Dana Inc (DAN) 2004 Q3 法說會逐字稿

Slides may be found at www.Dana.com in the Investors section. Good morning and welcome to Dana Corporation's third quarter conference call. At this time, I would like to begin today's presentation by turning the call over to Michelle Hards, Dana's Director of Investor Relations. Please go ahead, Michelle.

Thanks, Holly. Good morning everyone and welcome to Dana Corporation's third quarter conference call. The format for today's call includes remarks by Dana 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 9 months of 2004. We've also filed a copy of this release with the SEC in a report on Form 8-K. This report, the release, and the black and white PDF version of today's slides are available on our Dana.com Web site.

During today's call, we will be discussing Dana's financial statements with Dana Credit Corporation reflected on an equity basis, which is how we evaluate our operations. To comply with generally accepted accounting principles 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 for financial measures and reconciliations of the differences between the GAAP and non-GAAP measures can be found at the end of earnings release. In addition, supplemental slides reconciling certain non-GAAP measures have 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, 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.

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 Web-cast 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 good morning to everyone. On this first slide, you will see the key topics we will cover today. And we will begin with a review of our quarterly and year-to-date financials. Next, we'll provide an operational review encompassing the impact of steel, a look at our new business growth, and an update on the markets we serve. Then, we will wrap up with a few thoughts on our future and take your questions.

If you'll move to slide 4, I will begin our financial review with a very brief overview of our third quarter numbers before turning things over to Bob for a more expanded commentary.

On slide 4, third quarter sales totaled 2.1 billion compared to 1.9 billion during the same period last year. Net income for the quarter totaled 40 million or 27 cents per share, compared to 61 million or 41 cents per share for the period in 2003. Net unusual charges for the quarter totaled 20 million. Bob will break these out for you in detail and just a few moments.

Excluding unusual items, third quarter 2004 net income was 60 million or 40 cents per share, compared to 43 million or 29 cents per share for the period last year. Our third quarter 2004 results also included the impact from several positive tax developments which Bob will also cover in detail.

But as I noted in this morning's earnings release, if we put tax aside, I would characterize this as a disappointing quarter. This is largely due to the impact from the increasing cost of raw materials, and we will talk about this more in just a moment. But to give you a flavor of the severity of these costs, the increase in steel alone totaled 22 million, net of recoveries from our customers.

We had expected that the stronger performance in our heavy vehicle business and continuing cost reduction efforts would offset the bottom-line impact of these commodity price increases. But the magnitude of the increases, coupled with a decrease in light vehicle production volumes, simply hit us harder than we anticipated. Now continuing to slide 5, I'm going to turn it over to Bob, who will begin with a look at the income statement. Bob?

Thanks Mike. Good morning everyone. As usual, I will 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 the Michelle indicated earlier, we have included with the earnings release supplemental information that reconciles these numbers to the fully consolidated statements.

You should now be looking at slide 5. In the first column, you see the numbers that foot down to the 60 million in net income before unusual items that Mike talk about. In the next 4 columns, you see the unusual items.

Let's start with column 2. In the second quarter, you may remember that we recorded an unusual adjustment that added 20 million to income based upon our assessment at that time that we would, more likely than not, be able to use a portion of a capital loss carryforward from prior years that had been fully reserved as a result of the aftermarket sale.

The concept of “more likely than not” is important because of its accounting implications. We continue to make progress on the aftermarket sale, which is now likely to occur in November. However, what is no longer more likely than not is our ability to utilize the tax loss carryforward as previously expected. So we had to reverse the entry, giving rise to the $20 million charge reflected in column 2.

If I could take a moment for a brief editorial, we said in July that we thought that the accounting was illogical and that it seemed more appropriate to us to book gains and losses that result from transactions when they happen, not in advance. If there are any CPAs listening in today, we reiterate that position.

In column 3, we show 10 million and other charges related to the aftermarket. This consists of both transaction expenses as well as impairment charges for assets that were part of our aftermarket business, but are not part of any divestiture, nor were they ever expected to be. These are assets like empty warehouses and such that we currently have for sale.

Both the 10 million in column 3 and the 20 million in column 2 are charged against the results of discontinued operations because they relate to the aftermarket business.

In column 4, we have the effect of the DCC gains, which are simply a net 2 million after-tax that flows through the equity and affiliate earnings line and a reclassification between tax and other income that nets to nothing.

Finally, in column 5, we had a 13 million after-tax gain that is recognized in connection with the creation of our heavy duty brake joint venture with Knorr-Bremse. It works out that it's $20 million buried in other income and a $7 million tax charge.

There are also some odds and ends that relate to exiting certain lines of business that affected other income, cost of sales, and taxes that net to 5 million after-tax. So the 13 million from Knorr-Bremse, less the other stuff, is 8 million.

When you adjust all of the line items in the first column by the unusual items, you get to the reported numbers in the far right column, which foot down to our quarterly net income of $40 million.

Please turn to slide number 6. This slide is the year-to-date version of slide 5. Notice that the second column is zero. That's because this quarter's $20 million unusual charge just reversed the entry made in the second quarter, so there was no impact for the 9 months.

The third column shows the aftermarket related charges. This is just the stuff we talked about in the third quarter, plus 3 million in transaction expenses that we booked in the second quarter. The fourth column shows the DCC gain of 24 million that hit the equity and affiliate earnings line, less some expenses and tax adjustments that flowed through on the corporate books.

The fifth column is exactly the same as the light column that we saw on last slide, because we didn't have anything that wasn't related to the AAG or DCC in prior quarters. Again, if you walk these numbers across, you get to the net income for the 9 months of $215 million. That takes care of the unusual items.

So let's go to slide number 7. This slide compares our income statement with DCC shown on an equity basis for both the second quarter -- third quarter, excuse me, and the first 9 months to the same periods last year. I will address most of my remarks to the quarterly comparisons.

Sales for the quarter were 2.1 billion, up 12 percent from the 1.9 billion we reported in the same period last year. Exchange rate differences on foreign currency accounted for $49 million of the increase. Net new business added roughly 100 million. And the balance of the increase was due mostly to the strong market for heavy trucks in North America.

For the quarter, what's labeled "other income" is lower than it was in the second quarter of 2003. We had the unusual items this year. But last year's third quarter had its share of odds and ends, too, including a $15 million pre-tax gain on the repurchase of some of our bonds.

What really hurt us this quarter was the increase in cost of goods sold. Our gross margin was down from 7.4 percent last year to 7.2 percent this year. And we were well below where we were 90 days ago, as evidenced by the fact that even including this quarter, the gross margin year-to-date is 8.5 percent.

The explanation is increases in the cost of steel and other commodities that Mike will address later in detail. Let me just say at this point that the hit to the cost of sales for steel alone was $42 million. And net of recoveries from customers, it impacted the gross margin by 1.2 points.

As Mike said, the whole bottom-line effect, including the aftermarket on the Company, was 22 million after-tax for the quarter.

SG&A expenses are 5.4 percent of sales this year against 5.3 percent last. I should point out that last year's third quarter was a bit of an anomaly. If you look at the year-to-date figures, we're at 5.3 percent this year, which is about the same as the third quarter. But last year to date we were at 5.8 percent, 50 basis points more than last year's third quarter. That said, we should have done better and we will going forward.

Interest expense is up 10 million over last year in the quarter. And that explanation is a little bit embarrassing. During the quarterly close, we discovered that we had been inadvertently under-accruing the expenses related to our accounts receivable facility, which of course shows up as interest.

The error in the methodology goes back to the inception of the program nearly 4 years ago. No restatement was necessary, since the impact on any one quarter or any one year was immaterial. But it sort of sticks out like a sore thumb this quarter when we adjust the accruals.

Moving to income taxes, on 11 million of pre-tax income in the quarter, you would expect to see a small charge for taxes. Instead, what you have is a big tax benefit of $30 million.

Essentially, there were 3 items involved in a true up of our tax accruals that affected the quarter. The first was a settlement of outstanding issues from old returns that resulted in a pickup of $15 million. The second was an adjustment for the difference between the taxes on the returns for last year, which are now prepared, and what we had previously provided for. That was a pickup of 9 million. Those two totaled $24 million.

The final one was to adjust our effective rate for the current year down to 31 percent to reflect our ability to utilize research and development credits. As noted in prior quarters, our effective rate is a blended rate that includes the taxes on continuing operations that are shown on the face of the statements and the tax provision buried in the discontinued operations.

Due to differences in geographic profile, the rate on the disc ops is higher than the rate on the continuing ops. For those of you who have particular interest in effective tax rates, we you receive the 10-Q, you'll be able to take the year-to-date pre-tax income and the disc ops footnote, add it to the pre-tax year-to-date income shown on this slide, multiplied by 31 percent, subtract the 24 million, and the result will agree with the tax provision on this slide, plus the tax provision in the disc ops footnote. If you have any problems with this calculation please call Michelle, not me.

Equity and affiliate earnings for the quarter is down about 6 million from the third quarter of last year. This is largely a result of the fact that this year we reported 2 million in gains on DCC asset sales during the quarter, versus 9 million in last year's third quarter.

The subtotal below, which is earnings from continuing operations, is 57 million in the third quarter of this year versus 37 million in the third quarter of last year. The disc ops number looks shocking at first blush, but don't forget the 30 million of unusual items we talked about earlier. Add 30 to the minus 11 shown here, and you get 19 million this year versus 24 million last year. And the big difference is the impact of higher steel costs.

Overall, including the effect of unusual items, net income was down in the third quarter from 61 million last year to 40 million this year. Looking at the full year, net income with all the unusual items is up from 154 million to 215 million.

Those of you who have had detailed models on us have probably already noticed that the third quarter net income, added to the 6-month net income that were reported earlier, comes up short of the 9-month number. That's because during the quarter we adopted the FASB staff position, FAS 106-2, which relates to the accounting for the new federal Medicare subsidy. We adopted that position retroactively to the first of this year, which resulted in a restatement of the first and second quarters to add 2 million of net income to each. We've attached restated segment data for both quarters to the press release.

Please turn to slide number 8. This slide shows the cash-flow for the quarter and the 9 months. Whether you're looking at the quarter or the year-to-date numbers, the one line that leaps out at you is the working capital. The third quarter, which is usually more of a neutral quarter for us, shows a big increase in working capital, which impacts the year-to-date figures as well.

There are a ton of little items, but the two big ones that explain most of the variants are taxes and inventory. With regard to taxes, what happened was simply a reduction in accrual. If you think about those entries that we talked about earlier, we really took a credit that was on the balance sheet and other liabilities, and moved it to the income statement.

When you do that, you reduce other liabilities, which increases the working capital. That wasn't a big deal because it didn't affect cash. What was a big deal was a $109 million increase in inventory. This was the result of buying ahead on steel to insure supply and be ready to capitalize on any failure of the competition, particularly in heavy duty, to meet the increasing demands of our customers. We expect this to translate into market share gains, and we expect this to show up in the fourth quarter sales numbers.

The only other thing worth mentioning as regards to cash-flow is that in the last year's 9-month numbers on the asset sales and divestiture line, we had the cash from the sale of the engine management business and the proceeds of the sale of the Thailand operation. This year, the bulk of it is the sale of assets to Cypress Solutions as part of the heavy truck group's continuing efforts to outsource non-core components. Bottom line for the 9 months, we've increased net debt by 294 million due to the lower level of asset sales and the third quarter increase in inventory.

Please turn to slide number 9. This chart shows the walk board of our debt and equity from December 2003 to September 30th. On the line labeled net debt in the operations column, you see that 294 million increase from the preceding slide. Above that, also in the operations column, you see that we essentially funded the increase through a reduction in cash and an increase in short-term debt. At the bottom of the slide, you also see that despite the increase, the net debt to cap ratio remains in the mid-40s.

Please go to slide number 10. This is our debt portfolio at September 30th. There's been no change since the end of Q2 in the red bars, which shows our long-term bonds. The blue bar that represents the borrowings on our accounts receivable facility are $180 million, which is also exactly where they were at the end of June.

The change since June is in that first bar which represents a combination of borrowings under the bridge facility we set up to compensate for the drop in capacity on the AR program, when we had to start putting aftermarket receivables in to prepare for the sale, as well as some borrowings from DCC, which had a large cash balance as a result of the third quarter asset sales.

The DCC loan is just a case of optimizing returns. DCC is happy to get the 3 percent or so that we're paying them versus the 1 to 2 percent they would get on short-term investments. We save about 300 basis points versus what we would've had to pay had we borrowed on the bridge.

Please go to slide number 11. You could probably see more clearly on this slide how we have used the DCC cash surplus to our advantage. At September 30th, we had 145 million borrowed from DCC that we would have otherwise borrowed under the bridge.

So as not to overstate our liquidity, we have shown the DCC loan as a negative in the availability column, which makes the total undrawn amount of 430 million, which is what it would've been had we used the bridge. When you add it to our cash of 487 million, we show liquidity of over 900 million.

Now, please go to slide number 12. We said in July that we expected to report a significant reduction in the DCC portfolio during the third quarter. The actual number was a reduction of 345 million, bringing the total remaining down to 865 million from the 2.2 billion we had when we announced our attention intention to exit these businesses in 2001.

You can see that we made a sizable dent in the blue portion of the pie. This is the part of portfolio that consists mostly of some tax structure transactions that we were obliged to hang onto for a certain period of time. And by virtue of the settlement of the outstanding tax issues from prior years that gave rise to the positive adjustment to the tax provision in the third quarter, a number of these assets became salable.

Some of you may be questioning why the gain on the DCC asset sales was only 2 million during the quarter, given the volume of assets sold was so substantial. Does it mean that we've sold all the good assets early and now we just have cats and dogs? The answer is no.

I would remind you that during the second quarter, we had to pull forward about 18 million in gains that related to the transactions that closed this quarter. Just like the aftermarket thing, it had to do with our ability to use the capital loss carryforward and that odd more likely than not accounting standard that caused the tax benefit to be booked in a different quarter than when the transactions occurred.

As for where DCC is with regard to their debt obligations, they have enough cash on hand to fund the rest of this year's debt maturities, all of next year's debt maturities, and virtually all of the maturities in 2006.

Please turn to slide number 13. Let me just wrap up with this summary before turning it back to Mike. Net income for the quarter, before unusual items, was $60 million. We had $2 million of DCC gains. We had $30 million of charges related to the aftermarket, including the reversal of that $20 million entry from last quarter. And we had an additional 8 million from the Conor Bremsa transaction and other items. So, net income as reported was 40 million.

As you can see in the second column for the 9 months, the unusual items go the other way, adding 15 million to net income.

Finally, I would remind you that when you think about the quarter, you need to remember 2 numbers which are not unusual because they don't relate to specific transactions like asset sales, divestitures or exiting a business. But they are noteworthy because they are big.

We adjusted our tax accruals for prior years by 24 million to the good, and this only helped offset the negative impact of steel prices, which were 22 million after-tax.

Don't misunderstand, though, we're not happy with this quarter. But to cut to the chase, if you look at the segment data, EBIT from continuing operations without the unusual items is pretty close to last year's number. And that is after absorbing the higher cost of steel. With that, I will turn it back to Mike and slide number 14.

Thanks Bob. Let's begin by tackling a difficult issue, the impact of increased steel costs on Dana. Raw material costs in general, and increased steel costs in particular, have had a profound effect on our industry this year. As I noted earlier, the third quarter impact of increased costs for steel content totaled 22 million. Again, this is net of recoveries from our customers.

Now the central issue, of course, is capacity -- or lack thereof, really, which has driven the price of all forms of steel -- whether it's bar stock, flat rolled, as well as scrap -- significantly upward. We're doing what we can today to manage our 1.7 billion metal buy. More than 1 billion of this figure is raw steel and the steel content in our component purchases.

To provide you with some additional context, about 30 percent of our buy is in the form of raw steel from mills and processors, with the balance coming from components or products containing steel. This would include forgings, castings, stampings, and other assorted components like fasteners.

Due to the capacity issues, the leverage is clearly on the side of the steel suppliers today. But we can't just throw up our hands and play the victim. In the near term, we're doing our best to negotiate leveraged purchases. And we're taking advantage of OEM resale programs where they exist.

We're also a working with our customers to recover the cost of steel increases wherever possible, either in the forms of increased pricing surcharges or reduced price downs expected from us. But it's clear that we will have to work aggressively to remove costs elsewhere in our system in order to compensate for steel and other commodity increases. We're also aggressively pursuing longer-term solutions involving value-added engineering approaches with our customers to reduce material content and cost in our products.

Now if you'll please turn to slide 15, you can clearly see what we've been faced with this year and particularly during the third quarter. This chart plots the substantial rise in the cost of number 1 bundled scrap steel, which reflects the market rate for a premium level of scrap steel on Tri-cities Index.

Without going into great detail, this might best describe -- be described as our leading indicator for steel cost movement. As you can see, scrap steel costs have more than doubled over the course of 2004, and risen by roughly 65 percent since we last spoke with you in July.

Now if you'll move to slide 16, I will address our operational performance, which includes some insight into the impact of increased steel prices at the business unit level.

First, let's look at the operational performance, beginning with our Heavy Vehicle Technologies and Systems Group. For the quarter, the Group reported a 13 percent increase in operating profit on a 17 percent sales increase. Currency impacted sales by 12 million for the quarter.

To put these numbers in their proper perspective, I will remind you that 1 year ago, the Heavy Vehicles Group benefited from a favorable adjustment to its restructuring expense and an additional 5 million in the third quarter operating profit. The adjustment was tied to a change in the Group's restructuring plans, where they closed a plant in Montgomery, Alabama and moved the operations to a plant in South Carolina that had previously been scheduled for closure.

So on an apples-to-apples basis, the Group's third quarter profit increase would have been 44 percent, bringing its year-to-date profit increase to 56 percent. Of course, all of this is in spite of steel, which is has impacted our heavy vehicle business by 7 million this year, net of recoveries from their customers.

Now moving to slide 17, where we see a very different and disappointing story in our Automotive Systems Group. For the quarter, the ASG reported a decline of 12 percent in operating profit, despite an 11 percent increase in sales. Again, currency favorably impacted these numbers by 37 million for the quarter. Steel is the culprit here, with the decline being almost entirely attributable to our excess steel cost.

With increased costs of 13 million to the quarter and 21 million year-to-date, you can see that this group has borne the brunt of the situation with steel as well as other commodities. Now, if you'll turn to slide 18.

We see our third quarter results by segment compared to 2003. I've already discussed the business units in some detail. And with that then, Dana Credit Corporation contributed 4 million, even with its continuing program to divest its assets. The other line principally reflects the impact of the positive tax developments that Bob has just explained.

The performance of our discontinued operations, which -- the aftermarket held -- business held for sale, was down due to the 6 million impact of steel and some softness in the market. Some of you may have heard NAPA's recent comments to disregard during their third quarter call. As you can see, operating profit from our continuing operations was up significantly, mostly due to the favorable tax developments that we just discussed.

Finally, Bob also covered the unusual items, which bring us down to the consolidated line where we see a decline of 34 percent in spite of a 12 percent sales increase. Again, taxes aside, it was a disappointing quarter form from our perspective. Now, let's move on to slide 19.

Despite having detailed the negative impact we felt from rising steel costs, I want to be clear that we're not content to play the victim. We have a business to run and we must do it as successfully as possible regardless of external circumstances. So we'll focus on those elements within our control.

And along these lines, we're looking at two critical areas. The first is to aggressively reduce our cost structure. We have talked before about the vital importance of consolidating our global purchasing efforts. And we have made progress. Significant work and significant returns remain in front of us.

Another opportunity for cost reduction exists in the deployment of lean manufacturing techniques throughout Dana. Similarly, we're standardizing administrative processes to achieve greater savings as well. And finally, we're pursuing value engineering activities -- in other words, working with our customers to redesign existing components and -- in the effort to reduce costs. Now, if you'll please turn to slide 20.

Our second area of focus is growing the top line faster in a profitable way. Over the last 3 months we have added considerably to our book of new business, which I will detail in just a moment. The Heavy Vehicle and off-road -- or off highway markets continue to experience healthy growth. And we continue to focus on expanding our global footprint to an assortment of joint ventures and affiliations.

Moving to slide 21, I will walk you through our new net business story.

Looking at the latest update to our net new business chart, we've seen significant growth in both 2005 and 2006 during the third quarter. We've secured 155 million of new business since the update we gave you the last quarter. You'll see this in that the 2005 bar reflects an 80 million increase in new business, which includes new heavy-duty truck business with international. We see an additional 75 million increase in 2006, primarily the result of new axle business with Ford.

With that, let's now turn -- before I say that, I should probably say that this increase represents a renewed focus on growing Dana's revenue profitably. And the actions that we have taken are beginning to show evidence of success.

With that, now let's turn to slide 22. Let's look at our major markets, beginning with an overview of the North American heavy truck sector. Again, heavy truck has been a key contributor to Dana this year. As this chart indicates, we're seeing the expected rebound in orders and bill rate from the slower summer months, while inventory has held relatively constant.

We will continue to be on target with our original projection of 245,000 units of Class 8 production in 2004. I should add that over the last quarter, we've been particularly happy to help some of our heavy-duty truck customers when our competitors were unable to fulfill their commitments. And we hope to continue to build upon these situations moving forward and make them permanent.

Now, moving on to slide 23 and the North American light vehicle sector. This chart Highlights unit production sales and inventory. With the exception of the usual low production level in July, again the result of anticipated summer slowdowns, production was remarkably consistent in June, August, and September.

Inventory, on the other hand, represented by the red line on this chart, has come down off its peak during the spring and early summer months. We have, however, felt the impact of softened production in the mix of vehicles we support. This leaves us somewhat cautious about both production and inventory levels as we head into the final months of 2004. Accordingly, we're adjusting our schedule -- or our forecast for North America light vehicle production downward to 15.8 million units from our most recent forecast of 16 million, which was based upon our visibility in July.

Now if we will move to slide 24. Here is an update on the sale of our automotive aftermarket business to the Cypress Group. We now expect the transaction to close by the end of November, at which time we'll be in a position to comment more specifically our potential use of proceeds from the sale.

I know that many of you have questions about the sale of the aftermarket businesses, but we cannot respond to them today and hope that you will respect these limitations. We remain fully committed to bringing this transaction to a positive conclusion for all involved, and delivering added strategic and financial flexibility to Dana.

Now, if we move on to slide 25. Our revised guidance shows sales of at least 8.7 billion for the year, up slightly from our previous guidance of 8.5 billion. And as we announced last week, our earnings expectations have been revised from $1.90 per share to the range of 1.60 to 1.65 per share, excluding unusual items. This represents a net income range of $240 to $248 million.

We've excluded the full year effect of unusual items, such as gains and losses from the sale of DCC assets and the divestiture of the Company's automotive aftermarket businesses, as we can't reasonably quantify them at this point. Now, if you will, please turn to slide 26.

Starting at the low end of the net income range, or 240 million as we just discussed, we've adjusted our cash-flow projection accordingly. We've also adjusted our working capital reduction to zero, due to the increase in sales and therefore the accounts receivable, as well as an increase in inventory which is related to some pre-buying of steel, as Bob previously mentioned. Following this down to the bottom line, you will see that free cash-flow from operations has been reduced from 240 million to 100 million. Now, if you can go to slide 27.

Before we move into the question-and-answer session, let me summarize a few of the key points from today's call. First, our third quarter performance was disappointing. Raw materials, specifically steel, had a significant impact on our quarter. And unfortunately, we don't see this changing in the near term.

So, moving forward, we're redoubling our efforts to reduce our cost structure. Again, this includes consolidating our purchasing activities, implementing lean manufacturing initiatives, value engineering efforts we talked about, and the standardization of Company-wide processes.

At the same time, we will not lose sight of our growth objectives. Our attitude is that cost reductions and profitable top line growth are not mutually exclusive efforts. We must do both. We're making progress on both fronts. And we realize that much work remains ahead of us and that in this business climate, speed is of the essence. We're determined to succeed. Now, if you will please turn to slide 28.

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

(Operator Instructions). Rod Lache, Deutsche Bank.

It's Mike Heifler for Rod. Bob, I was hoping maybe you could walk us through the tax effect again. You went to really get to a clean number here. It seems like you guys are talking about 40 cents from continuing operations, but you have got this $24 million tax gain. And it seems like there's something in addition to that, where you guys are taking the effective tax rate down to 31 percent for o the full year from about 36 percent. So, if we were to adjust for all of this, what would a clean number be?

On taxes?

Yes.

Taxes alone, it would be -- as I said you've got the 15 million from the settlement and the $9 million number for the provision to return adjustment. I would guess that the 31 -- the adjustment on the effective tax rate was somewhere around $7 million for the year, which flowed through this quarter. So those are the 3 things. But if that was -- if you were trying to strip out that, I guess you ought to try and do something about that interest adjustment that went the other way, too.

Right, okay.

You know, what we've set aside as unusual items, as I said earlier, was what we usually set aside, which is the things that relate to specific transactions -- when we're divesting a business, when we are selling an asset. You know all these tax things were essentially over provisions in prior periods.

Okay, in terms of steel cost going forward, how should we be thinking about that for the fourth quarter and going out to 2005?

I will take that one. I wouldn't -- you shouldn't expect appreciably higher costs than they are today and that we've discussed. We've seen some declines recently in some of our forward prices or costs for items like aluminum and so on. I think, while it's very fluid, I wouldn't expect it to be much different than what we've seen in the third and the beginning of the fourth quarter. So they are incorporated in our guidance that we've given you.

Okay. When I look at the incremental margins on the light vehicle side of the business, and I try to adjust for the foreign exchange and for the steel and I look at it on a pre-tax basis, I'm still coming up with a pretty light incremental margin. Can you walk us through the incremental margins on the light vehicle side? And what's happening with the frame business as the profitability picked up there?

Let me take the frame and Bob can kind of think about his thoughts to walk you through the rest of it. From a structural standpoint, we continue to make progress on -- as we talked about last month, we continue to make progress with regard to the structures business and certainly on all the existing programs.

We're in the midst of the Tacoma launch with the new Toyota mid-size truck. We're in the midst of that launch right now. That launch is appreciably better than those that we've seen in the past. So I think we're continuing to make progress on that, and that is not the issue. Bob, do you want to try to cover Mike's other question?

Yes, the other question, Mike, two things I guess on that. If you look at the ASG alone, the margin impact of the steel would have been 21.

That's on a pre-tax?

On a pre-tax basis, and that SBU only. I mentioned 26 for continuing operations. It was 21 in ASG and 5 in Heavy. So, adjust for 21 for that. And then the currency for them was a pretty big number. It was $37 million. And that probably had about a $2 million bottom-line impact. So I think you plug those in and adjust for what Mike said about structures, and there you go.

Yes. I mean, I'm still coming up with something like 5 percent incremental margins.

Well, I think you're also not factoring in the cost of other materials like aluminum, higher price for oil, gas, electricity. And it's new business in some cases. And we all know that new business has slightly lower margin at the front end than it does at the end of the contract. But I don't have any more granularity for you than that.

Rob Hinchliffe, UBS.

I wondered if we could do that same incremental margin exercise for heavy truck. If we add back steel, it looks like a number around 12 percent incremental margins. Last quarter it was closer to 20. Any explanation there?

Of course, Mike said in his comments that we had last year an adjustment for the restructuring reserves in heavy truck. We had originally planned to close one plant, ended up closing another. That caused a flow back of $10 million pre-tax into the -- maybe it was 9 or 10 -- into the pre-tax numbers. So you've really got to back got out of last year when you're looking at the incremental margins. And when you do that, I think you'll find that they are more or less as expected when you allow for the steel -- said earlier steel was 5 in heavy truck.

You talked about kind of buying steel ahead of time, just making sure you had enough and maybe you could gain market share. Can you walk through that? What do you see heading into the fourth quarter?

When you say what do we see heading in -- do you mean in terms of market share?

Yes. It sounds like you are (multiple speakers)

I think you are aware that there are some people struggling in the market to cover all the heavy-duty truck needs. We've had heavy-duty truck customers approach us to cover some of the other competitors' needs. And we've been able to take advantage of some of that. We expect that to continue into the fourth quarter. And in some cases, I think it will be more permanent so to speak. But that's really what we're talking about.

The other part of it is that we wanted to be absolutely sure, with the uptake of the heavy market and also I should say the off-road and Ag market, wanted to be absolutely sure that we were not going to affect our customers. So we've been pretty diligent about getting on the availability of steel.

Now the flip side of it is that we're carrying a little more inventory than we would like. But I think on the whole, we are better off as a result of that, both near-term as well as long-term.

How about from the cost standpoint? Do you have to -- are the incremental steel costs you're facing higher as a result of buying steel earlier than you would have otherwise?

No I don't think -- I wouldn't necessarily attribute it to that any more than any of the rest of the steel that we buy. So we're not -- if you're implying, you know, are we out on the spot market versus a contract type of basis, I would not say that has a major effect.

Okay. Bob, you talked -- or maybe it was you, Mike. You talked about the aftermarket business. I guess you can't say much. But you neglected to mention the 1.1 billion that you have talked about before in proceeds. Is there a reason to think that that may be any different?

It will be what it will be. I think everybody is trying to read more into these delays. Unfortunately, we're kind of trapped in this sort of quiet time. Look, we've got a willing buyer and a willing seller. And we believe this transaction closes in November. It's just taking a little longer than we thought.

Okay. But the --

That's really is all we can say this point.

Okay. And then you mentioned your steel buy. How much of that is contract versus spot versus pass-through? Can you talk about that at all?

Well, the majority of it is under contract. There is -- as we talked about, you've got just various different pieces, whether it be rolled steel or bar steel or other types of steel content, whether it is backed through us from forgings or whatever. But, for the most part the majority of it is certainly under contract.

I guess just -- Bob, just one last question on that $24 million tax benefit. Has that been in your guidance all year?

No.

Okay. And at the beginning of the year, if I remember, you said $1.90 or maybe it was $2 you started the year out. And that was going to be a clean number, no unusuals or tax benefits. So this is a break from that?

No, we said no unusuals. We don't consider this one an unusual. But frankly, it was one of the reasons that -- because it was uncertain right up through the end of the quarter that we were probably a little later than some of the others in revising our guidance, because we didn't see much of a point in giving guidance that included the steel until we knew what -- and the taxes until we knew what the numbers were.

Darren Kimball, Lehman Brothers.

The working capital, Bob, this is not going to be a surprise -- year 351 negative through the first 9 months. There is not much historical precedent for you to bridge that gap. I know it's a seasonally strong working capital quarter -- the fourth quarter. Is neutral more of an aspiration than a 50-50 case?

It's certainly far from a slam dunk. It's going to be a challenge. I think we do have, if you look over the last 3 years, you will find a year when we did that much. But it's a big number. It means we're going to have to do something with some of that steel. And a lot of it is going to depend on sales, too, because ordinarily the fourth quarter's a pretty lame quarter for sales right at the end. And with the heavy truck market going strong, it remains to be seen what's going to happen in terms of bill schedules over the holidays.

And on the full year guidance, are you now assuming in your guidance that the aftermarket sale doesn't close this year? Or are you still assuming the 5 cents of dilution that ostensibly would have been in that number?

When you say what we are assuming on the aftermarket, we're really saying it's going till the end of November. And the pluses or minuses that we were talking about for 6 months, when you boil them down to about 1 month, it just doesn't amount to a hill of beans. So I think we do $1.60 to $1.65 whether the deal happens or doesn't happen. But to make it clear, we believe it's going to happen.

Okay. And I don't want to -- I know you don't want to get into it. But the fact that you're not saying what the outstanding issues are, whereas you were previously, is obviously something that appears leading. You made a filing and you referred to (multiple speakers) certain issues.

Before we said -- when we talked about the 8-K that moved it from September to October, we talked about the seller financing and the foreign antitrust approval. I can confirm that we have foreign antitrust approval in Poland now.

I think again, as Bob said, it's important not to read more into this than what we said.

Okay. And on the interest expense on the securitized receivables -- I'm sorry, could you just go over one more time what that effect was on the third quarter, and what the ongoing bump up would be now that you're treating it correctly?

It's 10 million before tax, $6 million after-tax in Q3. And it's hundreds of thousands of dollars a quarter. It's not a big deal. It's just when you lump about almost 4 years of the stuff into one quarter, it adds up.

Okay. And lastly, the Ford business -- is that a conquest or a brand-new vehicle on the '06 axle?

It's an expansion of additional business -- additional platforms from business that we have today.

Stephen Girsky, Morgan Stanley.

I want to push the backlog issue a little bit. '05 seems awfully late to be adding business. Is it just because there are supplies constraints from other suppliers that you are winning business here?

We told you last time that there were still some -- a fair amount of business that was still being worked and bid in '05. Some of it is captured from other competitors in the heavy side as well as -- you know, on some of our businesses, Steve, you do get the ability -- the OEMs have the ability to move this around at the last minute. I would say probably more towards our ceiling businesses, our fluid businesses -- certainly, we're not talking about axles and driveshafts here on the light stuff.

And what about what's out there for '06? Is there still a lot out there for '06 or no?

Still work -- we continue to work on '06. So I guess my point was that I am pleased that we're starting to build in on that backlog in '05 as well as '06 -- roughly a $150 million improvement this time, which is encouraging.

And just on steel -- slides 16 and 17, those are after-tax steel cost numbers you put in there?

Yes.

And you said you bought forward -- you said you are mostly under contract. So how -- our steel costs are now locked in for how long now?

Well again we've talked about this in the past. We're not going to let you bookkeep us on our contracts. But we've got contracts at various time intervals that roll off as new contracts come on. So we understand those. That is in our guidance. And we obviously are working on any of those that would roll off or we would have higher costs. We're working to offset that.

So this isn't necessarily -- I'm just trying to figure out if next quarter, if steel stays high, does this surprise us again incrementally? Or have we sort of got that under control?

One of the reasons that we waited, as Bob said, is to be sure that we gave you good guidance for the fourth quarter in addition to the year.

And Bob, did you give a currency impact on EBIT at all?

I gave a currency impact for the ASG of after-tax 1.9 for the quarter. So to get to an EBIT level, you gross it up. (multiple speakers) And the after-tax on heavy is 517.

5 point -- (multiple speakers)

517,000.

Okay. Got it. Thank you.

Chet Louie, Barclay.

Just a follow-up question on the aftermarket business sale. Can you guys still confirm that achieving investment-grade ratings continued to be a priority as you consider the allocation of the proceeds from the sale?

Yes. That remains one of our objectives, not just from this sale but as a general statement. We said many times that we think it's important to be investment-grade, not just to save a penny or 2 on interest, but more importantly to assure that we have access to the credit markets when we need it. So investment-grade is still a top priority.

In terms of the breakdown for the proceeds, is debt reduction still a good portion of it?

What we said on -- yes, it would be probably. What we said publicly is that we're going to use 200 million or thereabouts for pension and the rest will be divided between debt reduction and reinvestment in the business.

Michael Bruynesteyn, Prudential Securities.

Could you -- you talked about the consolidated purchasing. And that's one of the things that, Mike, you brought in when you came to the Company. Can you quantify the benefit of that so far? Are we seeing it already? And maybe could you give a total cost reduction number in the quarter?

I'm not going to give you a total cost reduction in the quarter. But the point is yes, we're seeing it. And as we've talked in the past, it builds over time. Some of these things require -- you've got two forms. You've got the leveraging piece and you've got what I call the technical piece, which means moving supply to another supplier or doing something to re-engineer the product.

An example on that would be -- we may have more different melts of bar stock than we need. And it's a little bit like the OEMs that you talk to going to common parts. We've got -- our way of going to common parts, in some cases, is consolidating a number of different alloys or melts that we have to get higher size melts and lower costs. Those kinds of things take a little bit longer because you have to validate with the customer.

So it is working. We're satisfied it's working. I've got to tell you that we're lucky to have that activity in place and have an understanding of where we are and also the improvement efforts. So I'm very satisfied with it. It will continue to build over time -- fourth quarter, first quarter, so on. The benefit continues to build over time.

Thanks. And can you clarify what's going into the large negative number in the other and the segment walk?

I will let Bob do that.

It's the tax.

Okay. And that -- on an ongoing basis what's in that segment -- there was Arvin Merit or costs and things like that in there before. But it is still sitting up. I'm just wondering what is keeping it up.

Well it's interest and taxes and corporate expenses. There weren't any other big changes.

And is there any kind of inflection point there that we can look for? Or should we assume -- what should we assume going forward for that, because it's kind of a black hole from us on the outside to see into that.

I think what you -- how you can get that is if you start with the financial statements, back out your forecast for the SBUs, which can be modeled pretty easily off the segment data, and then everything else -- the interest, the corporate expenses and any differences between a 39 percent tax rate and actual tax rate show up in other.

John Casesa, Merrill Lynch.

Just two quick ones, Bob. What's the pre-tax profit number associated with this $1.60 to $1.65 guidance, if you would care to tell us? And secondly, based on what you said about the inventory build, would we expect stronger sales and operating income growth in heavy-duty in the fourth quarter? Would it be a very strong quarter for that business unit?

I don't have the pre-tax number, John. But there's nothing else going on that would distort it that I know of, other than the taxes that we talked about in the third quarter and the equity earnings. (multiple speakers)

So for the full year (multiple speakers)

(multiple speakers) walk it right up.

Just to confirm, what is the full year tax rate in that $1.60 to $1.65? Is it 31 percent?

It's 31 percent, yes. Plus (technical difficulty) is 31. And as I said, 31 less this $24 million in Q3.

And it with regard to the heavy, John, yes we would expect a stronger performance in the fourth quarter. Now the thing that you have to understand is we're going to be there with our products. But as you know -- and in discussing with the heavy-duty people, the various companies that are building, some of them are struggling with other supplies.

So the projection is it will be a stronger fourth quarter. But we are always subject to the possibility that they under billed because of other component supply problems. We've obviously taken some of that into account in our guidance to you.

Jon Rogers, Smith Barney CitiGroup.

Mike, I just have a question on the steel issue. And I understand that there's a lot of moving parts here, and ins and outs with direct and indirect buys. But is it reasonable to assume that if the spot prices don't increase from here that you won't see any further price increases?

Well actually, in terms of raw buy, the actual buys I think that -- I guess I'm thinking through this because there are a lot of moving parts. We're not going to see appreciable increase if spots don't change. I think that's a good assumption.

And then Bob, just housekeeping question. Can you just tell me -- I understand that the guidance is $1.60 to $1.65. Can you tell me how much of that $1.60 to $1.65 in EPS we have over the first 3 quarters?

Yes. It's the income before unusual items year-to-date -- I'm groping for it here. It would be -- the 3 months -- 9 months -- $1.32. The guidance that is supplied for the fourth quarter is $40 to $48 million or 27 to 32 cents a share.

We're going to have time for one more, Holly.

Brett Hoselton, KeyBanc Capital.

All right, just under the gun. (multiple speakers) When you talk about the 27 cents to 32 cents, obviously you're excluding any unusual items. However, what I'm wondering here is some people I think may perceive that the tax rate adjustment or the account accrual -- receivable accrual adjustment might be unusual items, which you would not characterize as unusual items. Would there be anything along the lines of an accounts receivable accrual or a tax adjustment or something like that anticipated in your 27 cents to 32 cents for the fourth quarter?

No.

Longer-term tax rate -- 31 percent? Is kind of --

That would be great. Everybody was beating us up for years for having too high an effective tax rate. And now that we're getting down, we're getting beaten up for having too low an effective tax rate. So frankly, I would just be happy with a constant tax rate from here on out.

Is that kind of the expectation for 2005 and so forth? Or do you think it might range back up into that mid-30s range again?

Honestly, and this is just off the top of my head, I'm not even looking at crib notes here. I've got to feel that it would be more like 33.

And then when you think about the heavy vehicle contribution margins going forward, would you -- you've been fairly adamant that you're going to see some improvement in there, just as a result of improved operations and efficiencies and so forth. It's a little difficult to figure out whether that actually took place sequentially. I can't seem to find it going from second quarter to third quarter. As you move from the third quarter to the fourth quarter, would you anticipate some improvement in those contribution margins going forward or not?

I think that the margins look more -- in the fourth quarter more like they did in the second quarter than like they did in the third quarter as compared to the prior year. Again, the third quarter, when you look at heavy truck, was kind of botched up because of the last year's figures including the (technical difficulty) loop off (ph) thing.

And I think the rest of that, I would add, would be as you go into and look at what we talked about for heavy vehicles next year -- you look at the off-road, what you see at CAT and John Deere and other people, we're looking at a strong next year. So you're going to get the operational efficiency of that. You're going to have the full year effect of this steel going the other way. But I think all-in-all, you're going to see improving operating performance there.

As you think about recoveries on the steel side, particularly in the off-highway and the heavy vehicle, as we look at the third quarter results and we move into the fourth quarter and into the first quarter of '05, do you think those recoveries are -- do you think they will accelerate as you move into the fourth quarter and the first quarter?

Yes. Without telling you too much here, I would have to say that some of those are just now taking effect. In other words, you make some price movements in terms of the steel surcharge. There's a lag effect there. So yes, you will see improvement in terms of recovery in that segment of the business going forward versus the 9 months of the year. Do you understand what I'm saying?

Yes. So conceptually, if spot prices remain roughly the same as we move sequentially into the fourth quarter and the first quarter, your input costs look like they may stabilize. And I know that's a tough thing to estimate. And then the recoveries should accelerate. So you may actually see a decline in your steel costs sequentially into the fourth and the first quarter?

You are talking net steel costs?

Yes. Exactly.

Yes, net steel costs -- I think that's a good assumption. The one thing that is a little bit of a wildcard for us are the rest of the commodities -- power, natural gas, oil, and some of the other metallics. But all-in-all, I think we've given you a pretty good guidance. We have given you good guidance. And we will continue to work our part of the cost side to take other costs out to offset those.

Okay, good. Good. So I think we are at the end of this. And I'm looking for my sheet that I -- so thanks again to everyone for their questions and for participating in the call. We appreciate your continued interest and realize this has been somewhat of a confusing quarter in terms of the numbers. But I think Bob did a good job of explaining that to you. And we look forward to speaking to you again. Thanks. Take care.

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