Dana Inc (DAN) 2004 Q2 法說會逐字稿

Good morning. And welcome to the Dana Corp's second-quarter conference call. At this time I'd like to begin today's presentation by turning the call over to Michelle Hards, Dana's Director of Investors Relations. Please go ahead, Michelle.

Thanks Ashley. Good morning, everyone. And welcome to Dana Corporation's second-quarter conference call. The format for today's call includes remarks by Dana's Chairman and CEO Mike Burns and Bob Richter, Dana's Vice President and Chief Financial Officer. Our formal presentation will be followed by a question-and-answer session.

Earlier today we issued our news release detailing Dana's earnings for the quarter and the first 6 months of 2004. We have also filed a copy of this release with the FCC and a report on Form 8K. 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 Corporation reflected on an equity basis, which is how we evaluate our operating segments.

To comply with generally accepted accounting principals in the United States or GAAP, we have also prepared our financial statements on a fully-consolidated basis. A 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 also been included at the end of this presentation.

Turning to Slide 2, today's conference call remarks will include forward-looking statements. These statements are based on our current knowledge and involve certain assumptions, and certainties, 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 FCC reports.

Today's call is being tape-recorded. This conference call and its supporting visuals are the property of Dana Corporation. They 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. Mike and Bob will answer as many questions as time permits.

Now, moving to Slide 3, I'd like to turn the call over to Mike Burns.

Thanks Michelle. And I'd like to add my welcome to those of you joining us for today's call.

I'm going to kick things off by covering a few of the issues that are most relevant to Dana. Among the issues that I'll address are another solid quarter of performance, the pending sale of our Automotive Aftermarket business, new business growth, and an update on our global purchasing initiative. I'll then turn it over to Bob for an in-depth review of our quarterly and first half financials.

Now, moving to Slide 4, I'll begin with a brief overview of our second-quarter numbers. Our second-quarter sales were 2.3 billion, compared to 2 billion during the same period last year. Net income for the quarter, which included 33 million of unusual net gains, totaled to 108 million or 72 cents a share. This compares to net income, including 5 million of unusual net gains of 52 million or 35 cents per share for the period in 2003.

Second quarter sales were up 16% over the same period last year, with a majority of the increase being driven by our new business programs, which added approximately $100 million. And another 150 million, from higher production volumes in the principal market served by Dana, particularly the North American heavy-truck sector. Sales also increased by about 52 million because of currency impact.

Bob will talk more about the unusual items later, but to suffice it to say at this point, that we're happy to have the additional income. But we're also pleased that even without these unusual items, we still achieved second-quarter net profit of 75 million, or 50 cents per share, which is up substantially over last year's 47 million or 31 cents per share. This improvement was largely the result of new business, strong production volumes in our principal markets and cost reductions more than offsetting higher raw material prices.

Now, continuing to Slide 5, I'll review our sales and operating profit by segment. This chart shows our second-quarter results by business segment compared to 2003. Overall the operating profit of our continuing operations was up 46%, as you can see, the major driver here was the Heavy Vehicle Group, which achieved a 63% profit increase on a 16% sales increase.

Our heavy vehicle business continues to benefit from the increase in Class A production in North America, as well as growth in the off-highway market, and profit is up accordingly. Additionally, the currency impact on this group sales was approximately 10 million.

On the Automotive Systems side, the 15% sales increase, which primarily driven by higher production volumes, new business, and again, a currency impact of 42 million. Clearly we would have expected to see higher profit growth in this sector, and we would have if not for a few factors.

As you will recall last quarter, we told you that our efforts to reduce these excess-launch costs would be evident in his quarter -- and this is for the structures business -- and I'm glad to report that this is the case. We've reduced these costs we spoke of last quarter by roughly $4 million. And while still not at the level we want and expect, we firmly believe this situation will continue to improve going forward.

Secondly, earnings this year from our nonconsolidated ASG affiliates were 7 million lower. And finally, last year's numbers included 5 million aftertax from the sale of a [inaudible] operation in Thailand.

Now, income from DCC is 5 million, which is down slightly from last year. But just about what we expected as we continued to sell off their portfolio. The other line, which is mostly trailing liabilities from past divestitures corporate expenses and interest, was also about what we expected.

So overall, as you can see, sales from continuing operations were up 16%, and profits from continuing operations were again up 46%. There are also 2 reconciling items, that the results of discontinued operations and unusual items, both of which Bob will discuss in greater detail in just a few moments. With that let's turn to Slide No. 6.

This chart shows our second-quarter results by business unit compared to the first-quarter of 2004. I won't walk through this chart in the same detail as the last one. However, I do want to emphasize one key point.

When looking at our performance in the second-quarter, compared to that in the first-quarter, operating profit from continuing operations is up 19% on essentially flat sales. And if you factor in the performance of the Aftermarket Group, which is on the discontinued operations line, the total operating profit is up 23%. With that, let's turn to chart -- or Slide No. 7.

As you know, on July 9th, we signed a definitive agreement with the Cypress Group to sell our Automotive Aftermarket business for approximately 1.1 billion in cash. We expect the transaction to close by the end of the third quarter, at which time we will be in a better position to comment more specifically on our potentially use of proceeds from the sale.

Generally speaking, however, I can say that we still intend to use the proceeds for some combination of making a contribution to our pension plan, further reducing our leverage and re-investing in our core businesses. Now, this reinvestment could include items like joint ventures, focussed acquisitions, further consolidation, and capital spend to expand our footprint and improve operating efficiencies. Clearly the strategic and financial flexibility this transaction provides will be extremely positive for Dana as we pursue our strategic goals.

Now, moving to Slide 8, I'll expand on Dana's direction. Last quarter, I shared some early insights into where we've been and where we were going at Dana. Those of you viewing the slide presentation will see these items depicted in the first 2 columns of Slide No. 8. Having now passed my 100-day milepost at Dana, I believe it's time to address a third dimension; namely, what we've done.

First we've made significant strides in the integration of Dana. This effort is highlighted by the combination of the former Engine and Fluid Management and the automotive and system's groups into a new and increasingly coordinated Automotive Systems Group. In concert with our Heavy Vehicle Technology and Systems Group we now have a more streamlined structure and are well on our way to becoming a much better aligned with our customers and markets.

Along these same lines, we continue to more fully leverage universal activities, such as Purchasing, Human Resources, Information Technology, Manufacturing, Quality Initiatives, and so on. I'll cover the purchasing effort in greater detail in just a moment. As noted the divestiture of our aftermarket business will continue to sharpen our focus on Global Original Equipment Customers and Markets.

We are working to take greater advantage of our global footprint as evidence by negotiations with Don Fong in China and other expected transactions in Asia. And finally, we have closed the last of the facilities related to our 2001 restructuring program, and are now clearly focused on topline growth with a continually improving cost structure that addresses our gross margin. Now, turning to Slide 9.

Continuing on the topic of Growth, I'd like to share with you the newest addition of our Net New Business Chart, one that we promised in April. As we examined our alternatives in developing this chart, we spoke with a number of analysts who follow us closely, as well as investors who are less familiar with our company.

We also benchmarked our peers to determine which elements they typically included in communicating their new business's backlog to you. Some companies in this sector, of course, do not provide guidance regarding new business. However, most do, and among those who do, we learned that the vast majority provide guidance over a 3-year-period on a net basis, and without specific segment data.

Our objective was to provide you with the best possible combination of accurate, complete, and understandable data. With all that said, our new chart graphically shows accumulative net new business and quantifies the net change year-on-year, which alleviates the old problem of having to restate our numbers on an annual basis. We've also limited the span to 3 years, which is, again, the norm.

Perhaps the most important factor in our decision to go with the shorter time frame is that the 4th and 5th years are still quite fluid in terms of potential new business. To some extent, 2006 is also somewhat or very fluid, as we still currently are bidding on more than 400 million in new business with significantly more to follow in 2007 and 2008.

The chart you see here contains 2 deviations from the benchmarks. We retained the segmented data because of the very different dynamics of the automotive and heavy vehicle businesses. The other major differences are our decision to illustrate the programs entering and exiting the chart, reflected here as pluses and minuses.

Now, it should be noted that pluses and minuses also reflects significant platform changes. And an example of that would be last year's transition from the former stamped Ford 150 frame -- F-150 frame -- to the new hydroformed F-150 frame.

Now, we've supported both versions of the F-150, but in this format the business would be reflected as a plus and a minus. We believe this is the most accurate way to illustrate the status of our business programs. And with that, I'd like to turn to Slide No. 10.

This year's 420 million Net New Business reflects only a portion of the diverse array of programs we are proud to support. Here you see just a few of the exciting programs that feature significant Dana content. Now, again, we are quoting on a good number of significant new opportunities, and we are doing so with the healthy degree of confidence given our product array, technology, portfolio, and global footprint. Now, if we can turn to Slide 11.

You can see with along with New Business Programs the key contributor to our current success is the verging North American Heavy Truck market. We continue to project Class 8 truck production of 245,000 units in 2004. Like many questioned that number when we first announced it last year, and ironically some are now questioning whether this same forecast is too low.

Again, these are precisely the order levels we expected to see when we developed our forecast last fall, and we continue to believe that 245,000 is the right number. Incidently, as this chart indicates, orders were down significantly in June, as is typical in the summer months, but they exceeded the build-rate, which increased the backlog. Now, let's move to Slide No. 12.

This chart plots North American Light Vehicle unit production, sales, and inventory. Inventory, reflected by the red line on this chart, continues to be the big concern heading into the second-half of the year. Sales were exceptionally strong in May which brought inventories down. Sales for June however, were considerably lower, driving inventories back up.

Now, the July production is typically low, with current -- with normal summer shutdowns. Despite the continued incentive trend, we remain cautious about the inventory levels, and as a result have adjusted our forecast for North America light vehicle production to 16 million units from our original 2004 forecast of 16.2 million. Now, if you will, please turn to Slide 13.

Finally, before turning things over to Bob, I'd like to provide a brief update on our new global purchasing initiative. Our goals here are pretty straightforward. We want to transform a decentralized purchasing structure into a coordinated effort which harmonizes our processes, drives communization, and achieves economies of scale to deliver savings.

We've made significant progress in this area since our appointment of Paul Miller in as Global Vice President of Purchasing in May. Paul has already established a matrix structure that will support our goals. And a purchasing team has organized 2 supplier week-events in the past 2 months, which include 26 Dana teams meeting with 175 suppliers. We've already seen very positive results from these sessions.

Our successes in the purchasing area will play a big role in helping us to offset the increased material cost that we, and virtually everyone in our industry are experiencing. Now, moving to Slide 14, I'll turn it over to Bob for the financial review. Bob?

Thanks, Mike. And good morning, everyone. As usual I'll be talking about our financial statements, with DCC shown on the equity basis, which is how we analyze the company and is consistent with our segment disclosures.

As Michelle indicated earlier we've included with the earnings release supplemental information that reconciles these numbers to the fully-consolidated statements. You should now be looking at Slide No. 14.

Frankly, I was kind of hoping that as we put the big restructuring program behind us, I wouldn't have to use slides like this anymore. But with the unusual items that we've had in this quarter I think it's important to clarify how they impacted the various line items on the income statement.

In the first column, you see the numbers that put down to the 75 million in net income before unusual items that Mike talked about. In the 2nd, 3rd, and 4th columns, you see the unusual items. As we stated in the press release due to events that occurred after the end of the quarter, we now believe that the sale of the aftermarket, as well as the significant DCC asset sale are more likely than not to occur.

Now, the concept of more likely than not to occur is important because of its accounting implications. In both transactions we intend to generate capital gains that will allow us to utilize a portion of a capital loss carry forward from prior years that have been fully reserved. Since these transactions are now likely, accounting rules require us to reduce the reserve we had established against the carry-forward benefit in the second-quarter. This translated into $38 million in income.

The portion attributable to the aftermarket was 20 million, which as you see in column 2 shows up on the discontinued operations line. The DCC portion of the tax adjustment was 18 million, as shown in the 3rd column, 20 million is included on the equity and affiliate earnings line, offset by a negative 2 million on the income tax line.

The transaction costs are detailed in the 4th column. The amount attributable to DCC shows up as a 4 million before-tax charge against other income with a $2 million tax benefit. The portion of the cost related to the aftermarket, which amounted to 3 million after-tax is shown on the discontinued operations line.

When you adjust all of the line items in the 1st column by the unusual items, you get to the reported numbers in the far-right column, which put down to our quarterly net income $108 million. Like Mike said, you normally, would like to have more income than you expected. But in this case honestly it seems to me it would have been a lot more logical to see the benefit of the utilization of a loss carry forward show up in the period when the transactions actually happened. But as we all know sometimes accounting rules defy logic. Please turn to Slide No. 15.

This slide compares our income statement with DCC showing on an equity basis for both the second-quarter and the first 6 months to the same periods last year. I will address most of my remarks to the quarterly comparisons. Sales for the quarter were 2.3 billion up 16% from the 2 billion we reported in the same period in 2003.

Exchange rate differences on foreign currency accounted for 52 million of the increase. Net new business added roughly 100 million. And the balance of the increase was due to strong markets, particularly for heavy trucks in North America.

Other income was lower than it was in the second-quarter of 2003. You might remember that last year other income included a benefit of about $800 million before-tax in connection with a sale of a frame operation in Thailand, which is the biggest difference. Cost in goods sold declined as a percent of sales, our gross margin in the quarter was 9.6%, and that's up from 8.1% last year.

SG&A expenses are flat against last year. Actually they would have been down slightly, but for currency. As a percent of sales they declined from 6.2% last year to 5.4% this year. So overall our operating margin was 4.2% in the quarter versus 1.9% in 2003. For those of you tracking the sequentially operating margin was up from 3.2% last quarter to 4.2% this quarter, and we're pretty proud of that.

As a result of both higher sales and increased margin, income before-taxes almost tripled from 26 million last year to 72 million this year. Income taxes were 27 million, which is an effective rate of 37.5%. But this excludes the taxes buried in the discontinued operations line and includes a small effect from the unusual items. As we said in the last call we are using a overall effective tax-rate of 33 to 35% for the year excluding the unusual items.

Equity and affiliate earnings looks to be up about 10%. But remember from the last slide this year's number includes the 20 million in unusual items related to DCC. And last year's number included 5 million in unusual DCC gains. Some increase of $15 million from the unusual stuff.

If you adjust for this we're really down about $10 million, and most of that is the result of lower earnings from Getrag [ph] at our Mexican affiliate Spicer SA [ph]. The low earnings from those operations is what held back the earnings growth in the Automotive Systems Group which Mike addressed earlier. Discontinued operations is a story unto itself.

The aftermarket perform better this year than last, but not to the extent you see here. This year's number includes the 17 million of net unusual items that we've already discussed, and last year's number included a small loss from the Engine Management Group that we sold on June 30th of last year. So the comparable operating profit for the aftermarket business that is currently for sale, doubled from 9 million last year to 18 million this year. And this happened on sales which increased about 5% from 532 million from last year to 557 million this year.

So the bottom line as Mike said, was up from 52 million last year to 108 million this year. And again, excluding the unusual items from 47 million last year to 75 million this year. I won't go through the 6th month numbers since the explanations are all pretty much the same. But I would point out that excluding the unusual items, earnings from continuing operations were up over 60% from the first half of last year. Please turn to Slide No. 16.

This slide shows the cash flow for the quarter in the 6 months, and here again, I'll focus on the quarterly numbers. We've talked about the net income, and depreciation was pretty much in line with last year. The big sling in the line titled "Asset Sales and Divestitures" is that last year, we had the benefit of the sale of the Engine Management business, and the proceeds from the sale of the Thailand operation. This year, the bulk of it is the sale of some forging assets to Cypress Solutions as part of the Heavy Truck Group's continuing efforts to outsource non-core components.

Working capital went down 65 million in the quarter, which isn't a big number, but it is significant, because we usually see it go up a little bit in the second-quarter. Most of the numbers in the Uses Section are pretty much in line with those expectations in last year. The dividends are up, because this year we've been paying 12 cents a quarter, while last year, when we were still going through the restructuring, we were at the penny a quarter level.

On the last line in Uses Section you see a big increase in the changes in other accounts, and the big swing there really isn't a use of cash as much as it is an adjustment for the non-cash change in deferred taxes that was included as an unusual item on the income line. At the end of the day, there was very little change in the net debt during the quarter, unlike the second-quarter of last year when we benefited from the divestiture of Engine Management. For the 6 months, net debt is up 115 million. Please turn to Slide No. 17.

Here's the walk-forward of our capital accounts from the beginning of the year on the net-debt line in the 2nd column. You see that $115 million cash-change in net-debt from the previous slide. As for the components of net-debt short-term debt is down 51 million. That's due to the 231 million in bonds we paid off in the first-quarter, less the 180 million we borrowed during the first half under our Accounts Receivable Program. We funded that 51 million reduction in debt and the net cash outflow through 166 million reduction in cash on the balance sheet.

The 136 million increase in the equity in the 2nd column is just the earnings of the first 6 months of 171 million, less our 36 million in dividend payments and some unfortunate rounding. In the other column, the 37 million reduction in long-term debt is principally due to market-to-market adjustments on our interest rate swaps. The 44 million decline in the equity account in the other column is the effect of the strengthening of the dollar during the last 6 months.

At the end of the day, our net-debt to equity ratio was about equal to where it was at the beginning of the year, which is a good thing. Because at this point in the year, it's usually slightly higher. Please go to Slide No. 18.

This slide shows the composition of our debt portfolio, which is virtually unchanged from where it stood at the end of the first quarter. The average life is 9.1 years, the average cost, including the effect of our swaps is 6.16%, and we don't have any term debt maturities to worry about until 2008. Please go to Slide No. 19.

Here's a summary of our liquidity position at June 30th, which obviously remains strong. There are some changes though from prior quarters. The committed capacity of our receivables program had been 400 million instead of the 300 million you see here.

The difference is due to the fact that at the end of May we had to stop selling the aftermarket receivables into the program in preparation for the sale of that business. This number will continue to go down over the next month or so until it bottoms out at about 200 million.

To ensure that while we were waiting for the proceeds of the aftermarket sale to come in, we didn't see a reduction in our total debt capacity, we negotiated a bridge facility that ramps up to 200 million as availability under the AR program declines. The bridge will stay in place until the sale of the aftermarket closes. Of course, when that occurs, we expect to redo all of our bank facilities. Please turn to Slide No. 20.

During the quarter, we reduced the DCC portfolio by a further 50 million. Bringing the total remaining down to 1.2 billion from the 2.2 billion we had when we announced our intention to exit these businesses in 2001. By virtue of the sales we expect to conclude in the third-quarter, these are the ones that gave rise to the recognition of the unusual income in the second-quarter.

We should see even a more sizeable reduction in the pie when we look at this chart in the next conference call. Actually our hope would be to finish the year at under 1 billion, and as you see we are starting to chip away at the blue portion of the pie as well. This is the part of the portfolio that consists mostly of some tax structure transactions that we were obliged to hang onto for a certain period of time. Now, please turn to Slide No. 21.

All in all, it was a decent quarter, but we still have some challenges to deal with. So far this year, we've stuck with our guidance, even though we've had to contend with higher raw material costs and continuing albeit improving issues in our structures group. Those issues haven't gone away, and now we also have to allow for the possibility that we could see some softer production schedules from North American light vehicles in the second half.

So even though we may get some small benefit from consolidating the aftermarket a little bit longer than originally expected, we're sticking to our number of a $1.90 per share for 2004. And to be clear that number excludes the unusual items we've talked about today and any other unusual items we might have in the second half, including the gain on the sale of the aftermarket business. Please turn to Slide No. 22.

We're also not materially changing our cash flow guidance. The net income of 285 excludes the unusual items. We uped the depreciation number from 315 million to 325 million, since we'll have the aftermarket a little longer.

But we didn't change the working capital reduction target or the capital spend. We did increase the restructuring payments number by 5 million. But that's just a true-up of the forecast, based on the first half actual number.

So what we're essentially saying here is that we expect to generate about 240 million of pre-cash flow from operations, plus we'll have the proceeds from the aftermarket divestiture. And again, we intend to use this money for some combination of an exceptional contribution to the pension fund, reduction in our leverage, and reinvestment in our core businesses.

I know we're probably going to get questions today on the use of the proceeds, but be advised in advance that you're likely to be frustrated by our responses because we're not going to get ahead of ourselves and say much more on the subject at this point in time. We're approaching this very methodically. We're opposing a lot of discipline in the process and we're not going to be more forthcoming until we get closer to the closing. With that, I'll turn it back to Mike and Slide No. 23 for a wrap-up.

Thanks Bob. Before we move to the Q&A session, let me first summarize a few of the key points from today's call. First, our second-quarter performance was solid, highlighted by the 60% profit increase, excluding unusual items on sales growth of 16%.

Although, we are pleased with our performance, we're certainly not satisfied. Our drive for improvement continues as evidenced by our actions in consolidating the Automotive Systems Group to provide better focus on the markets we serve; by our advancements in addressing structures launch costs; by our aggressive work in establishing a global purchasing network; our efforts to finalize the sale of the Automotive Aftermarket business to the Cypress Group; and our approach to customers and consequently more revenue growth.

In short, we've made some solid strides towards those goals, but we also realize that much work remains ahead of us. And moving forward you can rest assured that we'll remain squarely focused on providing world-class support to our customers and further improving the efficiency and performance of our operations. Now, if you'll please turn to Slide 24.

This will conclude the formal portion of today's call. I'll now turn the call back over to the moderator, who will begin our Q&A session.

Today's Q&A session will be conducted electronically. If you would like to ask a question you may signal us by firmly pressing the star, then 1 digit on your touch-tone telephone. Dana will also answer questions from their website. We will take as many questions as time permits. For our first question, is coming from John Casesa of Merrill Lynch. Please go ahead.

Good morning, everybody.

Good morning, John.

Three quick ones. One, can you comment on raw material costs and what you're seeing in steel? It sounds like scrap prices are up again and I'm just wondering if some of the more benign environments are reversing themselves.

Secondly, I wanted to ask you about what was happening at Getrag in those nonconsolidated ventures in ASG. And finally, do you have a time frame on when you think these issues with structures will be substantially resolved?

Why don't you let me take the last two. And Bob, you want to address the raw material prices, or I can?

Sure. In the second quarter, John, steel alone hit us for about 13 million after-tax. And we also had increases in cost on commodities like brass and aluminum.

But frankly, we're seeing that debate as we go forward, and we're also getting some pass-throughs to customers, particularly in markets other than light vehicles. So I think the worst of it is behind us now, and we probably won't talk about it that much anymore.

Okay.

John, the question on Getrag in the nonconsolidated earnings. I think really two things for Getrag. Tough conditions in Europe, as you know, and then secondly, they're in a -- it was an expected period of transition here, where they're transitioning out of some older business into some newer business. So we expected to deal with some tougher conditions.

In terms of the other things affecting that obviously, our ventures in Mexico, performance not quite as good as we'd like to see. Again, fairly tough conditions in Mexico, and then we've also increased quite a bit of business with them, and I think they are having some trouble digesting that. We've got a number of people in their operations to help them. So that answers that one.

In terms of your last question was on the time frame on structures. Made good progress. I think you know that we've got a number of new pieces of business that we're implementing over the next year.

I would say that we're in much better shape to deal that from the standpoint of our procedures and our process than we were, certainly when I joined 3 months ago. We've got a launch team in place that will move from facility to facility to help that situation.

So I think that the worst is behind us, and clearly there is a lot of discipline in the organization, and a lot of oversight to be sure that they deliver the numbers.

Does that mean that by the end of the year we won't be talking about this?

I think -- hopefully, this is the last quarter we'll be talking about this.

Okay. Thanks guys.

Thank you. Our next question is coming from Rod Lache of Deutsche Bank. Please go ahead.

Good morning, everybody.

Hi, Rod.

A couple of things. The contribution -- the incremental contribution margins from heavy vehicles seem to be improving. But the ASG business incremental margins looked like it deteriorated. Did the -- Getrag issues have nothing to do with that; am I correct?

Well, both the Getrag and Mexico affected the PAT number, in the year-on-year comparison.

Right. But the EBIT numbers were not affected by that, right?

No.

Okay. Could you maybe address what is happening there. And what was the impact of currency on the operating income line in each of these divisions?

Currency on sales in the ASG was 41, and currency all the way down at the bottom line after-tax for the ASG was about a 1.5 million. So there wasn't a lot of currency affect in that number quarter-to-quarter. But, of course, ASG had the bulk of the steel costs increase coming through. And we're still pruning our operations as they combine the two SBUs, that was an extra cost.

Okay. And I assume that the impact on the heavy vehicles was negligible on the operating income line?

Actually it was slightly negative. We have a -- we make some product in Europe that we bring to the states in that market -- not so much for the heavy on-road vehicles, but we do so in the off-highway markets. So we actually have a negative affect from currency of about 200,000 on the bottom line in the heavy vehicle group.

Okay. And a question for Mike. Could you talk a little bit about what sort of gross margin targets you've established and what kind of time frame you expect to get there? What sort of benefits do you think you can get out of the purchasing consolidation, and is the consolidation of the ASG and the FMG expected to give you some synergies?

Well, I think -- as you know what I think Bob, mentioned, we're approaching 10%. I think we were at 9.6 this quarter on gross margins. We're going to continue to work it.

We know where we stand in relationship benchmarked to everybody else. We've got a lot of work to do here. I think it's suffice to say that you can expect that that's going to continue to improve as we go forward. And we're putting a lot of attention on that.

In terms of the purchasing savings and what we're seeing, we're not going to get specific about that. You'll see that in the gross margin. You'll see that in the results on a quarterly basis.

And what about --

Then your third question with regard to the combination of the two business units. I thinks a combination of -- or the benefits are a combination of -- they result from a combination of at least a couple of things, maybe 3 things. Obviously, we get some benefit in terms of overhead and reducing redundant functions. That's primarily on the support side.

But I think more importantly what we're seeing is a lot of efficiency with regard to improving our chances of revenue growth with the customers. Because we're doing a much better job of projecting and interfacing with the customers from an overall Dana perspective rather than individual business units.

And then it also drives best practice within those 2 groups, drives us to improve our operating efficiency inside the company. So it's both the revenue side and the cost side. The cost side being just the overall efficiency plus the reduction of some redundant people.

Great. Thank you.

Thank you. Our next question is coming from Chris Ceraso, Credit Suisse First Boston. Please go ahead.

Hi, thanks. It's Chris Ceraso. A couple of quick questions. First, just about everybody who has reported so far this quarter, has guided lower for Q3. Bob are you comfortable with the 38 cents consensus that's out there right now?

We haven't talked about quarterly numbers. Just the annual number. It's a 1.90.

Okay. But if you're acknowledging that there's some risk in schedules going into the high inventory level. Is it in the third quarter that we should be worrying about it or the fourth quarter? Or the --

It's probably in the third because I would I think people would tend to increase the shutdown periods. But if you do the arithmetic we've got to do a couple more quarters like the one we just finished to get to the 1.90 in terms of earnings per share. So I wouldn't think it would be as low as 38 cents.

Okay. On the net new business slide, I appreciate that one. You mentioned, Mike, that things are still kind of fluid for 2006. You're bidding on 400 million of new business. Can you give us a feel for, maybe, how much of that you're comfortable about winning? It looks like we sort of fall off quite a bit in '06.

I don't know if that's -- I don't if that's necessarily the case. I think what's happening is the people we're selling to get better in terms of their development cycles. We're seeing -- in this case we're over 400 million in '06 and then, god the number goes above 1 billion in '07 and '08. So I don't think you should look at that as big of a cliff as it might appear on the chart.

Now, in terms of what we expect out of that 400 million, we'll give you another update at the end of the third quarter obviously, that will improve. But I don't want to get into a situation where we're trying to project -- we obviously, have targets in terms of what we're trying to get. But I don't want to publicly disclose those.

Okay. Thanks.

Thank you. Our next question is coming from Chet Lou of Barkley's. Please go ahead. Excuse me Mr. Lou, your line is live. We'll move on to the next question. Our next question is coming from Gary Lapidus from Goldman Sachs. Please go ahead.

Hi. Can you hear me?

Yes, Gary.

Hi. A few different questions. On this aftermarket sale, could you tell us what you believe the tax basis is, so that we can maybe understand what the actual proceeds would be?

We've said that there wouldn't be a lot of tax leakage, and I think you can probably presume that that remains the case.

Okay.

Given that we had a net income effect of the ability to utilize the capital last carry-forward.

Yeah. And I would certainly understand you don't want to talk about potential acquisitions. But maybe on the -- at least the pension side, is there a number that we could think about, at least for that piece of the proceeds?

Yeah, there probably is. The under-funding was 547 million at the end of last year. And frankly, we're thinking about a number that's a little under $200 million --

Okay --

-- for an exceptional contribution. Now, we would have contributed 37 million or so anyway this year. So this is on top of that.

So you get some discount rate help maybe you -- I assume are your returns positive year-to-date?

Yes. Quite. And so what we don't want to do, though, is get anywhere close to fully-funded in a period where interest rates are rising. Because the next thing you know all of a sudden you got assets that exceed liabilities and we're answering questions --

Sure --

-- about people like you as to why we allowed so much money to get trapped in the first place.

Oh, yeah, I would never ask that. But somewhere in the 250 range or so; is that what you're saying?

Including the normal contribution --

Yeah. Yeah.

Which was already in the cash flow, because that's about our GAAP expense.

Yeah. Okay. Now this 16 million of production versus your original 16.2 just listening to the -- while we all agree with your inventory chart and have the same concerns you do, we're not just necessarily -- at least so far this reporting season. It's not like we've heard a lot of conviction about the car companies dealing with that inventory through production cuts.

So I mean -- is this something that you're doing based on what you're seeing in your sort of forward release schedules from them or is this something that you're doing bottom-up or is this more sort of your top-down perspective on how the year ought to shakeout given that inventory level?

I think it's more of a top-down -- we're trying to be somewhat conservative and prudent with regard to what we expect might happen.

Okay. And so by lowering it 200,000 units obviously, you're not changing your guidance, so there's something favorable there?

We've been inclined not to change our guidance all through the year.

Yep. Yep. Okay.

You've got in-flows and out-flows to that in terms of that. So I think -- we remain with that number.

Sure that's why I meant favorable. And then just lastly, on this -- on the sort of the difference in contribution margin, if you will, on heavy vehicle versus light vehicle, can I infer that a fair amount of that difference. In other words, heavy vehicle getting better contribution margin is because you're able to pass through the commodities there and maybe the lower contribution margin in light vehicle is because you're less able to pass through commodity increases?

I actually thing you ought to look at the heavy is being more -- just better operating proficiency as we start to catch up with these increasing schedules. As you recall last quarter, we talked about the problem of not trying to get ahead of that with people or inventory drove us to some increased overtime and shipping premium. I think that's probably a bigger piece than what you were talking about, Gary.

Okay. Okay. Thank you.

All right.

Thank you. Our next question is coming from Jon Rogers of Smith Barney. Please go ahead.

Yes. Thank you. I just have a question on the heavy truck mix. And it looks like if I just infer the volume for heavy trucks it was up this quarter's, 17%, and it looks like sequentially, your revenue was up 2%. Was there a pull-forward last quarter? Is there a mix issue going on there?

No. You've got -- you can't look at our heavy truck segment compared only to Class 8. We've got a fair amount of medium truck business, and there is also a good share of that, that is off-highway. You also got the -- you recall the Mack Business that's coming out. If you think back to that business --

Right.

-- chart that some of that orange bar south of the plus/minus line.

Right. Right. Okay, that clears it up. And then Mike I guess -- I know you don't want to talk about use of proceeds or acquisitions. But is there an area of your business where that you feel is where you can target growth maybe more aggressively. And is there other areas that you feel are going to grow more rapidly in the future where you might focus your efforts?

Well, I mean that's part of the process that were going through in terms of determining where we're going to put it. I think the thing that we've said and that we continue to say, is don't look for us to deviate too far from where we are today.

We'll fill in some -- we may possibly fill in white spaces of things that we need, you know, a piece of a product or whatever that we need to fill a product line, but don't look for us to deviate from that. I really don't want to get into discussing it anymore, because we just telegraph what we're thinking.

Sure. Okay. Thank you.

Thank you. Our next question is coming from Michael Bruynesteyn of Prudential. Please go ahead.

Hey, it's Mike Bruynesteyn from Pru.

Hi, Mike.

Can you talk a little bit more about this backlog and the volume assumptions? Are you assuming flat industry volumes in your backlog?

Those are based on the production estimates of the customers' discounted a little bit.

Okay. So if your customers are assuming, like, in the truck group or whatever, substantial increases in volume, that's reflected in the backlog, then? You weren't reflecting that in the prior version of the backlog; is that correct?

We're talking about the net new business chart, and in the out-years we use their production estimates for the programs.

Okay.

And we discount them a little bit because if you add up all the customers, you come up with a number bigger than the actual production is. Because everybody allows for the possibility of taking marketshare away from the other guy.

Sure. Sure. Absolutely that sounds prudent. So if we looked a the last time, you reported a backlog or a net new business number for 2005. I think that netted out to about $200 million.

So you have got $100 million more now. Which given the short-term that we have before '05, it's a little hard for me to understand. So maybe could you just explain how we get from the 200 million to the $300 million?

Actually, I think it was closer to 300, Mike. If you go back to the chart we used in I think it was the October conference call.

Alright. We'll go back and check that. Thanks. And finally, working capital, you said it was a bit unusual, but you didn't really give any color on that. Can you talk a little bit more on that please, Bob, as to why it was down?

Good job of controlling cash and not allowing inventories to get out of hand.

Is that repeatable or is this going to unwind?

Well, we said for the full year that we want a $100 million reduction in year-to-date, we're still up. So we still have our work cut out for us. But we got a little head start on it in the second quarter. I guess I'd characterize it that way.

Okay. Thank you.

Thank you. Our next question is coming from Steve Girsky of Morgan Stanley. Please go ahead.

Hi, good morning everyone. Can you hear me?

Yes, Steve.

Most of mine has been answered, so I may try one more that you may not answer. I don't see a lot of short-term debt here. So I'm trying to figure out how you deliver the Company. You just sort of buy in the bonds at a premium? Would that be the strategy here?

You guess correctly, Steve. We're not going to answer that question.

[Laughter] Okay. All right. Thank you.

Thanks.

Thank you. Our next question is coming from David Siino of Gabelli & Company. Please go ahead.

Hi. It was already answered. Thank you.

Thanks, David.

Thank you. Our next question is coming from Brett Hoselton of Key Bank Capital Markets. Please go ahead.

Morning, Mike. Morning, Bob. Morning, Michelle.

Morning.

Off-highway in the quarter. Can you give us an idea of what off-highway did in the quarter? And then what your projections are for off-highway?

Oh.

Just really looking for a rough estimate of kind of year-over-year change.

Yeah. 15% up in volume.

And do you think that's sustainable for the remainder of the year or would you expect that to pullback a bit?

Yeah. They've got a pretty good crop of net new business. So yeah, I think that is sustainable.

The Heavy Vehicle Technology and System Group as we look at year-over-year comparisons on the EBIT line, you've already talked about FX. Can you give me a sense as to what other pluses and minuses that might have impacted it? It looks like the net new business kind of nets out and so there's not really much impact there in terms of change in sales. But is there any other impact there on the EBIT line or change in sales?

No. I can't really give you any additional stuff, except as Mike said, we're working hard at trying to get as efficient as we ought to be at this level. Eliminating some of the premium freight and what not.

So as you look forward the contribution margins that you saw year-over-year in that group, would you say that those are achievable or do you think that they are going to improve going forward?

Well, they are certainly achievable, and you would expect some improvement going forward. We're continuing to make some capital investment to improve productivity, so, you know, I mean, were obviously across all business lines expecting to see improvement.

That's it. Thank you very much.

Okay, Brett.

Thank you. Our next question is coming from Chet Louie of Barkley's. Please go ahead.

Chet, you there?

Yeah.

All right.

Hello, Chet.

Yes.

Do you have a question?

Yes. Hi. This is Chet from Barkley's. Had some technical difficulties there.

That's okay.

It's a question for Bob. Bob, as you evaluate how you will be allocating the aftermarket business sale proceeds, will achieving investment gain ratings be a primary -- of primary consideration?

Yes, it is. That's a goal that is not just a goal of the Finance Group. That's a goal that's shared by Mike, as well as our Board of Directors. We genuinely believe that it's to the benefit, not only of the debt holder, but the shareholder to have an investment grade company.

Right. And then on a related note, would you consider buying back bonds in the open market, given that your nearest maturity is not until August of '07.

I would really rather not answer that right now. I think our options are pretty obvious, but we have left all kinds of opportunities open to ourselves, including open-market purchases, tenders, defeasance. All kinds of things. But the goal is to reduce the leverage on the Company.

Okay. Great. Thank you, Bob.

Yep.

Thank you. Our next question is coming from Kirk Lupsky of J.P. Morgan. Please go ahead.

Hello, guys.

Hi, Kirk.

I was hoping to get a little more color on your plans to expand your Global Footprints and particularly with respect to Don Fang. And if you could give us some color as to what that's going to look like and how much money you think you may invest there and what the timing of the investment would be?

I'll start out and I'll let Bob fill in. Because of my short tenure here I don't have all the history or the background of what has exactly been announced.

But the Don Fang activity for the most part, on the heavy side of the business. We have a lot of other activity that's in process in Asia. Again, because of the midst of being in negotiation on this, it's not appropriate to discuss.

But I think it's safe to say that it's an area that we've got to have a larger presence in. If you look at our geographic footprint, it's not -- you know, we need more in the East. We've got to have more in Asia. And likewise, I think there are some additional things that we can do in Europe.

Our setup with our sales group in terms of what we've done helps facilitate that, I think, in terms of getting Dana represented in total to our customers rather than by the old way under a diversified or a holding company approach. Everybody kind of did their own thing with regard to representation with the customer. So that will help us.

But I think it's probably prudent that we do not go further then that in terms of what we're trying to do.

What we have actually announced, Kirk, was a letter of intent and so we are in negotiations. So it wouldn't be appropriate to probably talk about investment. Just to give you some sense of scope though. It's a business that on a normal year would probably have somewhere around $500 million in sales.

Okay. And do you need to build a facility --

Well, in many cases what we're looking at here, the strategy would be to get on the ground quick. So that means that we'd be picking up at least portions of facilities or whatever. I mean the idea is to move quick, which means not be building facilities.

Okay.

Actually, I think probably have time for one more.

I just -- is it in the 315 of CapEx? I'm assuming that's not.

No, it is not.

Okay. Great. Thank you very much.

Your welcome. Ashley, one more.

Thank you. Our last question is coming from Rob Hinchliffe of UBS. Please go ahead.

Good morning, Bob. Good morning, Mike.

Morning.

And Michelle, too.

Thank you.

Afternoon.

Oh, yeah, that's right. Purchasing. Can you -- I know you don't want to talk too much. Can you sort of define the scope of the opportunity there, and is there any sort of catch-up opportunity potential?

Well, the scope of the opportunity, we have talked about it is, we think it's significant. And we think it's a big part of addressing that gross margin issue that we talked about. In terms of catch-up, what do you mean by that? You mean going backwards?

Well, it hasn't been a focus perhaps.

Oh, there's clearly -- if you're talking about that type of catch-up clearly is the case. The purchasing organization in parts of Dana was effective, but not uniformly, and very decentralized.

So you can imagine that there's potential in just getting the kinds of things that we do are in many cases similar between business lines that had different purchasing organizations. So this is an important part of that gross margin improvement.

Mike, what's your total buy of materials?

You can kind of look at it, I think rough terms, roughly, if you count everything, both productive material and indirect, in the area of 60% of our costs. Bob?

Yeah.

Roughly?

That's about right.

Okay. And then tax laws carry forward. You are going to use a chunk of it for aftermarket. Do you anticipate an opportunity to use all of it up, going forward?

Certainly love to. Because that would mean we'd have a ton of gains.

Yeah. So is there more sales coming?

Well, we've been using it for the DCC asset sales and we'll continue to do that. The amount that came through this quarter isn't the full amount that will ultimately be realized in terms of utilization of the tax laws carry forward. This is just the effect on net income.

Right. Okay. And then you talked about wanting to get back to investment grade. Can you talk about where a dividend increase fits in with your returning money to shareholders?

I think our first priority is to get back to investment grade.

Okay.

And then we'll consider that one.

I think that probably does it for today. I want to thank everyone for your questions and for participating in today's call. We appreciate your continued interest in the Dana Corporation. We look forward to speaking to you again soon. With that, we'll close it off. Thanks a lot.

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