Dana Inc (DAN) 2003 Q1 法說會逐字稿

Good afternoon welcome to the Dana Corporation's first quarter conference call.

This call its being tape recorded.

The format for today's conference includes remarks by Dana's Chairman and Chief Executive Officer, Joe Magliochetti and by Bob Richter, Vice President and Chief Financial Officer followed by a question and answer session. This quarter Bill Carroll, President -Automotive Systems Group 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 Michelle Hards, Director of Investor Relations. Please go ahead, Michelle.

Thanks, Ella.

Good afternoon everyone and welcome to Dana Corporation's 1st quarter 2003 conference call.

We issued our first quarter earnings release this morning and as required by new SEC rules we have furnished a copy of this release to the SEC in a current report on form 8 K. This report is available on our website at www.dana.com on the investor page under SEC filings.

During this call, as in the past, we will be discussing Dana's financial statements with DCC shown on an equity basis. Under the new SEC rules, we have included in our earnings release a presentation of the most comparable GAAP financial measures and a reconciliation of the difference between the nonGAAP measures with DCC on an equity bases and the GAAP measures with DCC on a consolidated basis.

If you would like a paper copy of the earnings release please call my office at area code 419-535- 4635 and we'll fax it to you promptly. Today's call is supported by a slide presentation, again, located on the Dana.com investor page.

Just as a reminder, our webcast system enables you to direct questions to us via the internet throughout this presentation. Joe, Bob and Bill will answer as many questions as time permits and all bona fide questions will receive a follow-up response.

At the request of several analysts and in the interest of fairness to all who have taken the time to dial in today, we ask that callers participating in today's Q&A session please limit themselves to no more than two questions each.

Hopefully everyone has now located the site. Let's move on to slide number 2.

I'd like to remind everyone that today's conference call remarks will include forward-looking statements. These statements are based on current knowledge and involve assumptions, uncertainties and risks. Our actual results could differ materially from those which 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 three, I would like to begin today's conference call by introducing Dana's Chairman and Chief Executive Officer, Joe Magliochetti. Joe?

hanks, Michelle and good afternoon everyone.

I would like to kick things off with an important announcement. After a decade of going against the accounting convention of listing the current year's data in the left-hand column and after constant prodding from our CFO, we decided if you can't beat them you might as well join them. So effective January 1, 2003 we've adopted this more conventional approach to our financial reporting. Hence forth the most recent financial information will be shown to the left.

Sales for the first quarter were $2.4 billion up roughly 5% from the same period last year. We achieved a profit of $41 million or 28 cents per share which compares to a loss of $229 million or $1.54 per share for the same period in 2002. During the quarter, specific assets of Dana Credit Corporation were sold resulting in gains of $10 million or 7 cents per share. The quarter ended on plan which is also up substantially from last year. This reflects new business wins, as well as the benefits of our restructuring program that was announced in October of 2001.

Now, continuing to slide number 4, I will review our sales and operating profit by segment. This chart shows our first quarter performance by strategic business unit compared to our 2002 results. Sales were up $121 million and net operating profit after tax was $4 million better than a year ago. We are seeing some benefits of our restructuring program, however our automotive systems group is still absorbing startup costs associated with several new programs within our structural solutions group last quarter. We expect these start-up costs will diminish as we approach the fourth quarter when we will see benefits from the planned production.

Within our automotive systems group we will also begin to see the full benefit of our more comprehensive restructuring initiatives during the latter portion of 2003. Automotive aftermarket sales and profits were down for a number of reasons and I'll address these in just a moment. We saw marked imporvement in the engine and fluid management and heavy vehicle segments. These positive results clearly reflect the benefit of greater efficiency and reduced costs related to our restructuring efforts.

In general, our first quarter came in very much as expected. There are still bits and pieces of the restructuring plan left to execute, including the 11 plants yet to be closed. These actions are on target for completion by year-end.

Now, let's move to slide number 5 for a more detailed review of our performance by strategic business unit. The automotive systems group experienced a 9% increase in sales for the first quarter compared to the same period a year ago. The majority of this increase resulted from higher production levels than in 2002 on certain popular models, and the early success of new programs in Australia. Bill Carroll will discuss this in just a few moments.

Net operating profit after tax was down 5% from the same period last year. As I noted earlier, one of the main factors for this continues to be the start up costs associated with the seven new launches in our structures group. These costs were $7 million greater on an aftertax bases than in 2002. Equity earnings were impacted by nearly $3 million after tax due to the performance of our operations in Mexico. Sales were down by almost 25% due to lower production levels.

In Venezuela the turmoil continues keeping the country and really its economy very unstable. On a positive note we are pleased to announce plans with our partner GETRAG for a joint venture with Volvo cars. This joint venture will supply all wheel drive and chassis systems supporting growth in the crossover vehicle market throughout the world.

Let's move to slide number six. The automotive aftermarket group experienced a sales decline of 4% compared to sales posted in the first quarter of 2002. The market remains relatively flat as customer consolidations continue and excess inventories are being worked down. The group's performance was also impacted by reduced demand in engine and builder section with fewer engines being sold.

The shift in mix with a stronger demand for lower margin second line products offsetting reduced demand for premium brands and the strategic business unit also enhanced its receivable reserves this quarter, reflecting additional concern for some smaller marginal businesses operating in the current environment. While certain additional marketing expenses were incurred to better prepare for the upcoming peak selling period.

As most of you know last quarter we announced the planned sale of our aftermarket engine management business to Standard Motor Products. The transaction is progressing well, and we recently received Hart-Scott-Rodino clearances. We remain on target for completion no later than the third quarter.

With that let's move on to slide number 7. Sales for Mike Glaisher's Engine and Fluid Management group were up $25 million or 5% compared to the first quarter of 2002 and profits were up 35%. The gains are primarily attributable to three items noted in this slide. First new business in this segment has helped to achieve additional growth.

Secondly we also saw increases in the heavy-duty engine market in North America specifically in liners and cam shafts. And lastly, the numbers reflect further evidence that our cost savings and restructuring improvements are paying off.

Moving to slide number 8, additionally, we are seeing some notable improvements within our fourth strategic business unit, the heavy vehicle technologies and system group. Sales were up 9% and profits were up 60% when compared to the first quarter of 2002. Currency helped the group's top line by $23 million as a significant portion of its business is based in Europe.

Apart from the currency impact, we are seeing some encouraging recovery in the off highway sector. Within the North American class 8 heavy truck market, we find less than a 2-months inventory supply. We find that used vehicle prices are stabilizing. The new EPA standards are being implemented with new engines continuing to perform very well and production back logs are very low. As a result, we see this important sector poised for a recovery.

With that I'd like to turn things over to Bob beginning with a closer look at our numbers on slide number 9. Bob?

Thanks, Joe and good afternoon, everyone.

You should be looking at our income statement for the first quarter compared to last year. As usual, this slide and others show DCC on the equity basis which is how we analyze the company and is consistent with our segment disclosures. As Michelle indicated earlier, we have included with the press release supplemental information that reconciles these numbers to the fully consolidated statements.

Sales for the first quarter were up a little over 5% from last year. The impact of acquisitions and divestures is minimal since the accounts of all the major operations we divested last year and the engine management operations which we intend to divest this year are shown on a single line as discontinued operations. Currency added 1.9% as the U.S. dollar declined against just about everything else in the world but the bulk of the increase was organic growth. Other income was flat.

Gross margin declined from 10.9% to 10.1% due to the start-up costs in the automotive systems group and the mix issue in the automotive aftermarket group that Joe just spoke about. This was offset by a reduction in SG&A expense which went from 8.4% of sales last year to 7.4% this year. So operating margin was up from 2.5% to 2.7%. We had no restructuring expenses this year, and interest expense was down due to lower debt levels. So income before taxes went from a loss of $11 million in 2002 to a profit of $36 million this year.

While the improvement in income -- with the improvement in income we are starting to get back to a more normal tax provision. Last year, as you may remember, despite the pretax loss we were still a taxpayerer in a number of foreign jurisdictions which is why the relationship looks unusual. The equity in earnings of affiliates line is up $7 million. This is principally due to the $10 million in gains on the DCC asset sales. But for this, it would have been down slightly since the operating income of DCC continues to decline as we reduce the size of the portfolio.

We also had lower equity earnings in our Mexican affiliate that was partially offset by increased income in the equity and earnings of GETRAG. Last year's discontinued operations number was positive because it included operations like FTE, Boston Weather Head, Daconcha and others whose net income including an unusual tax adjustment more than offset the loss from the engine management business. This year, Disc Ops is only engine management.

Finally last year we recorded a $220 million after tax charge in connection with the adoption of FAS 142 which changed the accounting for goodwill. So overall, we went from a net loss of $229 million in last year's first quarter to net income of $41 million this year.

Moving to slide 10, this slide compares the first quarter cash flow to last year. We've already talked about net income, so to save space, we've added back the $220 million for the accounting change in 2002, which, of course, was noncash. We've also netted some of the smaller items onto the line called net changes in other accounts.

Depreciation is lower than last year, principally because we no longer have FTE, Boston Weatherhead and the other businesses we divested in 2002. No divestures were completed in the first quarter of 2003. I'll talk more about working capital on the next slide.

The increase in Cap Ex reflects our increased capital budget this year. We intend to spend about $350 million for the full year versus the $246 million we spent last year. There is no change in the dividend and the difference in other accounts was largely due to deferred taxes.

As we said in February, at the end of 2002, we had recorded all of the charges associated with the restructuring plan we announced in October of 2001. Beginning this year we are just treating restructuring charges like any other operating expense so we have no costs to add back. We did, though, make $44 million in payments out of the restructuring accruals which was offset in part by $20 million we received from the sale of assets related to the program. Overall net debt went up $166 million due to the seasonal build-up in working capital which we'll talk about now with the help of slide number 11.

This slide walks the working capital on the balance sheet forward from the beginning to the end of the first quarter in each year. Every year we have a big seasonal buildup in receivables during the first quarter as we move from a weak sales month in December to a strong sales month in March.

Inventories didn't move a lot in either year, and we always have a bit of increase in prepaids in the early part of the year. While an increase in current liabilities usually offset some of the increase in the current assets, the relationship usually looks like it does this year. 2002 was an anomaly.

As we discussed in our conference call a year ago, we filed for and received a federal tax refund of more than $150 million at the end of March reflecting the carry back of our fourth quarter 2001 restructuring charges. The total for the cash change from operations are the same numbers we saw on the last slide and the difference between the two years is basically the tax refund.

On the next line you have the effect of working capital of the restructuring. This year, as we noted on the last slide, we had $44 million of payments out of the accruals. Last year, the net effect on working capital of the charges and the payments was $16 million. We also had a small divestiture in the first quarter of last year that impacted working capital by $3 million.

Finally, as I mentioned earlier, everything strengthened against the dollar this year so it had the effect of increasing working capital and last year currencies went the other way. So we end up with the balance as you see at the bottom which are lower as a percent of first quarter sales than a year ago, so we are still comfortable we'll meet our full year target for working capital reduction.

Let's move now to slide number 12. This slide shows the change in net debt for the quarter. The change in net debt from the cash flow statement is $166 million. There was some minor changes in foreign short-term borrowings and cash balances but basically we financed the change by borrowing $160 million on our accounts receivable program. The other column reflects the relatively minor currency adjustments and the marking to market of our interest rate swaps. But the big numbers on the first two lines reflect the reclassification of $250 million of bonds due in March of 2004 from long-term debt to short-term debt.

Equity went up by $41 million in earnings less than the $1 million in dividends and was positively impacted by deferred translation which accounts for $61 million of the $64 million shown as other change in equity. With the equity going up, even though we borrowed the $160 million to fund the build-up in working capital will ratio of net debt to capital barely moved. In terms of liquidity we are still in great shape. Between our accounts receivable program and our revolver we have $640 million of available capacity on top of the $542 million in cash on the balance sheet.

Moving to slide number 13. You see our debt portfolio at March 31, which has an average life of just over ten years and including the effect of interest rate swaps an average cost of 5.75%. The only term debt maturity in the next few years is the $250 million due in March of '04 that we have now moved to short-term debt.

Let's now turn to slide 14. This slide brings you up to date on where we are in the sale of the DCC portfolio. When we announced our intention to exit these businesses in late 2001 we were looking at the chart on the left. While we knew, for tax and other reasons, we would be retaining about $900 million in assets shown in blue for a few years, we have been actively working on the sale of the assets held by the three operating groups of DCC shown in yellow, red and green.

At the end of 2002, the total portfolio was down to $1,650 million and this quarter we sold assets represented by those two slivers that are sticking out of the pie chart on the right which totalled about $80 million. These are the transactions on which we realized the $10 million in gains we reported during the quarter. In total, since the start of the process, we've sold $630 million of portfolio assets and recorded net gains of $42 million after tax. The total portfolio assets now stand at $1,570 million and we'll continue to work on the rest of the yellow and red slices of the pie as we move throughout the year.

Please turn to slide number 15. In our last conference call, we said that we expected to report net income for the full year somewhere between $185 and $205 million. Although we've seen some adjustments in production schedule since then, we're still comfortable with our full year forecast of 15.8 to 16.2 million units for North American light vehicle production and 180 to 185,000 units for NAFTA class 8 production. So given that we've already realized $10 million in gains from the DCC transactions that we hadn't contemplated in our earlier guidance, we now see full year 2003 income in the range of $195 to $215 million.

Let's now turn to slide number 16. This slide shows our current outlook for full year cash flow. To be conservative here we are working off the low end of the range of the net income numbers we saw on the last slide. We are on track for depreciation of $350 million. As I said earlier we aren't backing off our forecast that we'll take out about $200 million of working capital again this year.

The divestiture number is the cash portion of the proceeds from the expected sale of our engine management business to Standard Motor Products. Having received Hart-Scott-Rodino clearence during the quarter we are now waiting for the completion of Standards financing. In total this would give us $835 million in sources of cash.

Cap Ex, as I mentioned earlier, should come in around $350 million and we aren't assuming a change in our dividend policy. So we should have at least $480 million in cash out of which to fund between $100 and $150 million in payments out of the restructuring accruals. We intend to use the excess $330 to $380 million to reduce net debt.

Please note that this forecast does not consider any dividend we might receive from DCC as they continue to sell down their portfolio, nor does it factor in the possibility of any divestures that we might accomplish apart from the announced sale of engine management.

That concludes my comments on the numbers. So I'll turn it back to Joe and slide number 17.

Thanks, Bob.

Slide number 17 highlights our net new business chart. Showing our projected incremental business through 2007. As we emphasized during last year's conference call, this chart reflects a more conservative approach to logging and quantifying the value of programs we have secured for the future. The numbers reported are for business we have definitely received with written commitments in hand.

At the same time, the chart does not take into account the $2 billion in annualized new business that we're currently quoting on. Assuming a conservative hit rate, of say 20%, these bids could mean an additional $400 million in sales for 2007. However until we get the specific awards we'll continue to use this more conservative approach in our numbers. We believe this approach provides a far more useful tool for our company and for those who follow us.

Not to be lost in all of this is the fact that during the first quarter we picked up more than $600 million in new business growing our cumulative total over the next five years to nearly $5 billion. Despite our aggressive restructuring plans, technology and product innovation has never received greater support in our company.

Now, let's move to slide number 18. Here we've shown a montage of new business wins spanning our engine and fluid, heavy vehicle and aftermarket sectors. Bill will talk in a moment about some of the new opportunities within our automotive systems group. But just to highlight a few of the opportunities shown on this slide, the first is the Blue Diamond medium duty truck collaboration between Ford and Navastar. Here we've won the front and rear axle business valued at something in excess of $50 million and production on this is just in the early stages of starting. We've also won the cam cover for the 4.0 liter Ford engine which starts later this year. Again it's about $11 million in new sales.

And then thirdly, some new business with John Deere on the John Deere model 6,000. Here we've won the axle and cooling module both valued in excess of $65 million expected to begin in the third quarter of this year. In addition to this new business award, we were pleased to receive the John Deere Achieving Excellence award at their technology expo on the 8th and 9th of April.

Now, as we move on to slide number 19 I've asked Bill Carroll, President of Automotive Systems Group, to comment on some of our new business in his group and it's a very exciting emerging technologies. Bill?

Thanks, Joe and good afternoon everyone.

The next few slides are part of a presentation that Bob Richter made at last week's Morgan Stanley global automotive conference. So much attention to our massive restructuring plan during this past year, one of the questions I'm often asked is where's the evidence of Dana's new business in this market place? Like Bob, I believe the March issue of Wards Automotive World magazine offers a pretty compelling third party endorsement of our progress and it certainly further illustrates how Dana's new technology has strategically positioned us on some of the hottest new programs in the industry.

Now let's begin with slide 20. After thumbing through some ads in the table of contents, the first text you hit is this editorial on hybrids. The picture is the Ford Escape hybrid due out later this year. This is with our rear axle and drive shaft.

Now moving to slide 21. After you get past the letters to the editor, the new starts on page 9 is an article on Toyota adding a truck plant in San Antonio for the Tundra which features our frame and drive shafts.

Moving to slide 22, there's an interesting article on page 1 1 about the Cadillac SRX topping all but one of the high end ,all wheel drive SUV's in handling. Only the BMW X 5 could match it. The front and rear differentials on the Cadillac's are made in our Dana/GETRAG joint venture in North Carolina. And, off course, starting this year, Dana will supply the axels, both front and rear of the BMW-X 5 made in the United States.

Moving on to slide 23. Turn the page and there's an article on General Motors Holden in Australia adding a third shift to make 18,000 [Menorals]. Now this will be exported to the United States where they will be sold as the new GTO. We provide the rear axle module and we've designed that module and the front corners of this vehicle.

Now, moving to slide 24. The next page has an article about Jeep's plan to make a new pickup truck of the Wrangler platform. That's good news for us. We supply both axels and all the drive shafts on the Wrangler.

Next on slide 25. In the auto insight column there's an article on the increasing importance of vehicle crash safety. This is an important agenda item for us all and certainly for what we design at Dana. Interesting the only full size SUV to get a double five star safety rating out of NTSA is the Ford Expedition which is built on a design Dana frame.

Moving to slide 26. On page 38 of the magazine starts a great four-page spread on the new Nissan Titan. This is their first full-size pick up and it was a big hit at the North American International auto show earlier this year. Thanks to an innovative gear design, we secured the contract for the rear axle and drift shaft on the two wheel drive version and both axles and drive shafts on the four wheel drive version.

Moving on to slide 27. The very next page talks about the frame for the new F150 and how its revolutionary hydro form design makes it nine times (INAUDIBLE) stiffer than the old version. The article just happens to mention that it's a Dana design frame.

Slide 28. There's a nice article on how Daimler Chrysler is setting a new standard with a Specifica Sports Tourer. Our Dana/GETRAG joint venture makes the rear axle and power take-off unit.

Finally, moving to slide 29. On the last page of the magazine there's an article on the hydrogen car and the boost development received following President Bush's last State of the Union message. As a supplier of plates, stacks or thermo management components to all the major fuel cell developments in North America and Europe, we think this is great news, too. We made some more news recently as we were named as General Motor's 2002 supplier of the year for fuel cell components.

Now continuing to slide 30. One of the most exciting new programs is a Nissan Pathfinder Armada, which was previously referred to as the WZedW project. This vehicle caused quite a stir at the recent New York auto show. And we are proud that it features our independant front axel and front and rear main drive shafts. Of course, we're also proud that it reflects Dana's growing success with new American manufacturers. Again, the common thread here is Dana securing highly desireable newsworthy business that features our latest technologies. We are tremendously proud of the diversity and promise of these programs, something we believe distinguishes us from our rivals. As we continue to shift our focus from restructuring to growth, I can assure you that this is only the beginning.

Now, let me turn it back over to Joe who will wrap things up beginning with slide 31.

Thanks, Bill.

In closing, I would like to focus on four key objectives. First we are on plan with our positive performance for the first quarter. We remain confident in our range of 15.8 to 16.2 million units of light vehicle production for North America. And our range for the heavy vehicle segment remains at 180 to 185,000 units for the year. Secondly, we expect our performance will be further enhanced throughout the year as we conclude the final actions of our restructuring program and begin to realize the full run rate of the related benefits.

Next to reiterate a point that Bob made earlier. We are managing for cash and working diligently to reduce our debt. This remains a top priority for us. And finally, we will be relentless in pursuing innovasion and new technology that will enable us to secure further opportunities within our diversified customer base. We are continuing to quote new business and as our restructuring initiatives near completion, we will turn our attention to a far more energized growth imparative. Clearly we are very positive about securing additional new organic market share gains, just as we have this quarter. We are also exploring additional strategic alliances that support our long-term growth objectives.

With that, Bob, Bill and I would now be happy to entertain any questions you might have.

Thank you.

Today's Q&A session will be conducted electronically. If you would like to ask a question, you may signal us by firmly pressing the 1 digit on your touch-tone telephone. Dana will also answer questions from their website. We will take as many questions as time permits and we'll take your questions in the order that they were received. Thank you.

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

Good afternoon.

Hi, David.

You normally have a seasonal pick up in earnings Q1 to Q2. But this year we've got a couple of obstacles. One, we have sequential declines in big 3 production with the big cuts at Ford and at General Motors and we also have this -- you have some extra product launch costs as you are doing a lot of ramp up in the next couple of quarters. Would you expect then to see that kind of sequential increase or not in this coming quarter?

Dave, I think the First Call consensus right now has us at about 31 cents a share for the second quarter. And I think we are pretty comfortable with that.

Okay. And then, separately, your SG&A expense popped down quite a bit. Is that sustainable, or is that one-time? Is this the run rate we should think about going forward?

Um -- yeah, I think it's going to be pretty close to that although I have to fess up we had a little bit of a pick up in some mark-to-market adjustments on some of our stock based compensation. We hope that works against us in the back half of the year. But, yeah, it should be mid-7s. 4, 7.5, something like that for the full year.

David there's a lot of programs under way to retain that level of spending. As you might recall, we've got this consolidation taking place within Bill's group where he's combining his engineering and product development center here in Marmee, Ohio. And while it gives us tremendous flexibility and improved efficiency, it also enables us to reduce our overheads and function more efficiently.

Okay. Thank you.

Thank you. Our next question is coming from Wendy Needham of Credit Suisse First Boston. Please go ahead with your question.

Hi, good afternoon.

Hi, Wendy.

Two things on auto systems. It looks like you picked up some nice business in '04 and particularly '05. Could you confirm that and could you talk generally about what that might involve, Bill?

Yes, Wendy. We have.

In the first quarter we have been able to win some Tacoma business, some axle, some drive shaft business and we have been able to get some new Jeep business, also. But if we look at the full 2004, we are finding that we've got some good global wins around the world. Again, the Ford Berra is moving through quite nicely. We have got the GM Holden business that's coming through. So all in all, we've got some nice business that we are starting to see that we are booking.

Great. Another then question, Bill.

A couple of years ago, I think it was, when you had us out there for a presentation on ASG and you started alerting us to all these start-up costs.

Yes.

You had said at the time that they might be penalizing you by 300 basis points on the operating margin line. Do you think that's still accurate or has there been some erosion from that? So should we be looking for a pretty sharp improvement in '04 on your operating margin?

Let's say this, Wendy. We are pushing to get back to historical levels within the automotive systems group, and we firmly believe our plans will get us there. Certainly getting past and absorbing and getting past the start-up costs will help us do that.

And just, I know it's still only supposed to be two questions. Do you get the full benefit of the lack of start-up costs in '04 or is that not until '05?

Let me jump in on that one. Because I think if you look at it broadly across the company in's always going to be some start-up costs.

Right.

We have always endured the start-up costs. Our plan, Wendy, is to be sure we don't have as many as concentrated as we have this past year. So I guess to answer your question we'll get through this period, we'll get back to some sense of normalcy and we'll try to hold that level of production.

Great. Thank you.

Thank you. Our next question is coming from John Cassezza of Merrill Lynch. Please go ahead with your question.

Hi, John.

Thanks very much. Good afternoon, guys. Just two questions.

First on the commercial vehicles business. I mean, what particularly seems to have given you more conviction that that cycle has picked up? Secondly I just had a question on the aftermarket business.

Yeah, there's a couple things, John. One, of course, is that we think that the industry has done a pretty good job of burning off the excess inventory that was in the pipeline and we are looking at roughly inventory to sales that's about 2.5 months for NAFTA. Orders are coming in at about 15,000 units per month month, and sales have been generated about 12.5. So we're beginning to see a little bit of a pick-up in orders. We are measuring it against freight hauled and while this has given us kind of a leading indicator, we are beginning to see some stimulus in the future as well.

So we're feeling pretty good about the number. Now recognize that this is almost flat with last year where we finished up at 181,000 units. So we are not projecting a barn burner recovery, we are expecting kind of a mirror image of what we went through last year.

But better than we originally expected coming in this year?

Better than perhaps you originally expected. This was our plan middle of last year.

Second on the aftermarket business there is at all a possibility some of the things that are happening there are secular? We have been waiting for a long time for excess inventory to go away, for pricing to firm up. It looks like the pricing trends broadly have weakened. If that is a possibility, Joe, I mean, would you reconsider your business composition?

You know, we'd always look at the initiatives that work in the best interest of the shareholder and we think there is some structural changes taking place in that sector.

At this juncture, John, we also see some opportunity for us. And I think the restructuring plans that Terry has put in place and some of the additional changes that he's just announced with regard to streamlining his organization structure, I think will bode well for us in the near term. Longer term, if we see any sustained structural changes taking place that are to our detriment in our plans, we'll certainly consider those.

Thank you, Joe.

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

Thanks. Can you give us a since, you mention 7 million was sort of the incremental year-over-year hit on the launch costs in the first quarter. Can you give us a sense of what the rest of 2003 would look like quarterly and when do those numbers peak? You said they recede starting in the fourth quarter.

Yes, Darren this is Bill Carol.

We effectively see getting through this, through the fourth quarter of this year. And again, what we're saying is is that, this is the single most important factor in us getting back to traditional or historical margins that we've had in this business. Once we get passed this, that's what we expect. And that's what will drive us through this year.

That means the fourth quarter launch cost comparison would sort have been, you know, flat or it just means it would be the first quarter with it ticks down and it's going to tick up from here to the third quarter?

Let's just say it will be substantially less than what we are seeing right now. That's what's in the fourth quarter. We'll get past most of the start-ups but we still have a significant start-up in the fourth quarter.

My second question is on the aftermarket. I guess broadly you'd said that the margin compression you saw in the quarter was -- was, you know as expected, and there's still restructuring benefits to come. I'm just wondering when you expect the restructuring to sort of overtake some of the other issues that are affecting that business and when we can start to see positive margin comparisons?

I think you'll see some significant improvements there as we move towards the second half of the year, Darren. I think the engine management change, divestiture of that business I think will bode well for us. In fact, bode well for Standard Motor Products as they consolidate production in their facilities. But I think at this juncture, you know, there's still kind of a lingering influence of the support needed for that business. The rest of our programs, the rest of the restructuring within the aftermarket is moving along very well.

Okay. And I -- this is really just part of that question. I just want to make sure I'm clear.

Yes.

The aftermarket sales that you're reporting, did you -- you didn't restate the year ago to remove the engine management sales, did you? You're reporting it -- how are you treating the engine management?

It says a Disc OP. We restated those sales last quarter, Darren with the year end.

Okay.

We reclassified it in the year end accounts as a discontinued operation. So we tucked out the sales and compressed all the P&L numbers to one line.

Thanks a lot.

Okay.

Thank you. Our next question is coming from Gary Lipedis of Goldman Sachs. Please go ahead with your question.

I'm going to change my name, I think.

Gary Clark.

It's just easier that way. I have a series of related questions like Darren. And maybe just leading off from that.

To the extent you talk about a margin recovery in the second half for aftermarket, does that largely hinge on the sale of engine management, or if for whatever reason that didn't take place in a timely manner, would we still see a recovery?

Absolutely. Jerry's got a number of things on the way right now, as we speak that we'll begin to reflect in that second period. And engine management isn't impacting -- is not impacting the aftermarket numbers that we've disclosed. Because, again, we've sucked all of the engine management accounts related to the operations being sold down into the --

Fair enough.

It's more of a distraction than anything else.

yep. Yep. Yep. Back on slide 17 with that impressive backlog, I guess as it relates to -- well, first are net price reductions -- not that you can always forecast that, but to the extent that you know it's not zero, do you include a net price reduction in this backlog, or do you not include any type of assumptions about price reductions?

The price reductions that are committed to when we get the new business are reflected in the chart. It doesn't consider any pricing on the stuff that isn't the new business. The continuing stuff.

Right so the base business.

Yep.

Yep. Yep. Okay. And I -- is it net of known roll-off in the base business?

Yeah, it is.

Yeah.

That for example is why the heavy truck numbers look kind of funky in 2004 and 2005 because you have the mat coming out of there.

Yep. Okay and then related to that. It looks like you know to the extent that you're sort of -- your start-up costs are occurring let's say a year ahead, so to speak so you're inoccurring a lot of start-up costs now related to things that really show up in your revenues in say late '03 into '04.

Right.

I mean it looks -- it looks like actually the level of start-up, at least on a revenue basis, is really sort of accelerating right right out through mid-decade. So therefore, why would we expect start-up costs to start to dissipate?

I think it's a question of the mix of business and the kinds of start-ups that we are pursuing. If you look at traditional product range where we're talking about a modification or enhancement of an existing range of product like an axle or drive shaft, there's not a tremendous start-up expense associated with that. If you're talking about a frame or a structure of some kind, you're talking about a whole new manufacturing methodology, a new plant, new equipment, new capital expenditures, new process. And those are the start-up expenses that we're enduring today.

Mmmm-hmmm. Mmmm-hmmm. Okay.

Those we don't see expanding as aggressively as we have in the past. Not that we would walk away from those opportunities, but we'll just be a little more measured in our acceptance.

Joe, when you mention the 2 billion that you're bidding on --

Right.

-- is that 2 billion over a multi -- that's not 2 billion of business that plays out through '07 I assume that rolls well out into the future years?

Some of that business is between now and '07. And some is even beyond '07, you're right.

Yeah. Okay. Nevertheless we're looking at, you know, maybe a 7% kind of organic backlog here?

Sure.

Yeah. Okay. Okay. Great. Thanks.

Mmmm-hmmm.

Thank you. Our next question is coming from Mike Bruynesteyn of Prudential Securities. Please go ahead with your question.

Hey, guys. Thanks a lot.

The growth in revenues, even after backing out the currency appears to substantially outstrip the build rates at your customers. Clearly this is a positive break from the pattern we've seen the last couple of quarters. Can you highlight what's the driver there? What are the particular programs?

I think it's all really being driven by the inovasion of the technology that Bill highlighted, Michael in his program. Those are the kinds of things we are bringing forward. Those are the kinds of things we are pursuing with our customers. The other piece of that, some of these creative joint ventures that we mentioned earlier, similar to the Volvo activity that we just announced. So there's a lot of things taking place that is a reflection of that kind of action.

Okay.

A couple of the Ford and Daimler Chrysler vehicles that are pretty important to us had a good quarter as well.

Yes. And also, Mike, it's Bill Carol.

We can look at the macro market and you have to look at micro what vehicles we are on. The vehicles we are on sport utilities and trucks in the first quarter, quite frankly, did quite well. And then you can take the Nissan, which we have, certainly, Frontier we have good activity on that, the Toyota has good activity on that and a lot of the Jeep and Ford products, as Bob had said. So the micro says that we run some pretty nice vehicles in this first quarter.

Great. Great.

And looking out at AAG coming back to what some of the other guys were asking about. When are we going to see upside on the revenue here? Do you have an indication or feeling for when we're going to start seeing it grow?

Are you talking about the AAG?

AAG?

The AAG, the aftermarket?

Yes, sir.

I think the aftermarket will probably be relatively stable for the next few years, Michael. I don't see a huge amount of growth taking place there. It's a business that we have a very darling positing in the aftermarket. Major distributors. There aren't too many there that we're going to be able to expand into. So we're reliant on the success of our current base of business, and perhaps some new product introductions. So I don't expect that to be a huge growth opportunity for us. I do expect it to be a substantial profit opportunity, and an opportunity for additional cash flows.

Okay, great. Quickly, I may have missed this. Was there a net income impact of the currency? Did you say that already?

Not that we disclosed.

Would you disclose that?

No.

Was it substantial, or insignificant?

It -- it's not -- you can do the math. 1.9% on last year's sales was about 43 million bucks and you can apply kind of the same normalized margins to that, and that was about it.

Okay. Thank you.

Yep.

Thank you. Our next question is coming from Rob Hitchcliff of UBS Warburg. Please go ahead with your question.

Thanks very much. Bill we've spoken before about the importance of the GMT 355 launch later this year.

Yes.

Now that we are, I guess, getting closer to it any concerns about that? And can you kind of give us some color on the importance of that launch for you guys?

Well, it certainly is important to us, and certainly important to General Motors. As you know, this is the replacement of the S-10. This is a very successful vehicle. We'll launch in the fourth quarter, and we are right on track.

We are very, very close with the General Motors every day, and I feel as good as I can on any launch right now that this will be a great launch for both of us. But it's a very important one for both. We have a new plant in Texas. New equipment, new people, and we'll continue to launch up toward that fourth quarter.

Okay. And secondly, just with the cash on the books and it sounds like you're going to kind of add to the cash with the cash flow from this year, is there a strategy baked in just to reduce net debt or do we actually do something and take that cash off the cash line?

We're constantly monitoring that, Rob. We'll see what happens as the working capital turns, as it always does and as we start to realize divestiture proceeds I think it's safe to assume that our plan is not just to hord cash forever. Obviously we would like to pay back the debt.

Okay. Great. Thank you.

Thank you. Our next question is coming from Brett Hasselton of McDonald Investments. Please go ahead with your question.

Good afternoon.

Hi, Brett.

Bill on the ASG, I just want to make sure I'm clear I understand this. It sounds like launch costs in this quarter were up $7 million over last year. I'm kind of hearing you say first quarter of next year all things being equal that $7 million incremental launch cost increase this year will not be there.

That's right. All things being equal, that's right.

Secondly on the automotive aftermarket group, I guess I don't quite understand. You're obviously in the process of doing a lot of restructuring yet your margins have gone down sequentially from fourth quarter to first quarter and last year to this year and yet going forward you anticipate that your margins are going to recover again. Can you kind of explain that?

Sure. There's two pieces in there that you should be mindful of. One, of course is, that I think we mentioned in here that we enhanced our reserves on doubtful accounts where we are concerned about some of the small businesses that are struggling through this consolidation. So that was one change.

Additionally, we talked about the fact that we were bolstering our sales and marketing expense to prepare for the peak period here that generally comes to us in that second quarter. So I think Terry's doing the right things. The third piece that we haven't seen the full benefit of is the consolidation and realignment that he's put in place within the brake parts group and that was something that was just announced within the last two weeks here. That will flatten the organization substantially and I think we'll see some significant benefits from that as well, Brett.

As we look at your margins and, you know, I think they were kind of in that 4 or 5% last year, now, you know, this quarter I think it was what, down in the 2, 3% range. How much of that change is due to the reserves or actually more simply, can you give us a number?

We haven't broken that out, but it was a significant piece of that total shift.

Okay. That's a one-time thing?

Right.

Is that right? Okay. Then finally, dividend, what are the next steps, Bob?

I think we've said pretty clearly that our first priority is to reduce the debt and restore our debt ratings.

Okay.

And when we have a new priority, we'll announce it.

Okay. Any sense as to -- I think before you said probably not before the end of this year. But it sounds like you're kind of hinting at the possibility you may see something by the end of this year; is that correct?

In terms of ratings?

Um -- in terms of -- when you -- in your discussion as far as the cash flow is concerned you kind of hinted at the idea that you said there's no dividend --

If I did, I didn't mean to.

Okay. Okay. Good. Thank you very much.

Yep.

I just might mention, before we take the next call, that if questions are coming in on the internet, for whatever reason, we may have a mechanical difficulty here, we are not receiving them. So it's not as if we are ignoring internet questions we are not just able to get them right now so we could take the next caller.

Thank you. Our next call is coming from Mike Kinder of Salomon, Smith Barney. Please go ahead with your question.

Yes. A couple of small ones. On the discontinued OPS you gave an aftertax number. What's the EBITDA equivalent of that in the quarter?

The EBITDA on the Disc OPS?

Yep.

Mike, I'll get back to you on that.

Okay. And then the other question was on the working capital, can you talk through -- you gave basically where you expect it to be at year-end, but can you walk us through by quarter, you know, is this the peak? Do you expect -- you know where do you expect it to peak and at what size?

Um -- it's pretty close to the peak if it isn't the peak. If you graph our working capital by quarter over the last several years, with the exception of last year, because of the tax refund, it typically shoots up because the receivables are really determined by what you've sold over the last six weeks and the last six weeks of the fourth quarter have the Christmas shutdown and Thanksgiving in them. So receivables are at their low point at the end of December. Then it rockets up in March, depending on how the second quarter comes out, it's flat to up a little and then it comes down pretty sharply in the third and then way down back again in the fourth as you have that weak end of quarter sales period.

Okay.

I'd urge you to do that analysis and look at the pattern over the last few years. I know for the last few years we have been talking about significant dollar working capital reductions that we've realized, but they've always been realized at the back end of the year and we always find ourselves talking about seasonal build up in the first part of the year.

It sounds like effectively we are at the debt peak for the year?

Um -- if, like I said if we're not there, we are awfully close.

Okay. Great. Thank you.

Yep.

Well, there's -- the internet is working now there's a couple of quick questions here. One of them has to do with Dana's involvement with GETRAG and the equity position that we have in the Volvo Dana /GATRAG joint venture.

Bill do you want to take that one?

Certainly. We've developed with GETRAG - GETRAG and Dana own 60% of the Volvo joint venture and Ford Motor Company owns 40%. From there, we will develop and design and assemble 100% of Volvo's activity on all their axels, all the all-wheel drive systems, and we will take over the plant in (INAUDIBLE) Sweden and it will be owned by Dana /GETRAG, and of course the 40% of Ford Motor Company.

Okay. Next caller?

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

Hello, guys.

Hello, Kurk.

I thought maybe we'd drop down into Dana Credit for a second and maybe, Bob if you could walk us through the cash revolving credit availability, what maturities are coming up this year, and what I'm really getting at is what the probability of a dividend is.

I think it would be pretty good. They've currently got $60 million drawn on a $200 million facility. Maturities on DCC are $99 million in '03, $209 million in '04, $67 million in '05, $100 million in '06 and then there's another $376 million in '07 and after. So they're not too imposing.

The only limitations that we have as regards the use of cash is that we are required to reduce the capacity on the revolver by two-thirds of the proceeds from asset sales starting now. Effectively. So -- because there was no adjustment in Q1. So other than that, the cash would be available. And we already have the ability to reduce that capacity by 140 without getting down to the level of our borrowings.

So the -- the probability of a dividend is greater than 50/50 you think?

I think the probability is a lot greater than 50/50. I think the only question is the amount.

Do you have any kind of range on the amount?

I think it will depend on future asset sales.

How is that -- is that market improving?

Well, as we said, you know, we've continued to be able to move pretty significant amounts of these assets at pretty respectable gains. And we've got a great team over there, and we're very happy with the performance.

I know I'm sure there was a lot of indigestion in that part of the market for awhile. I'm guessing that it's starting to improve. Just the overall imbalance of sellers and buyers is starting to --

There's a lot of assets out there that are available. There's no question about that. And clearly that inhibited our ability to do a transaction with a strategic buyer.

I guess the advantage of doing it the way we're doing it is we are probably getting better value than we would have gotten had we sold it as a package because we would have never found anybody who valued the whole bundle of assets as highly as people valued the individual pieces. The offset is what we are seeing and that is it takes a little longer.

Okay. And then shifting gears. We talked about the GMT 355. I was hoping to get an update on the F-150. Bill?

The F-150 is rolling right along. So-to-speak. We are working very, very closely with Ford Motor Company on the launch. I won't give you their launch date, but I can tell you that it is right now on time. We are working very closely with them. And as a matter of fact, we have already shipped some frames for the first prototype vehicle. So it's doing quite well.

Truck is looking great, too.

In terms of your cost and your costs are coming in as expected?

Yes. Yes, they are, as a matter of fact.

Excellent. Thank you.

One more caller, Emma.

Thank you. Our next caller is Monica Keeney of Morgan Stanley. Please go ahead with your question.

Good afternoon.

Made it in under the wire, Monica.

Can you believe it? I have just a clarifying question on the working capital.

Yep.

Last year, I think you had a benefit of 279 if I'm looking at the right slides.

Yep.

And I guess my first question is, is the 150 that you had in a benefit is that incorporated in that number?

Yes.

Okay. So if your goal is 200 for this year, do you think without that benefit that may be challenging?

Um -- it isn't -- it isn't a slam dunk, but we are very confident in our ability to do it.

Okay. So without -- then without that benefit, though, last year sort of the operational working capital benefit would have been 150 less, though?

Yes. That's true.

Okay. So you're looking to improve meaningfully on an operational front?

Yeah. Although, you know you have to look over -- you can't just look at last year. Over the last three years we've taken between a half a billion and a billion out working capital in this company from operations excluding all the other stuff like the divestitures and whatnot .

Right. Where do you see the most opportunity? And how do you sort of operationly, what are the big things that you are dealing with to get there?

Um -- obviously the biggest single hunk is in the aftermarket because they represent the lion's share of our working capital. But even if we look at Bill's operation, as I'm looking at Bill now. You know, they have -- they are trying to get down to basically zero working capital in their business over the next couple of years.

Monica the other thing that's helping us is we are focusing on the core content of our products and a lot of the work in process, a lot of the raw material inventories that we had tied up in noncore content is being reduced. As we rely on your cadre of other suppliers. So there's a lot of different initiatives going on all in which are -- all of which are intended to enhance our return on invested capital.

Okay. Last question on the covenant calculation, it looks like you are well within that for the quarter. What -- looks like I think the net senior leverage ratio for the quarter is 3.4 if that's correct. And what was the actual? I know there are a lot of sort of add-backs and things like that. What was the actual calculation?

We'll get back to you on that, Monica.

Usually Bob carries that in his wallet, but today he doesn't have it with him, Monica.

Okay. Thank you.

Okay. Thank you all for calling. We appreciate your interest in our company. We are pleased to report our results for the quarter and we look forward to talking to you again in the future.

Ladies and gentlemen. Thank you, this does conclude today's teleconference.

Please disconnect your lines at this time and have a wonderful day.