Dana Inc (DAN) 2002 Q4 法說會逐字稿

Good morning, and welcome to the Dana Corporation fourth quarter and full year 2002 conference call. This call is being tape recorded. The format for today's conference call is remarks by Dana's Chairman and Chief Executive Officer, Joe Magliochetti and by Bob Richter, VP and CFO, followed by a question and answer session. This quarter, Terry McCormack. President Automotive, [inaudible] is also attending the call and will also be available for questions. At this time I would like to begin the presentation by turning the call over to Greg Smietanski, Director of Investor Relations. Please go ahead, sir.

Thanks and good morning, everyone. Welcome to Dana's conference call for the fourth quarter and full year 2002. If you have not received a copy of our earnings release, please call my office as area code 419-535-4635. Today's call is supported by a slide presentation located at our website Dana.com and found on our home page. Just as a reminder, our website enables you to direct questions over the internet to us during the presentation. Joe, Bob, and Terry will answer as many questions as time permits and all bona fide questions will receive a follow-up response.

At the request of analysts and in the interest of fairness, we'd ask that dial-in questions during today's Q&A session be limited to a couple of questions per caller so that more of you are able to participate. Hopefully, everyone is located the site, let's move on to slide number two.

I'd like to remind everyone that in today’s conference call our remarks will include forwarding statements. These statements are based on current knowledge, involving assumptions, uncertainties and risks. Our actual results could differ materially from those that are anticipated or projected due to a number of factors that we will be discussing and others set forth in our SEC reports. This conference call and its supporting visuals may not be recorded, copied or rebroadcast without Dana's written consent. Continuing on to slide number three, we would like to begin today’s conference call by introducing Dana's Chairman and CEO, Joe Magliochetti.

Thanks, Greg and good morning everyone. Given the new accounting pronouncements and the complexity of our transactions during the past year let me say on the onset that our folks worked diligently to simplify the report but also to ensure it is meaningful. Nonetheless we urge you to listen carefully and perhaps tape your ankles before we begin.

Sales for the fourth quarter were $2.3b, up roughly 2.5% from the same period last year. Net income was a loss of $9m, including the final nonrecurring charges of $44m after tax associated with our October 2001 restructuring plan. We also had divestiture gains and losses which affected our results. Additionally we've modified reporting for discontinued operations moving forward. Bob will elaborate on these items in just a moment, but factoring out these unusual items, after tax operating income for the quarter represented a profit of $32m or 22 cents per share, in line with our previous guidance.

For the full year, sales as reported now without discontinued operations were $9.5b, level with 2001 sales. Our results reflect a loss of $182m but factoring for the unusual items just mentioned, as well as a $220m charge taken earlier this year upon the adoption of FAS 142 for impaired goodwill, after tax operating profit was $171m or $1.15 per share.

We accomplished a great deal in 2002. These achievements were highlighted by the successful execution of our restructuring actions and other efforts to better focus and align our company for profitable growth in our chosen markets. Clearly, we have taken some enormous steps to simplify our business model, clarify our focus and improve shareholder value. Admittedly these actions have created many moving parts and greater complexity in our reporting but rest assured you will see a more streamlined company and simplified financial reporting structure moving forward.

We believe we've demonstrated our ability to manage those items within our control and despite projections for flat or weaker markets this year we believe our restructuring actions have positioned us to benefit in the long-term.

Now continuing to slide four, I'd like to review our market assumptions for this year. North American light vehicle production which is what we watch rather than sales came in around 16.4m units for 2002. For the year average incentives grew to more than $2,300 per vehicle, an increase of more than 50% over the average for 2001. And light vehicle incentives jumped to more than $2,600 per vehicle.

We believe that vehicle makers bolstered these incentives to better utilize their capacity and that the industry will continue to use incentives. As a result, we believe that the demand pulled forward by these incentives, coupled with an uncertain economic environment will slow both sales and production for 2003. Based on these factors we expect production to decrease to about 15.8 from 16.3m units this year.

Moving to slide number five, outside North America, conditions are not much better. We see Europe, our second largest market, being essentially flat as a result of sluggish economic growth. South America is expected to show modest growth coming off a down year, however the uncertain situation in Venezuela has also tempered our expectations. If there's going to be any significant production increase from last year's 39.2m units produced outside of North America, we believe it will come in the Asia Pacific region.

Moving to the heavy truck market on slide number six, as this chart illustrates, this has been a volatile market with production down slightly -- down significantly from the extraordinary demand we saw in 1999. What looks like a surge in the middle of 2002 reflects fleet purchases in advance of the new emission requirements that went into effect for heavy duty engines in October of this past year. In total, about 181,000 heavy units were built during the year.

Nonetheless, we believe this market is poised for a nice recovery as evidenced in slide number seven. With inventory levels at less than a two-month supply the glut of used trucks has pretty been burned off and used vehicle prices have stabilized. The newly enacted EPA standards governing diesel engines and production backlogs are very low. Following a slow start we anticipate a gradual improvement in North American heavy vehicle sales, specifically we estimate that 2003 build rates for heavy trucks will be between 180,000-185,000 units and approximately 190,000 medium trucks. As mentioned earlier, we believe this bodes well for our business in this sector, particularly at the back end of the year. Our restructuring will improve our bottom line and our new business wins will grow the top line.

Moving to slide number eight, we'll review our new book of business. This is our traditional projected net new business chart. Showing anticipated incremental business through 2007. We expect to benefit from net new business over the years 2003 through 2007 which approximates to $4.5b. I'd like to remind everyone that at the close of every year we changed the base year. Therefore, the 2002 base year, which included about $500m of new business, is removed from all years, thereby reducing the aggregate. At the same time an additional year, in this case, 2007 is added.

During these challenging economic times we feel it is particularly important that this chart reflect a cautious outlook. Other adjustments to the chart include new business to the year 2003 has been adjusted to reflect the current year's expected production levels. As Daimler-Chrysler continues to evaluate the possibility of in-sourcing axle components for the upcoming Grand Cherokee renewal, scheduled to start production in 2004, we've taken the prudent position of removing this business from our new business chart. Consequently we reduced our net new business in the years 2004 through 2007 by the amount of our 2002 sales to reflect the uncertainty of this business.

New business related to operations that we divested in the fourth quarter of 2002 was also removed. And certain new business was redirected to unconsolidated affiliates resulting in its removal from this chart which applies only to our consolidated operations.

And finally, in cases where customers have lowered their production expectations for future programs or have rescheduled launch dates, we've adjusted our new business estimates accordingly.

For 2003, and beyond, we've stripped this chart to its really bare bones. It's a clean and what we believe to be a very conservative set of numbers.

With that I'll turn it over to Bob on slide number nine who will explain our financials in more detail. Bob?

Thanks, Joe, and good morning everyone. One of the major objectives that we have corporately is to simplify our business to improve focus and make it easier for Investors to understand. After I get through this rather long and tedious explanation of our numbers it will be easy to see why we want to do the same on the accounting side as well. Beginning in 2003 we'll be talking about GAAP net income period.

In 2002 our results were affected by the last of the nonrecurring charges associated with the major restructuring program we announced in October of 2001. Gains and losses associated with divestitures and a business held for sale, the change in accounting for goodwill under FAS 142, and the reporting of discontinued operations under FAS 144. With all these moving parts, I'm going to spend my time talking about the full year numbers rather than the quarter other than to note that the operating profit in the fourth quarter was $32m or 22 cents a share, which is within the range of 20 to 25 cents a share that we'd been talking about since July. Suffice it to say, also, that most of the items that affected the full year results hit the quarter, as well.

In our press release we included the table that you see on this slide to try to clarify the impact of all the different accounting effects. At the top of the chart, in the second column, which is full year 2002, you see a sales number of around $10.3b. That's the number that we and many of you have been tracking for much of the year. Under FAS 144 we are required to treat our fourth quarter divestitures and the planned sale of our engine management group that we announced on Monday, as discontinued operations. Sales of these operations which totaled about $780m are excluded from consolidated sales, which therefore show up on the statements at around $9.5b.

The next grouping of numbers on the table, starts off with operating profit that we've been saying would probably come in around $170m for 2002. It actually came in at $171m, and consistent with the sales breakout we've shown that this was comprised of $181m in operating profit from continuing operations and an operating loss of $10m from the discontinued operations.

The next grouping of figures shows the components of net income. Staying with the full 2002 Column, we start with the $171m in operating profit, deduct the after-tax restructuring expenses of $163m, which completes the program we announced last year. Add $30m in net gains on divestitures and arrive at $38m in net income before the effect of the goodwill accounting change, for which we took a charge of $220m in the first quarter. We wind up with a net loss including this charge of $182m.

The last group of numbers are the diluted EPS figures for operating profit and the net loss after the affect of the accounting change.

The change in presentation for the discontinued operations affects the prior year's income statements well. To help you out we have restated all of our segment reports for the last eight quarter and they are available to download off of our website. We'll continue our discussion on the statements using the next slide, slide number 10.

The purpose of this slide is to show as clearly as possible the effect by income statement line item of all of the items we talked about on the preceding slide. This will allow us to compare the results to the operating numbers we previously discussed, and give you figures that you can compare with your models.

The slide starts out in the first column with the income statement included in the financials attached to the press release. As usual, it's the version that presents DCC on an equity basis.

The second column shows the effect of discontinued operations accounting. According to FAS 144 you collapse all pretax amounts related to these businesses into one line on the P&L. In the discontinued operations column on this slide, we reverse the process to show the amounts from the discontinued businesses as they would have appeared by line item. Of course, there's no effect on the bottom line since it's just a reclassification.

The third column shows the adjustments by line item for the restructuring activities that related to the plan we announced in October of 2001. The $5m and other income is an impairment charge in connection with the sale of a thermo plastics business we booked in the first quarter based on a letter of intent, which is why it's in other income rather than restructuring expense. The $36m is impairment of inventory in connection with the outsourcing of certain operations. The $207m on the restructuring line is principally severance costs associated with announced facility closures and other work force reductions. The total of this column is $163m after tax. With all the charges associated with our restructuring plan now recorded we won't be talking about nonrecurring charges next year.

The next three columns on the chart adjust for the impact of our divestiture activities. We broke it out into three parts because when you look at the net effect of all the deals together it's really tough to understand what happened.

The first of the divestiture columns shows the effect of the DCC asset sales. There was a $39m net gain on their books that shows up on the equity and earnings of affiliates line. This was offset by $11m in transaction expenses recorded at the Dana level which had a $4m tax benefit. The net effect on the bottom line was $32m.

On Monday of this week we announced that we had signed a definitive agreement to sell the engine management operations of our aftermarket group to Standard Motor Products. We recorded a $38m pretax charge or $23m after tax during the fourth quarter, when we classified this business as held for sale.

The rest of the divestiture activity is shown in the third column called others. This would include the sales of Boston Weatherhead, FTE, [TACONCHE], AEC, [Borg Warner], and several other transactions which combine to produce a net gain of $46m before tax.

There were $21m in taxes payable on the gain and $4m was shared with minority owners so the bottom line effect on Dana was an after tax pick-up of $21m. The total of all three divestiture columns is the $30m we talked about on the last slide.

In the next to last column we eliminate the effect of the accounting change for goodwill and we arrive at the 2002 operating numbers in the last column which amazingly enough total $171m. Let's hurry to slide number 11.

This slide compares the operating numbers for 2002 from the preceding slide with those of last year presented on the same basis. Sales of $10.3b were relatively flat with 2001. After adjusting for a currency effect of $115m, and $142m for divestitures, sales grew about 2.7%. The major changes on the other income line were increases in interest income of $10m and translation gains of $12m.

Gross margin came in at 11%, compared to 9.9% last year. SG&A is down $82m from last year. On a percentage basis it was 7.9% of sales this year versus 8.7% a year ago. Operating margin improved to 3.1% this year, compared to 1.2% last year.

Interest expense is $25m below last year due to both lower interest rates and reduced borrowing levels. Equity and earnings isn't a whole lot different than it was last year, and bottom line we went from $5m in 2001 to $171m in operating profit in 2002.

There were several factors contributing to the improvement but the main reason was clearly the cost reductions attributable to the restructuring plan.

Please turn to slide number 12. This chart shows our 2002 performance by strategic business unit compared to our 2001 results. The information in both columns reflects the change in presentation to segregate the discontinued operations. As I said earlier, restated data for the last eight quarters can be downloaded from our website.

When you scan the numbers, you find that on essentially flat sales, all four of our SBUs show a marked improvement in profitability, which clearly reflects the benefit of the lower head counts and reduced infrastructure costs as a result of our restructuring.

Now let's move to slide number 13 where we'll talk a little bit about how we see all the moving parts coming together in 2003. This is a chart something like one we used in January when we spoke to the Splinter Group conference in Detroit. At that time, we started with the guidance used at the last quarterly conference call for sales and net operating profit after tax. The only change here is that the [no pat] as we saw earlier came in at $171m versus the $170m that we indicated in January. We've said we would lose about $630m of sales and $30m of incremental profit after tax associated with operations which we had divested. This did not include the effect of the engine management transaction, which had not yet been announced, but it did include the effect of all divestitures including the small ones that did not meet the criteria for reclassification as discontinued operations.

We said there would be an offset in the form of interest savings of about $12m after tax from the use of the proceeds of these divestitures. We also said it would be necessary to account for the asset sales at DCC, which would reduce their earnings power.

Adjusting for these factors gives a base result going into 2003 of around $9.7b in sales and $146m of operating profit. Using the range of $15.8-16.2m for North American light vehicle productions that Joe talked about, and the other market forecasts he discussed, we're looking for net income in 2003 to be in the range of $180-200m, which would represent a 23 to 37% improvement at the [no pat] level.

The third column wasn't on the chart when we showed it in January, but we've added it today to reinforce the point that the numbers we're talking about in 2003 are indeed net income numbers as well. So the $180-200m is also comparable to the $13m for 2002. That's what we said then.

Now let's look at the numbers as they are including the effect of the recently announced sale of our engine management business.

Please go to slide number 14. When we talked about $180-200m of net income in January, we were assuming that we would have engine management business for the full year. If we assumed that we closed the transaction by September 30th, which is pretty conservative, we would see our net income for the year at $185-205m. We also take out their sales because it's a discontinued operation, which will round to 200 leaving us with $9.5b in sales from continuing operations.

Now let's move to slide number 15 and talk about cash flow. This slide shows our cash flow for the full year. This is the same as the cash flow statement with DCC shown on the equity basis that was included in your statements, except that we've moved some of the numbers around to isolate the effect of the restructuring program and the put down to the change in net debt. Incidentally, under FAS 144, you're not required to restate the cash flow statement for discontinued operations and we did not.

Net income, before the effect of the accounting change for goodwill, is $38m. Depreciation was $387m versus the $400m we'd been using in our trend.

The divestiture line shows $298m which differs from the $353m shown on the financial statements for two reasons. First, we pulled out $24m in proceeds from dispositions related to our restructuring plan, which are shown down below in the restructuring section.

Secondly on this slide we netted the $31m that's classified as an acquisition in the statements against the divestitures. No slide of hand here we unwound a relationship in Europe with GKN. They bought out our share of a JV in the UK and we bought out the Spanish JV and the net was a big zero, but it gets shown broad in the statements.

I'll come back to the working capital number later on a separate slide, but suffice it to say at this point, we beat our targeted reductions of $200m pretty handedly.

CAPEX was $246m compared to the target of $250m we've been talking about all year.

At the bottom of the slide you see all items related to the restructuring. With the $163m in after tax expense we booked this year, we finished out our program with total charges for the 15 months since the plan was announced at $442m versus the original $445m after tax target.

Cash payments for the year were $200m, which is where we indicated they were trending in our last conference call. We brought in $100m of proceeds from the sale of assets from the program. This is a combination of asset sales in connection with our outsourcing efforts and the sale of idle assets. Bottom line we reduced net debt during the year by $753m.

Moving to slide number 16, I said I'd come back to working capital and here it is. In terms of dollars, working capital was pretty flat through the first nine months of the year, but as we've said many times during the year you have to watch if ratio of working capital to sales in order to gauge where the dollars will come out at year end. And we are pretty confident we'd see reduction of at least $200m. Turns out the reduction was much stronger.

As you see here the $279m was truly operations as we showed the divestiture effect separately. On the last line, you see $67m from discontinued operations. This is not the activity of the discontinued operations. This is another FAS 144 wrinkle. When you classify a business as a discontinued operation, you move all of their assets and liabilities to the current classification. Since you expect to turn them into cash in the short-term. The figure you see here is basically the property plant and equipment of the engine management business.

Moving to slide 17, on the cash flow statement we saw a reduction in net debt of $753m. Here we see it was made up of a reduction in borrowings of $384m and an increase in cash of $369m. There were two accounting items that offset a portion of this on the balance sheet. The first was the translation effect on our Euro denominated bonds that amounted to $33m.

The second was the mark to market on our interest rate swaps. You might remember that during the year we closed out our old swaps and put in new ones. As a result of those transactions we received over $70m in cash, which is included in the $94m you see here, and will be amortized over the next 10 years as a reduction in interest expense.

Moving to slide number 18, here's the breakout of our debt portfolio at December 31st by maturity. Only two quick points to make here. One, apart from some small working capital loans around world which show up here as other, we really had no short-term debt. Two, we have no term debt maturities until 2004. And after that, not until 2008.

Let's go to slide number 19. This slide is intended to simply point out that as of year end we had committed credit facilities totaling $1b with absolutely nothing drawn on any of them. On top of this, of course, we had about $550m in cash on the balance sheet. So liquidity is not an issue, and we were able to take advantage of this in renegotiating our credit facilities which were described in an 8-K filed on Monday.

Please go to slide number 20. You can read about all the stuff on this slide in that 8-K, but we reduced capacity under the Dana facilities by 200m through the elimination of the 364-day facility and the downsizing of the five-year facility. There could be security provided to the banks under the five-year facility if we were to draw on it for more than $50m or for more than five consecutive days. But frankly that's not very likely as we'd have to first eat through the $550m in cash on the balance sheet, then we'd have to use up all of the $400m capacity under the AR program before we get to the five-year facility. Of course, we had a springing lean in our facility last year at this time as well.

I might mention that at the same time we redid the Dana facility, DCC downsized their facility from 250-200m and committed to further reduce it by two-thirds of the proceeds from future asset sales. This isn't really a big deal Either, as they only have $95m borrowed on it currently are actively selling down assets, and the facility had to be paid off by June of next year anyway.

Now let's go to slide number 21. Here's even more reason to support the reduction in short-term capacity. We're looking at another good year for cash flow in 2003. We're working here off the low of the range of net income we showed earlier. To that, we add about $350m in depreciation, down from this year due to the divestitures. We pick up the estimated cash portion of the proceeds from the sale of engine management, and we believe we can take another $200m out working capital. This should give us about $825m in sources.

We expect CAPEX to be equal to depreciation and we have not forecasted a change in our dividend policy so this should leave us with about $470m before funding, between $100-150m in disbursements from the restructuring accruals. At this point, we foresee using the excess cash to further reduce debt. I might add that this forecast does not include the benefit of any other divestitures we might accomplish, nor does it include any dividends from DCC as a result of their asset sales, both of which are possible.

With that I'll turn it over to Joe and slide number 22.

Thanks, Bob. As I said at the top of this call, 2002 was a year of significant accomplishments. And we expect further progress this year. Remember, this is a work in process that ties to our transformation in 2005 growth plan. We rationalized our business units, consolidating seven to four. We sold non core businesses and closed or consolidated other non strategic operations. We removed layers of management and we reduced our head count, and we continue to outsource non core products and functions, further reducing our investment while transforming costs from fixed to variable.

Slide number 23 recaps the original estimates for our restructuring plan and our corresponding performance to date. As you will recall, the key elements of our restructuring plans are work force reductions of more than 15% and the closure or consolidation of more than 30 facilities.

We said that our plan would cost about $445m after tax. And as of the end of 2002 we had booked all the associated charges, which ultimately came in at $442m. To date, we reduced our permanent head count for this plan by 13%. And announced a further 3% reduction. In addition to this, our recent divestitures of the FTE hydraulic break and clutch actuation business, resulted in an additional 4% reduction.

As year end we had closed 28 facilities and announced further plans to close another 11 in conjunction with this plan. As these remaining facilities close, we will see the further 3% reduction in our head count that I mentioned earlier. And, a corresponding drop in our asset base.

A primary focus of this restructuring is to lower Dana's net investment and break even level. We're making solid progress on both fronts. We've lowered our people count and taken net assets from $5.1b to $4.5b this past year.

At this time, I'd like Terry McCormack to step in and comment on the initiatives that he has underway, including the recent announcement of our intention to sell businesses within his engine management group. Terry, why don't you step forward with slide number 24.

Thank you. I'm happy to have the opportunity to review some thoughts on just the outstanding job our automotive aftermarket team has done and working through our restructuring initiatives. These are the folks that make a difference for us and I am truly proud of our entire team.

I don't use the term outstanding loosely. As the numbers on the slide indicate our performance has measurable credibility and we exceeded the guidance we gave you at this call this time last year. To date, we've reduced our head count by more than 1,600 people, and we've closed six distribution centers and a couple of manufacturing facilities. These actions have enabled us to improve our operating profits by $59m this year on flat sales.

Now if we move to slide 25 we'll discuss the decision to sell the majority of our engine management group. This engine management business really detected here by the large yellow wedge in this pie chart was one of several strategic opportunities that Dana identified back in late 2000. By opportunity, we indicated that these businesses could be retained and improved or combined via partnerships or joint ventures or divested. Well on Monday we announced that we had sign add definitive agreement to sell a significant portion of these operations to Standard Motor Products for approximately $120m. Now this amount is subject certainly to post closing adjustments and in conjunction with the transaction we booked an after tax charge of $23m in the fourth quarter.

The operations involved in the transaction delivered just under $290m in sales last year, and included eight manufacturing locations and a distribution center in Nashville, about 1,900 people are employed by these operations. And because the transaction has yet to be completed, I’m very limited in my ability to comment on the specifics and quite frankly I can't. But what I will say is that we believe this action very much adds to our ability to focus on our brake and our chassis, our filter, our hard parts and our import businesses as well as the technologies inside of those businesses, while at the same time providing our engine management people and operations the ability to grow with Standard.

With that, Joe, I'll turn it back to you for slide 26.

Thanks, Terry. Several of our listeners have said that comments by our strategic business unit leaders have been very helpful. With that in mind, each quarter we've tried to assure that one of our key line executives was available for further updates on their specific activities. We appreciate Terry's comments today.

A couple of years ago you may remember us talking about our five point plan. To date we've been unswerving in our commitment. One element of this plan was to identify core businesses that would be retained. Our focus here was to improve their capital efficiency. Once identified, we'd allocate capital to these core businesses and begin a related effort to outsource low value, commodity type products and processes.

We also established a process to evaluate non strategic and under performing businesses and underutilized assets, with a specific goal to enhance value for our company and shareholders. We've collectively referred to these businesses as strategic opportunities.

We see the four businesses that were designated as strategic opportunities shown in slide number 27, along with their 2002 sales levels. We said for each of these opportunities we needed to determine the best solution among three basic alternatives.

The first is to remain the business after developing a workable plan to improve it. The second, was to combine with a solid partner, either through an alliance or a joint venture. And the third alternative was to divest the business if we were able to identify a buyer with a higher perceived value for the operations. When we complete the engine management transaction that Terry just shared with you we will have two remaining opportunities before us.

We are actively considering each of the three alternatives I've outlined, as we evaluate these remaining businesses. And we are prepared to move quickly once an optimal solution is identified.

Moving to slide number 28, as you know, our business can be affected by economic cycles. One aspect of our restructuring plan was to fundamentally change our cost structure to ensure the next time we hit a trough in the markets we serve we would be prepare to achieve our cost of capital, which is calculated to be about 10% after tax.

As we complete the remaining pieces of our restructuring program we are also working to transform our business in other ways to make sure we are going to the top line, as well. By virtue of our realignment, future capital expenditures will be better directed to a more focused range of core products. This will enable us to more efficiently and cost effectively provide our customers with a superior range of technologically advanced products.

Slide number 29, highlights some of the technologies that will add to our 2003 and future revenue base.

We're very proud to be the axle supplier for the new Nissan first full-size pick-up truck that was announced at the recent auto show in the United States here in Detroit called the Titan. This was one of the big hits of the show and it certainly received a lot exposure in the press. This win was secured by Dana's technologically advanced ring and pinion design that provides world class NVH characteristics and improved strength and durability. It also incorporates an axial lip design that enhances sealing on the axel shaft and prevents external contamination. And a new cover design for improved sealing capacity at the rear dif. We're particularly proud to supply both the front and rear axles for this vehicle.

Moving to slide number 30. Another Dana technology that has helped secure new business is our patented hydro-forming process. Specifically, we've had excellent results with the Ford Motor Company. This proprietary manufacturing process allows us to make a frame that's nine times stiffer torsionally than its predecessor. Our patented hydro-forming process expands this application to larger structures which allows us to do both side rails simultaneously and builds on our success with the 2003 Expedition Navigator that began production this past year. We will build on this solid foundation of improved durability, driving dynamics, ride refinement and quietness on the new 2004 Ford F150 that launches later this year.

Moving to slide number 31, another technology that has attracted new business is our electronic steering system which appears in the 2004 GM Sierra and Chevrolet Silverado pick-ups. This parallel hybrid pick-up is the first 42 volt system in North America. Now although the volumes are relatively low at this time, we see this technology growing.

Moving on to slide number 32, over the past year, we've substantially reshaped Dana streamlining our operations into four highly efficient market focused business units. As we enter 2003 we are now a leaner and more agile company. We've had a lot of moving parts this quarter, as Bob mentioned earlier, and certainly this year has been notable. Believe me we apologized for the resulting adjustments to your financial models. But in the end we believe these actions will shape a stronger Dana moving forward. Concentrating on our core businesses will help better focus our innovation and technology on our key opportunities for revenue growth.

At the same time, we will remain mindful of the balance sheet to optimize our return on invested capital. Looking to the future we are aware that further economic challenges lie ahead. And, yet, we also believe we are solidly positioned for improved earnings and look forward to building on the momentum of our restructuring program in 2003. In doing so, we will demonstrate further improvement in our financial performance while maximizing cash and solidifying our balance sheet.

With that, we're now ready to take questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, you may signal us by firmly pressing the one digit on your touch-tone phone. Dana will also answer questions from their website. We will take as many questions as time permits and we will take your questions in the order they were signaled.

Our first question is coming from John Casesa from Merrill Lynch. Please go ahead with your question.

Good morning, it’s John Casesa and Jackie Weiss. Good morning. Two questions. First of all for Terry, we've heard that some of the retailers in the aftermarket are starting to look at programs whereby they take goods on consignment and pay for them only when they are sold. Are you aware of this? Or to what extent is it happening? If happens the case would it not a major negative development in the aftermarket?

Yes, I'm aware of it. One of the large retailers has talked about it in general terms. I think it's called pay on scan. It's an interesting proposal. I made a presentation at the automotive symposium in Chicago and talked a lot about how the aftermarket will change in the future and more and more collaboration is important, excess capacity, that sort of thing.

We're not familiar with all the details of this plan and it's something that we need to know much more about as a major supplier to the aftermarket because we have many, many customers that we work with everyday, everyday, and it just depends on the details and I'm unfamiliar with all of those. We'll take a cautious look at these kinds of things in the future to make sure that it makes sense for us, our shareholders, and our other customer base going forward.

My reaction is that this would be conceptually very unappealing. Would you agree with that?

Well, any time you get into consignment inventories it's very unappealing.

I got you. Follow-up question from Jackie on heavy trucks.

Looking at the margins. I know production in North America for Class 8 vehicles was up pretty substantially in the fourth quarter. Your margins were up also, but not as strongly as we would have expected. I'm curious if there's anything going on or you also would have expected higher margins?

I think actually Class 8 in the fourth quarter was down. The third quarter was pretty strong. The fourth quarter dropped almost 51% last year and we're starting off a little slower this year.

Jacqui, there's also the off-highway businesses is in that same SBU, which doesn't budge.

So those sales were flat and the -- you’re saying your Class 8 sales were actually down because of lower production?

Right.

Jackie Weiss Okay. Thanks.

Thank you. Our next question is coming from Darren Kimball from Lehman Brothers. Please go ahead with your question.

Thank you. Can you talk a little bit to the backlog changes? It looks like you took about $255m out of 2003 and you also took quite a bit out of the out years. I know you mentioned the adjustment for Grand Cherokee but that's not a 2003 issue. Can you give us a little more detail on that?

Yeah, Darren, what we tried do in this whole net new business model is take it to what we believe to be the most conservative level. We adjusted the build rates down this year to the low end of the range. We gave you earlier. 15.8 to 16.2. And so that's reflected in the number.

We've taken out some of the business that we've now shifted to our partnerships, our affiliates, our non consolidated affiliates and then, of course, some of the programs have been rescheduled by our customers so there's a combination of several things that have taken place in these numbers.

So there's no major program cancellation, per se?

No major program cancellation per se. A lot of shifting. And, for example, I think one of the programs that we had scheduled for the latter part of '03 has now moved to '04, so it's moved by almost 12 months with a significant shift but it's still a solid program.

Right. But in its entirety you took about $560m out of ASG and I -- what was the Grand Cherokee? What was the 2002 Grand Cherokee amount?

Pretty close to 300.

Okay. What's the other half of that? Is that just lower build expectation or is there another --

We've also got as Joe mentioned, we shifted a couple of programs to non consolidated entities.

Then the lower build rate is the other piece.

And then the other segment was the E&FM that came down a good chunk. Can you give us any clarification there?

Pretty much the same issues. On engine and fluid management. That's pretty closely aligned in terms of customer base with the ASG.

Yeah, but I mean you took -- well, I shouldn't say that. You took -- well, you're right. Most of it is 2003.

One last follow-up on the backlog. Can you talk to the Titan -- how's that revenue fall into '03 and '04? Is the revenue on the SUV next year, as well?

Well, there is revenue on the SUV. I think the way the Titan is planned, taking a pretty conservative outlook on this next year. It's pretty well loaded into late '03 and early '04. But I think the total revenue next year is expected to be something north $100m. This year is probably 20% of that depending on the popularity of the vehicle. It's off to a great start, I have to tell you.

Okay. You guys are going to do the SUV, as well.

Yeah, we'll do both.

Okay. Thanks very much.

Sure, thanks, Darren.

Our next question is coming from Stephen Girsky of Morgan Stanley.

Good morning, everybody, can you hear me?

Yes, Steve.

Just a couple of quick ones because Darren got most of them on the backlog. In the backlog do you assume price going forward in there, or no?

If they are committed to them yeah.

So 2% productivity or something like that? It all goes in there then?

Anything that's in the contract is in there, yeah.

Okay. And I'm trying to figure out, Bob, what's the tax rate in the fourth quarter?

Awful.

Awful high or what is the -- I mean -- if I pull out the Restructuring, that's 70 some odd million, the $72m restructuring, what's the after tax of that $72m?

4 something?

If you're looking at the 32, you've got about 20 -- 32 after tax?

Yeah.

The tax number that corresponds to that above it is about 20.

Okay. So the pretax then is 52?

Plus or minus the equity earnings and the affiliated stuff, yeah.

Then you calculate a tax rate what's the number you get?

As said, Steve, we were talking about the annual numbers, give me a second here and I'll have it.

It's got to be about 45%.

And the reason it's that high is why? Mix of business where you make money or something?

Exactly.

Okay.

Exactly. We've got a couple countries where we're not taxpayers and a couple of those countries we lost money.

Did currency help you at all in the quarter, or no?

As I mentioned there was some currency translation on the for side included in other income.

That's the only place?

Well, obviously to the extent of the mix of international operations it helped. You know one of the -- on sales in the fourth quarter, we were actually down 18. Europe takes it up 40 but we've got a pretty substantial South American presence which went south by 63 during the quarter on the sales line. So while the Euro and Sterling and all the European currencies are helping, the steeper decline of the South American currencies is overwhelming it.

And is the same issue true of profit or no?

Well, what happens is you pick up in South American numbers some of what you give up on the top line, you get back through the translation gains. So there's a little bit of pick-up in currency during the quarter but it's not a big deal at the bottom line level.

All right. This deferred employee benefits, this $1.9b on the balance sheet, is that mostly employee benefits, pension and healthcare stuff or is there something else in that number?

That's what it is, pension and healthcare stuff.

Okay. So what was the pension at the end of the year, do you know?

We'll disclose that when we put out our financial statements in the 10-K.

Okay. Thank you.

You're welcome.

Thank you. Our next question is coming from David Bradley of J.P. Morgan. Please go ahead with your question.

Good morning.

Good morning.

If we look at the equity income, I think you mentioned on your earlier comments that the gains on the DDC sales were flowing through equity income.

The gross gain, yes.

Gross gains. So the equity income for the year I guess ran $97m up from $54m. How much of that -- first of all was there any -- I know it had a very high equity income line on the fourth quarter last year. Was there anything special on that item? How much of the -- what's the total DDC gain that ran through equity income on the year?

$39m.

So that $97m would be $39m less.

Right. And we also as we discussed a year ago at this time, the fourth quarter had some anomalies in it in DCC, too, so it was abnormally high.

Okay. And then you're still peeling assets out of DDC so we may continue to see gains coming through there is that for a while or are we done there?

That's the plan.

Okay. The tax rate for -- you mentioned was high in the fourth quarter. The same issues that affected fourth quarter will continue into next year?

Not so much. Because one of the nice things about being done with the restructuring is whereas operating income and GAAP income is the same, there's not the big reduction in taxable income, either. Because of the restructuring charges. So one of the reasons we lost money in some jurisdictions because the restructuring that we did, that behind us, the tax rate ought to be more normalized.

Okay. Then Ford is mentioning on their call they are going to run F150 stronger in the first half to build inventory to cover during the changeover. They also hinted we might get some hits in earnings in the second half because of the changeover costs. We assume that would follow through in your earnings as well because you're pretty heavily in that platform. Right?

If they boost their production requirements, David, yes, we'll see the benefit of that. And I think most of the startup costs associated with that we've already endured so we're a little ahead of the curve on that one.

Okay. Thank you.

Our next question is coming from Mike Bruynesteyn of Prudential Securities.

Good morning, guys. Nice job on strengthening the balance sheet.

Thank you.

On the Restructuring, in terms of the cost savings driving the earnings improvement, when does it really get worked through? And beyond that what is going to drive your earnings growth?

I think you'll see probably a clearer picture on the benefit of all this as we get to the second half of the year. Fourth quarter should be a more complete representation of what the art of the possible is. I think going forward it's really a combination of several things. We've got a range of products that we think will command some premium in terms of margin. We also have a completely changed business model enables us to focus on the processes that we do most competitively and most efficiently, relying on our supply base for those commodities that can be manufactured more competitively elsewhere.

Great. Then just one minor item. On page 13 when you talk about the divested ops. Does the $30m impact on profits imply 5% net margin on the divested ops? If that's true, why get rid of them if they are doing so well?

Slide 13.

Yeah.

Well, that's --

You got 600 million in sales and 30 million of [no pat] on divested ops, that's pretty good isn't it?

Yeah. But so McDonald franchises are pretty profitable, too. None of them fit strategically, number one. Secondly people were willing to pay us more as a multiple of EBITDA than we were getting valued at ourselves so that's a trade you make all day long for a non strategic operations.

I think it goes back to the sort we made earlier, Michael. Look there's so many businesses that can be supported effectively and provide focus within our product offering. There are other businesses that are interesting businesses that can perform better when compared with others, but it tends to dilute our energies. And so in fact there are some businesses here that are very attractive that will perform elsewhere and I think it's -- it fits our needs as well as the acquirer.

Okay. Great. Then back to my first question. In terms of how much benefit from restructuring would you expect to see in the earnings of this year. That works through by the end of '03?

I think what we're saying is it's most of the improvement from the 146 base to the 185 to 205 that we're throwing out at guidance. There's not a lot of help on the top line.

Okay. That will have worked lieu the system by tend of '03, is that right?

We think we get to the pretty close to the full run rate by the end of '03, yes.

Okay. Thanks very much.

You're welcome.

Thank you. Our next question is coming from Scott Merlis (ph) of Deutsche Banc.

Good morning,. Congratulations on your restructuring.

Thanks, Scott.

Terry, can you update us on pricing in the aftermarket in your product line?

Sure. Overall in 2002, we were a point, point and a half, maybe. That's overall.

In 2003 we see the engine side of the business very difficult, lots of competitors there. Probably another range of one, one and a half, maybe. Just depends on the product. We have an awful lot of varying product groups and types and we manage those competitive prices along those lines. So we're looking overall at that range. Like I said engine has an awful lot of competition so I don't see a lot there.

Okay. And I realize you raised your 2003 forecast really based on the engine management deal, but to what extent are you getting at least some confidence in the general outlook from your startups, your remaining cost reductions and I guess interest expense must be tracking in the right direction?

Yeah, I think if you look at the, you know, the business more broadly, Scott, I think we're feeling very positive about the benefits we've derived in the restructuring. Most of the plans are on target or even ahead of and I think the other real positive here is as our people are beginning to see the benefits of their effort, there's a stronger momentum that's taking place throughout the organization.

And when you get to the fourth quarter and beginning of next year, will the cost structure and downsizing reach a point where it facilitates approaching that $4 per share number you did in the last cycle once we turned normal volumes.

We think that's certainly possible. In fact, we'll try to give let's say a broader projection as we get towards the end of the year. But our goal here, of course, is to return to the levels of profitability that we've enjoyed in the past and maybe, in fact, exceed them.

Okay. Well once again, good progress and thank you very much.

Thanks. We're going to take a question off the internet here from Wendy Needham at Credit Suisse. She was asking about our pension. I don't want to give them more direct answer than I gave to Steve which was not very much of an answer. But I would clarify a couple of numbers she was talking about the status of the liability in the September quarter end conference call. We talked about a charge to net worth of up to $220m for the domestic plans to reflect a minimum under funded pension liability. That charge ended up being $242m when we brought in $20m or so from the foreign plans.

And as far as the expectations for change in contributions, that guidance hasn't changed, the cash does go mostly to the domestic plans. We said we did about $15m in 2002. And we expect to do $25-35m in 2003. And the domestic plans did finish the year up slightly. Very slightly.

Next question, Emma.

Thank you, the next question comes from Rob Hinchliffe of UBS Warburg.

Good morning.

I wanted to come back to the backlog for a second. I know you went through a lot of the changes that were in there, but Excursion, Dakota, are those still in the backlog right now? Ford Excursion, Dodge Dakota?

They are in the backlog to only the extent the schedules have been sustained. We adjusted them to the low end of the diminishing demand of the product.

Are you saying that -- I guess you haven't been notified the Excursion is going to be canceled still?

Well, I think the demand levels have been adjusted downward pretty substantially but I don't think they've announced publicly any plan to discontinue production.

Okay. And on the Dakota, that's the Durango is out, do I understand that right? And the Dakota is still in?

Exactly.

Okay. On working capital, another $200m. That kind of the same idea as we saw this year? I mean a lot of it comes out of Inventory?

Exactly.

Is that still aftermarket, Bob?

The bulk of it. Terry is nodding.

Sorry.

For the record.

I thought you could hear my head rattle. Yes, is it.

We're doing inroads elsewhere.

We're doing it across the company but certainly because Terry has a disproportionate share of the working capital in the company he also contributes a disproportionate share of the reduction.

And then last question, you made reference to and I think this is when you were talking about the backlog, some of the adjustments downward are due to divestitures that you've made to non consolidated affiliates, right?

Right.

Can you give us a sense of the revenue that is not consolidated at this point? What it is today? What it was before the restructuring plan? How much have you sold to your affiliates?

It's not necessarily sold to affiliates. Some has been transferred to a joint venture.

Okay.

For example, we have one example without naming the partner or the model, it's a frame opportunity that we're working on in Europe where we had originally planned to do it ourselves. We thought, gee, it's not very wise to add frame capacity in Europe, so we formed a joint venture with somebody who's already there. It will be a 50/50 joint venture. As that business transfers that drops out of our number. That one contract alone, I think happened to be about $80m. Just -- that's an example.

Right.

It's all part of the continuing program to try and minimize our investment and better leverage our assets.

Any ballpark, though, in terms of revenue what you've -- of the divestitures what you've sold to, whether it's affiliates or JV. What kind of revenue potential did you have and do you have now? I'm trying to get a sense of where the assets are being sold off to?

That's probably something we could come back to you on. At this point we doesn't have the data in front of us.

Okay.

Why don't you check back with Greg on that.

Okay. Thanks.

We're going to take a call off the internet or question, excuse me.

It's a question here that says growth in the worldwide automotive sales this year could welcome entirely from China. In addition to China -- China is increasingly becoming a manufacturing base for markets outside of the U.S., what's Dana doing to take advantage of this growth opportunity?

I think this is from Karsten Jensen (ph).

I think as some of you might know we have four operations in China today. We're looking at other opportunities to manufacture in China to serve the local markets but also to expand our export capability. I think we've learned a great deal in the several years that we've been there. I think we can invest more prudently and certainly we've now determined that an export component is an important part of the plan. And so those are the things that we're evaluating and have active plans underway as we speak.

Okay. Emma.

Thank you, our next question is coming from Danny Leang (ph) of American Century.

I think it was on the slide you talked about, two remaining opportunities. I guess can you give me an indication of expected proceeds if you were to sell those two other operations?

You know, I wouldn't even venture guess at this particular juncture. The engine hard parts business is a global business with operations in several countries around the world. [Quinton Hazel] is essentially a distribution business, most of the value there is in the inventory. So I wouldn't venture guess at this juncture.

The value of the inventory then?

I guess maybe if you wanted to just take a real – is it bigger than a bread box kind of look at it? You could probably use a number like 45 to 55% of sales, somewhere in there, that's about the average multiple for these kind of businesses.

Okay.

In the industry.

Thank you.

You're welcome.

We're showing time for one last question. Our last question is coming from Brett Hoselton of McDonald Investments. Please go ahead with your investments.

Good morning, gentlemen.

Good morning.

Really had two questions if you don't mind. Quinton Hazell and then the engine hard part business, can you give us a sense of what kind of [no pat] margins those businesses have? Are they sub standard to the corporate margins at this point in time? Are they money losers?

I'd say Quinton Hazell is a break even business for us today, Brett. The engine parts business is marginally profitable but substandard.

Okay. And then the second question for Terry is, as we think about the aftermarket and think about demand in the aftermarket. What are you seeing as far as demand when you look out into 2003. Should we anticipate roughly flat demand? Is it still on the decline?

Secondly, if we were to look at your core operations, without the engine management and the Quinton Hazell business, what would you estimate your margins might move to in 2003 if you were able to sell Quinton Hazell?

As far as the first question goes, there are two demand patterns in the aftermarket, one is independent, that's occurring out at the installer, the professional technician, that area, and the supply chain that supports it and that's running anywhere from two to six up but when it comes back to a manufacturer like us it tend to be flat and the reason for that is what I talked about at the global symposium is there's still a constriction or a contraction of distribution between the installer and the manufacturer. There are two points that are important, somebody is going to make it, somebody is going to install it. We're on the make end, that's good.

As the inventory contracts inside the chain, one of these days, reasonably soon, you'll start to see that translate back to the manufacturer.

I think, Joe, we got that question on the margin side, and, Bob, we talked about that. I believe it's around 8% is my recall to answer your question absent the Quinton Hazell line.

Thank you very much. It's a good business.

Thank you very much.

Okay. Thank you very much. We appreciate your attendance at our call today and look forward to your continued support and interest in the Dana Corporation.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.