Dana Inc (DAN) 2003 Q3 法說會逐字稿

Good morning, and welcome to Dana Corporation's third quarter conference call. This call is being tape-recorded. The format for today's conference call includes remarks by Dana's acting President and Chief Operating Officer, Bill Carroll, and by Bob Richter, Chief Financial Officer, followed by a question-answer session.

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, Ashley.

Good morning everyone, and welcome to Dana Corporation's third quarter 2003 conference call. Earlier today, we issued our third quarter earnings release and we have also filed a copy of the release along with the slides for this presentation with the SEC in a report on Form 8-K. This report is available on our website at www.dana.com, on the investor page under SEC filings.

Also, I hope that you all saw the announcement on Tuesday regarding the increase in our dividends of 6 cents per share in the fourth quarter. If you would like a copy of the earnings or dividend release, please call my office at area code 419-535-4635, and we'll send it to you promptly.

Today's call is supported by a slide presentation, again located on the www.dana.com investor page. In the spirit of continuous improvement, this presentation is now available in an easy-to-print PDF format. You will find this PDF file located in the vertical bar on the left side of the conference call home page.

During this call we will be discussing Dana's financial statements with DCC shown on an equity basis which is how we evaluate our operating segments and regions, rather than on the fully consolidated basis which we use for reporting under accounting principles generally accepted in the United States, or GAAP. A presentation of the most comparable GAAP financial measures and the reconciliations of the differences between the non-GAAP measures and the GAAP measures can be found at the end of our earnings release or at the end of this presentation.

In addition, reconciliations of other non-GAAP measures can also be found at the end of the earnings release or this presentation. Again, our non-GAAP measures reflect DCC on an equity basis, and the GAAP measures account for DCC on a consolidated basis. This is a reminder. Our webcast system enables to you direct questions to us via the Internet throughout this presentation. Bill and Bob will answer as many questions as time permits, and all other bona fide questions will receive a follow-up response.

Let's move to slide 2. I'd like to remind everyone that today's conference call remarks will include forward-looking statements. These statements are based on our current knowledge and involve assumptions, uncertainties, and risks. Our actual results could differ materially from those which we are anticipated or projected due to factors that we will be discussing and others that are referenced in our SEC report. This conference call and its supporting visual may not be recorded, copied, or rebroadcast without Dana's written consent.

Continuing to slide 3, I'd like to begin the call by introducing Dana's acting President and Chief Operating Officer, Bill Carroll. Bill?

Thanks, Michelle. And good morning, everyone.

Before we begin today's presentation, I'd like to take a moment to thank the many individuals in the audience who took the time to pass along their condolences on the recent passing of Joe Magliochetti. In business we're continually measured by our accomplishments, our results, and, ultimately, our stock price, but every so often we're reminded that business is also about people and relationships.

People are measured by their honesty, integrity, and wisdom. By any of these measures Joe was a special person, and I'm glad we all had the benefit of knowing him. Moving forward as we must, our resolve is only strengthened with an absolute determination to realize the promise Joe has always saw in the Dana people and the bright future he envisioned for our company.

Today, we're going to talk about how Dana people are working to make that bright future a reality. I'll begin with some comments on our third quarter performance, including Dana's results by business unit. I'll then hand off to Bob Richter who will provide an overview of our financials. I'll wrap things up with some remarks on our direction moving forward.

Moving to slide 4. Let's begin with a look at the results of our third quarter. Third quarter net income totaled $61 million, or 41 cents per share on sales of $2.4 billion. These results represent a significant improvement over our net income of 4 million, or 2 cents per share on nearly identical sales during the same period last year. This year's quarterly net income of $61 million included $9 million in after-tax gains from the on-going reduction of DCC's assets, and $9 million in after-tax gains from early retirement of some of Dana's debt.

Excluding these items quarterly net income totaled $43 million, or 29 cents per share, exceeding first call earnings estimates of 26 cents per share. Clearly, the course that we laid out two years ago is now yielding results, achieving or surpassing every goal associated with it and the strengthened third quarter performance validates our plan.

So let's move on to slide five. This chart shows our quarterly results by business unit compared to last year's third quarter. The top line of each business unit was impacted by the weaker dollar which added $102 million to our consolidated sales for the quarter. In the Automotive Systems Group, of the 69 million in increased sales, 44 million was due to currency which does little to the bottom line.

Now, this group is still absorbing start-up costs associated with several new programs within the structural solutions group. These costs were $7 million greater on an after-tax basis than in the third quarter of 2002. This number reflect all of the charges associated with bringing these programs on line. Fortunately, these costs are lessening and will continue to do so as we improve production efficiencies. So we will begin to see benefit from this new business in the quarters ahead.

In the Automotive Aftermarket Group, sales in the quarter were up $17 million due to fluctuations and exchange rates with market influences reducing this gain by $5 million. Now previously, we've talked about a shift in product mix away from premium branded product to lower margin second-line product. This continues to be a challenge for us, especially in the brake business. The biggest factor, however, was the broader softness we continued to see in this market. This group also incurred some restructuring costs during the third quarter. Nevertheless, without these, their [0 Pat] would have shown improvement year-over-year.

Now, our Engine and Fluid and Heavy Vehicle Groups also experienced higher sales due to currency effects of $24 million and $17 million, respectively. These groups currency adjusted sales decreased in line with lower production and their respective markets. However, Engine and Fluid held the line on profitability, and Heavy Vehicle actually made solid progress despite the lower sales.

I'd also like to note that the Heavy Vehicle Group adjusted its restructuring plans during the quarter by closing a plant in Montgomery, Alabama, and moving the operations to a plant in South Carolina that had been previously scheduled for closure. This action resulted in a favorable adjustment to this group's restructuring expense which added to this quarter's operating profit for the group. For Dana as a whole, the pickup from restructuring in Heavy Vehicle was offset by changes I mentioned earlier in the AAG and the rest of Dana. The consolidated total for restructuring was a small net charge of less than $1 million. You will find the supplemental slide at the end of this presentation that details our restructuring activity by SBU. Finally, you will once again see that the unusual items in the quarter include $9 million of gains from DCC asset sales and 9 million in after-tax gains from early retirement of debt.

Now, please turn to slide number 6. This slide highlights our net new business chart showing our projected incremental business through 2007. As we've mentioned previously, this chart reflects a conservative approach to logging and quantifying the value of programs we have secured for the future. The numbers reported are based on new business from which we have written commitments.

This chart also reflects known loss and discontinued programs. For example, the Automotive Systems Group totals in 2006 and 2007 reflect the loss of some Ford frame business, specifically the F-250 and 350. In this situation, we've made the conscious decisions to step away, rather than accept business that would not allow us to meet our targeted returns. With that said it's worth noting that we are currently quoting on over a billion dollars in new business and they have that in the queue right now.

Let's move to slide number 7 while I turn things over to Bob.

Thanks, Bill, and good morning, everyone.

I'll address most of my remarks about this slide to the third quarter numbers. Please note, again, that as usual all of my comments refer to our numbers with DCC on an equity basis.

Sales for the third quarter were up 2.3% over last year's third quarter. As already mentioned, sales increased 102 million in this year's third quarter compared to the same period last year due to the weaker dollar. Absent this, sales would have declined 48 million as new business wasn't sufficient to offset the weaker markets. As we've discussed before, this is a bad trade in terms of the impact on margins, as the volume declined reduces gross margin at the variable contribution rate, while the currency effect adds to cost of sales at a fully loaded rate. This and the launch cost that Bill talked about earlier explain why our gross margin for the quarter is down slightly compared to a year ago.

Other income is up because of the 15 million net pre-tax gain on the repurchase of our debt. Excluding that gain, other income would have been less than last year, and the reason for the decrease is attributable to defense cost in connection with the ArvinMeritor Tender Offer which are included on this line.

SG&A is down due to our restructuring plan and other cost reductions, and this decrease comes in spite of the effect that currency has on this line. SG&A is also down as a percent of sales from 7.4% last year to 6.5% this year. This was more than enough to offset the gross margin impact I mentioned earlier, so operating margin, that is sales less cost of sales and SG&A, is up from 2.7% to 3.2%. Mercifully, since we don't have any restructuring charges to distort our taxes in foreign jurisdictions this year, our effective tax rate is back to a more normal level.

Equity and earnings of affiliates is up year on year almost entirely due to the 9 million in after-tax gains on the sale of DCC assets. However, we don't have the income from the businesses classified since last year has discontinued operations. The $5 million shown in 2002 is the net income of FTE, Boston Weather Head, and Engine Management, all of which were sold prior to the beginning of the third quarter of this year.

Bottom line for the quarter: Net income is up from 4 million last year to 61 million this year. If you take out the net gains on the debt repurchases and DCC asset sales in this year's third quarter and the charges associated with our restructuring plan and income from discontinued operations included in last year's third quarter, we're up from 38 million last year to 43 million this year. If you look at the nine-month numbers, the explanations for the variances are pretty much the same. Additionally, last year's numbers included a $220 million charge in connection with the adoption of FAS 142 which changed the way we account for goodwill.

Please turn to slide number 8. This slide shows the comparative cash flow statement for nine months. As usual, to help you out, we've isolated the effects of our restructuring plan at the bottom. We've already discussed the numbers pulled forward from the income statement, so let's start with depreciation, which is down due to the divestitures and the tight control we've maintained over our capital spend. Proceeds from divestitures and asset sales in 2003 are largely unchanged from where we were at June 30th. The big ticket item this year is the $90 million we received from Standard Motor Products for the Engine Management Operations.

Working capital appears to be in big investment versus last year, and I'll come back to that. There aren't a lot of surprises in the uses of cash section, and in the restructuring section, you can see that we had no charges to add back, but we made payments out of the restructuring accruals which net of the proceeds from asset sales associated with the restructuring, resulted in a net cash outflow of 55 million. Bottom line: We ended the nine months with a reduction in net debt of 48 million versus last year's drop of 243 million.

You may remember, though, that last year we talked about a tax refund that we received as a result of the change in law that expanded the carry-back period for tax losses. That refund amounted to $170 million. If you take this payment out of last year's figures, because it was an anomaly, we're just about right where we were at this point last year in terms of cash flow, and we're right on plan.

Moving to slide number 9, I said I'd come back to the subject of working capital, and here we are. I just said that 170 million tax refund accounted for the bulk of the year-on-year difference in cash flow. Well, it's the same story in terms of working capital. 152 million of that refund hit current taxes, and, therefore, reduced working capital last year.

As you see here, if you adjust for that effect, the working capital change this year is much more comparable to last year. The difference of about 50 million is mostly the extra inventory and tooling we're carrying to support our new product launches. At the end of this presentation, for those of you who are inclined to crunch numbers, we've included a slide that details our three-month and nine-month working capital change by component.

Moving to slide number 10, this slide reports on the movement in our capital structure over the last nine months. The operations column reflects the fact that our net debt is down 48 million. That was the number on the bottom line of the nine-month cash flow statement we saw earlier. Equity is up 150 million from operations, and that's the 154 million in net income that we reported less the dividends we paid out.

Within the changes in short-term debt and long-term debt is the effect of the cash we paid for the debt repurchase. The 17 million in the other column on the net debt line includes an 18 million gross gain on the bond repurchases plus a 29 million improvement in the valuation adjustment related to interest rate swaps, less a $30 million increase due to currency translation.

The bigger shift at the top of the other column, between short and long-term debt, is simply the reclassification earlier this year of our 250 million in bonds due in March 2004 from long term to short term. In the other column on the equity line, all but 4 million of the 218 million increase is attributable to deferred translation adjustments, again as a result of the weaker dollar. You put all this together and our net debt-to-capital ratio is down to 50.7%. It's a big improvement from the 57% at the beginning of this year and the 61.2% we showed just 18 months ago.

Turning to slide number 11, this is our debt portfolio at September 30th. The only term debt due in the next few years are the bonds that mature next March. We bought back 19 million of them in the third quarter, so the remaining amount we have to pay off is now 231 million and is reported as short-term debt. We also repurchased 32 million of our bonds due in 2028 and 107 million of those due in 2029. After giving effect to the repurchases and the 100 million outstanding under our accounts receivable securitization facility, the portfolio has an average life of 9.1 years, and including the effect of the interest rate swaps, an average cost of 5.75%.

Please turn to slide number 12. From a liquidity standpoint, we continue to be in excellent shape. We have the 100 million borrowed against the AR facility and nothing borrowed against the revolver, so that leaves us with 70 million in available capacity on our committed facilities. This amount, plus more than 500 million in cash on the balance sheet, gives us a total of cash and availability of 1.25 billion or 13% of trailing 12-months' sales.

Go to slide number 13, which brings you up to date on where we are on the sale of the DCC portfolio. The starting point was the pie on the left, which is where we stood two years ago when we announced that we were exiting the DCC businesses. We continue to work on our plan and in September 30th of this year, the total portfolio looked like the pie on the right.

We reduced the assets in the portfolio by another 70 million this quarter and realized 9 million in after-tax gains. This brings the total, since we made the decision to exit these businesses, to 780 million in assets reduced, with cumulative after-tax gains of 58 million. And we'll keep on working on those red and yellow slices of the pie.

Please turn to slide number 14. With the gains realized this year, we're raising our full-year net income guidance to between 210 and 220 million, or earnings per share in the range of $1.41 to $1.48. Somebody's already asked why the bottom end of the range only went up by 15 million even though we had 18 million of unusual gains this quarter, and the answer is that we rounded because we thought a range of 213 to 223 looked a little silly. It's not any more complicate than that. Anyway, we don't forecast the usual stuff, so this range implies that net income for the fourth quarter from operations will be 56 to 66 million, or 38 to 44 cents per share.

Please go to slide number 15. This slide shows our current outlook for 2003 full-year cash flow. To be conservative, we're continuing to work off the low end of the range of net income guidance. Due to the tight control we're maintaining over our capital spend, we've lowered our depreciation forecast to 330 million. We've also lowered our projection for working capital reduction to 150 million from the 175 million we discussed with you in July.

We'd rather be conservative here and we have a lot of tooling bills to collect from customers and the extra inventory associated with our start-up's. Don't forget even that working capital is up year-to-date. The Q4 reduction implied in this forecast is in line with what we've actually achieved in the last few years. We've reduced our capital spend projection for the full year to 315 million, based on the rate of outlay year to date, and as you know we will spend a bit more on dividends than originally forecast, and Bill's going to talk about that in a few minutes.

Overall we should have free cash flow in the range of 375 to 405 million for the full year after covering the requirements of our restructuring program. I'd like to add that these numbers do not include any further divestitures we might accomplish, nor they do include any dividend we might receive from DCC.

Please turn to slide number 16. In July, we gave guidance of 300 million in net income, or approximately $2 a share for 2004. Today, armed with our third quarter performance, we're very comfortable reaffirming these numbers.

Please turn to slide number 17. This slide shows our return on invested capital on a rolling four-quarter basis with net debt being used in the derivation of invested capital. These numbers have the non-recurring stuff taken out ,so the improvements you see, since we embarked on this plan in October of 2001, is not due to the end of restructuring charges, the gains on the DCC asset sales, or any other unusual items. What it is, is a reflection of the benefits resulting from the execution of our plan to reduce the number of facilities we have, reduce our work force, divest non-core businesses, and outsource non-core manufacturing.

Pretty proud of this slide because it shows the solid improvement since the announcement of our plan in October of 2001. And based on our guidance for Q4 and into 2004, as we add new bars to the chart, we expect to show continued improvement.

So with that, let's turn to slide number 18, and I'll hand it back to Bill.

Thanks, Bob.

Before we go any further, I'd like to comment briefly on the status of the ArvinMeritor situation. Dana's position on this matter is clear. On July 22nd our Board of Directors concluded that the ArvinMeritor offer was a financially inadequate, high-risk proposal that was not in the best interest of Dana or its shareholders. Nothing has changed since that time. The offer is also opportunistic. The economy is improving monthly. Our business momentum is substantial and accelerating. Dana continues to maintain its focus on its own operations and on serving its customers.

In this quarter's stronger results reflect improved margins resulting from our restructuring initiatives, further validating the Board's conclusion that Dana's on-going strategy is a better way to enhance value for our shareholders. ArvinMeritor has extended it's offer on two occasions, despite the fact it has yet to announce any specific financing plans or resolve the serious anti-trust concerns related to the offer. We note that while Dana's performance and prospects continue to gain momentum, ArvinMeritor, based on its most recent analysts' call, seems to be headed in the opposite direction.

Moving to slide 19. In the four months since ArvinMeritor made its unsolicited offer, the S&P Auto Parts Index has appreciated an average of 14%. In the same period, ArvinMeritor's stock prices declined by 20%. It would appear to us that the investors may be questioning the logic of ArvinMeritor's offer and recent performance. We have said all along that in addition to being a bad deal from a financial point of view for our shareholders, a combination of Dana with ArvinMeritor would make no sense strategically in the emerging and substantially changed auto industry environment.

Moving to slide number 20. So, our focus moving forward is on continuing to address those issues that are vital to Dana's continued success, not on ArvinMeritor. In the past, we've used the analogy of a flywheel to describe our efforts, to accelerate Dana's progress. If you're familiar with the concept of the flywheel, you know it's a rotating wheel that once put into motion, leverages its own momentum to create consistent velocity with reduced effort.

That's what we're after. Increasing positive momentum. We are dedicated to providing world-class support to our customers around the world. We are streamlining our company and many of its internal processes to be more agile and efficient. We are improving margins, capital efficiency, and ROIC. We are aggressively cultivating innovation, technology, and new product development, and ultimately we are creating a Dana that is solidly positioned for growth.

Moving to slide 21. As we achieve this growth, we are also committed to the principle that dividends are an important component of the total return that we provide to our shareholders. To this end, earlier this week, our Board announced that it is raising our fourth quarter dividend to 6 cents per share. It is our continuing success in executing our plan that has enabled us to provide our shareholders with this dividend increase.

We committed that we would revisit our dividend policy as our results approached what could be considered investment-grade performance. With our net debt to capital projected to be well below 50% by year end, we are confident that we are aggressively moving toward that goal. Increasing the dividend at this time is also consistent with our expectation of continuing improvement in earnings.

Moving to slide 22. Looking ahead to 2004, we expect that the cost associated with our product launches will be largely behind us, and that we will begin to deliver full returns on these programs. Coupled with a steadily improving heavy truck market and stability in the light truck market, we believe Dana is positioned to further improve performance next year. And, as Bob noted, we are happy to reaffirm our belief that the earnings in 2004 will be at least 300 million, or $2 a share.

Now, before moving on to your questions, I'd like to share just a few closing thoughts on slide 23. We are extremely encouraged by Dana's improved performance during the third quarter as we outlined today. Third quarter earnings were significantly improved over the same period last year. We raised our full-year net income forecast to a range of 210 to 220 million. Net debt-to-capital ratio was lowered to 50.7, and we increased our fourth quarter dividend to 6 cents per share. These are important and positive accomplishments, but let me be clear. We are committed to quickening the pace and achieving further progress even faster. Speed here is of the essence.

Although our restructuring is essentially complete, we will continue to work aggressively to eliminate waste within Dana. Quite simply, whatever doesn't add value, will be eliminated. And we will grow our company. We are growing technology, we are growing the world-class capabilities we provide to our customers, and we are growing both the top line and the bottom line. Our plan is working. Our margins are improving. We've shored up the balance sheet by paying down debt, and we increased the dividend to our shareholders. We are making solid progress toward our goals. Our performance is becoming far more predictable, and we are far from finished.

Now at this time I'd like to move to slide 24. We will turn it back to Ashley for questions and answers.

Today's Q and A session will be conducted electronically. If you would like to ask a question, you may signal us by firmly pressing the 1 digit followed by the 4 digit on your touch-tone telephone. Dana will also answer questions from their website. We will take as many questions as time permits and will take your questions in the order they are signaled. For our first question let's go to Jeff Scogland. Please go ahead with your question.

Good morning. Can you talk about what your plans for future repurchase of bonds are, and whether or not you place any constraints on the current bank facility?

We're not facing constraints. Right now, we don't really have any plans to repurchase further debt. In the first quarter, we usually see an outflow of cash because the working capital builds up seasonally, and we had that 231 million in bond maturity to deal with, so our intention in the near term is to be building cash to prepare ourselves to pay off that debt when it comes due.

Okay. In regards to the dividend, I wonder if you could comment in terms of the potential of bringing that up in 2004. Historically, your pay-out ratio has been higher. I was just curious how you view that in terms of balancing with your desire to return to investor grade status. Thank you.

The Board talked about the dividend this time, and where we go from here. It was pretty clear that they're going to be looking at trying to strike a balance between a whole number of factors, including our financial position, as you mentioned our desire to gain and maintain an investment-grade credit rating, the cash required to fund the business, and our level of earnings and return on invested capital. That's -- anything more than that, on our part, would be speculation because it is the Board's decision. That's a good question. We have one off the Internet that perhaps we should just clarify. Somebody was questioning whether the new business chart we show is -- includes extension or renewals of existing business, and the answer is no, it doesn't. It's a net chart. And it actually subtracts things that we've lost. Maybe we can go back to the phone line.

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

Thanks. Hi, Bob.

Hey, Darren.

Just a couple things on cash flow. I know your fourth quarter working capital performance has been volatile, and you've had some big numbers in prior fourth quarters, but you sort of have an implied $370 million in-flow now to make your target. Is that a stretch at this point for you guys? Do you have to do sort of special things to hit that target, or is that, you know, kind of natural? The other question on cash flow is, you've underspent, I think, year to date on the cash pay-outs against the restructuring, so I'm just wondering if that's a good thing or just something that will wind up flowing into 2004?

As far as the working capital, as I said, if you go back over the last three years, Darren, we've had pretty big numbers in the fourth quarter in each of those years, and, obviously, we don't want to get too aggressive here, and we took the guidance down by 25 million, but the number we're looking at today we don't think is a big stretch. The other question had to do with --.

Your underspend.

The underspend on the restructuring. I think it's a little bit of both. A little bit of leak into future periods, and a little bit is a permanent reduction. You recall when we set this thing up we assumed that out of the total there would be a certain amount which was clearly noncash, like asset impairment, and the rest we assumed to be cash. And some of that cash included pension and stuff like that, that goes out for years, so really it isn't a big deal after next year.

Any sense what the cash payouts would be in '04, or should I follow up with you on that after the call?

Maybe follow up after the call. Of course, in the queue we'll have detail of all this stuff by quarter.

On the fourth quarter, any sense of, you know, what your revenue expectation is to go with that 38 to 42 cents?

About the same as this quarter.

Okay. And just lastly, you took -- the 16 million, the reversal of accrual for the Heavy Vehicle, is that an after-tax figure? Those are all after-tax figures on that page?

Oh, you're talking about the supplemental information slide?

Yeah.

Those are pre-tax numbers.

Those are pre-tax numbers, so what you're saying is we should look at that as just sort of, hey, you got a bunch of put's and takes there, and the net was essential neutral to the third quarter?

That's exactly right. But it did distort that one SBU.

That's helpful. Thank you.

Yep. Next question off the phone line?

Thank you. Our next question is coming from Ronald Tadross. Please go ahead with your question.

Thanks a lot. Good morning everyone.

Hi, Ron.

On the $300 million next year in net, I guess it looks like it's about maybe 75 -- maybe 60 to 75 million more than the first call mean, and if you boil that up to a pre-tax figure it would be about 100 million more than most analysts have in their models. I'm wondering, maybe you could just expand on whether or not you think you're going to do this on a operating basis, or if you look at the analysts' model, do you think the upside is on an operating basis? You know, is there some decline in the tax rate? We've seen tax rates go down for a lot of suppliers pretty significantly. Could you just talk to a little bit of the mix of those numbers, where you're doing better than you think people are modeling?

There's no change in the tax rate, Ron, at all, and there aren't any unusual items in that. That one slide that Bill talked about on 2004 outlook I think really details it. You know, we're looking at heavy duty volumes next year of 245 to 255. That's a big deal for us. We also won't have tose start up costs that we've had this year. I mean, year-to-date those things are about $20 million bucks after tax that have affected ASG margins. I think maybe people are underdoing that. The new businesses are coming in a pretty good margins. Interest costs are down, and we still got a few plants to close. So you factor all that in, and we get there. You start to get a full run rate on our restructuring benefits to really pay back for what we're doing, what we've done at this point.

But it is mostly in ASG than -- and in the commercial vehicle business?

Yeah. Yes, it is.

All right. Good. Thank you very much.

Certainly. Next one off the phone line?

Thank you. Our next question is coming from David Leiker. Please go ahead with your question.

Good morning.

Good morning.

Just a follow-up on the launch cost. Did you say $20 million in '03?

Yeah, year-to-date.

What's that number in '04, do you think?

Well, we've always got launch costs.

Right. But I mean unusual ones, greater than normal.

Nothing.

A little bit maybe in the first quarter but nothing to write home about. And that's why you get the big swing year to year.

Okay. And your increased guidance assumes no unusual items for Q4?

That's correct.

Okay. The -- can you give us an update on the launches? I know on your press release you talked about the seven launches and that those have gone well, but if you could just kind of run through a little bit and give us a sense of where you are on all those and what the performance has been.

This is Bill Carroll. Any frame launch, especially to the extent that these are, which are all brand new designs, new lines, new people, new plants, are difficult at best. We've worked very closely well our customers. The F-150's gone well. As you know, or if you don't, that's a very successful vehicle for Ford, and it really starts with the design of the frame. And they are actually advertising our frame, which shows how important it is. We're doing well with that.

We are launching right now the new Colorado frame out of Longview, so, you know, we have ups and downs, but we're certainly meeting all the customer requirements. We're launching the Free Star. We've launched the axle for the BMW. We are now launching the axle for the Nissan Titan. So they're all going right now. We're meeting the customer requirements. We're never really pleased 100% of the time, but we're working through those, and we're very excited about what we see on the top line and the bottom line with this business.

Doesn't sound like there's anything extraordinary at all that you're going through.

The guys in the plant that are doing these launches right now would probably differ with you, but, no, it's -- I won't say it's business as usual, but we are meeting the challenge at this point.

Bob, just one technical question. The gain on the debt retirement. What was the pre-tax number, and which line item did it fall in?

It's in other income. There was an $18 million gross difference, and then three went against that. That's the -- you have to charge off the unamortized original issue discount and issuance cost related to those bonds. So it was 18 gross reduction, less three, gets you 15 net in other income.

Then the after-tax is nine. Perfect. Thank you.

Yep. We can go another one off the phone.

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

Good morning.

Hi, David.

Selling, general, and administrative plunged. It's the lowest I've ever seen it, in terms of percentage of sales for some time, a long time anyway. Can you keep it that low?

Yes.

Whoa.

That's -- as a percent, it was pretty low. We've had things screwed down pretty tight. I think to say it's going to stay at that level, boy, that would be pretty aggressive, but obviously we'll keep working on it.

Okay. And then this is a technical question. I know for the other -- when you go through the segments and you break out in other line item, in the slides I think you're showing a change in the other from, you know, 61 to 65. What goes into -- that's no pad. In our models, I think most people, at least we that use the EBIT number, that went from 50 to 70, 20 million increase. Is that a temporary increase? And will it come back toward the 50 again or will it stay at 70? How is that going to work?

What you've got in there that's driving it a little higher are defense costs and the mark to market adjustment on our stock that are connected with, you know, compensation programs due to the increase in the stock price during the quarter.

Okay. So that hasn't changed so far this quarter, so if the stock stays where it is, that would come down, but if -- defense costs will stay there for awhile.

Let's put it this way, we hope, as it relates to mark to market, David, that you're calling and asking us about a big jump in that number every quarter.

Okay. So that number -- just trying to think about going forward. Why do defense costs flow through cost of goods sold and -- ?

It doesn't. It's on other income lines.

So it's an offset to other income.

Yeah.

Okay. But other income is quite high anyway.

Not if you take out the bond repurchases. It's actually down from last year.

I see. Okay. And then, finally, guidance on taxes. What kind of rate should we use going forward?

37 to 39 probably.

It was lower than that in the quarter, though, as I calculated it.

Yeah, that was just because of where the income came from.

All right. Thank you very much.

Yeah, thanks. Can we have another?

Thank you. Our next question is coming from Rob Hinchliffe. Please go ahead with your question.

Good morning, Bill. Good morning, Bob.

Morning.

Can you give us a sense -- Q4, how reflective of future, I guess, earnings potential is that? Where will the launches be in the whole ramp-up phase in Q4, and how will that compare with next year?

Well, in Q4, we'll be substantially past the actual launch, you know, and getting into more regular, if you will, terms that we're doing in the operations themselves. We are launching, like I said, this month, the Colorado frame, which is our new plant in Longview, Texas, and we are launching the front and rear axle for the Nissan Titan, and then we have next year, we've got our launch of our Land Rover frame and axles. So it's moving down smartly. It's just now getting the jobs per hour up and running the plant, and that's where we're at. So will substantially be behind us by the end of fourth quarter.

Okay. But year-over-year, then, there's pretty good gain just as the volume hits a normal run rate, then.

Well, we're looking that way at this point, yes.

You talked about quickening the pace of the restructuring and continuing to get costs down. You've done a lot already. What's left to do? I know you guys are rearranging a lot of the existing plants, and that kind of thing, floor layouts, but what else can you do to speed this up?

We're continually looking at what does not add value, not only in the plants but certainly in support groups and other areas of how we deal today, and we're not going to lay back, you know, we're not going to say, geez, restructuring is done, and here we are. We're going to always continually look at what waste is in our system, both in manufacturing, in the distribution, and in support groups. And everything's up for looking at how we can enhance and increase shareholder value here.

And then lastly, with regards to the UAW, can you give us sort of an update in terms of how that partnership is going so far? Any benefits you've seen to it? Just kind of how it's going.

Well, the -- of course, the partnership is for us to be working together to making sure that together we can be competitive in our operations as well as continue to grow with the big three, and any new business that they have. We settled our master negotiations here just a couple weeks ago. We had two plants in the UAW master. And I'll just say this: We think it was a very good partnership arrangement, and we are now getting back to normal in those plants. So I think in today's environment, we're working very closely with seeing how together in operations that will be affected with the big three to see how we can grow our businesses together.

How about from a standpoint of efficiency, in terms of quickening the pace of the restructuring and making your plants more efficient. How does the UAW fit into that?

Well, let's put it this way: There's a different attitude, and I'll say this, inside the UAW, that in order for us to be competitive, in order for our operations, the way they have to be, to be competitive with China, to be competitive with other areas of the world, to maintain jobs here, there has to be a competitive nature in how we deal together and understand that in our plants that our UAW today, we're in this together.

And so there are a lot of relationships that we're building with them. We can -- they understand that we have to have the efficiency and productivity in order to maintain the competitiveness here. They understand that work rules have to change, and they understand that -- I'll just say it this way, we're not the enemy. They understand that together we have to be competitive in our operations. So I think with that attitude change and with us sitting down and looking at our operations and how we have to be competitive, we can improve our efficiencies, and we have done it.

Okay. Thanks, Bill.

Sure.

We have one question off the Internet here asking about the outlook for capex. As we said, for 2003, we're looking at 315. As we look into next year, '04 for capex, we'd imagine it being about equal to depreciation. We don't want to fall into the trap of piling on a lot of assets after we've spent all this time rationalizing our asset base. We can go back to the phone line now.

Thank you. Our next question is coming from Monica Keeney. Please go ahead with your question.

Good morning.

Good morning.

I was wondering if you could talk a little bit about where you see heavy-duty margins going, because they were up pretty nicely this quarter year-over-year and with improved volume. Where do you see those going?

Remember there's the restructuring adjustment to those heavy duty numbers.

How much is that?

That was about 16 million before tax that was in there, and so that sort of bumped the operating profit of the heavy duty group in this particular quarter, Monica.

Okay, so adjusting for that, what does the margin look like? I just don't have it in front of me.

I'd have to calculate it to be honest, but I'm sure you can get back to Michelle on that. As far as thinking about what happens to the heavy duty margins going forward, for a typical day in a product, you've probably got 60% material, 10% labor, and 30% overhead, so you get this, like 30% contribution rate, a little higher than that in heavy truck. It's a more volatile market. You get more of a risk premium to be committed to that kind of market. So it's --

Only 30 to 35%?

Yeah, it's 35 plus.

Okay. And then can you guys -- that you gave us a 2004 capex -- can you translate the -- any guidance to EBITDA for us? Do you have that handy?

We haven't done that or made that public yet, Monica.

Okay. Last question is, can you give us an update on, you know, where you are in the process of asset sales? Do you feel like you have a lot more to do, or are you pretty happy with what you've been able to do so far?

Monica, we continue to look at that. There's nothing that's laid out on the books that says, you've got to sell this, got to sell that. What we're looking at is, again, looking at our non-core, looking at what we have to do to be efficient in our operations, and how we can continue to improve our margins. So we're always looking at it. We're not done. And I'm not sure if we'll ever really be done continuing to improve our margins.

Okay. Thank you.

Sure.

Next question off the phone line?

Thank you. Our next question is coming from Matthew Mark. Please go ahead with your question.

Just a quick one of the ones that are left. Can you talk about how much the ArvinMeritor process cost you in the third quarter?

Well, it cost us more than we spend on copy paper and stationary.

Truly, you know, if you look at this, I don't think what we're paying is out of line with what other companies have paid in similar situations, but I don't think we want to get into quantifying them and get into a position where we have to start discussing quarterly variations in defense cost. They are what they are, and whatever they were, we made what we made in spite of them, and we'd just prefer to leave it at that.

It would -- just, Bob, be helpful to know whether or not it was a material amount, just so we can gauge the earning power of the business absent this process.

We weren't required to disclose it.

Thanks.

Next question?

Thank you. Our next question is coming from Kirk Ludke. Please go ahead with your question.

Good morning, guys.

Hi, Kirk.

I've got a couple different topics I wanted to touch on. One was, I'm hoping to get a better feel for the likelihood of a dividend from Dana credit. So, Bob, if there's any color you can give us on what's left in that portfolio, looks like it's about $500 million of assets that are still for sale. Seems like the economy is getting better, and maybe the likelihood of an asset sale, meaningful asset sale and or dividend from Dana credit is increasing.

I think there's a pretty high likelihood of a dividend from DCC. I think the better question is, What is the amount of that? And that's going to really depend on where we are as we get closer to the end of the year in terms of asset sales. In the supplemental information that's attached to the press release -- you've got a copy, and I guess it's also on the website -- you've got a copy of DCC's balance sheet, and you can see they've got a pretty good cash position and have done a pretty nice job of paying down debt this year. But at this point I'm not prepared to forecast what that might be.

Okay. Great. Next topic is, there's been some rumors about an asset that's in one of your core businesses that may be for sale, and I'm just curious if you want to comment on your attitude toward -- to making acquisitions.

Well, we don't -- you know, we don't comment on rumors. As of this point in time, we are running our business, we're working our plan, and those are the facts of it, and we just showed you what the third quarter is, and we'll continue to improve, and we'll continue to work our plan. There's rumors all the time, on various aspects of all the businesses, but we just don't comments meant on rumors.

Last question. I think, Bill, you mentioned in passing that the F-250 and F-350 frame is -- has been awarded, I think to someone else.

Yes.

Is there any color you can give us on that?

No, it's 2006, 2007. The only color I can give you is what we had said in our comment section here is that, we're not going to take on business, we're going to be disciplined and not take on business that we know we cannot make a proper return for our shareholders. And, quite frankly, that was the case here.

Now there's two out of the three big frame manufacturers that are kind of taking that position. Do you feel that like part of the market is getting more rational?

We can make money in frame business. We've showed you and others that we can. We've got great Ford business, great General Motors business. We've got great Land Rover business. We can make money on it. Certain jobs, certain businesses, or certain programs, maybe you can't. So I'm not going to sit here and say you can't make money in frames. You can.

Thank you very much.

Sure.

Next one off the phone line?

Thank you. Our next question is coming from Brett Hoselton. Please go ahead with your question.

Good morning Bill, Bob, and Michelle.

Good morning.

Couple of questions here. First of all, as I look at fourth quarter, you, I think, Bob, indicated that revenues -- you're kind of thinking roughly flat, and it sounded like you were just throwing out a rough estimate, but is that generally directionally correct?

Yeah.

As I look at fourth quarter --.

Brett, that's maybe a little bit lower in aftermarket, a little bit more in heavy, but net-net is about flat.

And then as I look at fourth quarter to first quarter, generally, we see a nice rise in revenues due to some production numbers, then also a nice rise in margins. My question would be, as I look at the first quarter compared to the fourth quarter, is there anything that -- any major positives or negatives that I should be thinking about?

All the stuff we've already talked about. The heavy's, notably.

New business.

New business coming in. These launches that are going on right now chip in volume, so it's all the stuff we've been talking about.

Your pension, I don't know if you've had a chance to look at that yet, but can you give me a sense of what your returns are year-to-date, and do you have any idea what the current funding status is?

Yeah, I do, but I'm not going to talk about that. We'll talk about it in the fourth quarter, you know, when we pick the discount rate, because that really probably has more to do with our funded status than anything else because the funds are holding up. Our year-to-date return is 13%.

And you talked about FX kind of working against you and helping you out on the revenue line and working against you on the operating line. Can you flesh that out a little bit more? I apologize, I kind of missed that portion of the call.

What we're saying is, that when the sales come in because of currency, you know, you're getting, on the net income line, maybe, you know, 5% after tax, and you get a fully loaded rate into cost of goods sold, not the contribution rate, whereas, when you see the market drop in terms of volume, that comes out at the variable contribution rate. You know, call it, as we said earlier, maybe 30%, which means you're getting an 18% hit after tax, so it's a big difference. You don't want to make that trade all day long.

And then finally, is there any -- can you provide any update as to, you know, kind of the timing and expectations and so forth regarding finding Joe's replacement?

Well, it's completely up to the Board at this point in time. The Board will be doing what's right for the shareholders and for the Dana Corporation, so it's in the hands of the Board, and that's as far as we'll go with that.

Thank you very much, gentlemen.

Sure.

Thanks. Phone line?

Thank you. Our next question is coming from Steve Girsky. Please go ahead with your question.

Good morning, everybody.

Hi, Steve.

I may have missed this, or it may have come in pieces. What was the total currency impact on revenue and on profit?

We said it was about $100 million on the revenue line and about 5 million on the profit.

Okay. So the european EBIT looked like it was up a lot. Was that just cost saves? I know the 5 would go in there. Anything else in that number?

Well, there's new business, there's cost savings, all kinds of stuff. It's not just currency.

Okay. And this aftermarket margins seem to be up materially from the second quarter.

And, frankly, if you put the -- if you pull out the -- the restructuring charge, it looks like it's up even more. Is that just sort of the benefits of cost savings that finally come in here?

You remember in the last quarterly call we talked about some actions they were taking particularly in the brake group to reduce head count, and what you're seeing is the benefit of that.

That's like of a 100 people that you mentioned.

Yeah, you have the cost of getting those people out in the second, and you have the benefit of not having those costs continuing in the third.

So we're now sort of back to where we were on a reasonable basis then, right, in the aftermarket margin front?

Yeah, that's a fair statement.

Right. Okay. Thanks a lot, guys.

Thank you. One more question, and then we'll call it quits here.

Our final question of the day will be coming from S.T. Tellapragda. Please go ahead with your question.

Good morning, and congratulations on a good quarter. Just a couple of brief questions. Can you comment on the status of the asbestos claims?

We actually do that in the 10-Q when it comes out, and you will see those numbers, but I can tell you in advance you won't be surprised when you see them.

Great, great. And can you comment on how the antitrust second request process is going with respect to ArvinMeritor's offer, and if this has had any effect or is it starting to create a distraction at the operating level with your employees?

We have had the second request. We're working diligently to make sure that we get the information. It surprises us, I guess. At the same time, it also lets us know that maybe there are some issues there that we've been saying all along with antitrust, whether we've gotten the second request. No, it hasn't -- it's not affecting the operations at all at this point. You know, we're working very closely well our legal group and we'll fulfill the requirements.

Great. One last question, if I may. Can you clarify your incorporation status with respect to the Virginia Share Control Act and what your options are in that regard?

That's a pretty detailed question. I think we are already are past the time limit. I wonder if you would mind calling Michelle on that one.

Sure. Thank you.

Thanks very much. Bill, you want to wrap it up here?

Yeah. Thank you everyone. Let me just make a couple of comments on our wrap-up. And just let me reiterate today's messages. Obviously, earnings are up, guidance is up again, debt is declining, and dividends are up. And all I want to say is that from our standpoint, this is only the beginning. We'd like to thank everyone for listening today, and, as always, we appreciate your interest in the Dana Corporation. So thank you very much.

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