Dana Inc (DAN) 2003 Q4 法說會逐字稿

Good morning and welcome to Dana Corporation fourth quarter conference call. This call is being tape-recorded. The format for today's conference call includes remarks by Dana's Chairman, Glen Hiner and by Bob Richter, Chief Financial Officer, followed by a question-and-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.

Good morning everyone and welcome to Dana Corporation's fourth-quarter conference call. Today, we will review Dana's fourth-quarter and full-year 2003 results. 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 a 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 reconciliation of the differences between the non-GAAP and the GAAP measures can be found at the end of our earnings release. In addition, reconciliations of other non-GAAP measures can also be found at the end of the earnings release.

Next, I would like to direct your attention to slide two. I would like to mention 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 are anticipated or projected due to factors that we will be discussing and others that are referenced in our SEC reports. A copy of today's earnings release and the slides supporting this presentation have been filed with the SEC in a report on form 8-K. This report and the slide presentation are also available on our Dana.com website. The presentation is again available online in an easy to print PDF format.

This conference call and its supporting visuals may not be recorded, copied or rebroadcast without Dana's written consent. Just as a reminder, our webcast system enables you to direct questions to us via the Internet throughout today's presentation. Dana's Chairman, Glen Hiner, who is calling in and our Chief Financial Officer, Bob Richter, will answer as many questions as time permits. All other questions will receive a follow-up response. Now moving to slide three, I would like to turn the call over to Glen Hiner.

Thanks, Michelle. Good morning, everyone. Thank you for sharing your time with us today. I would like to offer some opening comments regarding the significant announcements that Dana has made during this past week. Bob Richter will then handle the balance of our presentation, including an overview of Dana's fourth quarter and full year financials. Moving to slide four, where I would like to be able to share with you a few thoughts on Dana's new Chief Executive Officer and President Michael Burns. Let me begin by saying how thrilled we are to have a leader the caliber of Mike Burns taking the helm at Dana.

Mike joins us after 34 years at General Motors, the last five spent in Europe as President of General Motors Europe, a $20 billion division of General Motors. Mike combines strong leadership skills, a deep industry knowledge, international savy and acumen with a unique mix of positive energy and personal integrity. High ethics. As we indicated at the outside of the board search process, we conducted a comprehensive search internally and externally to Dana for the best qualified executive to lead Dana through our current transformation and into our second century. At the end of this extensive process, we unanimously concluded that Mike is the very best person, and we are delighted that we were able to attract him to Dana and that he will be joining us on March 1.

If we move to slide five, I am pleased to discuss Dana's second significant dividend increase in as many quarters, which is in fact our 265th consecutive dividend. On Tuesday, the Dana Board approved a 12 cent quarterly dividend payable in March. This represents an increase of 6 cents from our most recent payment, and an 11 cent increase over that of September. As these recent increases demonstrate, the Board is confident in Dana's direction. These actions also indicate that dividends remain an important component of the return we provide to Dana shareholders. We now believe that Dana's dividend payout is more consistent with levels typical of our sector.

Looking ahead, any future dividends will be considered by striking an appropriate balance between Dana's performance, our relative financial position, and the continued need to invest in the growth of our core businesses. Before I turn it back to Bob Richter, let me just finish by saying that despite the extraordinary challenges Dana faced in 2003, our people remained remarkably focused on our most important objectives. Delivering value to our customers, and providing improved returns to our shareholders. And because of their successes, we are benefiting from renewed momentum, a sharp and strategic focus and a resolve to achieve even greater things in 2004. With that, I will ask you to turn to slide six where Bob Richter will take over. Bob.

Thanks, Glen, and good morning everyone. Those of you who have already seen today's earnings release will recognize this table from the front page. As a quick summary, sales from continuing operations were 2.1 billion for the fourth quarter of 2003, compared to 1.8 billion during the same period last year. 2003 fourth quarter sales were favorably impacted by 132 million of foreign currency translation. With the balance of the increase due to improved heavy truck production in North America and new business coming on stream.

Net income totaled 68 million or 45 cents a share compared to a loss of 9 million or 6 cents per share during the same period in 2002. The improvements here were driven by higher sales, the effects of our restructuring plan and certain tax benefits which more than offset higher than anticipated startup costs in our structures business. You also note for the quarter we had 6 million of net income from unusual items; that includes 8 million in gains on the sale of DCC assets, less a $2 million charge for post-closing adjustments on some earlier divestitures. Net income in last year's fourth quarter also had some unusual items, $3 million in gains on DCC assets sales, and 44 million in charges relating to the restructuring plan announced in 2001.

For the full year, sales from continuing operations were 7.9 billion in 2003, compared to 7.5 billion in 2002. $351 million of this increase was due to foreign currency translation. New business offset partially by lower North American vehicular production particularly in the first half of 2003, accounted for the balance. 2003 net income totaled $222 million or $1.49 per share compared to a loss of 182 million or $1.22 per share in 2002. As detailed on the slide, net income in 2003 included net gains from divestitures and the repurchase of debt, while net income in 2002 reflected a charge associated with the change in accounting for goodwill, restructuring cost, and net divestiture gains.

Lower vehicle production and softness in aftermarket business during the early part of 2003 hampered our year-on-year comparisons, but the improved performance at our engine and heavy vehicle units drove stronger earnings in the second half of the year. But for the effect of startup costs and structures, we would have seen the same type of improvement from the Automotive Systems Group as well. One of the things that hits you when you look at this table is the fact that we have reclassified the aftermarket business as a discontinued operation. The impact of this change is explained more fully on the next slide, number seven.

For those of you who may not have had a lot of exposure to discontinued operations accounting, we can tell you from experience it takes some getting used to. The aftermarket business qualifies for this treatment because it is a business we intend to sell within 12 months. Actually we are still pushing for a June 30 closing. We do not expect have any continuing involvement in the business after the sale. The consequences of disc op treatment varies depending on which one of the financial statements you are looking at. The income statement treatment requires us to take the results of the aftermarket out of each line item, and collapse them onto a single line labeled "results of discontinued operations." This is done not only for the current year, but also for the prior years.

On the balance sheet, we do something similar. All of the assets of the aftermarket including plant and equipment are shown as a single current asset and all of its liabilities are shown as a single current liability. Unlike the income statement though, prior periods are not restated. Finally, on the cash-flow statement, there is no change to the current period or the prior periods so the cash-flow statement line items will not necessarily track the change in the related balance sheet items. With that background, let's turn to the income statement on slide eight.

The left hand column of this slide shows the income statement as it would have looked if we had had no discontinued operations whatsoever in 2003. Of course, the aftermarket was not the only disc op we had this year; in February of 2003, we announced our intention to sell the Engine Management operations at the aftermarket to Standard Motor Products. We completed that sale on June 30, so the numbers in the second column remove all amounts related to that business for the first six months of 2003 and just reflect the net loss of 11 million as the result of discontinued operations. If you adjust the numbers in the first column, by the numbers in the second column, you get the third column which looks like the numbers everyone would have expected to see for 2003 had we not announced the sale of the aftermarket business in December.

The effect of that decision is shown in the fourth column where we collapse all of its results to one line, and when we adjust the third column by the amounts in the fourth column we get the reported numbers in the last column. It's a little painful, but we thought it would be worthwhile to show how it all fits together and we particularly wanted to help people who were used to looking at our numbers including the aftermarket, to see how the disc op treatment changes them.

We've included some supplemental slides which are available at the end of this presentation which show reconciliations in this format for the fourth quarter of 2003, as well as for the full year and fourth quarter of 2002. Just a couple of comments on the differences. The old Dana in the middle column had sales of just under 10 billion. After subtracting about 2 billion in sales for the aftermarket business, the total is now just under 8 billion. Old Dana had a gross margin of 9.7 percent. Without the higher margin sales of the aftermarket, the new Dana has a gross margin of 7.9 percent. On the flip side, the aftermarket had relatively higher selling expenses than our OE business. So, while old Dana had SG&A to sales of about 7 percent, new Dana has SG&A to sales of 5.6 percent which is pretty low for our industry.

We will need to change our way of thinking about these numbers going forward and since we did not allocate any of the parent company's interest expense to the aftermarket, when the proceeds from the sale are realized, we will need to adjust our thinking about what interest expense will be going forward as well. Moving to slide number nine, this slide compares our 2003 fourth quarter and full year income statements to the same period last year. All the numbers are after the reclassification of the aftermarket as a discontinued operation. Sales for the quarter were up 14.5 percent over last year. As I said earlier, half of the increase was due to the effect of currency and the balance was due to new business and stronger heavy vehicle sales.

Gross margin in the quarter was 8.1 percent, that is up from 7.5 percent a year ago. This comes in spite of the fact that we had about 11 million in pretax costs related to structures that were clearly higher than we would have expected. SG&A expense is the same as a year ago in dollars, but down from 6 percent of sales to 5.2 percent of sales. Unlike last year, when we were recording the final installment of the charges associated with our 2001 restructuring plan, we don't have any big restructuring charges this year. The $5 million is just stuff that met the technical definition of restructuring cost, but which we consider just part of normal operations.

The only other item of significance we haven't talked about is taxes. As you can see in the first column, we ended up with a 2 million benefit for the quarter on pretax income of 35 million. In large part, this was due to profitability in certain international operations where we have net operating loss carry forwards that offset any tax expense. We also had some R&D credits come through in Canada, and some favorable settlement adjustments that helped. Bottom line, net income was 68 million in the fourth quarter compared to a loss of 9 million in the same quarter last year.

For the full year, we have every already talked about the sales change, other income is up due to a number of factors including the gains on our debt repurchases in the third quarter, the recovery of development costs which resulted from the sale of our Thailand structures business in the second quarter, and net gains over the course of the year from the sale of various assets as part of outsourcing arrangements or from assets that were freed up through restructuring.

As I said earlier, the gross margin was 7.9 percent that is down from 8.5 percent last year due to startup costs. Offsetting this was a decline in SG&A as a percent of sales, from 6.2 percent to 5.6 percent. What looks like a 20 percent effective tax rate for the year on this slide might seem low, but the effective rate before treating the aftermarket as a discontinued operation was a more normal 30 percent. The full year net income was 222 million, versus the loss we reported last year of 182 million which included the 220 million charge for the accounting change on goodwill.

Please go to slide number 10. This slide reconciles our full year 2003 segment numbers for the discontinued operations treatment. Again to help you out at the end of the presentation you will find similar reconciliations by segment for the full year of 2002 and the fourth quarters of both years. The explanation of the reconciliation is basically the same for all the periods. For sales, we eliminate the sales of the aftermarket SBU which we will no longer report as a separate unit. We add to the Engine and Fluid Management Group the sales of the Clevite operation which is that portion of the aftermarket group that we are retaining because of markets and distributes almost exclusively engine hard parts and ceiling products manufactured by the Engine and Fluid SBU. The change to the other line in the sales column is to get rid of the elimination of intracompany sales between other SBU's and the aftermarket. On the profit side, you basically have the corresponding P&L impact of everything I just described, except that the net shows up as a profit from discontinued operations.

Let's now look at how the realigned segment numbers compare from last year to this year turning to slide number 11. This chart shows our full year results by business unit compared to 2002. The top line of each business unit was impacted by the weaker dollar, which added $351 million to sales. In the Automotive Systems Group, the sales increase was driven by currency in new business. The bottom line was essentially flat as the incremental profit you would have expected to see was offset by the startup costs we talked about all year. The full year total and this is not all startup cost, just those over and above normal levels, amounted to 26 million after tax.

Both Engine and Fluid and Heavy Vehicle also experienced sales increases, but their profit was up significantly due largely to the benefits of the restructuring actions we have taken over the last two years. Income from DCC and this is the operating number for DCC, excluding the gains on asset sales which were included in the unusual items line, is down simply as the result of the decline in their asset base as we continue to sell off the portfolio. We'll talk more about this later.

Other, which includes intracompany eliminations, as well as corporate and interest expense shows a favorable variance due to a variety of factors. Interest expense is down, corporate expenses are down, and this is also where the variation between the effective tax rate and the standard tax rate of 39 percent we apply to all of our operations shows up. The total of all that good stuff is a lot more than the 11 million you see here, but that is because this slide also includes the cost we had to bear as the result of the ArvinMeritor defense. We aren't complaining about them, we earned what we earned in spite of what we paid the bankers and lawyers, and that was just an unfortunate fact of life for us in 2003.

Nevertheless, as you see in yellow, sales from continuing operations were up 6 percent and profits from continuing operations were up 58 percent. Below the yellow line you have three reconciling items, all of which we have talked about on previous slides, that take you back to the net income and those are the results of discontinued operations, the unusual items and the impact of last year's accounting change. Now let's turn to the balance sheet and slide number 12.

This slide reconciles the asset side of our December 31, 2003 balance sheet, including the aftermarket to the reported numbers in order to highlight the disc op treatment. As you see a total of 1,254,000,000 of assets gets pulled out of the various line items including property plant and equipment and other noncurrent assets, and then shows up on a single line in the current asset section under the caption "discontinued operations." These are the assets of the aftermarket business we're selling. As an aside, if you divide the inventory number of 743 million for the continuing businesses in the last column into our 2003 sales from continuing operations, you find that our inventory turn ratio is 10.6 times. I point this out because it is much more in line with the norm for the supplier industry than the eight times kind of number we used to show with the aftermarket included.

Let's now look at the liability side of the balance sheet on slide number 13. Since most of the liability is assigned to the aftermarket business recurring anyway, there's not much to comment on here. Although there was a small change in the minority interest number, as there are businesses in Eastern Europe and Latin America that are less than 100 percent owned that will go with the deal. For those of you who might be tempted to page back to the last slide to get the asset numbers so you can compute the net book value of the business, I will save you the trouble, it is $947 million.

Let's now look at the cash-flow statement on slide number 14. This slide shows the comparative cash-flow statement for the full year 2003 and 2002. Remember there is no effect of discontinued operations accounting here. I will not walk down the line items because frankly every number is essentially in line with what we have been talking about all year save one, working capital. You might remember that through the first nine months of this year we had an increase in working capital of 219 million, and we boldly stated in our last conference call that we expected to finish the year with a reduction of working capital of 150 million which implied a reduction in the first fourth quarter rather of 369 million.

Everyone thought we were crazy, but frankly after cutting working capital by 370 income and 275 million in the fourth quarters of 2001 and 2002 respectively, and also knowing that we hoped to recover tooling reimbursements from customers totaling about 75 million, we thought we could do it. We were wrong. Working capital did decline during the quarter by just short of 150 million, but not only did we not get the tooling reimbursement due to startup issues, we had to carry about 40 million of additional inventory to support the startups, and on top of that, sales in the month of December wound up being about 85 million more than we expected, and of course all of that sat in receivables at December 31.

The good news is that all these are timing issues and we look for a reduction in the seasonal buildup of working capital that we would have otherwise expected in the first quarter of 2004. So, at the end of the day we're still pretty proud that we were able to reduce the net debt by 272 million on the year. Moving to slide number 15, this slide shows a walk forward of our net debt and equity for 2003. The first column shows the balances at the end of 2002. In the second column, we see the 272 million reduction in net debt from the previous slide; 157 million of that amount was used to reduce borrowings, most of which was accomplished through repurchases of our bonds in the third quarter. The balance of 115 million was added to cash. The change to equity from operations is simply our earnings of 222 million, less the 14 million we paid in dividends.

Other factors which are shown in the third column like currency, and mark-to-market adjustments on our interest rate swaps had very little impact on the net debt. The big swing between long and short-term debt was just the reclassification that happened in the first quarter of our bonds that mature in 2004 from long-term to short-term. The 360 million increase in equity shown in the other column is almost all attributable to two things. A deferred translation gain of 295 million, which incidentally equals the cumulative deferred translation losses we reported in the three previous years, and the pickup of 62 million due to a reduction in the unfunded minimum pension liability. Overall, we finished the year with net debt to capital of 45 percent, versus 57 percent at the end of last year. To put this into further perspective, let's turn to slide number 16.

This is my favorite graph in the whole world because it shows how much we have accomplished over the last three years to improve our balance sheet. From its peak in June of 2001, we have reduced Dana Corporation's net debt by over $1.1 billion. Also worth noting is that our ratio of net debt to capital of 45 percent is down from its peak of 61 percent in March of 2002. What really makes this more impressive is that the improvement in the ratio comes in spite of reductions in our equity due to $445 million in restructuring charges related to the 2001 program, $260 million in minimum pension liability, and $220 million related to the goodwill accounting change. We're actually having T-shirts made with this graph on it so if you want one for your very own just call Michelle in our IR department . You do not need to indicate what size you want because Dana net debt T-shirts only come in small.

Now let's turn to slide number 17. This slide brings you up-to-date on where we are with 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 our plan and at December 31, 2003, the total portfolio looked like the pie on the right. We reduced the assets in the portfolio by another 130 million in the fourth quarter and realized a net gain of 8 million after tax. This brings the total since we made the decision to exit these businesses to 910 million in assets reduced, with after-tax gains of 66 million. We will continue to work on those red and yellow slices of the pie in 2004.

Please turn to slide number 18. Shifting gears, we traditionally provide an overview of our markets including the aftermarket during these calls. But, given our intention to sell the bulk of our Automotive Aftermarket business, we won't be doing so going forward. Strategic focus is the primary rationale behind this decision to sell this business, enhance focus for both Dana and the aftermarket group. We believe this businesses future opportunities will be optimized under new ownership that is principally dedicated to the automotive aftermarket. At the same time, we believe that Dana's future will be optimized both focusing on our OE markets, and recommitting ourselves to being the very best in our areas of expertise. As we have said before, we intend to use the proceeds from this divestiture for some combination of reinvestment in our core business, a contribution to our pension plans, and further reduction of debt.

Moving to slide number 19, I would like to take a look at our other key markets beginning with light vehicle production. In North America, we came into last year thinking that light vehicle production would be about 15.8 million units. Early in the year, everyone thought we were low, by Spring everybody thought we were high and in the end we ended up being just about right. This year we see volume increasing to roughly 16.2 million, as there is no indication that the OEs will let up the incentives.

Turning to slide number 20. In South America, production in 2003 was up a few percent percentage points although the increase was lost in rounding on the graph. This year, we look for a bigger increase, about 2.3 million units. Moving to slide number 21. In Europe, and I need to point out that this is Europe as defined by Danish geographers so it includes central Europe, India and the Middle East. Volume was pretty flat in 2003. The forecast for this year is up, but honestly if the Euro stays where it is, that won't be very helpful for the local economies there so if there is any part of our forecast that could be suspect this would be it.

Finally, moving to slide number 22, we see the Asia-Pacific story on light vehicle production and this region should continue to grow nicely as the Chinese market develops further, we see production in 2004 at 19.6 million units. Please turn to slide number 23. Moving to the heavy side of the business, North America and commercial vehicle is the most cyclical of our markets. You can see how far we fell off the '99 peak before bottoming out in 2001. Here we expect 2004 to be a strong year, as we go from 176,000 units of class A truck production in 2003, to at least 245,000 units in 2004. Class 5 to 7 production should also show good improvement as we expect about 211,000 units next year.

Moving to slide number 24. Apparently our forecast of 245,000 units of NAFTA class A build that you saw on the last slide continues to be on the high end of the range of expectations out there, but really given the levels of incoming orders in December and January, I think January actually topped 30,000. We are sticking to our story and expect to see a quarterly ramp up like you see on this slide which should make for some very favorable comparisons for our heavy vehicle group this year.

Please turn to slide number 25. Here we see the various segments of the off-highway market that we serve. There is a lot of green on this slide this year. Apart from expected softness in a couple of segments in Europe, this market appears poised for some pretty good growth as well. Moving to slide number 26, in addition to expected growth in our markets, we're also excited about adding roughly 400 million in net new business in 2004. Our focus on technology and innovation has resulted in our participation on a number of exciting new programs with an impressive array of customers. These programs include launches that came on stream last year, and are now in their first full year of production as well as others that start this year. Moving forward, our commitment is to compete even harder to grow the top line of our business.

The net new business chart that we have traditionally shown is not included in today's presentation. Frankly, a number of you told us in the past that this chart was a source of some confusion and Mike Burns has made it clear that one of his top priorities will be revenue growth. So, we will work together with Mike in the coming months to develop a better metric to help us in communicating our progress to you in this regard.

Let's go to slide number 27. These are the assumptions underlying our guidance. It's based on the market forecast we just saw, that 400 million of net new business coming on, not having to deal with the 26 million in excess startup costs we had this year. Continuing to realize higher run rates on the benefits of our restructuring actions, continuing to reduce our debt which will lower our interest costs, and completing the sale of the aftermarket business by the end of the second quarter.

Now let's turn to slide number 28. Here is the guidance based on those assumptions, which remains unchanged since we announced the sale of the aftermarket in December, and should result in at least $1.90 in earnings per share for 2004. Please move to slide number 29. 2004 should also be another good year for cash generation. We start with $1.90 of EPS which works out to about 285 million in net income. We previously said the depreciation should be about 340 million in 2004 but the aftermarket group has about 50 million in appreciation annually. So assuming that divestiture closes on June 30, we are now looking at about 315 million in depreciation. And, since we should get the tooling money we expected in the fourth quarter of 2003 and early 2004, we moved our expected reduction in working capital up to 100 million.

In the usa (ph) section we said that we expect to spend equal to depreciation next year. So since we have reduced the depreciation number for the aftermarket sale to 315 million, we've also reduced the CAPEX number to the same amount. We have one more year of significant payments coming out of the restructuring accruals which we now expect to be about 80 million and our dividend at the current rate of 12 cents per share would be roughly 70 million. That would leave us with 235 million of free cash, plus whatever we receive from the aftermarket sale.

Turning to slide number 30. We step back and look at the big picture a minute, what we see is the beginning of a new and improved Dana. We are refocused on growing with our OE customers. We are leveraging strategic partnerships on a global basis like the recently announced joint venture with GETRAG and Volvo. And our new products are helping us to win exciting new business. I tell you there is also a new spirit at Dana. Getting through the difficult challenges of 2003 really brought us all together and gave as a renewed sense of confidence and optimism. We're ready for whatever the future may bring and as we embark on the next leg of the journey, we are pleased to do so under Mike Burns' leadership. When you put it all together, we like our story.

Now, if you would please advance to slide 31, I will conclude the formal portion of our presentation by thanking you all for listening and Glen and I will now welcome any questions you might have for us.

Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Gary Lapidus of Goldman Sachs.

Good morning. A couple of questions. You mentioned the book value. Maybe if you could just sort of dimension for us how we might want to think about what kind of valuation you think you could get for, I know you do not want to be too specific, but maybe if you could talk us through the pros and cons as you see it?

You guessed right I am not going to be specific at all.

That's why I said the pros and cons. Sort of in the spirit of those green and red arrows you showed us on one of the slides.

Okay. I think the only official statement we are making today is by virtue of our accounting treatment, we are saying that we expect to receive equal to or greater than the book value for the sale of the aftermarket. The process is moving along very nicely. We always get the question, the books out? Yes, the books are out; we send out a lot of books, and we're seeing a nice mix of buyers. We have said that there are strategic buyers, there are European buyers, there are financial buyers, and I think Gary that probably the best benchmarks would be to look at similar transactions and the base is usually set by the financial buyers based on multiples of EBITDA.

Okay. So at book value, is this ROIC positive transaction?

Yes, and it will be even better than that as we reinvest the proceeds.

Sure, yes, because your OPAT here, is that operating profit after-tax, is that what you are showing us?

Yes.

So, for 2003, looks like your discontinued operations is 58 (ph) am I seeing that right? Or that probably includes -- that is the AAG sale so there it is, 58, is that right?

Yes.

You said there is no allocation of interest expense in there, is that right?

There is a little bit of other stuff in there, but you take the 58 Gross it up, you got 100 yet, 50 million of depreciation -- there are a couple other odds and ends running through the numbers --.

That is only a 6 percent business and yet you can sell it at book value? Okay, that is ROIC positive. I guess just one other thing. Versus our model, the operating income was a little bit short, particularly in automotive. The automotive margin wasn't quite what we expected on the operating line. And then obviously the tax situation made up for that. One, if you could just comment on why at least in my first look we didn't see quite the improvement in margins sequentially in year-over-year. I would have thought in automotive. And secondly, what should we be thinking about for a tax rate? What is implicit in your '04 guidance?

I think the biggest single factor that impacted the Automotive Systems Group was clearly the startup costs. You said that the results were a little lower than you anticipated. I tell you they were a little lower than we would have anticipated, too. Taxes are what they are, and if we had not have had the startup costs in the fourth quarter, we obviously would have done a lot better. We had said as I recall on the last conference call, that we thought the worst of it was over. It had run about 6 or 7 million after-tax in each of the first three quarters of this year. It was 7 million after-tax 11 million before again here in the fourth quarter.

So you were not expecting that if you read rewound the tape three months ago, six months ago kind of thing?

No, and we said we weren't.

Okay. So what happened that caused those startup costs to show up, where there some delays in programs or unanticipated changes or something that would have caused that and is that going to persist as we move in through the beginning of '04?

I think it had to do with a lot of internal disruption. Fortunately it didn't have a lot of impact on the customers, but it had an impact on our bottom line as we took some -- brought on extra people and had extraordinary freight charges and the like to make sure that we could meet our commitments to the customer. As to whether it will happen and they continue to go on, I think there will be a little bit of it in the first quarter. We made a comment to that effect in the press release, but I guess we probably expect the first quarter number to look more like we expected the fourth quarter to look, in that it is largely the end.

Just the '04 tax rate?

I would expect it to be normalized. Thirty six percent, something like that, 37 maybe.

You guys are not moving to Zurich, are you, so that Mike doesn't have to move?

Actually, my wife is Swiss, Gary, so that is a tempting proposition.

Maybe investors wouldn't mind going there either versus. All right, take care guys. Thank you.

Steve Girsky of Morgan Stanley.

Good morning everyone, can you hear me? Just a couple of quick ones. European EBIT doubled as I look at it. How much of that was currency?

It would be proportional to the sales. We will dig that number out; what is the next part?

Was there any Latin (ph) currency -- what drove the Latin increase in the EBIT just volume?

Yes, a little bit of volume and a tiny bit of currency, but not much. I am still working on the European.

The last one is the pension, what is the status of the pension at the end of the year and what do you think pension expense is going to do?

We said pension expense will go up a little bit next year. I think we have talked about a number in the U.S. in the $30 million $35 million kind of range. Absent an extraordinary contribution as a result of using the proceeds from the aftermarket sale, that our normal contribution would be about equal to the accounting expense. As far as the unfunded status of the plan, you will get that when we file the K between now and the end of the month. But, obviously we had a pretty good year in terms of pension returns as reflected by the fact that we had a $62 million positive adjustment to equity.

Did you change the discount rate?

Yes, we did. It is lower, and that will be disclosed when we put out our annual statements.

Okay.

The EBITDA number in Europe the currency impact was 20 million on the year.

What was the quarter?

You'll have to give us a minute on that one. Do you have another question to stall for time?

No.

Five.

Five in the quarter in Europe, and then there was a little more in Latin somewhere.

Yes. But again not a lot.

Not five?

No.

Thank you.

Jon Rogers of Wachovia Securities.

Wachovia Securities.

Good morning. I have a couple questions. Bob on the tax rate, you said that your guidance is 35 to 37 percent implicit in the 190. Are some of these unusual benefits potentially going to continue in 2004?

Not a lot of them, I wouldn't think. Otherwise we would have a different tax rate. We always end up with these funky things going on in the fourth quarter. I think if you looked last year in the fourth quarter, it flipped the other way. I think our effective tax rate was 60 percent. So, what happens is -- for example the Canadian R&D credits, we could have reduced our effective tax rate going through the year. And then, if we didn't end up being able to claim those credits, we would have ended up having an odd tax rate going the other way in the fourth, so we tend to be conservative on these things. It worked out to our advantage this year, but I would say that 35 to 37 percent as I said earlier, is a good number for next year.

Just on debt reduction this year, it looks like it might be tough to call some of the bonds that you have out. Do you have a plan for using the proceeds for debt reduction?

We are working on that plan, and we will talk about it when we have the numbers for the proceeds.

Okay.

We're not hinting on it in advance.

Lastly, the increase in heavy truck production, that has been a big beneficiary of some of your earlier restructuring programs. How should we think about the contribution margin in that division, given the strong expected increase in production?

I think actually I have been quoted as saying publicly that a typical Dana product would have about 60 percent material, 10 percent direct labor and 30 percent contribution margin. And because of the cyclicality of the heavy truck market, you tend to get a benefit because of the risk reward trade-off and the contribution margins are a little higher in that business, closer to 40 percent.

Okay. Thank you very much.

Chad (indiscernible) with Barclay's (ph).

Good morning. A couple quick questions. First, you have made significant progress in this area, but can you talk a little bit about your target debt to total capital at the end of this year? Also talk a little bit about your priorities for free cash flow for '04? Finally, talk about your conversations with the rating agencies and what they are looking for to get you guys back to investment-grade? Thank you.

Our primary goal is to get back to investment-grade. We have had continuing conversations with the rating agencies. I think frankly given the significant impact that the sale of the aftermarket will have on our numbers, I think that it is likely that they will refrain from making any massive change until that happens and we fully discuss with them our plan. What we do with the money will also have an impact on that debt-to-cap ratio. But, I think if you look at the automotive supplier industry, you would find that the median net debt-to-cap is somewhere around 40, and we operated historically in the 40 to 50 percent range when we were an investment-grade company. So, clearly you want to be at the low-end of that range, but we're already at 45. If you factor in our free cash flow plus imagine that we might use some of the proceeds of the aftermarket to reduce debt and clearly would in the short term, until we identify reinvestment opportunities it obviously has a tremendous impact on the ratio. So, we like our chances in that regard.

So, as far as debt to total capital is concerned, where do you see that at the end of the year, just a ballpark?

Again I can't say that other than because that would imply what we expect from the -- in terms of proceeds from the aftermarket sale and how we would use those proceeds. You have got the free cash flow available exclusive of the aftermarket sale that we envision at this point as $235 million, so you could imagine what would happen if we put that against net debt.

Your Engine and Fluid Management Group performed well this quarter. What are you guys thinking as far as contribution margins in this segment for '04?

I think we have indicated that would be more typical of our traditional 30 percent kind of contribution margins.

Great. Thank you.

Darren Kimball with Lehman Brothers.

Let me just say you are not allowed to ask about working capital.

Okay. Let me just scratch that one off. Let me ask then about the first quarter outlook given what you said in the press release about launch costs remaining higher than anticipated. Can you give us any sense of sort of your run rate in the first quarter vis-a-vis a year ago?

I think that, like I said earlier, I think the first quarter is probably going to look like we would've expected the fourth quarter to look originally. It will have a more normalized tax rate and lower launch costs in the ASG.

I heard you say that, but I thought -- I wasn't sure if you were talking that the launch cost would look more like what you thought the fourth quarter would look like. I didn't realize that you were saying that the bottom line would look more like what you thought the fourth quarter would look like. Could you help us understand the aftermarket's performance at the top line and at the bottom line in the fourth quarter? It's very difficult to find the apples-to-apples.

I think if you look in the supplemental information, the supplemental slides at the end of the presentation, where we broke out the income statement, Darren, in the fourth column of the fourth-quarter slides that we got there, you can pretty much see it. Those reconciliations where we showed how we get from the Dana as expected to the Dana post disc op treatment, that fourth column on those slides are the fourth quarter for the aftermarket essentially. But line item detail on the income statements, I guess I would refer you to that, and give us a call back if you have questions after you look at that.

I will look through that. And just wondering if you could give a sense of the blended growth expectations -- that is a great slide you have on the off-highway stuff. But I don't know if I could get there from that.

The one with all the green and yellow arrows?

I don't sort of know which markets you are most dependent on necessarily. And just wondering what sort of a reasonable growth expectation?

Construction and AG (ph) are the dominant ones, and we do have a higher mix than you might expect in Europe. Because we got a number of our off-highway operations are based in Europe. But I would guess that a number five percent plus is clearly there. When you blend it all together.

Okay. The last question I had, I don't know if Glen is still on the call, if he might be able to speak to the sort of cultural changes that the Board is trying to achieve by bringing in an outsider to the company?

I'm happy to. Bringing in of an outsider to Dana was not with the intention of achieving a culture change. It was an objective of finding the very best person that was available to lead the company, and we just felt that Mike Burns was a unique person, with the kind of market experience in our markets that we wanted. He basically grew up on the supply-side of GM, and only in his most recent assignment has he been on the car side. So, he knows how to be a supplier to the automotive industry. We think that his having lived and worked both in Asia and in Europe puts him knowledgeable of where we believe the future is for market growth, so we want that there. But, also I think anybody new coming in is going to bring a different kind of energy, a different kind of drive, and he will be able to assess that as he makes up his own agenda. I think it is already evident to me that the people of Dana are taking to this guy. I think it's going to be an infectious opportunity of growth for us, and he will focus on growth and that is where we believe the company needs to go.

Great. Thank you.

Maria, we're going to be able to take two more calls due to the time situation we have.

Matt Stover with Wellington Management.

I just kind of want to follow-up on some questions that have been asked. If I'm doing the arithmetic right on the aftermarket, the income in the fourth quarter of 17 compares (technical difficulty) 41 of last year. On the EBIT side?

I would have to look that up, I just don't have that sheet of paper in front of me.

Looking at chart, on the reconciliation sheet.

For the fourth quarter?

Aftermarket AAG sale 17 million, revenue 514. How did that fall out of bed, and did you trade income for cash flow in the aftermarket business in the fourth quarter?

No. The sales were up but the aftermarket has been performance this year has been down a bit all year compared to a year ago.

You have really choppy margin progression and 5 percent in the first half and 7.5 percent in the third quarter and now 3 percent in the fourth.

We seem to be getting some interference -- I do not know if you're hearing it. You know frankly the fact that the dynamics of that market are so very different than the dynamics affecting our other businesses and there is so much less visibility on that business, frankly that is one of the reasons that we have considered the sale of the aftermarket a good idea strategically.

Sure, I understand that. But what I'm thinking about and the feedback on the quarter is the operating income is when you include the discontinued operations is probably lower than people thought. A piece of that has to do with the aftermarket, as we do our arithmetic, and I just -- you're doing 40 million, you're doing 20 million in the fourth quarter this year. That is a big delta. Just a big delta, you had a flattish comp in the third quarter.

I guess I would expect the comps to look up going into next year. Because if you think about because I'm sure that is the gist of your question is what do we think about as long as we continue to hold this business. If you think back to the first quarter of 2003, that was a pretty weak quarter. Then in the second quarter of 2003, we took some charges in the aftermarket to reduce some costs in the break group and get the margins back in line in that segment of the aftermarket. Which we did, so I would think that during the six months that we continue to hold the business you should have some pretty favorable comps unlike what you saw in the fourth.

Okay. On the automotive side, right, we did 49 in million in income on EBIT, and the issue there in terms of margin performance had to do with higher startup expenses than we would have thought. I'm having a hard time squaring the fourth-quarter performance with the third-quarter performance in that if I add back, let's just say I add back that 11 million in pretax, I still get to a margin rate in the fourth quarter that is lower than the third, and I am just wondering if you can provide some clarification if they were other items in there other than the startup?

Yes, there was. The other item that was going on in the Automotive Systems Group there was some retro price adjustments.

What was the value of that?

We haven't said.

Nickels or dimes?

Well, to us it looked like dollars.

I mean are we talking single-digit millions or double-digit millions?

We are talking single-digit millions.

The legal adjustments, how much did that --.

The legal adjustments?

The fees in the quarter?

You're talking about for the ArvinMeritor? We're not talking about that. Like I said, we made what we made in spite of them, whatever they were. I think you could probably take a stab at them, but --.

Single digit millions?

I think you can probably take a stab at it, Matt, you are a pretty good guy.

I completely missed the ArvinMeritor numbers on that one, I would have made a lot of money on it.

Thanks for calling. We really do have time for just one more.

David Leiker with Robert W. Baird.

I got in under the curtain here. Good morning.

You only get one question and one follow-up here because we are really trying to respect the time.

That is fine. Can you put a quantify the tooling receivables, that didn't show up in the quarter, that got pushed out?

$75 million.

And then the second is can you break down the current, the 132 million currency in the quarter by the business groups?

Yes. It was $30 million oh, wait, by business group. It was $69 million in the Automotive Systems Group, $37 million in the Engine Group, $24 million in Heavy Vehicle, and 1.5 Other.

And then one last clarification. Your guidance.

That's an extra follow-up question David.

I know, your guidance does not include the assumption of any gains does it?

No.

Thank you.

Thanks a lot, David. Thanks a lot, Maria. Thanks to Glen Hiner for joining us on the telephone. Thanks again to everyone for listening today. As always, we do thank you for your support and for your interest in Dana. Bye-bye.

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