Dana Inc (DAN) 2004 Q4 法說會逐字稿

Good afternoon. My name is Carlie, and I will be your conference facilitator today. At this time I would like to welcome you to Dana Corporation's fourth quarter conference call. I'll begin the presentation by turning the call over to Michelle Hards, Dana's Director of Investor Relations. Please go ahead, Michelle.

Thanks, Carlie, good afternoon everyone, and thank you for joining us today. Earlier we issued an earnings release detailing Dana's earnings for the quarter and full year, we have also filed a copy of this release with the SEC and a current report on form 8-K. This release as well as a PDF version of today's slides are available on our website at www.Dana.com. Today's call will include remarks by Dana's Chairman and CEO Mike Burns, and Vice President and Chief Financial Officer, Bob Richter. Their remarks will be followed by a question-and-answer session. We will be discussing Dana's financial results today with Dana Credit Corporation reflected on an equity basis, which is how we evaluate our operations. Accounting principles generally-accepted in the United States, or GAAP, require us to prepare financial statements on a fully consolidated basis.

Our presentation with DCC on an equity basis, is not in compliance with GAAP. Therefore, a presentation of the most comparable GAAP financial measures and reconciliations of the differences between the GAAP and non-GAAP measures can be found at the end of our earnings release. In addition, supplemental slides reconciling certain nonGAAP measures have been included at the end of this presentation.

Topics discussed today in this call 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 anticipated or projected, due to a number of factors including those discussed today and in our SEC reports.

This conference call is being recorded. This conference and its supporting visuals are the property of Dana Corporation. They may not be recorded, copied, or rebroadcast without written consent. As another reminder, our webcast system allows you to direct questions to us via the Internet. Mike and Bob will answer as many questions as time permits.

Moving to slide 2, I'd like to turn the call over to Mike Burns.

Thanks, Michelle, good afternoon everyone. I'll begin today by reviewing the Company's highlights in 2004. In doing so, I'll describe ways in which we made important operational progress and strengthened our financial foundation last year. Next Bob Richter will provide a detailed financial review of the fourth quarter and full-year results, as well as our sales and earnings guidance and market outlook for 2005. Then I'll wrap up with a few thoughts on our goals for 2005, and at the end Bob and I will take your questions, as Michelle said.

If you move to slide 3, I'll begin with a macro overview of 2004. Here's a snapshot of Dana's performance in 2004. We posted very strong sales growth over 2003, and our renewed customer focus and execution have begun to pay off. As you'll see from the fourth point on the chart, in fact, last year we secured $700 million of incremental new business through 2007. The divestiture of our aftermarket business is one element of our refocusing. At the same time we're taking a top-to-bottom look at how to better align all functional disciplines with our business objectives. Our intent is to focus more resources, more creativity, and more energy on anticipating and responding to our customers' needs, and I'll provide some specific examples of this in a few minutes.

2004 earnings were clearly not what we had originally projected. This was due primarily to higher material cost, and unusual gains and losses. Another factor was soft Light Vehicle production at the end of the year. Excluding unusual items, we did report a strong year-over-year increase in operating income. With the proceeds from the sale of the After market business we've strengthen our balance sheet, and in doing so we regained our investment grade credit rating with two of the three rating agencies.

Now if we'll turn to slide 4 please. This slide summarizes our fourth quarter and full year financial results. Fourth quarter sales totaled $2.3 billion compared to $2.1 billion during the same period last year. We recorded a net loss for the quarter of $133 million or $0.89 per share, compared to a net income of $68 million, or $0.45 per share for the period 2003. Net unusual charges for the quarter totaled $195 million, which I'll discuss in more detail, excluding these unusual items fourth quarter 2004 net income was $62 million, or $0.41 per share, the same as last year. Our fourth-quarter results were impacted by even higher steel costs in the third quarter, however, as Bob will cover more fully later, we benefited from some higher than expected tax benefits. Again, we are not yet where we'd like to be, but we are making progress and we have a game plan that we are confident will work.

On to slide 5 please. From my very first day of Dana which is almost a year, I've stressed a need to grow our top-line revenue. The Company has taken significant steps and will do more, but we've taken significant steps in reducing our cost structure. But revenue growth is vital to our long-term success. So we have the priority of aggressive cost reduction and revenue growth. I'm pleased to report that sales grew 14 percent to $9.1 billion in 2004. $300 million of it came from favorable currency effects, 440 came from pricing and volume, but best of all more than a third of 2004 sales growth or $400 million resulted from new business. We plan to build on this success in 2005, and I'll show you more about this in just a few moments.

Now let's continue for now with the full financial results and move on to slide 6. Several key factors impacted our net income in 2004. Bob will provide the details but just a couple of comments I'd like to mention. Net income excluding unusual items was $262 million, up 43 percent from last year. We were helped by favorable tax benefits in the third and fourth quarters, but we also had to contend with increasing steel costs. These costs totaled almost $70 million after tax, net of customer recoveries, including discontinued operations. Other specific actions we took throughout the year generated unusual charges of $180 million, these actions included selling most of our aftermarket businesses, and some additional DCC assets, repurchasing about $900 million of long-term debt, and consolidating and realigning some manufacturing capacity. Each of these actions positions us better for the future.

If if we can move to slide 8. This slide and the one that follows summarize our sales and operating profit performance by business unit. They show the impact of steel, after tax and net of customer recoveries which for the Automotive Systems Group was $20 million in the fourth quarter, and 41 million for the year. For the quarter Automotive Systems reported a 27 percent decline in operating profit despite a 11 percent increase in sales. Again currency favorably impacted the sales numbers by $55 million for the quarter.

While we're not happy with the fourth-quarter results, they're understandable in the context of what happened to steel prices. If you add back the $20 million effect of steel in the fourth quarter to the 49 million of fourth quarter operating profit after tax, you get $69 million which is comparable to the 71 million on the same basis in the first quarter, with similar volumes during both periods. For the full year the Automotive Systems Group is up 13 percent on sales including 231 million of currency effect. We're pleased that we've been able to absorb about $40 million in higher steel cost, that's after tax and net of recoveries, and still hold the profit about flat. This reflects the benefits of higher volume but more importantly lower cost of other purchase materials and process savings.

If we move on to slide 8. The heavy vehicle technologies in Systems group reported a 14 percent increase in operating profit on a 16 percent sales increase for the quarter. Steel impacted the group by $7 million after tax. Without steel, profit would have been up nearly twice as much. Currency impacted sales by $17 million for the quarter. The relationship between the sales increase and the profit increase in the heavy vehicle group for the year, looks a lot better than what we saw in the fourth quarter. With profits up on a percentage basis about twice the increase in sales. The currency effect on sales here is $65 million. Looking forward we're still facing some stiff headwinds, but we're committed to getting more profit out of this business.

If we move to slide 9. As most of you know, Dana enjoys a diverse customer base in its three principal markets. To the left you can see the components of these markets. The blue slice indicates the portion of sales to Light Vehicle customers, the orange and yellow slices indicate commercial and off highway sales. With our renewed focus on our OEM customers, whether they be light, off road or commercial, we see continued diversification of this customer base, as key to our future success. To the right you can see our customer breakdown. Sales to the Detroit big 3 or the US big three, Ford, General Motors and Daimler Chrysler, accounted for approximately 45 percent of our sales last year, and sales to the next 5 largest customers added another 18 percent.

We can move to slide 10. With our automotive after market business sold one might say Dana doesn't have a choice but to focus on ROE customers, that's true but when we say focus we're referring to more than just plants and equipment reported on the balance sheet. Focus means execution, faster, more efficient and better execution Focusing on our ROE customers, means being more responsive to their needs and we laid the groundwork in 2004 to do just that. Last year we overhauled our business development organization and put together the right teams, the right tools and processes to better capitalize on every opportunity to serve our customers. These teams are better equipped to pursue our customer, our products and our regional growth objectives. Consequently our win rate is showing steady and solid improvement.

Likewise, we took a hard look last year at how we managed and launched new programs. No question we saw the need for improvement. I'm proud to say the consistency and discipline we're following today has resulted in major improvements here also. Launches are always incredibly complex, each one has its own unique set of challenges but our cross functional teams today are effectively managing these challenges, and we're receiving positive customer feedback, and again we're winning new business which is a convincing sign of customer satisfaction. We must deliver the highest products on time, Dana strengthened both its delivery and quality performed in 2004, for example, we reduced the delivered defective parts quality, or parts per million, which is the key quality metric for our customers, by more than 75 percent year-over-year. This moves us into a very competitive range, and we'll continue to improve that number in 2005.

If we can move to slide 11. Our renewed focus on our OE customers, and our improved execution of processes that provide value to them, and produce positive results is shown in this slide. Throughout the year we have added $700 million in incremental net new business through 2007. We were able to add profitable new business to 2005 and 2006, when many thought it was too late in the year. The same potential exists for 2006 and 2007 and actually we're bidding on several billion dollars of new business in '06 and '07. For the first time we're showing our net new business for 2007, which is already at the 300 million level, and back to the diversification point made earlier, almost 60 percent of the net new business shown here, is with non-big 3 customers. In other words, the non-big 3 US customers. As you know, the format of the chart has changed over the past, and I'd argue that what we're using today is the truest and most transparent way we can express new business.

Now if we can go on to slide 12. Our new business reflects the diverse customer base I spoke about earlier. Many of the new vehicles we're supporting were on display at the North American show in January, of the 23 vehicles launched at the show, that go into production this year, we actually have 19 -- content on 19 of these vehicles. We have significant content in many of these new vehicles, and some exciting new technologies, that's we're confident will attract additional business going forward.

For examples of these just turn to page 13. We supply the all-new aluminum ultralight weight space frame under the 500 horsepower new Z '06 Corvette. Our engineers reduced the space fram mass by more than 30 percent from the original all steel design creating an ideal marriage of form and function. Hummer H3. We're supplying a welded steel frame that delivers exceptional stiffness, something that you would expect to see on the Hummer. This vehicle also includes one of our thermal acoustic protective shields to manage heat, and reduce engine noise and vibration. We're producing frame, drive line, and engine products for the global Toyota truck program which is called the Tacoma here in North America. Through a joint venture with [GTN] that uses Dana's patented hydroforming processes, we're supplying the 2005 Land Rover LR3 sport utility vehicle with frames as well.

Other Dana technologies including Advan TEK axles, which feature our proprietary gear geometry for a smoother quieter ride, and several other engine components are on this vehicle. We have a slew of products on the new Ford Escape hybrid, among them the rear axle, drive shaft, oil coolers, air bag, fill tubes, power steering assemblies and various ceiling products. These are just examples of, and really great examples of Dana people working together to meet our customer demands for greater value and better vehicle performance.

If you will go to slide 14, we're standardizing our administrative processes and centralizing certain disciplines like purchasing and IT, in order to reduce cost and improve performance. We're firmly committed to taking waste and nonvalue added steps out of our system. A couple of examples, Paul Miller joined Dana in April after 25 years at Delphi and General Motors, brings a proven track record of successfully organizing global purchasing and supplier quality development programs to Dana. Through the centralized purchasing organization Paul has created, Dana's benefiting from greater buying leverage.

Bruce Carver joined Dana in September from Pepsi. There Bruce played a key role in the integration of IT operations following Pepsi's merger with the Quaker Oats company in 2001. His leadership team at Dana's began standardizing IT platforms and applications, and consolidating our back office operations, to make us more efficient and more effective. We also have teams working on other areas like Human Resources and Finance.

And moving to slide 15, I'd like to turn the presentation over to Bob for a more in-depth review of the financial numbers.

Thanks, Mike, and good afternoon, 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. It's also 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 15, which details our fourth quarter income statement. In the first column you see the numbers that foot down to the $62 million in net income before unusual items, that Mike talked about. In the next four columns you see the unusual items. Let's start with column 2. In the fourth quarter we executed a consent and tender to repurchase the majority of the 3 long-term debt issues outstanding, that contain restricted covenants. As previously announced, we succeeded in getting a majority of each of the 3 issues, so we are no longer bound by the covenant limitations. Because of the high coupon on these issues as we've discussed before, they had been hedged through interest rate swaps, which effectively converted our exposure from fixed to floating rates. The $157 million that was charged to other income during the quarter, is the net of the premium we paid to repurchase just under $900 million of face amount on the debt, less the gain that resulted from unwinding the swaps. The resulting net charge is deductible for tax purposes, so we end up with an after tax effect of $96 million.

In the third column you see the effect of the costs associated with the announcements we made in the fourth quarter regarding the realignment of our manufacturing operations in the off highway group, the outsourcing of ring castings at our engine products group, and some other similar moves. Total people reduction associated with these actions is about 600, and the pretax cost is $70 million, against which there's a 24 million tax benefit. Our affiliate [GETRAG], also is engaged in some restructuring activity, which accounts for the small $3 million charge on the equity and affiliate earnings line. The total after tax impact of these moves was $49 million on the quarter.

In the fourth column you see a $52 million charge on the discontinued operations line. This is the net effect of the After market sale, after sifting through retained liabilities and providing for transition services, and a small amount of taxes in various jurisdictions. Finally in the fifth column, you have $2 million on the equity and earnings of affiliates line, that represents the after tax gains on fourth quarter sales of DCC assets. In the last column are the numbers as reported, including all the unusual stuff. All-in-all, while we're happy about having completed the after market sale, gotten the realignment actions underway, and improved our debt position, the quality of the earnings was disappointing. While we did better than our guidance, it really came from two places, $34 million in tax benefits, or about twice what we were banking on, and strong earnings from affiliates.

Please turn to slide 16. The last point I made is reinforced on this chart which shows the sales and operating profit after tax by segment, with all the unusual items we just talked about isolated on a single line near the bottom of the slide. Mike discussed the results of the business units earlier. On the third line you see the strong quarter from DCC, and the tax benefits all show up on the other line. So while continuing operations show a 12 percent sales gain and a 28 percent profit gain, we should have had more income from the business units. On the discontinued operations line, you see that the after market business we sold in November contributed $2 million prior to the sale, versus the $15 million they reported for the full fourth quarter in 2003.

Please turn to slide 17. Slide 17 is the year-to-date version of slide 15. Walking across the unusuals, the numbers in the debt column are the same as those we saw earlier, because all of the activity occurred in Q4. The realignment numbers change a little, because there were a few charges in Q3 that we talked about in the last call. The AAG column here is 65 versus the $52 million we saw on slide 15. You'll remember that we recorded $10 million in Q3 and $3 million in Q2 for asset impairment charges and transaction expenses related to the discontinued operations. In the DCC, column we have a total of $22 million, the fourth quarter number was $2 million on the equity and earnings affiliates line, in prior quarters we also had $20 million in gains from DCC, offset by some expenses for transactions that were borne by the parent against which there was a $4 million tax benefit. In the last column under the heading unusual items is the gain we recorded in Q3 in connection with the formation of our joint venture with [Kenor Bremsa]. The last column are the numbers as reported, with all of the unusuals included.

Let's go to slide number 18. Here we see the segment comparison for the full year. Again Mike's already covered the two business units. DCC is up year-on-year, due to their strong fourth quarter, and the other line has the tax benefits from both Q3 and Q4 in it. Overall, sales from continuing operations are up 14 percent and profits up 60 percent. The discontinued operations number is dead flat year-on-year, again this is only the operating income for the after market business. The loss on the sale and the other unusual items are shown on the next line.

Now moving to slide 19, this slide compares our income statement with DCC shown on an equity basis, for both fourth quarter and the full year to the same periods last year, with all the unusual items included. Let's walk down the year-to-date numbers by line item. Sales for the full year were $9.1 billion, up 14 percent from the 7.9 billion we reported last year. Mike's already discussed the components of the increase. The other income of course has that charge for the debt buy-back in 2004. The year-on-year increase in cost of sales are you resulted in a gross margin of 7.7 percent this year, versus 7.9 percent last year. Made a lot of progress on our cost reduction initiatives, but it got more than eaten up by steel. The next line is the realignment costs, most of which occurred in Q4.

On the next line, you see that our SG&A expenses remained relatively low at 5.2 percent of sales this year down from 5.6 percent of sales last year. The resulting operating margin is up from 2.2 percent last year to 2.5 percent this year but that is not enough. Interest expense was up by $12 million, partly due to higher floating rates in 2004, but mainly as a result of the adjustment we made to the cost of our accounts receivable securitization facility in Q3. That amount you may recall was $10 million. The loss before tax of $99 million, reflects the debt buy-back and the realignment costs, on that kind of loss you'd normally expect an much smaller tax benefit. We talked in length in the last call, about the $30 million in tax benefits we recorded in Q3 that reflected predominantly a book to return adjustment following the filing of our 2003 return, and adjustments arising from a settlement of prior year issues with the IRS. In Q4 we were able to release some reserves for foreign NOL's and realize some state tax benefits.

I want to make a point out here that this stuff doesn't fall out our trees. Our tax people have worked very hard with the operations folks, to allow us to realize these benefits, and at the end of the day every dollar counts. Not a lot has changed in the minority interest or equity and affiliates line. On the latter, the stronger DCC income was offset by lower earnings out of our Mexican affiliate. Income from continuing operations including the usual stuff was $95 million this year versus $175 million last year. The Disk Ops number in 2004 has the loss of the After market sale in it, and shows at the bottom of the slide you see net income including all of the unusual items of $82 million for 2004, compared to $222 million in 2003.

Please turn to slide 20. This slide compares our cash flow statement with DCC shown on an equity basis, for the same period shown on the prior slide. Again I'll address most of my remarks to the full year numbers. We're already talked about net income. Depreciation was about the same as last year since our cash flow statement includes our total operations, and we had the after market for 11 months. On the asset sales and divestitures line this year, we have a huge number that includes the cash portion of the proceeds from the after market sale and some other miscellaneous asset sales. The big transaction in last year's number was the sale of the engine management business to Standard Motor Products.

The working capital number this year was really disappointing. We ended up investing $261 million. The number was inflated by strong sales in December, with SAT receivables across year end, and the fact that we had a few customers who dragged some payments on us right at year-end too. We can also claim that the disruptions in steel supply hampered our ability to drive the inventory down, and all of those things did have an impact, but the fact of the matter is we didn't get the job done on working capital, and this has to be a top priority along with our cost initiatives in 2005. We ended up spending $324 million in CapEx, that's a little more than we've been saying, but the final number got driven up in Q4 by exchange rates. Dividends reflect the $0.12 rate that was in effect all year. The $80 million for restructuring payments is right in line with our estimates, on the next line we've isolated the exceptional $198 million pension contribution we made with the after market proceeds. Finally the changes in other accounts, is where we have the deduction of the earnings of affiliates, the changes in the tax accounts, which were non-cash, and some effect of the debt repurchase. Bottom line, net debt went down by $375 million.

Please turn to slide 21. This chart shows the walk forward of our debt and equity for the year. On the line labeled net debt in the operations column, you see that $375 million decrease from the preceding slide. The other notable change is to equity where we had a positive deferred translation adjustment of $222 million, and an improvement of $134 million in the provision for minimum pension liability as a result of that $198 million contribution I referred to on the last slide. And these numbers are included in the equity adjustment in the other column. Our net debt-to-cap ratio finished the year at 34.5 percent, which is the lowest its been in over a decade.

Please go to slide 22. To further put into perspective what we've accomplished, we've been working hard on this for several years, we've top the net debt down by over $1 billion from the peak in June '01, and we've taken taken a ratio down from a peak of over 60 percent in March of '02. The real reward came as Mike said, when both Standard & Poors and Fitch moved us up to investment grade in December.

Please go to slide 23. This is our debt portfolio at December 31. The real story here is that as a result of the debt repurchase and the new notes we issued in December at a 5.85 coupon, we now have a average maturity of 9.5 years and an average cost of 6.23 percent, and we don't have a term debt maturity until 2008.

Please go to slide 24. This slide shows our liquidity position at December 31. We had undrawn capacity on bank lines of $655 million, but that probably overstates the case because at year end we had borrowed $185 million from DCC. The reason for the arrangement for DCC was simple. They had excess cash, and we were able to pay them at a lower rate than we would have had to pay the banks. They got a much better rate than they could have gotten on short term investments. As to not to overstate our liquidity, we've shown the DCC loan as a negative in the availability column, which makes makes the total undrawn amount as if we hadn't used DCC $470 million. When you add in our cash of $619 million, we show total liquidity of over $1 billion. I mention too that we're in the currently in the process of renegotiating our five year bank facility to reflect our improved credit standing, and expect to have that done in a couple of weeks.

Now let's go to slide 25. The reason DCC is sitting on so much cash, is the progress we've made on reducing their portfolio in 2004. The chart on the left, shows you where we were when we decided to exit the businesses, and the chart on the right is where we stand today. We're down about $1.4 billion, and we've reported $88 million in after tax gains on the disposals. This year the gains were $22 million and the asset reduction was $530 million. Our plan as we've said before is to complete the process in 2007, when the last of the DCC debt matures.

Let's go to slide 26. Want to turn now to 2005 starting with our markets. We see global Light Vehicle production being up about 3 percent, with most that have growth coming in Asia. In particular China. Our forecast for North American production is dead flat at 15.8 million units, we don't expect much growth in Europe either with a forecast of 20.7 million units, against about 20.5 million in 2004.

Moving to slide 27, 2005 should be another good year for commercial vehicles in North America which is an important market for us. We look for Class 8 production for up almost 13 percent, from about 259,000 units in 2004, to 293,000 units in 2005. Medium truck builds should also be up nicely at around 256,000 units.

Please turn to slide 28. We've changed format a bit than in the past on off-highway.. This chat plots unit production volume of wheeled vehicles in each geographic region for Construction, Ag, Mining, Material handling and Forestry applications. Globally the increase from 2004 to 2005 is about 4 percent. We also participate in the markets for outdoor power equipment like riding lawn mowers and leisure vehicles such as golf cars, and have strong market shares in both sectors but we exclude them from this chart because their unit sales would overwhelm the 5 segments we've plotted here, and this is where the big sales dollars are.

Let's turn to slide 29. We expect that commodity prices will remain high in 2005, particularly steel. We will continue to negotiate leverage purchases and take advantage of customer resale programs where they exist. We'll also continue to work with our customers to recover the increased cost of steel wherever possible, but our customers are facing the same pressures on the cost side. With their limited ability to increase vehicle prices, it'll be difficult. In 2005, we estimate the earnings impact of steel prices at a 100 million after tax net of customer recoveries, versus 2003 price levels. Just to be clear, this is $30 million after tax more than we had in all of Dana in 2004, and $45 million more than we had in the continuing operations in 2004. While scrap steel prices have fallen and demand is moderated, the steel prices to us have been slow to react. And so with the outlook uncertain we can hope for the best but we need to plan for the worst, and that means pursuing our cost reduction goals with even greater intensity.

Moving to slide 30, based on our market assumptions we will expect 2005 sales to be approximately $9.6 billion. As for net income our full-year guidance as a range, in earnings-per-share of $1.40 to $1.62. Our goal had been and continues to be at the top end of that range. The range though reflects the challenges ahead. We have the all the things everybody else has, higher steel prices, and no growth in North American Light Vehicle production, but we also have some unique challenges. Specifically we won't have any income from the after market next year, DCC will continue to see their earnings decline as their asset base goes down, and we certainly don't expect the same level of tax benefits in 2005 that we enjoyed in 2004. I also should add that earnings number is really back-end loaded because the Light Vehicle production cuts will be most noticeable early in the year, and our big earnings driver and the cost reduction initiatives sort of accelerate as you move through the quarters. So our guidance for Q1 is a range of $0.17 to $0.23 a share.

Please turn to slide 31. As for cash flow, depending on where we are in the range of earnings guidance we expect to generate between $170 million and $210 million in free cash, which would be available for dividends, acquisitions or further debt reduction. Looking at the line items, depreciation should be about $300 million with the after market gone, and after struggling this year, we expect to get back into the mode of seeing working capital as a source of cash in 2005. Our CapEx is expected to be about $325 million, and with the realignment actions we took in '04 we're now probably looking at a figure of $30 million in cash payments coming out of the restructuring accruals. The line labeled other is the adjustment for non-cash items, like earnings of affiliates and other stuff that gets hung up in the balance sheet. The bottom line is given our strong balance sheet and this forecast, we should have plenty of cash available to support our strategic initiatives.

Please turn to slide 32 and I'll turn it back to Mike.

Thanks, Bob. In 2005 and beyond we're committed to growing at twice the market rate. We'll do this by reinvesting in our focus businesses. This means developing new technologies that create value for our customers, it also means our eyes are open for strategic acquisitions and joint ventures. We'll also build on our momentum by executing on the most fundamental action of delivering the best quality products on time to our customers, and we'll expand geographically in growth markets like China, India, and eastern Europe.

Turn to slide 33, To grow our earnings in 2005 we'll be accelerating our cost and productivity initiatives, which again include leveraging our new purchasing function for greater savings, deploying lean manufacturing and value engineering globally, and continuing to standardize our administrative processes. In 2005, we'll also continue to strengthen our cash flow and further solidify our balance sheet.

Turn to slide 34, before we move to the Q&A session, let me summarize a few key points from today's call. First, our earnings excluding unusual items, improved in 2004 despite sharply higher commodity prices. Second, after more than 3 years and a lot of difficult decisions and actions, Dana has a strong balance sheet. Third our success in 2005 depends first and foremost on the success of our customers, we're focused on satisfying their needs with value-added solutions. Fourth, if we can meet our customers' needs, then we'll also see success in growing our sales and earnings. We feel there's solid momentum behind both of these coming out of 2004 into 2005. Cost reductions and profitable top-line growth are not mutually exclusive we must do both, and finally, flawless execution of goals that have been articulated in plans that have been set that it's critical that we meet these by -- and create customer and shareholder value in 2005. Our results in 2004, show that the Dana people are up to the challenge, now, if you will, please turn to slide 35. This will conclude the formal portion of today's call. I'll now turn the call back to our facilitator Carlie, who will begin the Q&A session.

Thank you. Today's Q&A session will be conducted electronically. [OPERATOR INSTRUCTIONS] Dana will also take questions from their website. We will take as many questions as possible. Your first question is coming from John Casesa of Merrill Lynch.

Thank you very much. Mike, You're struggling with earnings here but business is generating very satisfactory cash flow and you're building this war chest. What is the environment like, is it satisfactory, is it difficult, or is it hard to generalize?

You mean in terms of the acquisition environment?

What's the probability that you be able to profitably re-deploy this excess capital?

It's high probability John, but we're going to be very selective, very careful about it. We've talked in the past about some of the activities we have going in China and other places around the world. You're going to see us do some things to look at assets that give us the capability for growth in eastern Europe, as well as throughout Asia, so I think the climate's good but on the other hand we're not going to -- we're not going to let it burn a hole in our pocket. We're going to be very careful about what we invest in. Don't look for an [Ekland].

And Mike, I assume that Bob's pricing of thousand times that you would not jeopardize your credit rating for any deal?

No, I think that's true. The credit rating is important to us, and it's especially important I think in the climate we're in, because we're in a climate that there's clearly going to be some consolidation. I think there's going to be some things out there some businesses that will become available, so the investment rating is important to us. As Bob pointed out, we didn't do a good job on working capital. We've got sources of cash inside the business, in addition to getting the business operating at a higher level.

Finally to follow up. How concerned are you that this commercial vehicle cycle which is going great guns, is going to have a pretty severe reversal sometime in '07, and that you've got to get some of this some stuff done before that happens?

Clearly the commercial and off road piece is important to us over these next two years as we transform the automotive business. I don't know, there will be, -- there certainly will be a decline, I suspect that some of the peak that we see in '06 will get clipped a little bit, and some of it will occur in '07 which will lessen that decline, but there's going to be a decline.

On the other hand, the off road business that we have is doing very well. It's growing very well. We continue to add customers so that's somewhat of a buffer to that. But clearly we have to use this next 20, 24 months in a very important way. The commercial and off road business helps buffer some of what we're going through on the light duty side.

Thanks very much.

Okay.

Thank you. Your next question is coming from Chris Ceraso from Credit Suisse First Boston.

Thank you, good afternoon, everyone.

Good afternoon.

If I could follow you on the heavy vehicle business, I think that given the expectation for volume in '05 and '06 is still pretty strong, I think the bigger focus then needs to be getting the margin to come through. Can you talk about maybe why margins in the heavy vehicle business were disappointing in 2005, despite decent volume, and what you think will change in 05 because if you compare where margins are now peaks in that business, there's quite a gap to improve.

Let me -- and Bob, you chime in here. Let me take it from a couple different ways, Chris. Clearly steel in '04 hurt and you could see that net, net of all recovery of all recovery still hurt. In some cases our contractual obligations with customers, you know, don't give us immediate steel recovery, in some cases it's more difficult than others, so they lag that steel increase. Dana obviously before I got here, I can't take any credit for this, did some really good I think restructuring activities in the commercial vehicle and heavy duty market. In some cases getting rid of businesses or vertical integration that in some cases clipped the top of the cycle off, but certainly protect against the bottom. So you're seeing some effect of that. If you adjust for those and we've looked at the same numbers you have, if you adjust for those, the story looks quite different, in fact, I'd say they're at or better than the pace once that's adjusted. The other piece of it is you're absolutely right. We're expecting more from this business than we're getting. And I think you'll see the improvement. They're very focused on improving.

The supply is still tight, not from our shop, but from other things that drive the business, so there is some additional overtime as a result of that. There is additional premium to freight as a result of that, but this business, quite frankly, should be performing better than it is but I don't think it's as drastic as it might look when you compare it to the past numbers. Bob.

The only thing I'd add is in that particular SBU, if you look at the full year, Chris, you had $65 million of the sales gain was currency, which only drops about $2.5 million to the bottom line. Good point.

So you need to factor that in as well

So if we're not looking at a 10 or 11 percent upside here or, you know, if that's no longer the peak margin because of the way you've restructured the business, where should we expect that to get to if everything goes right and the volume is there?

Can you handle that will one, Bob. I'm not sure I could predict it.

Chris, I don't know that we're going to get that granular forecasting margins by SBU, but it can get better. We didn't get, we didn't get everything we should of out of the business this year, that's not a secret. We've been talking about that all year and our people are very much aware of that and are going to be working very hard this year. I'd also tell you that, you know, as Mike said, our primary focus is on the return on investment of that group, and if you want to see evidence of what Mike spoke of in terms of the transformation and the exchange they made in getting assets off the balance sheet, in exchange for profitability you can see it in the improvement in the return on invested capital in the business.

Okay. One more. On the cost performance that you're banking on a better second half, is any of that related to ongoing discussions with your customers in terms of sharing cost or recoveries on some of the materials issues, or is this sort of all internal Dana generating cost saving?

I'd say it's internal, but we'll continue to work the customer interface. We've not given exact numbers in terms of recovery but I'd say, you know, we're on par with other people in the industry with regard to that. From what we can tell. But I really think, Chris, the majority is on the, you know, the large part. It's on the cost side of the business, and, you know, we're seeing that stuff flow through. The problem is that the steel certainly, you know, was a pretty stiff headwind through last year. I think it's safe to say that, you know, should be said that we're looking at the steel as being somewhere in the level of the average of the fourth quarter, so we're not assuming that some of that improvement is coming from a reduction in steel cost.

Okay. Thank you very much.

All right.

Thank you. Your next question is coming from Darren Kimball from Lehman Brothers.

Hi, guys.

Hi, Darren.

I was wondering if you could speak to the 2005 tax rate expectation for starters.

33 percent.

Okay. And I have to ask you about working capital. I mean, why is the 2005 forecast more credible after missing the 2003 and 2004 numbers by a significant margin?

Well, I guess I'd say you're right to question it. But be--, you know for a couple of the other reasons I cited that contributed to the increase this year, that should actually be a more easy target to hit, than it was when we first threw it out. We usually see receivables ramp-up as we move from Q4 to Q1 and through the year, while Q4 sales were stronger this year, by about $100 million and that money sat in receivables. We had the payments drag, and everything goes well, steel at least becomes more predictable next year, which will allow us to better manage inventories.

I think so, Bob, if I can just interrupt. I think the other thing Darren, is we've put a focus team on this, so we're not going to miss this number. In other words, we've put people on top of it to go out and make it happen, really reporting back through the business units but also to Bob and myself ,so there's a lot more focus on it. We did not do a good job.

Should it be any less of a back end weighted situation in 2005, are we going to be, you know, sitting here approaching the fourth quarter of 2005 and the entire cash flow year is going to come down to that, I mean, what do you think the first quarter from the working capital source use might look like?

It's a tough call but I don't expect it to be the big use that it typically is in the first quarter because of the reasons we just cited on the floor. We've seen increases in working capital of a couple hundred million dollars in years past going from Q4 to Q1 and I don't see that this year.

Okay. And I was also hoping you could speak to pension and OPEB expense, I don't know if you can give a 2004 actual,l and curious giving effect to the pension contribution what might happen to those numbers in 2005, given all the other assumption changes that you might be experiencing.

Actually I can't do that because we haven't put out the audited statements yet with all the footnotes. What I can do is comment on the P&L impact of the pension contribution, which is about 10 million bucks after tax. So the expense will be $10 million lower than it otherwise would have been because of the contribution.

Can you at least say whether it's a headwind or tail winds in '05 versus '04?

Boy, it's not a big deal either way.

Okay.

Because you've got the benefit of the extra contribution but you've got a lower discount rate going forward.

Okay. And I assume you're not expecting to make a contribution to the pension in '05; is that right?

Nothing significant domestically.

Okay. Can you speak to the --

I can tell you, I can tell you what we're going to use for our pension assumption going forward. We used 6.25 as a discount rate this year, and we're dropping it to 5.75 for next year.

Can you speak to the strength in the affiliate earnings both nonDCC & DCC, $11 million versus $3 million last year. We haven't seen a run rate like that in quite some time?

I wouldn't call that a run rate. I'd call that an anomaly. I don't think you're going to see that forward. I think what you saw in the first three-quarters out of DCC is more typical of what you're going to see next year, Darren. In the fourth quarter we had some residual realizations that were pretty favorable currency worked right. There was some reserve adjustments, but that's not a sustainable level of earnings.

And the other affiliates?

The other affiliates we're down a little bit in most of the down as I commented was in our Mexican affiliate. They're getting clobbered pretty hard for steel down there as well.

Is that a full year comment, Bob, I thought you had considerable strength in the fourth quarter year-over-year?

Actually that was a full year comment: our Mexican affiliate year on year was down about 45 percent in terms of their net income contribution.

Okay. I'm not sure I understand what drove the very favorable year on year comparison for a affiliate income in the fourth quarter.

DCC.

Let me follow up with you on that one.

DCC is the Q4 effect and year on year, gosh, it's really not all that extraordinary.

Okay. Last question, you mentioned that the cost-cutting -- was back end loaded.

On slide 19, the equity in affiliates both years is $93 million.

Okay. And last question, you mentioned that the cost-cutting would be back-end loaded this year, and I was just curious why that would be the case given that you should see the benefits immediately I would think of the fourth quarter restructuring charge.

But you don't get the benefits of all the cost-cutting measures that we're going to implement in 2005 until they're implemented. So you get, you know, three-quarters and a half of the stuff you do in the first quarter, two quarters and a half of the stuff you do in the second quarter and so forth.

It's primarily as we move through the leaning of the facilities as well as the value engineering piece of it, you're right, do you get the restructuring piece but I'd say that's more than swamped by the rest of it, and so it builds through the year. The purchasing obviously, you know, that started last year, so it's a phase in of additional activities on primarily lean and value engineering in addition to additional purchasing activity so that's really what we're seeing there.

That's helpful, thank you.

Darren, I'd also add on the restructuring activities there's not a huge impact on '05. We took the charge in '04, we'll take the actions in '05 but you won't start realizing the benefits until the facilities are actually closed, and people are actually discharged.

Got it.

Thank you. Your next question is coming from Jonathan Steinmetz from Morgan Stanley.

Good afternoon, everybody.

Hi, Jonathan.

Few questions it took you took the bottom end of the range down on net income and free cash flow versus what you spoke about last month in Detroit. I wondered if you'd discuss what changed in the past month that caused you to do that.

We didn't really offer a range in Detroit.

You sort had a point figure, right.

Yes, which was the top end of the range, and we were careful to say it's our goal as I said today it remains our goal, but what we're really saying when citing the current range, is that given all the headwinds, there's probably more downside than there is upside.

And out of those headwinds is there something that's changed the most in that time period that sort of puts the range where it is?

The volume's a little more definitive in the first quarter. You know, I don't really think there's that's anything significant that other than maybe, probably there are some tiered suppliers that are in a little tougher shape, but those are probably the 2 big things.

And the earnings itself would suggest if you normalize for the tax benefits that you're basically expecting the last three quarters to be up relative to prior year on a continuing basis. So it seems like you're banking on a lot of cost savings. Is there any way you could give us a numerical goal on the cost savings and which of those buckets you talked about between the purchasing and the lean and the value engineering? Which of those is most critical to meeting that?

I don't think I'm going to lay it out for you as definitive as you want to see it.

You know if you're looking at it, we've talked about the heavy vehicle business and looking for better performance there. I'd say, you know, as I talked about lean and in value engineering, again better performance, this stuff gets phased in. It takes time to identify and then it takes time to phase in. So I really would prefer not to give you a number that you can come back and book keep against us.

Uh-huh. And just, someone asked about acquisition and the cash on the balance sheet. How much cash do you think you need to keep on the balance sheet and how long are you comfortable keeping excess cash?

Maybe a quarter of $1 billion is probably a very comfortable operating number. We got a little bit more than that as I've commented to several people in response to questions publicly. Some, a lot of, not some, not a lot. Some of the after market money came in, in foreign jurisdictions. We had some European operations and South American obligations, transactions close to year end, and for tax and other reasons we weren't able to get all that cash back in the domestic treasury by the end of the year, so I guess our cash is a little inflated at the end of the the year because of that.

Let me ask you another way, if we take the cash and whatever you're generating through the year, would you expect to be sitting here a year from now with the similar number of cash available?

No I think it would be closer to that 250 kind of number.

Great, thank you very much.

Thank you. Your next question is coming from Rob Hinchliffe from UBS.

Hi, everybody.

Hi, Rob.

Just following on Jonathan's question, is that pretty much saying you're going to be doing an acquisition during the year or paying down more debt or where does that cash go?

I think the answer is, for sure, I mean, we've talked to you in the past about some of the things that we have underway, there are letters of intend in some respects on certain joint ventures and so on so it's, I think you're going to find us to be very prudent about what we do, but you could also expect some activity over the year just like you saw in the latter half of last year.

Book-of-business starting to pick up a little bit. Where are you guys having the most success, which product lines?

It's interesting. We're doing very well in the heavy business. We're gaining share in the commercial business. You don't see that gain of share in your net new business because that's more of a volume increase. And then we're, as we said, over 60 -- approximately 60 percent of that is outside of the traditional big 3, so we're seeing it in transplant business, we're seeing it outside of the U.S. so I'm pleased, you know, I -- I'm kind of surprise it had took that long to get to this question but if you look at the one bright situation here is that net new business, profitable net new business is really -- you know, we've really picked it up. We've got a system, we know where everything is, we know was's in front of us, Bob and I are involved in the decision rules as to how we go after it, and we're seeing results.

Mike, would you say it's in your traditional structures in axles, or which product lines are doing so well?

It's pretty broad. And it's probably I'd have to say more in the areas of our stronger businesses traditionally. But it's a pretty broad basis. You know, obviously the rates of growth on some of the smaller businesses like ceiling, they're pretty high. But they don't amount to as much as axles, or driveshafts, or whatever. But I'm pleased. We're, you know, we're doing well in that area, and I actually think it can get better.

The $145 million in new business for heavy vehicles for '07, supplemental slides, what volume assumptions does that take into account in the U.S. for Class 8 for North America?

Well, take what we talked about.

You only had '06 in your regular presentation.

The future years are based on the customer unit volume expectations. You recall the way we do our chart, we right size the current year, and we -- for each of your volumes are based on the unit volume assumptions coming from our customers. We do discount them a little bit because everybody always thinks they're going to take mark share away from the other guy. So they can't all be right at the same time. But it's not based -- you don't see cyclical swings in the net new business chart unless it would be in the current year.

So there's no real volume assumption that you're making for that number; is that right?

That's right.

At this point. We the we'd make that assumption when 2007 became the first year on the chart.

And then just lastly. EPS, your guidance for '05, you guys have had understandably a lot of moving parts going on. Is this a clean number for '05?

Yes.

And then taxes, 33 percent, you guys have been real good tax managers. Is that 33 percent straight up, or are there other benefits coming in the tax line there or --

I really think that that next year's number are a pretty clean number. I like to think the debt we have repurchased, and the actions in off highway and engine this year, and the sale of the aftermarket, there's not a lot of crazy stuff going on.

Bob and I are really starting to report quarters that don't have all these moving parts to it and I'm sure you are too.

And the one thing we might have, that is not included in this number and it would just be additive, it would be gains on DCC asset sales, but what we're giving guidance on is not net income but the earnings before unusual items.

Okay. Thanks.

Okay.

Thank you. Your next question is coming from Jon Rogers, Smith Barney.

Yes, good afternoon.

Hi, Jon.

Hi, Jon.

Just a follow-up on Rob's question, Mike. As we look at -- your business is pretty well diversified. The is there one area of focus, is there one business that you like better, maybe the structural drive line or heavy vehicle, and where the new business and potentially acquisition opportunities might focus?

Yeah, it's a tough question. Let me see if I can answer it quickly. I like -- I like the off road a lot and especially with the growth in Asia, you know, the off road is something that we've a lot of capability in. We've got good market share, we've got -- you know it's a good business. Obviously the commercial business is good, a bit cyclical, but, again, a good business. From the automotive standpoint, for the most part I think we're satisfied with the portfolio. We're not as strong as we need to be in certain parts of the world.

We're putting a lot of focus on Asia. We're putting a lot of focus on -- you know, we're clearly under represented in Europe. So what you're going to see is us work towards trying to get that more to a 50/50 level outside the U.S. versus inside the U.S. . And so I don't think there's anything in particular. Obviously not going to you know, I'm not going to tell you which ones, but if we've got a business that isn't performing, we're going to put our capital and resources in places that we do have that are performing. So we're not going to continue to invest in businesses that aren't performing, so you'll start to see the direction.

Thank you. And just one more for Bob. As we look at DCC in a rising interest rate environment, does it make it harder to wind down that portfolio?

Not really, not really. Because most of the transactions certainly from our internal standpoint, you know, we have them pretty well match funded. So it's not an issue in terms of holding the transactions. In terms of marketing the transactions, so much of the benefits of the lease are embodied in the tax benefits, as well as the residual value that those two components don't really change that much.

Okay. Great of the and then, Bob, is there any currency assumption in the new business backlog, or doesn't it matter?

No, it's really current rates.

It's a pretty pure number, in terms of volume as well as currency.

And that would be at currency rates?

Yes.

Yes.

Thank you very much.

Carlie, just to break in for a second, we've got time for a couple more. Do you have a couple questions?

We do, sir.

Okay.

Your next question would be coming from Brett Hoselton from Keybanc Capital Markets.

Hi, Brett.

Good morning, gentlemen. Michelle, hello. Slide 11 you talk about the net new business, you alluded to I think it was several billion dollars worth of additional business that you're currently billing on for '06 and '07. I guess the question would be as you look at '06 and '07, and you think about the potential for winning some of that additional business is there any way to give us the magnitude of the potential increase from the $250 million to $300 million that you're looking at adding in '06 and '07?

I really don't think you can get a little bit of indication that happened from '05 and '06 when we started showing you this in July, Bob, the first time we showed you this report. What's different about our business from some of the other business you look at, for instance, off road the time from is somebody making the decision until they put it on the vehicle is very quick. We also got a lot of customers on the light duty side that have very fast design cycles, and in some cases validate our product of representative in kind. Other applications that they have on their products. So the old deal of it had to be in the bank three years before it happens, I think we're seeing more and more of that, especially with our mix of business not being the case.

So should you expect, well, based upon history, yes, and based upon the book-of-business we have and the one thing that it's -- I think it's kind of hard to demonstrate on the phone is, we know by customer, by platform, by region of the world, we know what's out there that we're going to be seeing, we're either bidding on or going to see bids on in the next, you know, actually the next five, six years. And that's something we didn't have before. So I guess simple answer, would we expect to see a little bit, more than likely based upon the history of last year.

And when we look at the earnings guidance for 2005, the $1.40 to $1.62. The swing from $1.40 to $1.62, what are the major factors there? How much is a big cost reduction programs?

You know, a large part of it our execution ability to execute on the cost reduction programs.

Is that something completely within your control, you talked about some of the value engineering and sounds like it might involve some of the customers as well?

It obviously does but the last time I checked with our customers they were looking for savings wherever they could get them also. We don't think we will have anything reasonable that could be validated and meet their requirements, I don't think we'll have trouble with that. But you're right some of these things that you come up with take longer than others, but cost reduction is a big part of it.

The other big variable is steel and other metal pricings.

And, Bob, is it at all possible for you to give just a rough idea of the progression of earnings, you look into the second quarter, third quarter and fourth quarter, I mean, we really gained about a 50 percent decline in first-quarter earnings. Do you expect something comparable in the second quarter, is it much less severe in your mind, and maybe an increase as you go into third and fourth quarter? How would you look at that?

Kind of, it ramps up as you go through the year, although the second quarter is probably a little bit more of a jump than you might expect, if you just looked at a normal stair step kind of pattern, because second-quarter sales are always higher than third and fourth quarter sales. As far as the first quarter number, you know, if you take the $0.41 we just reported and you just back out the taxes, I think you get something like right about in the middle of the range.

Okay.

Of 17 to 23. I think it was like $0.22 for taxes or something like that.

Okay. Thank you very much.

Sure.

Carlie one more, huh? .

Your last question from the phone line is coming from David Leiker from Robert W. Baird.

Hi, David

Hi, David.

Good afternoon. A number of questions here I guess. Not a number. You look at the other income that you show up at revenue the (121) versus 18, the pre-payment of the debt if you strip that out, it's really 36 versus 18, two questions, what's in that line item and two what's the increase year-over-year?

Oh, what's in the line item is interest income, currency transaction, not translation but transaction gains, as well as miscellaneous income from asset sales.

There's really nonoperating type items, correct?

Yeah, and also not particularly significant, but that's what's in the line typically.

Okay.

I honestly can't think of anything that sort of leaps out at me as an unusual.

Okay. And if we look at.

You're talking the quarter, right? In the quarter?

Yeah. If you look your pretax numbers excluding unusuals it's a small loss, your third quarter was a small loss, but sequentially revenues are up by almost $200 million. This deal impact is probably comparable. Why didn't that incremental revenue fall off?

Actually it's not comparable. If you add up the steel, after tax, it was 22 in Q3, and 31 in Q4.

So $10 million swing on a $200 million swing in revenue.

That's $10 million after tax and so you got to gross that up.

So you would indicate that all of that is steel related?

Yeah, and you've also got the, you know, you've got some currency as you move from Q3 to Q4 as well. The dollar slid against against just about everything.

The taxes and unusuals. I guess the last thing here, is you made a comment you expect first half earnings to be down versus the first half of '04. Since we've had a lot of numbers float around with discontinued, unusuals, et cetera, what are you looking at your first half '04 earnings as reported as you're comparing that against?

The earnings from continuing operations plus discontinued operations but excluding the unusual items.

So GAAP net income less unusuals.

Yes.

Okay. Great. Thank you.

Okay. I think we're going to wrap it up. Thanks, everybody, for your questions and for participating. Bob and I will commit to you that we'll continue to make this call simpler as we move forward, so we have more time for questions for Bob. Again, thanks, everybody, and we'll talk to you next quarter.

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