Dana Inc (DAN) 2004 Q1 法說會逐字稿

Good morning, and welcome to DANA Corporation's first-quarter conference call. This call is being tape recorded. The format for today's conference call includes remarks by DANA's Chairman and CEO, Mike Burns, and by Bob Richter, Chief Financial Officer, followed by a question-and-answer session. As a reminder, our hosts will be speaking over slides found on our Website, www.DANA.com, in the investor section.

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 first-quarter conference call. Earlier today, we issued our first-quarter earnings release. We have also filed a copy of this release with the SEC and a report on Form 8-K. This report, the release and the user-friendly black-and-white PDF version of today's slides are available on our DANA.com Website.

During today's call, we will be discussing DANA's financial statements with DANA Credit Corporation shown on an equity basis. This is how we evaluate our operating segments, rather than on the fully-consolidated basis, which we use for reporting under accounting principles generally accepted in the United States, or GAAP. The presentation of the most comparable GAAP financial measures, and reconciliations of the differences between the non-GAAP measures and the GAAP measures, can be found at the end of our earnings release. In addition, supplemental slides reconciling certain non-GAAP measures have been included at the end of this presentation.

Turning 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 today, and others that are discussed in our SEC reports.

This conference call and its supporting visuals may not be recorded, copied or rebroadcast without our written consent. Just as a reminder, our Webcast system enables you to direct questions to us via the Internet throughout today's presentation. DANA Chairman and CEO, Mike Burns, and Chief Financial Officer Bob Richter will answer as many questions as time permits.

Now, moving to slide three, I would like to turn the call over to Mike Burns.

Thanks, Michelle, and good morning, everyone. Now that I have officially been on the job at DANA for about a month and a half, I'd like to begin today's call by offering some of my thoughts or insights into where DANA has been and, more importantly, where we are going. One of our most important efforts will be to transform DANA from a fairly decentralized company into a more strategically integrated one. This will help us be far more coordinated and consistent in our actions, as well as in our approach to our customers, and will drive cost improvement.

Along these same lines, we are actively working to more fully leverage universal activities such as purchasing, human resources, information technology as well as manufacturing and quality initiatives, to name just a few. And as the recent combination of our automotive systems and engine and fluid management groups demonstrate, we are also committed to better aligning our organization with our key customers and markets. And with the planned divestiture of our aftermarket business, we will continue to sharpen our focus on global, original equipment customers and markets. We'll also seek to take a greater advantage of DANA's global footprint by working to become more globally balanced in supporting our customers. And finally, we will put the big one-off 2001 restructuring program behind us, and move to focus on topline growth, with a continually improving cost structure that addresses our gross margin.

Now that we have established where we've been and where we are going, I would like to talk about what we are doing to get DANA where we want it to be. If you would, please turn to slide four. One of the key themes for DANA, moving forward, is a commitment to sharpening our strategic focus. As this graphic illustrates, companies with greater focus -- and those are depicted by those to the upper right -- are typically rewarded with higher multiples than those companies that are more diverse -- obviously, the ones to the lower left. And our mission is to improve to the northeast quadrant of this chart.

Now, if you will turn to chart five, strategic focus was the primary rationale behind DANA's decision last December to pursue the divestiture of its automotive aftermarket business, which represents about 20 percent of our sales. Because a number of you have asked me about this, I want to be clear that I fully support this move. We believe that DANA's future will be enhanced by focusing on our original OEM or our global OEM customers and markets, and by recommitting ourselves to being the very best in our areas of expertise. At the same time, we believe the aftermarket group's future opportunities will be optimized under new ownership that is principally dedicated to that market. As we previously mentioned, this sale is targeted for completion by June 30th. And, as we have said before, we intend to use the proceeds from this divestiture for some combination of reinvestment in our core businesses, a contribution to our pension plan and further reduction of debt.

Now, if I can move to slide six. Among the pleasant surprises that I've found at DANA are a solid quality story, bolstered by manufacturing and warranty performance that is comparable with any of our competitors. I have also found more than 500 trained Six Sigma black belts, which is a tremendous demonstration of our commitment, and a valuable resource to driver further cost and quality improvement. These black belts are just one element of a workforce that has been unified, from what I can tell, by a unique challenge that it faced over the past year, or the unique challenges that it faced over the past year, and I believe is capable and poised for positive change.

And most importantly, as you'll see on slide seven, what we have is a truly diverse global customer base. This graph depicts some of the customers on the light vehicle side of our business. As you can see, in fact, we supply significant products to virtually every major automotive manufacturer in the world. And when we consider that this segment is a global market, supporting the production of more than 55 million vehicles annually, it is apparent that we are underrepresented with some customers and in some regions. So we have a great opportunity to grow in these areas.

Now moving to slide eight, please. We also benefit from a very strong customer base supporting the heavy truck and off-highway segments, where we see emerging growth. The heavy truck market in particular is rebounding from a cyclical low, and this recovery should benefit DANA over the next several years. If you look at slide nine, this illustrates the cyclical nature of the North American heavy truck market; from a high of 334,000 units in 1999, the market bottomed out in 2001. Moving to the present, we can 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.

Now, when we first threw this number out in the third quarter of last year, a lot of people questioned the number. Now, following three strong months of incoming orders, many of you are now asking whether we are going to raise our forecast again. The answer is no. These are precisely the order levels we expected to see when we developed the forecast last fall. We think that the heavy vehicle OEMs will be very cautious about increasing production too early, so we'll see a rising backlog, as you see on this chart, with production ramping up through the year. And in the end, we believe 245,000 is still the right number. I should add that we expect medium-duty trucks production to show a year-on-year improvement, a good year-on-year improvement. We anticipate 211,000 of these trucks being built in 2004, which is an increase of about 8 percent over last year.

Now, if we can, let's move to slide 10. Along with our extensive customer relationships, DANA has also an impressive global profile. With operations in 30 countries and a series of partnerships and affiliations around the world that broaden our reach, DANA's global footprint is substantial. But, as this slide illustrates, 70 percent of our sales are currently generated in North America. So I believe there is even a greater opportunity to profitably grow our sales outside of North America.

If we can, I'd like to go to slide 11. Looking at our organization and product mix, you can see that the recent combination of our automotive systems and engine and fluid management groups have resulted in our continuing operations comprising two business groups -- the new automotive systems group, depicted in the pie chart on the left, and our heavy vehicle technologies and systems group in the pie chart on the right. These groups enjoy a nice distribution of products spanning our key markets.

Moving to slide 12. Building on this product base, we expect to benefit from roughly 400 million in new net business in 2004. This includes launches that came onstream last year, and are now in their first full year of production, as well as others that start this year. Here, you can see just a few of the exciting programs that feature DANA content. These are new programs that feature DANA content. As a side note, I think it's particularly interesting that the 4x4 version of the Nissan Titan pickup is DANA's highest-content vehicle. While others may talk about expanding their customer base, this is a pretty clear indication or illustration of our existing customer diversity.

Now, many of you have weighed in on how you would like to see the new business in the future displayed. And we have taken those comments, and if you have further comments, please get them to Michelle Hards, and look for us to incorporate these in our July Q2 conference call.

Now, if we can go to slide 13. Now, let's talk more specifically about DANA's first-quarter performance. Sales for the first quarter were 2.3 billion, up roughly 17 percent from the same period last year. We generated net income of 63 million or 42 cents per share, which compares to 41 million or 28 cents per share for the same period in 2003.

The sales increase was driven by improved production volumes and new business, which accounted for 175 million, and currency, which accounted for 125 million. During the quarter, we continued to reduce the assets of DANA Credit Corporation, resulting in gains of 2 million or 1 cent per share, which we have reported as unusual items. Last year's first quarter also included gains from DCC asset sales, so consequently, as you see here, net income excluding unusual items for the first quarter was $61 million or 41 cents per share, compared to 31 million or 21 cents per share in 2003.

Now, continuing to slide 14, I'll review our sales and operating profit by segment. This chart shows our first-quarter results by business unit compared to 2003. As you will note, this reflects the combination of our automotive systems, as well as our engine and fluid management groups under the automotive systems banner. The sales increase in our automotive systems business was driven by higher production volumes, new business and 98 million in positive currency impact. Operating profit was up 25 percent. This would have been even greater, if not for some continuing launch-related costs in our structures group. For the quarter, these incremental launch costs were about the same as in the fourth quarter of 2003, which was 6 to 7 million after tax more than we originally expected coming into the quarter. I am personally committed to resolving this situation. While the number did not improve dramatically during the quarter, I have spent significant time with our structures team, and we took a number of actions during March to address the remaining issues. And we are seeing improvement, and the effect will be evident next quarter.

Our heavy-duty business benefited from the increase in class A production in North America, as well as growth in the off-highway market, and profit is up accordingly. Currency impacted this unit's sales by 26 million. Income from DCC is up, due to better-than-anticipated values realized at the end of a couple of transactions that offset the decline that we would have otherwise expected as we continue to sell off the portfolio. The other line, which includes intra-company eliminations as well as corporate and interest expense, is about -- is what we expected.

So overall, as you see in the first yellow line in the slide, sales from continuing operations were up 17 percent, and profits from continuing operations were up 85 percent. Below that yellow line, there are two reconciling items -- the result for the discontinued operations and unusual items, both of which Bob will discuss in greater detail.

With that, let's turn to slide 15, where I'll turn things over to Bob.

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

As Mike said, sales for the quarter were up 17 percent from last year. The impact of acquisitions and divestitures on our sales was minimal, since the accounts of the engine management operation that we divested last year and the aftermarket business that we intend to divest this year are shown separately on a single line as discontinued operations. Currency accounts for about 125 million of the sales increase, as the dollar is lower against just about everything else in the world than it was a year ago. But the bulk of the increase was due to organic growth, a combination of new business and stronger light and heavy truck markets in North America. Other income was off, due foreign currency transaction losses, lower interest income and some odds and ends in the 2003 number that did not occur in 2004.

Gross margin increased from 8.2 percent last year to 8.5 percent this year, in spite of the continued structure startup costs that Mike talked about. SG&A increased 6 million, due entirely to currency translation. As a percent of sales, it improved from 5.9 percent last year to 5.3 percent this year. Interest expense is down, due primarily to lower debt levels, and income before tax, at 44 million, was up about 150 percent.

Our effective tax rate looks like it was about 26 percent, but in fact, the tax rate embedded in the discontinued operations was 46 percent, so the overall effective tax rate for DANA was 33 percent. Based on where our income is coming from this year, a 33 to 35 effective rate is probably the right number to think about for the balance of the year.

The decline in equity earnings reflects the fact that we had 10 million in non-recurring gains on DCC asset sales in the first quarter of 2003, versus 2 million in the first quarter of this year. If you exclude these amounts from the income from continuing operations, we're up about 85 percent versus last year.

The 13 million in income from discontinued operations in this first quarter is the net income of the aftermarket business that is currently being held for sale. The 5 million last year includes both the aftermarket business and the engine management business we sold in June of 2003. The engine management business lost 5 million in the first quarter of 2003. So if you add that back to the number on the statements, you find that the aftermarket business that is currently held for sale contributed 10 million in last year's first quarter. So they are up 30 percent on a sales gain of about 7 percent, and we show the aftermarket sales information in the segment data that accompanies the press release. All in, net income is up 54 percent, from 41 million in the first quarter of last year to 63 million in the first quarter of this year.

Moving to slide 16, you see the comparative cash-flow statement for the first quarter of 2004 and 2003. Remember, there is no effect of discontinued operations accounting here, so the depreciation number in both years includes the aftermarket, which is why it's about the same. Not a lot to talk about on the asset sales, just some odds and ends related to outsourcing non-core components and getting rid of some idle facilities.

Working capital increased 180 million. That's about in line with last year's number, and it's the normal seasonal buildup we always see, as we move from the fourth quarter that ends with the Christmas holidays to the first quarter that ends with what's usually a pretty good month of March. In fact, this year's March was particularly strong, and the increase in working capital would have been even bigger if we had not collected more than $70 million in tooling reimbursements from our customers. Those who listened to our last conference call may remember that we had mentioned that we had originally expected to receive these monies in the fourth quarter. So not to worry; the cash is now in the bank.

In the uses section, you see that CapEx was about the same as the first quarter of last year. Dividend payments reflect the current rate of 12 cents a quarter, versus the penny we were paying in early 2003. And finally, this is the last significant year of cash payments from the restructuring accruals that we established in 2001 and 2002. As we said before, it should be about 20 million a quarter flowing out of those accruals this year. Bottom line -- despite the run-up in receivables due to the strong first-quarter sales, the tooling payments allowed us to hold the increase in net debt to about 25 percent less than last year, or $121 million.

Moving to slide 17, this slide shows the walk-forward of net debt and equity putting for the first quarter. The first column shows the balances at the end of 2003. In the second column, we see the $121 million increase in net debt from the previous slide. This was made up of a decrease in cash of 213 million and debt repayments of 92 million. Actually, the 92 million is the net number. We paid off 231 million of maturing bonds during the quarter, and borrowed 140 million under our accounts receivable securitization program to support the working capital increase.

The change to equity from operations is simply our earnings of 63 million less the dividends we paid. Other factors, shown in the third column, like currency and marked-to-market adjustments on our interest rate swaps, had very little impact on either the net debt or the equity during the quarter. So overall, we finished with net-debt-to-capital of 46.4 percent, versus 45.1 percent at the end of last year's fourth quarter.

Please go to slide number 18. This is our debt portfolio at March 31. The yellow bars represent some small loans that we have around the world, mainly to finance working capital. And in blue, you see the 140 million that I mentioned earlier we borrowed under our accounts receivable program. With the retirement of those 231 million in bonds that matured in March, our next term debt maturity does not happen until 2008. The portfolio has an average life of 9.4 years and, including the effect of our interest rate swaps, an average cost of 5.78 percent.

Please turn to slide number 19. From a liquidity standpoint, we continue to be in excellent shape. We have the 140 million borrowed against the accounts receivable securitization facility, and nothing borrowed against our five-year bank facility, so that leaves us with 660 million in available capacity on committed facilities. This amount, plus 451 million in cash on the balance sheet, give us a total of cash and availability of 1.1 billion.

Let's go to slide number 20. During the quarter, we continued to work down the DCC portfolio. The starting point was the pie on the left, which is where we stood at October of 2001, when we announced that we were exiting the DCC businesses. At March 31, the total portfolio looked like the pie on the right. We reduced the assets in the portfolio by another 100 million in the first quarter, and realized a net gain of 2 million. This brings the total since we made the decision to exit these businesses to 940 million in assets reduced, with after-tax gains of $68 million.

Please turn to slide number 21. Here you see the assumptions underlying our guidance for 2004. We start out with our market forecast of 16.2 million of North American light vehicle production and 245,000 units of NAFTA class A production. We have 400 million of net new business coming on this year. In 2003, we had 26 million in excess startup costs over and above the normal level that were associated with new programs, mostly in our frame business. While we continue to experience costs in excess of our expectations, as Mike said, we have taken corrective actions, and expect that these costs will certainly be much lower in the full year of 2004 than they were last year.

We continue to realize higher run rates on the benefits of our past restructuring actions. We will continue to reduce our debt, which will lower our interest costs. And we are maintaining June 30 as the target date for the divestiture of the automotive aftermarket business.

Turning to slide 22, you see that if all this happens, our expectation is that the results should look like our guidance, which you see here, and which remains unchanged since we announced the sale of the aftermarket business in December. We are still looking for earnings per share of at least $1.90 for the year.

I might mention that, while we did have those higher startup costs on structures in the quarter just ended, and we did see some increase in steel costs, we do not see a need to change our guidance for either reason at this point.

Let's turn to slide number 23. 2004 should also be another good year for cash generation. This slide shows our preliminary cash flow projection, again with DCC treated on an equity basis. The $1.90 of EPS works out to 285 million in net income. Depreciation, assuming we have the aftermarket business for six months, should be about 315 million in 2004. Because of the tooling reimbursements we received from our customers in the first quarter, and others we expect to receive as we move through the balance of the year, we still feel pretty good about our ability to take 100 million out of working capital, despite the anticipated increase in sales.

As for uses, we will again hold CapEx equal to or less than depreciation this year. We have the 20 million a quarter in payments coming out of the restructuring accruals I mentioned earlier, and our dividend at the current rate of 12 cents a share would be roughly $70 million. That would leave us with 235 million of free cash from operations, and I should note that this slide does not consider the expected proceeds from the sale of the aftermarket business or the potential uses of those proceeds, which, as Mike said earlier, will be some combination of reinvestment in our business, contribution to our pension funds and a reduction in net debt. Our clear objective has been, and continue to be, returning to investment-grade as soon as possible.

Now, let's turn to slide number 24. This is a slide we have been using for a couple of years to explain what we're trying to accomplish here. The yellow wave represents our business cycle. What we're saying is that we want to position DANA so that we generate a return on invested capital at the bottom cycle that is at least equal to our cost of capital, which is currently around 10 percent after tax. At the peak of the cycle, we're targeting an after-tax ROIC in the high teens, so that over the entire cycle, we can average 15 percent after tax, which we know would be 90th percentile performance for the suppliers sector. We have always said that we get there in two ways. The 2001 restructuring plan was intended to be the big driver in getting us back to the cost of capital, and it's working. What will determine whether we get those returns in the high teens at the next peak is our ability to transform the business, and that means doing all the stuff that Mike talked about at the beginning of the call. I can tell you that our commitment today to achieving our transformation objectives is every bit as strong as our commitment to hitting our restructuring objectives was when we launched that effort in 2001.

Let's move to slide number 25, and I will turn things back over to Mike for a few closing thoughts.

Thanks, Bob. In the near term, our focus will be very straightforward, achieving topline growth and delivering gross margin improvement. These goals are consistent with the broader effort Bob just referenced, and they will be driven by actions that we are taking today.

So if you would, please turn to slide 26. As today's results indicate, our performance has improved. But I want to be clear -- we are by no means satisfied with where we are today, and we recognize that there is work to do here. We have identified where we are going, and we're actively working towards our goal. We are taking timely, decisive actions to ensure that we maximize the value we deliver to our customers and to our shareholders. Fortunately, DANA -- in a fortunate way, DANA is well positioned for improvement. We have a solid customer base and an extensive global footprint, both of which we plan to more fully leverage. And we have a great group of people who are ready for change. I can promise you that our customers will take notice of our renewed commitment, and we also look forward to demonstrating our improvement to the financial community in the form of enhanced operational performance.

Now, if you will please turn to slide 27, we'll turn it back to our moderator so that we can take your questions.

(OPERATOR INSTRUCTIONS). Darren Kimball, Lehman Brothers.

I was hoping you could talk about your international growth strategy. I was just wondering if you could contrast your approach to the historical approach, because it seems that that has been a focus of DANA for some time, and there has not been a lot of success in growing in Europe, et cetera, et cetera.

I think it gets to our discussion around centralized versus the coordinated approach to that. And I think what you'll see us do is to get a lot more coordinated with regard to our assets on the ground and our capabilities among the business units or the two groups. I think that can make a big difference, and quite frankly, it has probably been underutilized in the past. A lot of capability exists in the Company, and we have got great relationships with virtually everybody. We need to grow those in a coordinated way, and I don't see a reason why we cannot do that.

Is more of an emphasis on acquisitions also a piece of it?

Well, it would, but it would be specific acquisitions to fill in maybe a hole in a product area that we have. I think the other piece of it is obviously acquisitions in the underrepresented areas, from a customer standpoint. I think that particularly, you would see that in Europe and in Asia, and especially in China.

And just one follow-up. With regard to the launch costs, it looks like the excess launch costs did not come down on a year-over-year basis. You mentioned that you had spent a lot of time there in the quarter trying to help these guys get the situation fixed, which, quite frankly, is a little frightening that they cannot do it and they need you to come in and help.

But I was just wondering if you could give us a little more granularity on what the issues are, so we might have some confidence that they may recede.

Well, I guess, first of all, all the issues are fixable, from my standpoint. When I joined in March, that was obviously one of the first places that we started looking at. And we have taken a number of actions with additional people as well as additional acquisitional emphasis in the area. We have got a lot more people, a lot of our black belts working. I am not in any way concerned about the ability to fix the business, to fix the structures piece, and we're already seeing improvement. There's going to be a lot of focus on my part until it's done.

David Siino, Gabelli & Co.

Two quick questions. Bob, are you implying that steel had no negative impact on the gross margin this quarter?

No, it had a small negative impact.

Roughly speaking, how how much steel do you buy annually?

In excess of $1 billion. It's really made up of three big clunks (ph). The first is steel that we buy, particularly for our frame program, through customer programs. Then there's another segment of it that is steel that we buy directly, not through customer programs. And then the third part of it is the steel content in the parts that we buy, forgings and some of the things that we have outsourced.

And from what you can tell now, for the balance of the year, there will be no discernible impact from steel?

I didn't say that. What we did say was that we'll be working with our suppliers and our customers and that, coupled with other purchasing economies that we look to realize this year, allow us to hold our guidance where it is, in spite of whatever we see.

I think the other thing that we would add to that would also be that we are seeing the surcharges decline, and there's further expectation that they will decline further. So I think all those things, in combination with the fact that heavy engagement with both our suppliers and our customers with regard to mitigating this. And as Bob said, we recognize that we're going to have to drive the rest of the business harder, from an improvement standpoint, to offset any negative effects. So we are not changing our outlook.

And, Mike, does targeting the gross margin necessarily imply more restructuring? Or is that done with?

Well, I don't think you are ever done with actions to improve cost. The big restructuring that was done started a couple years ago. That certainly helped and focused on labor and some overhead. We're obviously going to continue to improve the efficiency of our facilities. We're going to work on overhead. The combination of the automotive groups is a good step in that direction.

The one area that you're going to see more focus on, a lot more focus on, is purchasing, and moving from essentially a decentralized approach to a very centralized approach, and you will see quite a bit of activity and some information here in the next few days.

We will take a question off the Internet, which is what are the expected net proceeds from the aftermarket sale? There has been a lot of speculation about it. We have not said anything other than we expect that it will be greater than the net book value of the aftermarket business, which was just over $900 million.

David Leiker, Robert W. Baird.

First, a numbers question. In your depreciation and CapEx guidance, how much from the aftermarket group is in both of those numbers?

25. The aftermarket has about 50 million of annual depreciation. They would spend about the like amount, and since the outlook is based on the assumption that they are divested on July 1, you have got a half of that. So it would be 25 in each line.

And back on launch costs, I'm trying to get to what the root issue here is that you're grappling with. Is it a bottleneck issue, is it a complexity issue? If you could explain a little bit there.

I've got to be a little careful from a customer standpoint here. But it is a complexity issue. It's an integration of manufacturing processes. When you think about a frame or a structure, it's not a set of rails that are welded together. There's a lot more that goes on our frames today than in the past, and in particular, we have had some problems with the process and the setup of a particular facility, to some extent, that has driven this, and it is completely fixable. There's nothing there that I see that is ongoing.

Now, you can ask the question of why it has gone on so long. I really can't address that. The only thing I can do is make sure that it gets fixed and gets fixed soon.

So should we expect these costs to remain at the Q4/Q1 levels into Q2, as well?

No, you'll see improvement in Q2 and an improvement in Q3, and throughout the year. We will get this fixed.

So is that implying these costs will stay higher than normal through the end of the year?

Well, on a year-to-year comparison basis, I guess I'd have to think about what other startups we have, but --

I'm talking about just that one program.

No, no. They will drop considerably.

And what would higher volume going through that facility do here later this year? Are you able to handle that?

Yes. Capacity is not an issue here.

And one last thing is, on the contribution margin, if you look year over year, even adjusting for currency or sequentially, there's a pretty meaningful shortfall in what we would have expected. Is that -- I mean, launch cost is clearly a part of that, steel cost is also a part of that. But it seems like it's more than just that.

Are you talking Q1 of last year against Q1 of this year?

Sure, or Q4 to Q1, as well. You are in close to single-digit contribution margin.

Well, I think what you have got to remember is -- I will do Q1 to Q1, and the explanation is not a lot different going Q4 to Q1. From Q1 to Q1, you have got 125 million of the sales increase is coming from currency, and that comes in not at the contribution margin, but at an operating margin, which is about 3 percent. Then you have got the new business that comes in not at a contribution margin but at the gross margin, which is about 8 percent. And then you get down to the 100 million or 110 million or whatever it was that's left over that was really volume. And that's the stuff that comes in at the contribution margin, which is 30 percent on light and higher than that, closer to 40 percent, on heavy. Call it a blended rate of something around 33 percent. And if you multiply that all out and after-tax it, adjust for changing tax rates, steel costs, marked-to-market on our stock-based compensation, the numbers walk forward.

And that would be true also of Q4, even with a jump in the commercial vehicle build?

Yes, it would, although the currency impact Q4 to Q1 is less. It's probably about 25 million of currency going Q4 to Q1. And frankly, the increase in commercial vehicle build, while pretty remarkable Q1 to Q1, was not all that great from Q4 to Q1. What, it went from 50,000 to 52,000 or something like that?

No, that's true.

And that's not a whopper of an increase. In fact, the biggest driver of our sales increase in the heavy vehicle unit going from Q4 to Q1 was actually the off-highway business, which unfortunately does not enjoy the kind of contribution margin that we see in heavies.

Robert Hinchliffe, UBS.

Bob, I wondered if you might just give a little more color on the tax rate. I think I might have missed the detail you were talking about.

Sure. It was 26 percent from continuing operations. It was 46 percent on the discontinued operations, and there will be, in the Q, which should be out next week, there will be a full P&L for the disc ops by line item. But you'll see it's a 46 percent tax rate on the disc ops. So if you look at the whole of the DANA Corporation, the tax rate was a reasonable 33 percent. And I think what you'll see, going forward, is that both the disc ops and the continuing ops will kind of gravitate toward that. In the first quarter, we had some pretty good earnings in some places like France, where we have some net operating loss carryforwards from continuing operations that drove the effective rate down. And in the disc ops, we had some unprofitable operations in the UK, where we don't realize the tax benefit. And so those went through unaffected (ph) that drove those rates up. I think, as you get into the second quarter, the domestic operations start to represent a greater percentage of the consolidated earnings. And as I said, the disc op rate goes down. The continuing op rate goes up. They sort of meet around 33 to 35.

And that's, you think, sort of a long-term, even beyond this year, tax rate for you guys?

Well, we'd like to think so. We are trying to do our best to get a little more contribution out of the tax line.

Speaking of run rate for the year, looking at your 8.5 billion revenue guidance, you did 2.3 this quarter. So this looks like it will be one of your better revenue quarters for the year, yet you've got to pick up the pace in terms of EPS to hit your $1.90 number. So what do we see going on here? Is it that costs really have to come out as the year progresses?

Well, you've got a lot of things. You've got the restructuring. Benefits are continuing to keep playing a bigger role. As Mike has talked about already, you have got the startup costs diminishing as you move through the quarters. On top of that, your new business starts to become more profitable as you move through the quarters.. And then the big thing are some of the newer initiatives like the purchasing, which really does not probably kick in until Q3/Q4 in a meaningful way.

Did you give Q2 guidance, Bob? I'm just trying to think of how the year is going to progress here, if it's really going to be back-end loaded.

Yes, it will, and no, we won't. We are staying with our annual guidance, relying on the quality of the sell-side analysts, Rob, to do the quarterly numbers.

We've got two quarters in a row at 41 cents. Even though revenue is up quite a bit this quarter, presumably revenue is going to be down a little bit next quarter. Are earnings going to be better or worse?

I don't know about that. I would say that revenues will probably be roughly the same in the second quarter as they were in the first, just thinking about the state of the markets. And as I said, I think you get more momentum as you go forward on some of these other initiatives. So I will break my rule; I will give guidance. I think second-quarter earnings will be higher than first-quarter earnings.

Mike Kender, Citigroup.

A couple of questions. One is you talked about potential acquisition thoughts overseas. What about divestitures? Any change in thought there, beyond the aftermarket business?

Not really. I think you're pretty much up to speed with what we're thinking about. So no, not significant.

Mike Kender, Citigroup And the other question was on sources and uses of cash. You threw out a number for the year. In terms of working capital, where should we see the the peak this year?

Seasonally, the big rise is the first. And then it rises just a little bit, as you move from March to June, and then it starts coming down pretty significantly in Q3 and then falls off the table in Q4. That's been our traditional pattern.

Mike Kender, Citigroup So basically slight use of cash in second quarter and then basically second-half cash generation?

Yes, exactly.

Mike Kender, Citigroup And then the other question is, given the amount of free cash generation you have, you have cleared out your debt maturities for the most part until '08. Aside from acquisitions, what else do you do with the cash?

We have told you the three areas we're going to use it. I think we will be more specific about that, Mike, once we know the amount of the cash and when that cash is going to come in, because the timing, the amount and market conditions at that moment will play a role in that final decision. We'll be more forthcoming as we go forward.

Christopher Ceraso, CSFB.

I've got a few items. First, if we can go back to the tax rate, you said 33 percent sounds like where you should sort of normalize. Is that lower? It seems to me that's a bit lower than you had historically been, which is maybe in the 37 percent range or so. Is that right, and if so why is that?

Yes, those are the numbers. And a lot of it has to do with just where the earnings are coming from. There's several foreign jurisdictions where we have tax loss carryforwards. In addition to that, we continue to look for ways to reduce the tax bill, not just at the federal level but around the world and at the state level also.

I am sure this is not as big for you, but GM mentioned yesterday that its tax rate is going to be lower, partly because of the Medicare prescription drug benefit. Are you feeling that at all?

No, that's not read in.

Next question. Something you mentioned earlier about your average cost of borrowing and the fact that you had swapped some debt into the shorter end of the curve. What is your exposure there, Bob, when short rates start to go up?

Well, the two issues that were -- that went out as high-yield issues -- that would be the nine's (ph) of 2011 and the 2010 notes. Those are basically swapped into floating rates, and have been. We did that the day we issued the notes.

So I guess I can do the math there. That's your point?

Yes.

Next question. Your return on capital discussion -- you said that at the peak you would like to be in the high teens. Where do you think we are now? What does the peak look like to you, in terms of volume, in both the light and heavy markets?

Well, the peak -- I think, in the heavy side the peak is going to be probably 2006, because in 2007, you have the next emission change coming on to heavy-duty diesel engines. So you couple a ramp-up, which you would normally expect as the economy expands, plus people make up for the delayed CapEx in replacing their fleets over the last several years. And you throw on top of that perhaps a pre-buy -- I would think 2006 is probably the peak in the heavies.

And that's, what, 400,000-plus?

Oh, no. 300, high 2's.

And what about on the light side?

I actually think the light side, from an overall standpoint around the world, we are probably -- we're continuing to build there. I don't know that we have seen the peak, especially with European volumes being down as they are, and the growth in Asia, and what should be a strengthening Latin America. So it's hard to make the call in North America as to where exactly we are, but overall I think we will still continue to see growth worldwide on light vehicles.

And then last question. It seems that the structures business is giving you a bit of a headache here. Normally, though -- correct me if I'm wrong -- that is a business that should generate some decent margins for you. What is your outlook on the structures business in general? Is that an area where you would put additional money to work, or is that something that you would tend to scale back on?

No, we are not in any way concerned about the structures business, from the standpoint of investment. We'll get this business fixed, and get it to its rightful place and its historical place. It's unfortunate, but we cannot really look in the rearview mirror on this one. We've just got to go forward and get it back to where it's supposed to be. It is fixable.

Do you want to grow that business, Mike?

Yes. I would -- yes, I would want to grow the business.

Brett Hoselton, KeyBank Capital Markets.

First of all, 6 to 7 million in after-tax launch costs in the first quarter?

Yes.

And, Bob, I thought that was a pretty bold move of you to suggest that next-quarter earnings were going to be up. I was wondering, can you talk about some of the pluses and minuses? Clearly, heavy track production is going to be up by a lot, and that is going to help you out. Launch costs, it sounds like you're thinking you're going to be flat to down. Are there any other pluses and minuses as we move from the first to the second quarter that you think are going to have a material impact on earnings?

We have got a couple more restructuring things going on. I think you've get the seasonality of the aftermarket that will probably be a good thing for us. Second quarter is usually their best quarter of the year. You might have the beginnings of some of the savings on the purchasing side. Mike is pretty brutal on cost, so there might be lower costs for the controller ranks. That was a joke.

High probability.

I wasn't sure if I should laugh at that.

No, there's no problem there.

And then a follow-on question for you, Mike. On the two things that you are focusing on, you picked out gross margins as a second item. And I'm wondering, why gross margin numbers versus something like operating margins, let's say? Any particular reason, or is it just --

First of all, when you look at it and you do comparative work, it's an area that jumps out at you that needs attention. We've got 60 percent of our material cost -- of our cost is really material. We have talked about that in the past. You really try to get as many elements in this as possible, but focusing on the key ones and the ones that have the biggest leverage. And I think that's a good one. It's an easy one for people to understand, and quite frankly you are working on 80 to 90 percent of the issues there, easily.

And then, as far as the steel issue, Bob, I think, if I remember correctly, your frame programs are essentially -- and maybe your structures -- are essentially on the resale program. So that really does not impact you; is that correct?

With some of the larger customers, yes.

Jackie Weiss, Merrill Lynch.

Good morning. It's John Casesa and Jackie Weiss. The question I wanted to ask was the launch expenses have caused your results to be somewhat under expectations. What kind of things do you think will go better than expected that will allow you to meet guidance for the year? What are sort of the bright spots in the '04 outlook?

Let me take a part of it, John, and then Bob can fill in. He can kind of think about it while I'm talking. If you look at the heavy-duty truck business, you look at the chart -- I forget what the chart was, but look at order intake versus production. We're going to see that build throughout the year pretty substantially, in terms of actual production. I think the heavy-duty business, they're being somewhat cautious, probably rightfully so. But that order intake is building, and the order bank is building to a point where we are going to see a fairly significant increase there.

We're going to take some actions on purchasing here in the next few days. I'm just not ready to announce it today, but we are going to take some actions that are really going to solidify and beef that process up considerably, and we will see performance there. We're continuing to take costs out of the organization; we will continue to do that. We're going to solve the launch-cost issue, so that is not going to be on the table. And I am not uncomfortable with our direction at this point; I think it's very achievable.

And Mike, do you think that these actions you can take in purchasing can favorably impact this calendar year's results?

Absolutely, absolutely.

And maybe -- unless Bob has a comment, I just have one follow-up question.

The only other thing I would add to that is something that is often underlooked, and that is the off-highway market. We talk about the heavy and we talk about the light, but if you look at our year-on-year numbers, our sales to the off-highway business are up 30 percent, and they are up 20 percent sequentially.

That's a good point, and we're very encouraged by the people that we sell to. You look at their results, and obviously it's taking inventory down in the field. So you would expect that to be pretty robust.

And that's a pretty concentrated industry structure; am I correct about that, Bob?

No, I don't know that. Not in our customer base. There's a lot of smaller customers.

No, I meant in terms of your competitors.

Ah. Yes, I would say very concentrated. We have got a good portion of that market and a very good global footprint on that market.

Just following up on the earlier question about contribution margin, Bob, I'm not sure I fully understood your answer. When we look at the year-over-year change in the heavy vehicle business, it's quite substantial. And we don't calculate that big a -- quarter on quarter, we don't calculate that big a contribution margin. Is it just that you feel (ph) there's not enough volume kicking in there?

Are you doing year-on-year or sequentially?

Sequentially. Compared to fourth quarter, it looks like the contribution margins, specifically in the heavy truck segment this quarter, was less than a quarter ago -- year-over-year basis.

On a year-over-year basis. We are looking year over year, and that's why I am a little puzzled to why the numbers are not bigger.

Well, I can do year-on-year or sequential, but I can't do them both at the same time.

Just do year-on-year.

Okay. The sales are up 19 percent in the commercial vehicles segment of the heavy vehicle group, because you have got that big increase in the off-highway. And I'd tell you that we did have one of our heavy vehicle customers go into receivership in the first quarter, which created a bit of a charge.

Okay, well that would be --

And I would also tell you that we got a lot of the contribution margin on the additional volume, but remember that you don't get the big contribution margin on currency and you don't get it on new business, and there were some of both of those. And then lastly, I guess, as you think about what happened in the quarter, Mike mentioned that the OEs were kind of reluctant to bring people back and get too far out in front of this thing. And I think we are thinking the same way. So I am not sure we get the full contribution margin, either.

So, in other words, our overtime costs were higher.

Yes. We were paying overtime and weekend rates.

Okay, those are -- those wouldn't be obvious to us.

Kirk Ludke (ph), JP Morgan.

A couple of different topics. One is a follow-up to the steel question, which is of the $1 billion of annual buy, how much is purchased under customer programs?

We have not said, Kirk.

With respect to DCC, I notice you have got 95 million of cash. You have got current maturities of 189 million, and I think I read in your 10-K that the revolver expires this year at DCC?

Yes. We'll probably just let that lapse.

Do you have an asset that you have scheduled to monetize here, and that's how you're going to make up that difference? Or what --?

We continue to work on it. This quarter, for example, the assets went down by 100 million. And we will continue to sell assets and collect the cash just rolling off the portfolio, and we believe through the combination of the two we can meet those debt maturities without an issue.

I notice you did not put any dividends from DCC in your forecast. So what are the chances of this actually becoming a source of cash for you?

Probably not this year, because of the maturities.

And lastly, regarding the aftermarket business, it seems as though the results quarter to quarter, at least the last couple quarters, have been somewhat uneven. I think the fourth quarter was a bit of a disappointment, and the March quarter is up year over year. And I am wondering if you can give us some -- whatever color you can about how that business is doing, and if you could provide some guidance for the full year, that would be even better.

I'll do the first part; I'll give you a little color. The first to the fourth was pretty flat, but you are right; we did have some nice year-on-year improvement. The first quarter is seasonally week in the aftermarket. They typically have a lot of marketing programs that kick in in Q1, and try to do a lot of changeovers. There's a cost associated with changing over a customer, and if your changeovers occur in Q4, it's just a drag on the period. You don't have an opportunity to recover it over the year. So they try and time the changeovers in the first, and that's why, even though sales can be up as you move sequentially from Q4 to Q1, I think, if you look at our history, you will find that you don't always see that translating into a big bottom-line improvement sequentially until you move from Q1 to Q2. Is that helpful?

So there were more changeovers in the first quarter of '04 than there were in the first quarter of '03? Is that the --?

Well, year to year, I am not apologizing at all. The sales were up 7 percent and the profits were up 30.

Yes. I am just wondering what kind of number we could add back.

We could continue to do that each and every quarter on that basis, that would be great in terms of year-on-year improvement. I thought you were talking sequentially.

I guess maybe the way to handle it is if you could give us a sense for how much of these nonrecurring or extraordinary items there are in the numbers that we could kind of gross this --

Frankly, no longer than we intend to hold the aftermarket, I think trying to refine your models to get to that level of granularity probably is not worth the effort.

Maybe we could take one more question.

David Bitterman, Deutsche Banc.

Three questions. One is, do you guys think that sell-side guys like to themselves talk? Two, can you give us a sense of your margin goals for the business generally, and any comments on relative share gain versus your competitors?

I'll pass on the first.

I am exposing myself, by the way.

In terms of margin, I guess we would let the return on invested capital talk, and express it that way. One of the things that makes competitive margins for us difficult to talk about is the amount of earnings that we receive from our equity affiliates, particularly the Petrag (ph) in Germany and Spicer FA (ph) in Mexico. So we are probably better off thinking in terms of return on invested capital, and I think that wave chart we looked at about three slides from the end sort of spoke to that.

As far as share gains --

I think that, from a share gain standpoint, obviously that's the intent -- to grow the share as we go forward. And you'll see some of that, obviously, within the net new business that we have. And the focus is on continuing that. I think that, from a regional standpoint -- obviously, probably the two highest potential areas are Europe and Asia. But I would expect to see share growth also and increase revenue in North America. So we are intending to grow faster than the industry, so I think that would be an indication of where we are headed. And it would require share growth to do that.

I think we are going to stop there. I want to thank everybody, and we will end the call at this point. Have a good day.

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