead in, and which ones are
outperforming and which ones are underperforming in the portfolio
here? Jim Donlon - ArvinMeritor - Designated CFO for Arvin
Innovation Well, I would start with the wheels team and just say
that that one is doing quite well with its manufacturing footprint
in both Mexico and Brazil with wheels that have a greater capacity
for opening the air around the wheel and thereby allowing more air
for cooling the brakes. So although we think of a steel wheel as
just a standard commodity item, there are technological
improvements about how you do the wheels that give our group a real
advantage and so that's a real strength for the organization. As we
move into the door systems, a lot of improvements there in the
latching and the motors that we have, so we're moving toward some
technology in the door system that hasn't been there before that
gives our team an advantage. We call that the smart systems
approach. In the chassis we're developing the smart systems versus
the competitors over time and this is some active, active systems
as opposed to passive chassis systems. I won't go into too much
detail on this call, but it's going to allow the chassis group to
move from a more standard suspension and module system into
advanced systems with greater value added for the customers. On the
roof systems, right now we've already moved from what I would call
a standard manual crank roof into standard motor roofs and now
we're into the panorama roofs which are individually designed for
each customer and bring quite a bit of unique special engineering
for each of our customers in the roof segment. www.streetevents.com
Contact Us 6 2008 Thomson Financial. Republished with permission.
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8. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM - ArvinMeritor,
Inc. LVS Spin-Off Update John Murphy - Merrill Lynch - Analyst So
it's fair to say that wheels are really the outperformer and then
you look at ride control -- probably be the underperformer sort of
on the top end and the bottom end of the spectrum there? Jim Donlon
- ArvinMeritor - Designated CFO for Arvin Innovation In terms of
current status, but I would say that with improvements that are
planned, ride control and the suspension group are planned to move
up into the better territory very quickly. John Murphy - Merrill
Lynch - Analyst Last thing. Mary, just on page 13 you mentioned the
potential of taking on more debt if the markets were open. Do you
think you're getting enough credit in the current market to float
this company on its own? And what would be the rationale for taking
on more debt. Is it just more breathing room or what's the thought
process there? Mary Lehmann - ArvinMeritor - SVP, Strategic
Initiatives, and Treasurer Well, to answer your first question, we
do believe that in combination with the liabilities that are being
transferred that we do have sufficient capacity in the credit
markets to do what we need to do in conjunction with the
liabilities that we have that we're able to transfer. So if you
look at the total package of liabilities and traditional debt, we
think it's very appropriate for both Arvin Innovation and
ArvinMeritor going forward. I think if the credit markets open up a
bit more it just allows us to substitute traditional debt in place
of liability transfers which would probably be slightly preferable
to us, but we believe that today we've got a situation and a plan
that works. John Murphy - Merrill Lynch - Analyst Great. Thank you
very much. Operator Chester Luy, Barclays Capital. Chester Luy -
Barclays Capital - Analyst Good morning, everyone. Just a few quick
questions here. First, we're estimating that Arvin Innovation
accounted for about one half of the cash burn for the total company
over the last 12 months. Is this a reasonable estimate? Jay Craig -
ArvinMeritor - CFO This is Jay Craig. I'm not certain we've
disclosed that before in any of our segment reporting to date. So I
don't think at this point on this call we'll be disclosing that.
www.streetevents.com Contact Us 7 2008 Thomson Financial.
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9. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM - ArvinMeritor,
Inc. LVS Spin-Off Update Chester Luy - Barclays Capital - Analyst
Can you talk a little bit about the pricing and competitive
environment in commercial vehicle market as one of your competitors
emerged out of bankruptcy with a better cost structure? Jay Craig -
ArvinMeritor - CFO I think as we've stated previously, we undertook
a fairly detailed study of what our competitors were able to
achieve in terms of cost reductions including the competitor that
recently exited bankruptcy. And certainly that was one of our
reasons for beginning our Performance Plus process. And we think
all the initiatives we undertook in the various areas of P Plus,
including reducing manufacturing cost, studying opportunities for
improved customer pricing and also reducing our overhead costs,
have positioned us well against those competitors. The other issue
I had mentioned is we are largely a non-union environment in the
United States, so our wage rates of our employees are quite
competitive. Chester Luy - Barclays Capital - Analyst All right.
And then finally, can you update us on the operational issues at
your European commercial vehicle business? Jay Craig - ArvinMeritor
- CFO I believe you're referring to what we've mentioned in
previous calls, that our operational issues that were primarily in
Europe in our last fiscal year. And I think, as we've stated
previously, we haven't had any de-cycling of customers since last
August. So we've almost gone a full year now, we're approaching a
full year of really not having any significant operational issues
in Europe and we're continuing to see improvement in our
operational performance. We also previously announced a capital
expenditure program in Europe to increase our capacity that we
expect will start to kick in towards the tail end of this current
fiscal quarter we're in and into the fourth quarter of next year.
This program does not involve building any new four walled
facilities, but just increasing efficiency in certain bottleneck
operations within our facilities. Chester Luy - Barclays Capital -
Analyst Great. Thank you. Operator Jeff Bennett, Dow Jones. Jeff
Bennett - Dow Jones - Media Good morning, Jim. Just a quick
question on whether you think that with the way that U.S. sales are
going right now, and especially after Ford's announcement about its
concerns, how does that affect the spin-off? Does that delay it in
any way? www.streetevents.com Contact Us 8 2008 Thomson Financial.
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10. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Jim Donlon - ArvinMeritor -
Designated CFO for Arvin Innovation Jeff, the good news for us is
that our business has shifted so much from the U.S. environment
into other worldwide environments that I don't want to say we're
unaffected by it, but with only 22% of our business in the U.S.
market now it is less of an issue for us. And what I can tell you
is that things are so strong in Brazil and for some of our product
lines in Europe and Asia -- Asia is running very strong at this
point. So we've got three counter-balancings against the softness
of the U.S. market and it's enabling us to move forward even though
the U.S. market is as soft as we're seeing an this point in time.
Jeff Bennett - Dow Jones - Media Great. And just lastly, do you
think you'll be able to do it within -- complete the spin-off this
year or are you looking into next year? Jim Donlon - ArvinMeritor -
Designated CFO for Arvin Innovation We're indicating that we'll get
this done within the next 12 months. If conditions are favorable we
will try to get it done as soon as we can. But we're trying to be
careful because we don't really know what the financial markets and
the automotive markets will be and therefore we're saying that
we'll get it completed within one year. Jeff Bennett - Dow Jones -
Media Thank you. Operator Brian Johnson, Lehman Brothers. Brian
Johnson - Lehman Brothers - Analyst A few questions just on some of
the things around LVS. First, as you look at that $2.7 billion to
$2.9 billion of revenue, what portion of it would you call new
business? And kind of within that, where do you put the dividing
line between business you're -- in terms of when it was booked --
between business you're comfortable with the profitability of and
business that is the run-off of old business at low margins? Jim
Donlon - ArvinMeritor - Designated CFO for Arvin Innovation Brian,
let me just say that I don't have exact numbers for you today, but
I can give you the general flavor of it. And that is that these
business contracts are typically out over a four-, five- or
six-year period for the length of the time of a product line with
one of our key customers. So they're typically on a four-, five- or
six-year cycle. So if you would take our starting revenues of $2.3
billion and you would say that that's got in it a mix of products
that would be running off and that would typically be on about
maybe $300 million or $350 million of run-off in a year and then
you would first go to replace that business. And then what our team
has been able to do is to find new projects for ArvinMeritor that
are not only just keeping us steady with the run-off of old
business, but building the new business. So out over the next
couple of years we'll be putting on, when I net it against the
run-off of old business, we'll be putting on about $0.5 billion a
year of new business that would build us from the $2.3 billion up
to the $2.7 billion to $2.9 billion. www.streetevents.com Contact
Us 9 2008 Thomson Financial. Republished with permission. No part
of this publication may be reproduced or transmitted in any form or
by any means without the prior written consent of Thomson
Financial.
11. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Brian Johnson - Lehman
Brothers - Analyst And in terms of the low margins, is there a sort
of dividing line between a year you would say okay, business before
this year we're not as comfortable with the profitability as
business after that year? For other suppliers, for example, it's
around 2005 when they had the last wake-up call around steel and
resins. Jim Donlon - ArvinMeritor - Designated CFO for Arvin
Innovation I would say that those were the time period when it hit
us the hardest. I will also say that there was a period in there
where there were price down issues with customers that will cycle
out of our run-off of old business. It's hard for me to pick a date
exactly as to when that affects. What I would generally say to you
is we've been able to kind of claw our margins back over the last
couple years about a percent a year of kind of clawing our margins
back. And we see the forward business is going to enable us to
continue our forward progress on these margins. Brian Johnson -
Lehman Brothers - Analyst Okay. And how is the CapEx of the Company
going to be split between new co ARVI and ARM? Jim Donlon -
ArvinMeritor - Designated CFO for Arvin Innovation What I would say
is one of the detailed attachments -- I know you haven't had this
information very long, so you haven't been able to see it yet. But
if I went to page F34 of the filing it would show that in the past
the light vehicle side, or Arvin Innovations, would have had CapEx
of $52 million in 2005, $38 million in 2006 and $72 million in
2007. I would say if you blend all of that together it's kind of a
run rate of on the order of $50 million to $60 million of CapEx per
year, a little bit higher one year, a little lower another year.
The page breaks that out into the detail for the body systems group
separate from the chassis systems group, I won't repeat the numbers
here, but it breaks it into those two business segments. Brian
Johnson - Lehman Brothers - Analyst Okay, I didn't see. And I guess
final question, maybe this is in the Form 10 as well. The split in
the 209 pension and OPEB between pension and OPEB? Mary Lehmann -
ArvinMeritor - SVP, Strategic Initiatives, and Treasurer Yes,
that's in the Form 10. Jay Craig - ArvinMeritor - CFO That's in the
Form 10 as well. Mary Lehmann - ArvinMeritor - SVP, Strategic
Initiatives, and Treasurer We're just trying to find a page
reference for you, Brian, here. www.streetevents.com Contact Us 10
2008 Thomson Financial. Republished with permission. No part of
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12. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Brian Johnson - Lehman
Brothers - Analyst It's not on the SEC site yet; it's probably on
your own. Jim Donlon - ArvinMeritor - Designated CFO for Arvin
Innovation If we look on page F22, it will show -- hold on just a
second. The various assumption pieces that are a part of the
retiree medical plans, does it get into the -- breaking out the 209
later in that footnote? And F26 also getting into some of that
detail. Brian Johnson - Lehman Brothers - Analyst Okay, thanks.
Operator Douglas Karson, Banc of America. Douglas Karson - Banc of
America - Analyst On the previous spin-off call you said that
leverage at the CVS business could migrate back to the 2 to 3 times
range potentially in a few months which I thought was surprising.
Given the market is tough and you've got raw materials increasing,
how do you feel about this goal? Is this timing still kind of
appropriate? Mary Lehmann - ArvinMeritor - SVP, Strategic
Initiatives, and Treasurer I think that's probably not something
that we meant to say if we said it. Over time we -- and that may
have been a number that we quoted in terms of net leverage
including cash. But I think over time we do expect our leverage at
ArvinMeritor, the remaining company, to migrate certainly down if
you factor in our expectation for improving earnings and at least
the initial cash payment that comes from Arvin Innovation upon the
spin-off. So we're confident that with our improving outlook and
expecting that to continue into the future that we see the leverage
coming down especially in light of a 2009 year which we expect to
be a strong underlying year around the globe for our CVS market.
Douglas Karson - Banc of America - Analyst Okay, that makes sense.
Separately, on the wheel business with steel pricing going up so
fast, can you give us a picture of how you're passing those price
increases in your raw materials through? It looks like Mexico and
Brazil operations have helped a lot there. Just give us a little
more color on that. Jim Donlon - ArvinMeritor - Designated CFO for
Arvin Innovation This is Jim Donlon. I would just indicate that as
a separate note, you saw that we indicated we were going to be
reviewing these commodity increases with all of our customers and
adjusting with them individually as we had the commodity increases
and that would be effective for June 1st. We are proceeding with
all of that work and have made various arrangements. They are
slightly different by different types of businesses that we have
but it is proceeding very well. And we're putting those changes
through effective with the 1st of June. www.streetevents.com
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13. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Douglas Karson - Banc of
America - Analyst Okay, great. All right, guys; that's it for me.
Thanks. Operator Ryan Beene, Crain's Detroit Business. Ryan Beene -
Crain's Detroit Business - Media Good morning. Could you please
describe for me the reaction of your customers to the announcement
that you're going to be reviewing in adjusting your product line
because of the steep rise in commodity and steel costs? Jay Craig -
ArvinMeritor - CFO I would say overall it would be disingenuous to
say they were pleased, but I would also say they weren't surprised
given that other suppliers, particularly the steel suppliers, had
made similar announcements previous to ours. So the discussions
have been difficult, but we've had a lot of objective data to share
with them. And so far we are seeing some of the success that we
anticipated through the announcement. But again, I would say that
overall they aren't pleased, but certainly not surprised. Ryan
Beene - Crain's Detroit Business - Media Okay. Now if you could
just give me sort of a ballpark range for the surcharge. And
obviously not broken down by product line, but is there like a
ballpark? Jay Craig - ArvinMeritor - CFO We haven't been disclosing
that. We'd rather keep those types of details just between
ourselves and our customers. Ryan Beene - Crain's Detroit Business
- Media Okay. Thanks, guys. Operator Himanshu Patel, JPMorgan.
Himanshu Patel - JPMorgan - Analyst Good morning. Earlier you guys
had mentioned some of the European platforms were doing pretty well
on the LVS business. Which ones are those? Jim Donlon -
ArvinMeritor - Designated CFO for Arvin Innovation Several of the
VW products for us and the BMW ones are doing quite well.
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14. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Himanshu Patel - JPMorgan -
Analyst Okay. Then on slide 9, you may have provided this in the
Form 10, I haven't seen. But can you give us a little bit of a
breakdown on the revenue split of the $2.3 billion, how it sort of
breaks out between these five product areas? Jim Donlon -
ArvinMeritor - Designated CFO for Arvin Innovation We break that
into the chassis systems and the body systems and that would be
$1.2 billion for the body systems and roughly $1.1 billion for the
chassis systems. The farthest that we break that out, Himanshu, was
shown I believe back on F33 of the Form 10. We do not take it
farther than that into other subsegments. Himanshu Patel - JPMorgan
- Analyst Could you at least, Jim, maybe let us know within chassis
which one of those three is sort of the largest one. Or is it not
even a fair statement, are they all sort of evenly sized? Jim
Donlon - ArvinMeritor - Designated CFO for Arvin Innovation I'd say
it's fairly well-balanced. Himanshu Patel - JPMorgan - Analyst
Okay. And then can you give a little bit more perspective on the
commodity cost outlook for the next 12 months? Are you at a state
now where there are still many unknown variables in terms of where
contract prices are going to land? How much assistant cost you may
have to provide your Tier 2 suppliers? Or are we at the stage now
where you have a fairly good line of sight on what the hit will be
to your business over the next 12 months and it's just sort of a
matter of time as those costs cadence into the P&L? Jim Donlon
- ArvinMeritor - Designated CFO for Arvin Innovation I would say,
Himanshu, that it is starting to become visible to us what the
standard, if you will, the base contract costs are going to be.
What has been particularly troubling through this recent period has
been the statements from suppliers to us that they were going to in
effect go above and beyond whatever our contracted amounts were and
surcharge that to us, in which case we had to turn around and
surcharge that to our customers. So what I would say is the base
amounts are starting to become more well understood and known and
we have had and continue to have one year or sometimes longer
contracts for the commodity purchases. But the awkward piece has
been surcharges over and above whatever was contracted. Jay Craig -
ArvinMeritor - CFO And I would add, Himanshu, what we've tried to
do is to mention those cost increases by product, by customer that
we've received from our suppliers so we tend to do some forward
planning and outlook so that we can have very substantive and
detailed discussions with our customers on the surcharge
(inaudible). www.streetevents.com Contact Us 13 2008 Thomson
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15. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Himanshu Patel - JPMorgan -
Analyst Jim, just to clarify, when you say you have a good amount
of visibility on the base contract prices, is that for the next
period, sort of '09? Jim Donlon - ArvinMeritor - Designated CFO for
Arvin Innovation That's for our upcoming forward year that would be
-- we're in the final stages of working through at this point in
time what would be our base contract prices for our fiscal year
'09. Himanshu Patel - JPMorgan - Analyst Okay, so my question would
be directionally is it unfair to assume that -- or is it fair to
assume that the cost of some of these commodities, like steel, that
you're going to incur in the second half -- and I'm thinking
calendar years -- of 2008 with the surcharge, is that fairly
comparable to the new base price that's being talked about for
let's say calendar '09? Jay Craig - ArvinMeritor - CFO I'm not
certain we're ready to say that at this point. We'll obviously be
providing further guidance on our 2009 outlook. And as Jim
mentioned, most of these adjustments currently are coming through
in the form of surcharges from our suppliers. So we haven't yet
gotten all of the data on what the new contract prices will be for
2009. Himanshu Patel - JPMorgan - Analyst Okay, last question. I
haven't heard you guys talk a lot about the health of the Tier 2
supply base. I imagine those guys have been muddling around with
the commodity cost problem for the last six months. What's the
situation there? Are they simply in much better health than where
they were back in '05? Or is this also an area that we're going to
hear more about in the second half of the year? Jay Craig -
ArvinMeritor - CFO From us I think what you have heard is we formed
a multiple disciplinary troubled supplier group which hadn't
existed here before. And we've been much more proactive in working
with our suppliers on helping them forecast their cash flow needs.
And at times we have had to make some accommodations that we
mentioned previously on accelerating some of our payments to them
which you've seen in some of our payable stage changes. But so far
it has not come at a significant P&L cost to us and we are very
aggressive and proactive in managing that. Himanshu Patel -
JPMorgan - Analyst Okay, thank you. Operator Sarah Thompson, Lehman
Brothers. www.streetevents.com Contact Us 14 2008 Thomson
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without the prior written consent of Thomson Financial.
16. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Sarah Thompson - Lehman
Brothers - Analyst Good morning. A couple questions for you. On
slide -- I think it's slide 13 you're talking about I think all
those costs, or at least corporate allocation costs, are included
in your LVS segment EBITDA. But where are the pension, OPEB and
other transferred liabilities? Are those in CVS or are those in the
unallocated corporate? Mary Lehmann - ArvinMeritor - SVP, Strategic
Initiatives, and Treasurer The majority of them would be carried in
unallocated corporate today. Sarah Thompson - Lehman Brothers -
Analyst Okay. And then, are there any other adjustments we should
make to unallocated corporate? I'm just trying to look at what the
actual pro forma EBITDA should be on the remaining Arvin business?
Jay Craig - ArvinMeritor - CFO We don't believe there are any other
significant adjustments you'd have to make. Obviously at some point
in time after the effective date of the filing we'll be filing a
pro forma for ArvinMeritor as the remaining company, which will
help walk people through that. Sarah Thompson - Lehman Brothers -
Analyst Okay, great. And then also on the off balance sheet debt, I
think in your Form 10 it says there's about $122 million of that
off balance sheet that went to the LVS business, but you guys have
borrowed I think a couple hundred million dollars more since the
end of the year. Can you just tell us, is it the same proportion
LVS/CVS or has that changed at all? Mary Lehmann - ArvinMeritor -
SVP, Strategic Initiatives, and Treasurer Sarah, I'd say the
majority of the factoring that we're doing in Europe is related to
the CVS business. Sarah Thompson - Lehman Brothers - Analyst So is
it the majority of increase in the last six months? Mary Lehmann -
ArvinMeritor - SVP, Strategic Initiatives, and Treasurer I would
say so, yes. Sarah Thompson - Lehman Brothers - Analyst Okay. And
then lastly, on the cash, I know you said your leverage is going to
be about even, but I'm just trying to figure out what the pro forma
cash would be to make that leverage even. Can you help us with
that? www.streetevents.com Contact Us 15 2008 Thomson Financial.
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17. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Jay Craig - ArvinMeritor -
CFO I don't think we've disclosed that at this time. Again, we'll
be putting together the pro forma for the remaining company,
ArvinMeritor, and we'll be providing that data at that time. Sarah
Thompson - Lehman Brothers - Analyst Okay. Can I just ask it this
way then? Is it appropriate? I think you're transferring $72
million of cash to the new entity? Mary Lehmann - ArvinMeritor -
SVP, Strategic Initiatives, and Treasurer $72 million is the March
31st number pro forma, yes. So that would have been the cash that
would have been in the LVS segment as of March 31st. So that's the
way we've laid out the data in the Form 10 consistent with that.
Sarah Thompson - Lehman Brothers - Analyst Okay. And then the other
things that you brought up were obviously maturing the 2009 Notes
which would come just out of cash and repaying the on balance sheet
AR which would come out of cash. Is there anything else I'm
missing? Jay Craig - ArvinMeritor - CFO No, I think you've got all
the pieces. Sarah Thompson - Lehman Brothers - Analyst Okay, great.
That's all I had. Thank you. Operator Jon Leisinger, Sankaty
Advisors. Jon Leisinger - Sankaty Advisors - Analyst Good morning,
guys. I had a quick question on your MRAP production assumptions.
If you could give us kind of the cadence or breakdown on a
quarterly basis of how those volumes will trend, maybe on a
calendar basis, that would be really helpful. Jim Donlon -
ArvinMeritor - Designated CFO for Arvin Innovation I would just
share with you that at this point the big push has been to get as
many of the MRAPs as possible over into the theater as quickly as
possible. What we have seen up to now has been a big push to get
those in this fiscal year. There will be some that will spill over
into the next fiscal year, but most of what's been handed out so
far will run through ArvinMeritor through this fiscal year with
only a little bit remaining on into 2009. Jon Leisinger - Sankaty
Advisors - Analyst Okay. So the lion's share then taking place in
calendar -- Q1 and Q2 then? www.streetevents.com Contact Us 16 2008
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18. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Jim Donlon - ArvinMeritor -
Designated CFO for Arvin Innovation Yes. Jon Leisinger - Sankaty
Advisors - Analyst Okay. And then I guess on the cash you expect to
pay --. Jim Donlon - ArvinMeritor - Designated CFO for Arvin
Innovation Wait a moment. Let me say, in our fiscal year. So for me
what we're saying is the bulk of it is running out through the
remainder of -- out through September and there will be some that
will spill over into the first quarter of 2009 and a little bit
into the second quarter. Jon Leisinger - Sankaty Advisors - Analyst
Can you break out how many units were produced during calendar Q1?
Jim Donlon - ArvinMeritor - Designated CFO for Arvin Innovation We
have not gotten into that level of detail. Jon Leisinger - Sankaty
Advisors - Analyst Okay. And then just quickly, on the cash you
expect to pay to the Arvin -- I guess the existing company in
excess of the $100 million, is that just if you're able to raise
more debt or where would that additional kind of funding be coming
from? Mary Lehmann - ArvinMeritor - SVP, Strategic Initiatives, and
Treasurer That is funded directly out of the $125 million of debt
that we expect to have on the Company, on Arvin Innovation as it
spins off, plus the pro forma for the $72 million that was on as of
March 31st, and that leaves you with a certain excess balance that
could be paid to ArvinMeritor. Jon Leisinger - Sankaty Advisors -
Analyst Okay. All right, thanks. Operator I would now like to turn
the conference back over to Terry Huch for closing remarks. Terry
Huch - ArvinMeritor - Director of IR I'd just like to thank
everyone for joining us today and invite you to follow up with your
Investor Relations or Communications contact with further
questions. www.streetevents.com Contact Us 17 2008 Thomson
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19. FINAL TRANSCRIPT May. 28. 2008 / 8:00AM, ARM -
ArvinMeritor, Inc. LVS Spin-Off Update Operator Thank you for your
participation in today's conference. This concludes your
presentation. You may now disconnect. Good day. DISCLAIMER Thomson
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