Dana Inc (DAN) 2003 Q2 法說會逐字稿

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Good morning. And thank you everyone for joining our call today. We obviously have a lot to discuss with you so lets get right to it. We plan to cover three topics today. A discussion of our Board’s response to Arvin Meritor’s (ph) recent unsolicited offer, a discussion and analysis of our second quarter performance and finally a review of Dana's business strategy and how we are positioned for enhanced earnings growth moving forward. Finally, we'll conclude with a question and answer session.

On July 8th, Arvin Meritor announced plans to launch unsolicited, unfinanced opportunistic and highly conditionally $15.00 per share tender offer for Dana. On July 9th, they formally initiated the tender. Since then Dana’s Board of Directors, our management team and financial legal advisors have carefully analyzed the offer to determine its potential impact on the interest of Dana and its shareholder. Following a series of Board meetings yesterday, Dana filed a schedule 14D-9 with the SEC in which the Board recommended that shareholders not tender their stock in response to this offer.

In slide number five, I would like to share with you some of the reasons behind Dana's Board's recommendation. First, the offer is a financially inadequate high-risk proposal that fails to fully recognize Dana’s premier franchise in the vehicular industry. Second, the offer is highly opportunistic. As such it essentially denies Dana’s shareholders the full benefits of the company’s restructuring and strategic plan that we have been working on over the past 18 months. Our restructuring plan is nearing completion and we are on track to exceed our original commitments for facility rationalizations and work force reductions. We expect to begin to fully realize the benefits of this restructuring by the end of this year.

Finally, the Arvin Meritor offer is highly conditional. For today, I would like to highlight two such conditions, lack of financing and antitrust concerns that create significant uncertainty as to whether the offer could be completed regardless of the circumstances.

Moving to slide 6, I would like to expand on each of these points. Our Board has concluded that Arvin Meritor’s offer does not adequately reflect the value of Dana and is less than the value we can achieve under our current strategic plan. The Board and management have carefully reviewed Dana’s strategic plan and noted that it calls for 2003 earnings per share and 2004 earnings significantly higher than the current street estimates. The strategic plan that we are executing is expected to produce 2003 estimated earnings per share of $1.31 to $1.44 and 2004 estimated earnings per share of more than $2.00. We are on the right path and Dana is positioned to achieve its earnings growth in 2004. We have also received opinions from our financial advisors that Arvin Meritor’s offer is inadequate from a financial point of view. Additionally, it is worth noting that the stock continues to trade above the offer price.

Lets move to Slide 7. We also believe the offer is opportunistic, as Dana’s stock price was near its 52 week low when Arvin Meritor first approached Dana. The offer was also presented at a time when our business is poised for improved performance for several reasons. Number one, we had said publicly that our run rate in fourth quarter will just begin to reflect the full benefit of our restructuring plan. Secondly, a recovery is continuing in the heavy duty vehicle market where volumes are expected to grow from 181,000 units in 2002 to approximately 280,000 units in 2005. And finally, we will soon fully absorb the start up costs that have been associated with our 7 new product launches and generate improved profitability.

Let's move to slide 8. Arvin Meritor’s offer is also highly conditional. First, Arvin Meritor must raise the necessary financing, which they have yet to do. Second, the offer is conditioned on satisfying Hart-Scott-Rodino (ph) regulatory requirements, these first two points I’ll come back to in a moment. In addition, there are numerous other conditions to the offer that we won't have time to discuss today.

Let's move to slide 9. The financing condition maybe a substantial obstacle to complete in the offer. The size of the financing required, as well as the resulting pro forma credit ratios, provides significant financing risk for Arvin Meritor. The resulting 88% pro forma debt to capital ratio, based on Arvin Meritor’s own disclosures, would be among the highest in our industry. The amount of external new financing would be significant, several billions of dollars. In addition to the financing to purchase Dana shares there would be approximately $1b of existing Dana debt that they would more than likely need to refinance at a substantial premium. In addition to the leverage incurred to finance of the purchase of Dana shares, and the assumed debt, there are significant pension and OPB liabilities. These are other post employee benefit liabilities that would impact the overall leverage of the combined entities. The rating agencies have already indicated their concern over the resulting leverage in the proposed combination. Lastly, we believe the difficult history of highly leveraged transactions in our industry may also make financing the transaction a substantial challenge.

Moving to slide 10. On the antitrust front, we believe that serious issues could prevent Arvin Meritor from completing the offer. Specifically in the medium and heavy duty markets for axles, drive shafts and foundation brakes, the combined entity would have market shares ranging 80%to 100%. Through our respective joint arrangements with [inaudible], we are the only North American suppliers of complete heavy truck drive train systems. As a result, the transaction is very likely to be subject to intensive scrutiny from government anti trust authorities and may result in litigation to block the offer. This issue presents significant uncertainty and instability for our shareholders and our customers.

Moving to slide 11. Dana's Board was committed to fully evaluating this offer and is focused on building value for Dana’s shareholders. The Board actively monitors the company's progress in meeting the goals of the business plan and takes this obligation very seriously. The Board is actively involved in setting the strategic direction of Dana and evaluating the company’s strategic alternatives. Dana’s Board is clearly focus on safeguarding the interest of our shareholders and building shareholder value.

Let’s move to Slide 12. To recap, the Board recommends that you reject the Arvin Meritor proposal for the following reasons. First, the offer is inadequate and fails to recognize the company’s value and unique capabilities. We also believe the offer is opportunistic, in that Arvin Meritor’s attempting to acquire Dana just as it completes its restructuring . Just as the heavy duty market is expected to improve, and just as we are poised for an improvement in operations, we believe that these critical factors are not yet reflected in Dana's stock price. Additionally, the structure of their offer would deprive all Dana’s shareholders, particularly those who don't accept the offer of the opportunity to realize the full value of the their investment in the company. Finally, the Arvin Meritor offer is highly conditional which means there is great uncertainty to Arvin Meritor’s ability to complete the transaction. Arvin Meritor has been unable to identify its specific financing plans despite needing to raise substantial new debt to fund the transaction. As I mentioned earlier, another condition to the offer is clearing antitrust concerns which we believe would be a substantial challenge. In summary, the proposal is a financially inadequate, opportunistic, high risk proposal and we recommend that Dana’s shareholders not tender their shares to Arvin Meritor’s proposal. Given the company’s opportunities and expected near and long term growth prospects, the management and Board believes that the shareholder's value created under the current strategic plan is greater than the offer. Let me turn it over to Bob Richter for a review of our second quarter and I will be back to discuss Dana’s outlook later in the presentation. Bob.

Thank, Joe and good morning, everyone. You should be looking at slide 13 now, which gives you a quick summary of our second quarter. This years our sales came in at $2.5b down slightly from last years $2.6b. Frankly, the full extent of our markets weakness was masked by some major currency movements which inflated our sales by approximately $90m. Net income however was even at $52m for both years. The same holds true for our EPS was which $0.35 in both years.

Looking at slide 14, this chart shows our quarterly results by business unit, compared to the last year's second quarter. As I said earlier, the top line of each business unit was impacted by the weaker dollar, which added $92m to sales for the quarter. The currency impact was more than offset by the underlying decrease in sales due to lower production levels. In the Automotive Systems Group, sales were up $27m due to currency. Therefore, the volume related sales decline was $31m. In addition to the lost margin on these sales, this group is still absorbing start-up costs associated with several new programs within our structural solutions group. These costs were $6m greater on an after tax basis than in the second quarter of 2002. We expect that these start up costs will diminish as we approach the fourth quarter, when we’ll benefit from the new product launches.

The biggest shortfall is in the automotive after market group. As you may recall, we were down from last year in the first quarter as well. We talked at that time about a shift in product mix away from our premium branded product to lower margin second line product. This continues to be a challenge for us, especially in the brake business. The biggest impact, however, relates to the continued softness we are seeing in this market. We've taken action to reduce staffing in the brake group, and the cost of those actions also negatively affected the quarterly profit. Our engine and fluid and heavy vehicle group experienced higher sales due to currency of $28m and $26m respectively. Currency adjusted sales in this group also decreased in line with lower production in the respective markets. The unusual items in the quarter include $7.5m of gains from DCC asset sales, which are offset in part by a $2.5m in additional costs associated with the closing of the sale of the engine management business to Standard Motor Products.

Please turn to slide 15. This slide brings you up-to-date on where we are with the sale of a DCC portfolio. When we announced our intention to exit these businesses in late 2001, we were looking at the pie chart on the left. While we knew for tax and other reasons that we would be retaining about $900b in assets shown in the blue for a few years, we have been actively working on the sale of the assets held by the 3 operating groups of DCC, shown in yellow, red and green. At the end of 2002, the total portfolio was down to $1.650b. You will recall that we sold about $80m in assets in the first quarter and we sold another $80m during the second quarter. We realize $7.5m in gains from DCC asset sales during the quarter. In total since the start of the process, we have sold $710m of portfolio assets and recorded net gains of $49.5m after tax. The total portfolio assets now stand at $1.490b and will continue to work on the rest of the yellow and red slices of the pie as we move through the balance of the sheet.

Please turn to slide 16. As already mentioned, sales benefited $92m this quarter from stronger international currencies. Gross margins down compared to a year ago because the lost contribution margin on the lower currency adjusted sales is much bigger than any pick up we received from currency translation. SG&A is up a bit because of currency and higher cost associated with adjusting certain stock based compensation plans for the upward movement in our stock price. Adjusting for the additional compensation expense and currency effect, SG&A would have been $8m lower. The recurring operation less G&A continues to be lower in relation to year ago levels as a result of our restructuring initiatives. The equity and affiliate earnings line includes DCC. Last year the second quarter included $27m in gains on DCC asset sales versus the $7.5m in the current quarter, which accounts for most of the difference on that line from year to year. Lastly, discontinued operations this quarter is the engine management business that was sold on June 30th so this line will disappear next quarter.

Please turn to slide 17. Here's the cash flow statement. Again, we're showing you the comparative analysis for both the second quarter of each year and the full six months. We are very pleased to report that we ended June with our net debt position being flat with the end of last year and down $166m since March 31st. No question the proceeds from the sales of our engine management and frame operation in Thailand were the big driver, however we have also been controlling our capital spending. And that helped as well. Working capital increased slightly from the end of the first quarter. This should be the peek for the year and will start its normal seasonal decline from now to the end of year. A slide detailing the change in working capital is available at the end of this presentation, but given the amount of material to be covered today, we won't be reviewing this analysis in detail and just provided the extra slide as supplemental information for those obsessed with crunching numbers.

Moving to slide 18. This slide reports on the movement in our capital structure over the last six months. The operations column reflects the fact that our net debt is unchanged, at least due to operating forces, while our equity increased $90m. That's the $93m in net income that we reported less the $3m of dividends we paid out. In the other column the $36m increase in net debt reflects $26m of currency movements and $10m of increased value of our interest rates swaps. On the equity line, all but $3m of the $213m increase relates to foreign currency translation. As a result of these movements, our net debt to capital ratio was down to 52.8%, a major improvement from the 57% at the beginning of year.

Turning to slide 18. You see our debt portfolio at June 30th which has an average life of 10.4 years and including the effect of the interest rate swaps an average cost of 5.85%. The only debt due in the next few years is the $250m that matures in March '04, that is now reported as short term debt. Please note that we did not have any borrowings under either our $400m accounts receivable program or our $400m bank revolver. As a result, in combination with our cash position, our liquid resources total just short of a billion $1.350b.

Please turn to slide number 20. In our last conference call, we increased our guidance saying that we expected to report net income for the full year somewhere between $195m and $215m. Given what we know today, frankly, we would have increased the guidance again this quarter if it weren't for the uncertainty of the cost associated with the Arvin Meritor offer. For now we'll stay with the $195m to $215m range which would imply earnings per share of $1.31 to $1.44.

Please turn to slide 20. This slide shows our current outlook for full year cash flow. To be conservative, we're working off the low end of the range of net income numbers we saw in the last slide. Due to the divestitures happening earlier than expected and the tight control we're exercising over our capex we lowered our depreciation forecast to $340m. We've also lowered our projection for working capital to $175m from the $200m we discussed with you previously. This is not because we're letting up at all in our drive to lower our investment in this area. Part of our original $200mgoal related to a $25m reimbursement for customer tooling in relation to the Thailand frame operations. We did get the money for the tooling, it just appears a line below because the money came from the buyer of that business as part of the divestiture proceeds rather than from the customer as we expected. We've also reduced our capital spend projection for the full year to $325m, which is more consistent with our current pace. Overall, we should have excess cash in the $375m to $425mrange at the end of year after covering the cash requirement of our restructuring program. I would like to add that these numbers do not include any further divestitures we might accomplish. Nor do they include any dividends we might receive from DCC.

Now to slide 22. This slide shows our return on invested capital on a rolling four quarter basis, with debt net debt being used in the calculation of invested capital. These numbers have the non recurring stuff taken out so the improvement that you see is not due to the end of the restructuring charges or the realization of DCC gains. What it is, is a reflection of the benefits resulting from our restructuring initiatives, divestitures of non-core businesses and continuing emphasis on the outsourcing of non-core manufacturing. We've shown solid improvement since the announcement of Our restructuring program in October of 2001 and turning to slide number 23, we remain with our view that we will seek continued improvement throughout the rest of 2003. Please turn to slide 24. Joe?

Thanks, Bob. I'll spend the next portion of today's call providing an update on the substantial progress we already made in repositioning Dana for stronger performance. There's a number of important developments to discuss. As a starting point, this visual provides a break down of the contribution made by each of Dana's four strategic business units to our financial performance.

Slide 25. You see the strong relationship we forged with a diverse range of global customers by securing new business from such customers as BMW, Nissan and Toyota to name but a few, we continue to grow our business with Foreign based OEMs that manufacture here in the United States. Recently, we announced the award with new light axle business with Toyota in South Africa. As many of you know, Dana is the sole provider of frames for Toyota in North America, as well as a major supplier of drive shafts. Both of these business relationships begin with Toyota providing Dana with an opportunity to prove its ability as a world class supplier in a location outside of the US, [inaudible]. We view this new business win as yet another opportunity to grow our presence with this important customer and demonstrate our skills and abilities. We plan to do this by demonstrating our ability to meet Toyotas rigid standard for quality, technology, and dependability, all of which are Dana hallmarks.

Move to slide 26. I'm pleased to report our restructuring plan will be substantially complete by the end of this year. Let me recap a few milestones. When we began this task we estimated that restructuring costs would amount to approximately $445m, we came in slightly under that original estimate. That's an after tax number. When we began this task, we set a target of 30 or more facility closures. We delivered with 39 plant closures, 31 completed, 8 in progress. When we began, we pledge to reduce our work force by 15% or more. Today our workforce has been reduced 20% since the start of our restructuring. We promised to out source substantial amounts of non-core components and we've done so to the benefit of Dana. We pledged to divest ourselves of DCC assets. To date, we have completed divestitures of more than $700m. The result of these efforts is a Dana Corporation that is positioned for growth. As our restructuring program nears completion, our transformation efforts are reaching critical momentum. In the past, we've averaged three new product launches annually. Today, we're in the process of rolling out 7 programs which are expected to begin delivering full returns in early 2004 and beyond. In the face of recent sector wide challenges in the heavy truck markets, Dana sees the opportunity to restructure its heavy truck operations into a leaner, more nimble organization. Today, we're well positioned to capitalized on a resurgence in this traditionally cyclical sector. We expect to heavy duty truck volumes to increase from 175,000 to 180,000 units in 2003 to 245,000 to 255,000 units in 2004 and approximately 280,000 units in 2005. Our ground work is in place and Dana is right sized for growth. We are able to pursue opportunities with greater capital efficiencies and a more viable cost structure.

Moving on to slide 28. Core to our transformation effort is our commitment to lead our industry by deploying the most advanced technology available. We know that technology drives price and leads to new platform wins, For Dana this has meant $1.3b of new business over the past four years. This is translated into a growing and increasingly diversified customer base as witnessed by our recent new business wins by current and new customer and increased content per vehicle. Through innovation and technology, we are building our reputation as a more focused global leader in providing value added product systems and services. Today I am proud to say that we are more aggressive in the deployment of technology and more innovative in product development than at anytime in our nearly 100 year history.

Let’s turn to slide 29. This slide highlights our net new business chart showing our projected incremental business through 2007. As I mentioned last quarter, 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. Not to be lost in all of this is the fact that during the second quarter we picked up more than $20m in net new business throwing our cumulative total over the five years from the base to nearly $5b.

Slide 30. In conclusion, we have much to look forward to in the coming quarters and even more to be excited about over the longer term. For 2004, we expect improved top line performance, the direct result of increased heavy duty volumes and continuing new business wins. At this time, we're also providing 2004 guidance of $300m in net income or approximately $2.00 per share. Likewise, we expect bottom line and cash flow improvements to continue, resulting from the completion of our restructuring program, substantially improved operating leverage and reduced start-up costs. Looking long term, we expect annual top line growth between 6% and 7% and continued margin improvement we remain committed to strengthening balance sheet and returning to an investment grade credit rating. And as our financial flexibility increases, we will reexamine our dividend policy.

Moving to slide 31. With that, Bob and I would be now happy to entertain any questions you might have.

For our first question, let's go to David Bradley of J.P. Morgan.

Good morning. Couple of things. One a number of companies that have reported in the sector so far have reaffirmed their guidance for the year but recalendarized (ph) a bit telling people to come down a little bit on Q3 but up on Q4. I'm looking at big three production schedules that look like sequentially will fall about 15%Q2 to Q3 and I'm wondering whether or not the consensus number of $0.25 doesn't look a little high relative to the number you just recorded unless you got some gains on sale to flow through there.

Obviously we're going to be a little more weighted to Q4 than Q3. So I would agree with your general observation. Frankly, the consensus earnings are below our guidance anyway.

For Q3 also?

Yeah.

So you think you will be do better than the $0.25 consensus in Q3?

Yeah.

Does that superior performance depend on any kind of asset sale gains or not?

No. We're starting to see the benefit of our restructuring as I mentioned earlier. It's beginning to flow through the bottom line. We came into the year with a pretty conservative outlook in terms of industry volume so we were is pretty prudent in the management of the business.

We've been conservative on guidance since we started this restructuring program. I think last year we upped the guidance six times during the year. This year we've done it twice so far. We would have done it again today but for the uncertainty of the offer.

I'm also looking at the full year guidance. Last quarter you gave us a $185 and $205 base number and then $10m worth of one time and it pushed it up to $195 to $215. You kept the $195 to $215 but it looks like the one timer portion has gone up given that you had a couple one timers . So of the two -- of the $195 to$215, how much of that would be considered gain on sale sort of stuff?

Same as before. I think what we're saying is that the one timers that we would have added to that number are off set by the uncertainty of the cost associated with that offer. We ended up back where we started.

You had something like $15m of one time gains this last quarter.

No, we didn't. It was $5m. It was $7.5m on the DCC less the $2m extra on the Standard Motor Products sale.

Don't you also have $8m from the entire operation?

We don't consider that an unusual item. Let me tell you a little bit about that, because I think Michelle has already gotten a couple of questions on that. This all relates to this global truck plan that was going to be the Chevy S-10 and the Isuzu I190 and when we got the contract, the deal was we had to build a plant to supply the Shreveport plant where GM was going to build the S10 and we had to have a plant in Thailand for the I190. After the contract was awarded, there was a ton of design changes coming out of Isuzu. And it ended up not being the same product as the S10. I think during this period, GM and Isuzu also changed their relationship. As a result, we found ourselves with a plant in Thailand that was producing components not full frames for a vehicle that was a whole lot different than we originally imagined. We had a big tooling bill and we had to [inaudible] development costs that we were discussing the cooping from the customer. The customer rather than pay us direct said, look, why don't we settle this this way? We'll find a supplier to pick up the whole business. In fact, what happened was we got reimbursed for the design and development cost by the supplier who bought the business. We got reimbursed for the tooling from the guy who bought the business rather than getting a check from the customer. Had the check come from the customer, it would have been included in sales and we wouldn’t be having this conversation. We get checks from customers all the time for design and development costs that we don't talk about. So I don't think that the return address on the envelope that the check came in should make a difference in how we treat it.

Thank you.

Our next question is coming from Steve Girsky from Morgan Stanley.

A few quick ones. That Thailand thing where was that-- that wasn't in revenue? Was that in other income or where was that thing?

It came through as other income because technically it was the sale of a business.

Currency, the impact on EBIT?

Not a lot frankly.

Does it look like Europe’s credibility was up a lot.

It's probably $5 after tax, $8 before.

Okay. And can I just ask you about, Joe, about scale in your businesses? You guys have experience with buying a big after market company. How important is scale in that business? And does a $3b after market company have a lot more scale than a $2.2b after market company and is there big benefits to that?

I think there's obviously some efficiencies in the distribution mechanics and the warehousing. But typically the support that's required from the standpoint of sales, marketing, field representation, there's not that much of a gain involved in that aspect.

Right. And just on a pension, Bob, do you have any status on how your pension is doing year to date?

The fund is up 12% year to date. You know, we still maintain the concentration in the long-term treasuries strips.

Thanks.

Thank you. Our next question is coming from Ronald Tadras (ph) from Bank of America.

Just going right in to the Arvin Meritor thing. Could you go through why, if you are still opposed to talking with them?

Ron, just a short answer on that is that when we look at the combination of businesses there, we don't see the business logic of a combination. Setting aside the inadequacy of the valuation, all of the stumbling blocks with regard to antitrust and the conditions on financing and other conditions of the offer, just stepping back and looking at the industrial logic here. We don't see the benefit of a combination. Our focus has been to narrow the business of the company to do fewer things extraordinarily well. If you look at our industry, I think most industries you’d find that the companies that typically perform best are those that are clearly focused. I think those that are involved in a multiplicity of businesses typically under perform and in fact there are very few success stories in that regard.

It sounds like you think the benefit of any administrative costs, you know, reductions would really be overwhelmed by the business risk issue?

Further more, I think that the synergies that have been documented really are the lowest synergies in the business combination of any of the recent transactions. I think what we're saying here is that there isn't a lot of savings in that regard. Hereby, I'm talking about a percent of total gross sales. There's not a lot of benefit in that regard. If we look to the range of products and think about other businesses that have had significant portfolios, most of those companies have narrowed their focus down to the things that they do well so that they can better provide support for their customers.

Joe, I guess wouldn't be it less disruptive to your employees in your company if you just sat down and made your case like you're making it here and then just got on with it, couldn’t this potentially drag on longer?

We've done all of that. We've responded several times to various proposals that have come forward. It doesn't make any sense to us to continue.

Okay. And then on this $2.00 for next year, does that include gains on sale?

It's operating net income. So we don't have anything extraordinary in that number.

Do you need to take any restructuring charge to get to that $2.00 number?

Most of you restructuring expense has been already been booked in 2002. We are starting to see the ultimate benefit to that, our run rate really in the fourth quarter will just begin to reflect the performance that we think is more directly attributable to the restructuring.

Thank you very much

Thank you. Next question is coming from Gary Lapidus from Goldman Sachs.

Couple of questions. On the 2004 guidance, I think the slides mention a heavy truck production forecast. Could you share with us what your thoughts are on the North American light vehicle production number that underlie that forecast?

For 2004?

Yes.

I think people are talking 16, 16.5.

Would the $2.00 then be at the $16m level and then when you have the plus sign or greater than to that allows the production up as high as $16.5, is that how to look at it?

I think that's probably a fair way to look at it. All the reports that we're seeing here suggests that ever so slowly the economy continues to improve. And hopefully we'll begin to see the increasing benefit of that as well as we go in to the new year.

And to that end, I think earlier in the call you mentioned hitting your run rate by Q4.

Right.

So the kinds of performance that we'll see in Q4 at the various segments, combined with a $16m production rate, you think that's what carries you to the $2.00? So whatever we see in Q4 extrapolated out to the full year of $16m that ought to be getting us to $2.00 and if it is not, there is something wrong with our models.

It is close. We got one or two plants that still have to close that probably won’t happen until Q4, So we won't have the full benefit of those last couple of plants. It's getting close.

Could either of you guys maybe just give us a flavor of -- without getting specific unless you want to -- customer reactions to this unsolicited offer and what various customers think of these kinds of combinations? What they are telling you.

I think as I said in my remarks, if you look at the combination particularly in the commercial vehicle side for medium and heavy vehicle. The combination of our business, both for heavy axle drive shaft and brakes in some instances represents 80% to 100% market share. There's clearly concern for competition. I think if we look at others, there's concern for the continuity of existing programs and the commitment longer term to the capital required to support those programs. When you talk about total debt to cap of 90% here, it kind of put some of those future programs in peril.

One last question on the backlog you show. Does it provide for provide for price downs to customers. In other words, is it net of expected price downs on carry over business and is it net of programs that you know you're coming off of?

It's reflective of the business agreement that we have. So if there's a forecasted price reduction in that business, that's been booked in to the numbers. And, in fact, it's a reflection of our known businesses losses as well.

But it does not have price downs on existing businesses, it has the price down on the new business.

Although wouldn't the existing business some of it also have contractual price downs in it. How should we think about that when we hear about these customers claiming higher and higher year over year savings in materials. I think they're up to 3.5%.

Those are all interesting numbers. Because the target ranges from 3% to 4%. I think the reality is they hover around 2% in terms of what has been achieved. In our business plan, we've agreed these kinds of thing we reflect it in the number.

Thank you. Our next question is comes from Darren Kimball of Lehman Brothers.

If I go ahead and take out the Thailand gain, you earn about $0.26 in the second quarter. I say that because it's not going to recur in the third quarter. I was intrigued by your comment of third quarter north of$0.25. I was hoping you could be a little bit more precise about that sequential walk given this revenues are typically and will be down quite a bit and you typically have a much seasonally weaker quarter 3Q versus 2Q?

We have a lot of new programs staring up in the third quarter. Secondly we have recurring payments for design and development costs that we receive from our customers, which would argue against taking out the Thailand numbers. And we continue to make progress with a couple more plants closing on the restructuring.

So there will be some similar type of payment from your customer in the third quarter?

Not of that magnitude, Darren. But it always happens. I don't recall you calling up and asking us to take the costs out of our operating expenses when they were going through. And what we're doing is getting reimbursed for them.

I am not so much debating what the second quarter number is as to why you're able to do so well. You mention the start-ups, are they going to help the third quarter, I would think they would be a hindrance initially?

It gives us additional volumes right now because on some of these programs all we got is cost and we don't have any volume.

The other thing Darren, in the third quarter we begin to run at rate. A lot of those start-ups are already underway as we speak. They are in the debugging stage. They’re trying to come up to the run rate that require at the optimal production. That will start to occur as we go through the third quarter and fourth quarter. We are ensuring costs in the second quarter associated with start ups that will benefit us in this third quarter and fourth quarter.

We're taking one-time hits that are running through the after market numbers to take out better than a hundred folks in response to the market condition answer what we're seeing happening on that shift from first to second line on the brakes. So those costs are in the quarter. And in this third quarter, we won't have the cost and we will have the benefit.

So it sounds like a reasonably confident statement about the launches that you're not worried about big pot holes here you think that the hard work is behind you?

Absolutely, these are major, major programs. The F150, the Expedition, the Navigator. All of those are running well.

Thank you.

Thank you. Our next question comes from Brett Hoselton of McDonald Investment.

On the Arvin Meritor, is there a reasonable price at which you think you would allow Arvin Meritor to look at your books or is it just such a non-sensible combination in your opinion that it doesn't make sense for them to look at your books?

If someone came to your home, knocked on the door and said I would like to buy your house at a price that's less than the market with no financing and, you know, there's a possibility that it could never occur. Why would you even bother to extend the effort in the conversation?

So I take that as a no?

Absolutely.

Okay. Second question, the medium and heavy duty truck, the axles, drive shafts, foundation brakes that you talk about potentially being anti-trust issues, could you quantify possibly the annual sales associated with that business and whether the margins or maybe corporate average for the heavy vehicle business or above or below?

I think that business for us is probably a couple of billion dollars in total, margins tends to be a little stronger and it’s a cyclical business and the unit volumes are less than the automotive production. The customers typically are willing to accept a little stronger pricing for the reliability and dependability of supply even though the unit volumes aren't that attractive. It is a good business, it tends to deliver the cost of capital at the bottom and something well above that at the top.

Finally, on the after market business, as we look out into third and fourth quarter, this mix issue that you are dealing with now, it sounds like you anticipate it continuing given that you are doing a little restructuring.

I think there's been a continuing shift in the after market to a second line of products. I think some of it might have to do with the reliability and the dependability of the new vehicles. Such that on the repair for the seconds owner, the mileage might be such that they're not really willing to put in the full value of the premium line when they may only have another, you know, 30,000 or 40,000 that they're trying to achieve. That second line lesser price product seems to have greater appeal. What we're having to do is restructure or business to accommodate those lower margins.

Thank you our next question is coming from Chris Ceraso (ph) of Credit Suisse First Boston.

Just to follow up on comments of restructure of the after market business, you're taking out 100 people. Are there any further facility closures or could you flush that out a little bit?

The facility closures are pretty much completed in the after market as part of the restructuring plan. This is a further reduction in staffing and work force in response to the market dynamics that Joe talked about.

The second line, Chris. The services that might be required with the premium line, including training and clinics and all of the things that take place on the road are really thrills that aren't required on the second line. You're only selling on price and availability. We're trimming out the support functions that are not necessary.

So it's not something structural where you need to shrink the business further?

No.

Is that the major driver of the short fall? Are there other things going on in the after market?

I think that's probably the primary focus there.

Although we still got the consolidation trend going on out in the market. I think if you talk to most to the people who sell in to after market, you will continue to hear about how that consolidation results in excess inventory. We're not seeing that one for one replacement ratio between the parts that used at the installer level and a reorder at the manufacturing level.

And then last question on start-up costs, will they be higher or lower in '04 versus '03?

Lower. As we said. We had about $7m in start-up costs after tax over and above the normal level in the first quarter. Had about $6m in the second quarter. Most of these launches happen as we get through the rest of this year.

So launch costs next year are what $15mor so lower than they were this year?

Well, it's like I said, it was running $6m, $7m a quarter for two quarters. So it's at least that.

Thanks.

Thank you. Our next question is coming from Mike Kender (ph) of CitiGroup.

Yes. Couple of quick follow ups. On your bank covenants, can you update us on how much room you have under those.

Ample

Basically nothing is tight for the rest of this Year as far as you can see.

Not at all

Great

If you run the numbers, you know, what we're talking about in terms of $195 to $215 equates to about $750m of EBITDA. So if you check the numbers, we got plenty of room.

And on the cash sources and uses, looking at in to '04. Where do you see that structuring cash use going to versus $100, $150 laid out for '03?

The bulk of the cash is gone. It might be $50, $60m. But we're not going to be talking about it that much.

And should we see capital spending on capex ramp up to take make up some of the short fall or should that stay ---?

I reckon it will stay around the $350 level.

We've been prudent on the capital expenditures. We have seen substantial benefits because we've out sourced a substantial amount of non-core component that we use to manufacture internally and it has given us greater cash flow consistency and in fact lower costs. We're maybe moving our capital requirements to new lower level.

Okay. Great. Thank you.

Thank you, next question is comes from John Casesa from Merrill Lynch.

I was wondering if you could give us a little bit more detail on '04 forecasts. I got interrupted here. If you reviewed this, you don't need to get it again? What do you expect for margin trends by business unit for '04 there [inaudible] strong and that is offsetting weakness in the other businesses, do you think improvement in all businesses year-over-year?

We're looking at improvement of all businesses year-over-year because as you know, this has been pretty much a restructuring plan that's touched all four of the business units. So if you're thinking about it, you've got a light vehicle market that say at the $16m level here in North America, you got heavy truck moving up to $245 to $255, you got the start up costs behind you. You more or less at the full run rate after you get those last 8 plans closed at restructuring costs. We you got another $400m worth of new business at decent margins coming in, interest cost are down, debts down. And that's pretty much the scenario.

And Bob, in terms of so I can see why you have volume growth in heavy truck, you have maybe static industry volumes and better margin performance and also revenue growth in light vehicle. After market, what do you think there?

I think on the aftermarket side, Jon, business is relatively static, but the improvements that we put in place, reduction in costs and overheads will continue flow through the bottom line.

Thanks.

Thank you, our last questions is coming from Rob from of USB Warburg.

Couple of questions. The $2.00 number for 2004 I just want to make sure I understand that, that's purely operating, no DCC proceed or any other assets sale proceeds?

There will be proceeds but no gains.

Okay.

That effect the income number. I’m sure we'll continue to work the assets down.

So that number is purely a clean operating number.

Right.

And then what's the tax rate on the DCC and the Thailand plant in the quarter. You gave after tax numbers what is the before tax?

Thailand was basically no tax.

Right.

And DCC we said was 7.5 after tax.

And the before tax?

Well it's a little bit difficult because we're using as you know, I think we've talked about it before -- we have a pretty substantial capital loss carry forward. So a number of these transactions generate capital gains which allows us to utilize that capital loss carry forward. So there is often no difference between the before and after.

Okay. And then lastly, just thinking about the restructuring plan taking it out maybe a year further. $2.00 in '04, is that a launching pad for the out years or can we still expands this even further?

Obviously, there's further improvement that we'll see going forward. Our numbers going out to '05 are very attractive. not something we want to present to you today, really get back to the historical performance that we have been able to achieve as corporation.

Okay. Thanks, everybody.

Very good. And thank you all for joining us on this call. We'll look forward to talking to you soon.

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