Dana Inc (DAN) 2005 Q1 法說會逐字稿

Good morning. My name is Marisha and I will be your conference facilitator today. At this time I would like to welcome you to Dana Corporation's first 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.

Good morning, everyone. And thank you for joining us. Earlier today we issued a News Release detailing Dana's earnings for the first quarter of 2005. 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 statements today with Dana Credit Corporation reflected on an equity basis which is how we evaluate our operation. Accounting principles generally accepted in the United States or GAAP require us to prepare our 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 non-GAAP measures have been included at the end of this presentation.

I'd like to remind everyone that topics discussed 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 that are anticipated or projected due to a number of factors including those discussed today and in our SEC report. 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. 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. Now, moving to Slide 2, I'd like to turn the call over to Mike Burns.

Thanks, Michelle. And good morning, everyone. Today I'm going to kick things off with an overview of our first quarter results and a discussion of the key factors that impacted our performance. I'll also cover our operational results in net new business growth. After that Bob Richter will provide a detailed review of our financial results and discuss our sales and earnings guidance for 2005. And then I'll wrap things up with a few thoughts on our second quarter in the year and then Bob and I will take your questions. So if you'll move to Slide 3, I'll begin with a look at our first quarter results.

First quarter sales totaled approximately 2.5 billion, compared to 2.3 billion during the same period last year. We recorded quarterly net income of 18 million or $0.12 per share, compared to 65 million or $0.43 per share during the first quarter of 2004. Income in the first quarter of 2004 included 13 million from the discontinued automotive aftermarket businesses that were sold in November and 2 million in unusual gains related to Dana Credit Corporation asset sales. We're happy to note that unusual transactions in the first quarter of 2005 did not have a significant impact on net income and I suspect you saw that in what we sent out this morning. Like many others, within our sector, our first quarter results were impacted by a number of external factors and turning to Slide 4, we'll take a look at these.

Here you see the three items that have the greatest impact -- had the greatest impact on our first quarter performance. Steel remained the most significant challenge due to the higher material costs we incurred, as well as some related one-time payments to our suppliers. We do not expect steel to have the same impact in the second quarter. We were also impacted by a heavy-vehicle component shortage and lower-than-expected light-vehicle production levels. Now, let's take a look at each of these beginning with Slide 5.

On March 23rd we increased our outlook for steel -- the steel impact by 10 million or $110 million aftertax for the year. This increase which is net of recoveries from our customers, reflects the higher-than-anticipated material costs we incurred during the first quarter. As you can see in the surcharge scrap steel prices, which are one of the indicators of overall steel costs, have decreased dramatically in the recent months and demand is moderating. But the reality is that many of the ingredients in steel, coke coal, alloys, and so forth are still high. As a result the price of forgings and other components we've purchased has been slow to follow the scrap decline. We remain hopeful that we'll see less pressure on steel and other material price increases during the balance of the year. But because we can't count on this, we are acting decisively to accelerate our cost reduction efforts to realize savings to offset the potential impact of material costs. And I'd like to move to Slide 6.

The second item that impacted first quarter earnings was a component shortage from a principal supplier to our Commercial Vehicle operations. During March heavy-duty axle shipments were affected by this component shortage which had a direct effect on earnings. We can now report that the components supply has been restored and we will have the necessary product to fulfill our April shipments and expect this supply to remain sufficient going forward. Thanks to the cooperative efforts of everyone involved we made the best of a very difficult situation and it appears that this matter is now essentially behind us.

Now, moving to Slide 7 we'll take a look at the first quarter Light Vehicle production. At the outset of the year we anticipated global light vehicle production would grow by roughly 3% with North America being essentially flat at 15.8 million units. However, first quarter reductions in North America production and certainly -- and uncertainty over future production schedules have prompted us to trim our North American production guidance to 15.7 million units. Obviously, we are monitoring the situation closely and in anticipation of your desire and interest in the same, we've noted several of our key light vehicle platforms on this slide.

Now, if you'll move to Slide 8, please. Looking at the performance of our business units, sales were up in both the Automotive Systems and Heavy-Vehicle groups. Positive currency effects added 49 million to ASG sales and 13 million to the heavy-vehicle group. Automotive systems bore the brunt of the increased steel costs which were up 23 million from the same period a year ago. This obviously had a major effect on the operating profit aftertax which Bob will detail in just a few moments. On the heavy-vehicle side profit was affected by the component shortage that I just described. This impact included not only reduced shipments but also the extraordinary efforts, such as increased overtime and freight expenses that were necessary to optimize our customer's build schedules. Now, continuing to Slide No. 9.

While we've experienced our challenges on the bottom line, topline growth continues to be a very positive story. In fact, we've now added about 1.1 billion of incremental new business through 2007 which actually is over 900 million of which has been awarded since July of 2004. A third -- yes, July of 2004. A third of the 170 million awarded since our last conference call is for 2005. The diversity of our Heavy business has allowed us to add profitable business this year and the potential clearly exists for further gains in 2006 and 2007 for all of our product lines.

Now, let's go on to Slide No. 10. Stepping back for a moment, we can see that this new business supports our broader objectives of achieving greater geographic and customer diversity. Roughly 70% of our net new business for the 2005 through 2007 period is outside North America and approximately 80% is with non-big three customers. These wins provide us with important momentum in the growth areas we're targeting. Now, before turning things over to Bob, let's move to Slide 11 where I'll talk about three recent actions that position us for stronger performance moving forward.

In February, our principal Brazilian subsidiary, Dana-Albarus, initiated a tender offer in Brazil for the 15.8% of its outstanding shares not currently held by Dana. Completion of this offer will enable Dana to consolidate all the profits from this business while at the same time saving the administrative costs associated with operating a separate public company. In another recent action we announced in March, an agreement to form a 50/50 joint venture, Dongfeng Dana Axle Co., Ltd. in China. We expect that the joint venture will be established in the third quarter following government approval. We will initially have a $60 million net investment in the venture which will provide axles and potentially other driveline products for the growing Chinese commercial market. Annualized sales for this joint venture in 2005 are expected to be approximately 400 million.

And finally, during the month Dana and IBM announced an agreement for IBM Business Consulting Services to provide Dana with administrative services in the Human Resources area. This will include services, such as payroll and benefits, compensation, and recruitment and training. This move is designed to improve our flexibility in managing human resource processes while also delivering cost savings over the 10-year life of the contract. With that I'll turn the call over to Bob who will begin his financial review with Slide No. 12. Bob?

Thanks, Mike. And good morning, everyone. As usual I'll be talking about our financial statement 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 No. 12 which shows our segment comparison for the full first quarter. The Automotive Systems Group showed a sales increase of 5% or 90 million, of which 49 million was due to currency. Their profit aftertax was down 44% or $31 million of which $23 million was the result of higher steel cost, net of customer recoveries. Their equity and earnings of affiliates, including Getrag in Germany and their Mexican affiliates was also off $6 million. In the Heavy-Vehicle Group sales were up 95 million or 16%. Of this $14 million was due to currency. The stronger volume allowed them to report a small year-over-year profit gain despite a $9 million aftertax effect of higher steel prices. This is again net of customer recoveries and the negative effect of the component shortage.

There wasn't much variance from last year in the DCC earnings or on the line labeled "other" which includes interest charges and corporate expenses. So the decline in earnings from continuing operations is essentially attributable to steel, the component shortage in heavy, and the lower equity earnings in automotive. The 13 million shown for results of discontinued operations in 2004 was the net income of the aftermarket business which was sold in the fourth quarter of last year. So there is nothing on this line in 2005. And while we had a net gain from the sale of DCC assets of 2 million that was called out as an "unusual item" in 2004, the net effect of unusual items in 2005 was negligible.

Please turn to Slide No. 13. In recent calls I've had to spend an inordinate amount of time identifying unusual items that impacted the quarter. Fortunately this time around we don't have much in the the way of unusual items to talk about. DCC did generate 1 million in aftertax gains on asset sales, but there were related transaction expenses incurred at the Dana level that hit other income and pretax income for about 2 million and amounted to roughly $1 million aftertax. The net of the gain and the aftertax expense rounds to zero, so as I said earlier, there was no significant effect of unusual items on the quarter.

Let's move to Slide No. 14. This slide compares our income statement for the first quarter last year's. DCC is shown on an equity basis and the numbers are as reported so they include the unusual items. Let's walk down the year-to-date numbers by line item. Sales for the quarter were approximately 2.5 billion up 8% from the 2.3 billion we reported last year. The total currency effect was 63 million or 3%. Other income is up in part due to a $5 million increase in interest income. This includes about 2 million on the note we took back from Affinia in connection with the sale of the aftermarket business. The other half of the variance is due to the fact that last year's number was lower than normal because of some one-offs. We typically average 10 to $15 million a quarter on this line rather than the 7 million we had last year.

The increase in cost of sales resulted in a gross margin of 6.3% this year versus 8.5% last year. The decline in margin was almost exclusively the result of higher steel costs. The year-on-year increase in steel costs in both business units that I reported earlier totals 32 million aftertax, which if you gross up at 39% tax rate, we apply to the operations equates to $52 million before tax. If you're to add that 52 million to the gross profit, you get a gross margin of 8.4% which is just about equal to last year. So again, the margin issue is basically steel plus some inefficiencies due to the component shortage on the heavy side.

On the next line you see that our SG&A expenses remain relatively low at 5.2% of sales in both periods. The dollar amount increased by $9 million in the first quarter of 2005, but of this, about 3 million was due to currency. And 2 million was due to the consolidation in 2005 of the accounts of our Japanese gasket subsidiary, Nippon Reinz, which we acquired majority interest at the end of the third quarter of last year.

Interest expense is down 3 million. You might have expected a bigger reduction given the debt repurchase we executed last year. However, higher short-term rates hit us for about 4 million of additional expense versus last year. Despite the fact that we had 11 million of pretax income we have no provision for taxes and this is basically just the sort of anomaly you can have when pretax income is a small number and it's coming from various jurisdictions around the world at differing rates and in some cases with loss carry-forwards. 33% is still a good rate to use when thinking about future quarters when the income should be higher.

Finally, on the Equity and Earnings of Affiliates line there is a $10 million variance. Remember this includes the unusuals, so DCC accounts for a couple 3 million here and the Automotive Groups affiliates had lower income of 6 million. Finally, as we said earlier, we no longer have any discontinued operations to report. So the bottom line, including everything, shows net income of 18 million in the first quarter of this year compared to 65 million in the first quarter of last year.

Please turn to Slide No. 15. This slide compares our cash flow statement with DCC showing on the equity basis for the same period shown on the prior slide. We've already talked about net income. Depreciation was about the same as last year and as always, we benefited from the proceeds of some small asset sales. Working Capital always goes up in the first quarter due to an increase in receivables and the semiannual interest payments we make on our bonds, and it did this year too, but more than it should have. Inventory was the principal culprit. It's up $85 million from year-end due to buying ahead steel and forgings to secure supply, and as a result of the component shortage on heavy axles that kept us from building product using the other components that did arrive. We expect to burn most of this off in the second quarter.

CapEx is about even with last year, but lower than a rate that would take us to the expected spend of $325 million for the full year. So expect a number of closer to 100 million on this line next quarter. Payments out of our restructuring accruals are down, but you can also look for this to increase in the quarters ahead. We're now trending towards more like $45 million for the full year. The changes in "other" accounts line is always a mishmash of entries. Actually the negative 36 million this year, which is driven by deferred taxes and equity in affiliate earnings is a more typical net change than the positive 14 million we had last year. Bottom line net debt went up by $267 million.

Please turn to Slide No. 16. 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 $267 million increase from the preceding slide. The other notable change is to equity where we had a negative deferred translation adjustment of 56 million due largely to the strengthening of the dollar against the Euro. Despite the increase in the net debt and the hit to equity from translation, our ratio of net debt to cap remained under 40%.

Let's move to Slide No. 17. And this is just to make the point again, the sort of increase we saw in net debt is very normal in the first quarter due to the seasonal runup and working capital.

Please turn to Slide No. 18. This is our debt portfolio at December 31. We now have an average maturity of 8.4 years and an average cost of 6.78% on the long-term portion of the portfolio and 6.03% overall. I should also note that at March 31 we had 239 million borrowed from DCC.

Please go to Slide No. 19. The reason DCC is sitting on so much cash is the progress we've made on reducing their portfolio. The chart on the left shows where we were when we decided to exit the businesses at the end of 2001 and the chart on the right is where we stand today. During the quarter we reduced portfolio assets by a further $75 million. Most of the reduction was in the red slice of the pie as we wound up our partnership with Kodak [Police] Photofinishing equipment. That also relieves us of the obligation to guarantee a portion of that partnership's debt which has in the past been disclosed in the notes to our financial statements. Our plan as we've said before, is to complete the asset sale process by 2007 when the last of the DCC debt matures.

Please turn to Slide No. 20. On March 23rd, we provided full year EPS guidance in the range of $1.30 to $1.45 per share. We just picked the midpoint of this range a $1.38 and multiply it by the 151 million shares we have outstanding on a fully diluted basis, that would imply full-year earnings of 208 million. Now, since we only earned 18 million in the first quarter that says we need 190 million over the balance of the year to hit the midpoint or $63 million per quarter. The obvious question is how in the world can we go from 18 million in Q1 to an average of 63 million a quarter going forward?

Please turn to Slide No. 21. This slide shows the reconciliation of those two numbers. In the first quarter we had the component shortage and some other odds and ends that aren't likely to be repeated in subsequent periods. Those total about $6 million. As we stated, when discussing our guidance in our March 23rd Press Release the increased first quarter steel costs were affected by some special situations. The total aftertax increase in steel in 2005 versus 2003 levels, net of what we recovered from customers in the first quarter wound up being $34 million. We also indicated on March 23rd that we expected the total for all of 2005 would be about 110 million. If you subtract the 34 in the first quarter from the 110 million for the full year and divide by 3, that suggests that the average quarterly impact over the balance of the year will be about 25 million or 9 million less than in Q1.

In the case of DCC, their income will continue to decline as they sell off more and more assets. The wind down of the partnership on that photofinishing equipment I mentioned added some income in Q1 and will remove the income from the partnership that would have been expected in coming quarters. So bottom line, DCC will be running at more like 2 million a quarter in net income rather than the 6 million they reported in the first quarter, a decline of 4. On the other hand, the first quarter was unusually weak for other equity affiliates, notably in the Automotive Group and their income should be up about $4 million per quarter on average going forward. Generally, production volumes in Q1 are about equal to the average of a strong second quarter and weaker numbers in Q3 and 4. So there's no adjustment for volume required to get to an average quarter. But as you see on the next line we do get a pick up from new business as a lot of that 470 million you saw in the net new business chart doesn't start kicking in until the second quarter. And then, of course, we have our cost reduction initiatives. This is purchasing, lien, VAVE, and the functional transformations that could add another 18 million. So that's how you get there.

Having said that, I'd remind you that this is an average quarter and some of this stuff is far from evenly spread. The cost reductions against -- gain steam as you go through the year so they'll be larger in Q3 than in Q2 and higher still in Q4. The new business rolls on in similar fashion. Volume, on the other hand, while flat from Q1 versus an average quarter is normally way up in Q2 which is historically our strongest quarter, then drops off in Q3 before picking up a bit in Q4. I point this out just to say that this is only an analysis to demonstrate how you bridge from the first quarter earnings to a higher number going forward. We're not giving quarterly guidance, just that annual EPS range we started out with on the last slide of $1.30 to $1.45 per share.

Please go to Slide No. 22. As for cash flow, depending on where we are in the range of earnings guidance, we expect to generate between $146 million and $169 million in free cash. Which would be available for dividends, acquisitions or further debt reduction. This amount could also be further supplemented by asset sales. Looking at the line items, depreciation should be about 300 million with the aftermarket gone and notwithstanding the overrun on inventory investment in the first quarter we're still working to achieve $100 million reduction in working capital on the full year. As I said earlier our CapEx is still expected to be about 325 million and we've adjusted the figure on cash payments from restructure accruals to 45 billion based on our current expectations as to timing of these projects. The line labeled "other" is largely the adjustment for noncash items like earnings of affiliates and deferred taxes that get hung up in the balance sheet. Given our strong balance sheet and this forecast we should have plenty of cash available to support our strategic initiatives. Let's move now to Slide No. 23 and I'll turn it back to Mike.

Thanks, Bob. Let me wrap-up things now with a few comments on our 2005 goals. Our key goals are, as you know to achieve profitable sales growth at twice the rate of the global vehicle market with more customer and geographic distribution. That's happening. We want to grow earnings by accelerating our costs and our productivity initiatives. Again, these include leveraging our purchasing function for greater savings, deploying lean manufacturing and value engineering globally, and continuing to standardize and take out costs from our administrative processes such as the Human Resource function I mentioned earlier. And we'll also continue to strengthen cash flow and further solidify our balance sheet.

Now moving to Slide 24. Against this backdrop here's where we stand going into the second quarter. The heavy duty component shortage is behind us enabling us to focus more resources on other operational issues that have held back margin expansion in the heavy-vehicle group. This is critical and it will help us to be more fully -- to more fully benefit from the strong demand in this sector. We're continuing to push forward more aggressively than ever with our cost reduction initiatives. Everyone is involved in this. On the revenue side, we're committed to maintaining the momentum we've established with the net new business.

And finally, like others within our industry, we will closely monitor the light-vehicle production in steel issues going forward. Bob showed you earlier in the net income walk forward how these and other actions fit together to support our full-year guidance. As we look to the near-term future, we must acknowledge that our industry is facing many challenges. Our customers, our competitors, and our suppliers are all confronted with difficult decisions. But despite these challenges no one at Dana finds our current situation acceptable. We are striving to achieve superior performance levels regardless of external factors.

With that please turn to Slide 25 where Bob and I will be happy to take your questions. This is going to -- this will conclude the formal portion of today's call. I'll now turn the call back over to Marisha, our facilitator who will begin our Q&A session.

[OPERATOR INSTRUCTIONS]. For our first question let's go to John Casesa of Merrill Lynch.

Two questions, one, the big picture, one small picture. The big picture question, Mike, or Bob, is you know with the light-vehicle OEMs it seems to be entering an extremely difficult period. Do you see any changes in their purchasing strategies? It looks like they're going to go up the supply base again. And if that's the case, and for you is that a risk or an opportunity in that they might shake things up a bit? And then just secondly, are resin prices -- resin inflation, is that affecting you?

John, I guess on the first question, I -- you know, we work closely with all the purchasing groups. You know, they're faced with the same kind of situations we're faced with. They're going to continue to look for improvement. I tell you, I think you're going to see them in some respects have to be -- have to open up the value engineering piece of this and try to get true costs out of the whole supply chain. I mean, I don't think it's as easy as just cranking down on the suppliers. I think there's going to be more and more activity on trying to get costs out of the supply chain. Does it open up the possibility for something? Maybe, but I don't think we're really counting on a lot of that.

On the resin cost it does affect us. It affects us most in the sealing group. That's a good business for us and that group is one of our better with regard to being able to drive improvement, a group to offset those. So it does affect us, but I wouldn't say it's -- you know, it's not something that takes us over the top.

And Mike, just following up with the first question, have you seen any change in behavior toward a more value-driven and less price-driven approach by any of your important customers?

Yes. I think we have. And really it's driven by the fact that, you know, there's only so much you can take out of this -- out of the value chain and with the price of steel we're all effectively driven with higher costs. You can pass it around but you ultimately have to take it out to get the cost out and so moving from one place to the next really doesn't do a lot for that. So yes, I think -- you know, people are more focused on trying to find ways to get the costs out.

Thanks very much.

Okay. Thank you, John.

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

Yes, good morning. Just have a --.

Good morning, Jon.

Mike, just a quick question on the steel price issues. How flexible are some of these newer contracts that you have if there's a big downward movement in prices in the stock market?

Most all the contracts that we have have an element of -- you know, the surcharge or the variable piece of steel pricing, so I think it's safe to say that they are variable. There's always a fixed component and a variable component of most of our contracts.

Okay. Great. And then there's been some talk about some asbestos relief and I know you haven't talked about asbestos in quite a while, but are you guys going to benefit from these -- some of these new programs that are proposed?

Well, I think that -- let me answer and then Bob -- Bob, do you want to try to answer that? I guess --.

Well, I think there's a couple different options that have been talked about, one is a trust fund concept and the other is a requirement for medical necessity. And I think it really depends which one would ultimately be considered as to what the impact on us would be. I guess just as a general proposition, certainty is better than uncertainty, and that would be a benefit in that regard.

And that is exactly what my answer would have been also. So I think if we do get something at least there's some certainty to the situation.

Okay. Great. Thank you.

Okay.

Thank you. Our next question is coming from Himanshu Patel of JP Morgan.

Good morning.

Just a -- I joined a little bit late so I apologize if you ran over this. In Slide 10 where you give some of your customer split could you just put a little bit more color around that? How much is Asia, how much is Europe on the backlog? And on the customer mix, how much is auto driven and how much is truck?

Yes, I can do a little bit of it. I'm not going to split it up by region of the world. It gets too complicated, but just to kind of go back over the highlights of that again. 1 Billion between '05 and '07 of net new business and 900 million of it since July of 2004. So I think you can start to get a feel for the initiatives we've put in place in all parts of the world and really looking at the entire pipeline of new business that's available, that has an effect.

The third point that we made was $170 million of new business since the last call, which was really just a couple months ago because the first quarter, you know, the call was rather late. And then if you really get into that, and I think the data is provided to you maybe in the backup, what you can see is the heavy-vehicle side of the business, which means commercial and offroad, out of that 170, we added -- 100 of that is in the heavy and offroad piece which is good business, important business, gives us more diversity, there's a lot of positive things that come from that.

I think the final two points would be that a much larger percent of our business outside of North America during this 2005 to 2007 period of net new business, 70% of it and 80% of it with non big 3. So you can kind of get an idea here where we're focusing. And we're getting -- you know, we're getting the results, kind of goes back to Jon's earlier question with regard to pressure that OEMs are under. We need more diversification. We're getting that, and you know, I'm pleased with the result. This is working.

Mike, if I could follow-up, you -- since you've arrived you've obviously made some big efforts on the purchasing side. I'm just wondering, how much effort have you guys put behind sort of making the footprint flexible enough to handle a heavy truck downturn if and when it comes, let's say '07 stroke '08?

Actually even before I came they were working on that. We've continued to work on it. We -- and I think we've talked about it in the last call. We had shifted some of the work that we did internally to outside suppliers to try to really get our fixed costs down and take away some of this big swing when the market turns. And as you know, the market does turn in this, so I think that's one piece of it. And we talked last time about the fact that that sometimes clips off the peak, but it also clips off the valley of this.

I'd say the second piece of it is the diversity of our customers. We certainly have grown outside U.S. sales. That's especially true on the off-highway stuff, but to some extent even on the commercial. And we're going to have strong growth in Asia because of what's going on in India, what's going on in China, the Dongfeng activity does that. So what we're -- I think it's really two pieces. One is to get our footprint and our cost structure in better shape to handle the downturn, but secondly, it's this diversification of the customer base and especially geographically that will help us also.

Okay. And then maybe we'll -- just one follow-up. Coming back to one of the earlier questions on raw materials, you -- is it fair to say that you guys have now started to see some customer recoveries that are noticeable from the automotive side? We always knew on the heavy truck side it was a lot easier battle.

I don't -- I wouldn't go so far as to encourage you to think that that's getting a lot easier. I mean, we see some improvement. There's recognition that, you know, the rubber band can only be stretched so much. But it still is -- you know, it still is by far the toughest part of the business to try to capture steel recovery on. And you know, you've just got to work at it every day.

Okay. Thank you.

Okay.

Thank you. Our next question is coming from Rob Hinchliffe of UBS.

Good morning, Rob.

Hi, Rob.

Thanks. Good morning, guys. I guess a few questions. Look at the -- your earnings walk board for the year and it looks like the new business is coming on at a pretty good margins. How are you able to generate margins like that especially with the business being added so recently? Is it the cost cutting or is it just targeted in the right area or what is it?

A lot of it is in the heavy area, as you know, which doesn't a lot of often times require new tooling so it comes on at closer to the contribution margin than say a big new frame plant where you'd have to make a major investment; off-highways is another component of it.

In some cases we're just better utilizing the capacity we have in place to do more, in other words, with new business. So there's maybe some tooling involved but not a plant or a facility or a line. So it's -- I think it's the combination of those. Probably the biggest driver though would be the heavy piece of this.

Even with your less vertically integrated there, even with volumes at pretty close to peak now you can still fit it into some of your existing footprint?

On the margin and I'd say that's probably more so on the offroad side. And you know, the offroad business, the people have done a wonderful job of running that business and being able to get more out of their installed capacity.

Okay.

And they're getting nice market share gains.

Okay.

In terms of fixed capacity, you know, we did serve the market when it was for Class 8s when it was over 300,000 units a year a few years back. And during the restructuring while we moved off some of our component manufacturing to outside suppliers, we didn't really affect the total capacity of the Dana Corporation. It would just mean adding a few people here and there.

Okay. With regards to the cost reduction initiatives, it's still in that walk forward. One of the neat things about this quarter is no real extraordinary charges. Anything to come? Any special items to come given these cost reductions or these are benefits for things you've done in the past? For charges you've taken in the past?

These are the results of the initiatives that we have on going. I'd say it's a mix. You know, what you do in the first quarter you enjoy for the next three. What you do in the second quarter you enjoy for the last two. So there's a little bit of all of that. But this was really intended as a walk forward from Q1 to the average quarter for the balance of the year. Just to give you some dimension where -- as you know, we're reticent to get more granular and say this is the amount from purchasing, this is the amount from lien; for example. But we're trying to help as much as we can to let you put some size on this thing.

And we -- can we go forward without special charges for the next few quarters? It's been one of the confusing things about Dana in the past.

We don't have any expectations of any special charges going forward.

Okay.

One of our objectives is to -- you know, one of our objectives is certainly to try to keep that as clean as possible and with the aftermarket, you know, the automotive aftermarket gone with the Dana activity, you know, winding down -- DCC excuse me. I'm sorry. DCC activity winding down, it starts to clean that up.

Yes. I guess one last one. One of your competitors in heavy truck is saying how they're benefiting to a pretty good degree from the [indiscernible] issue. Is that true? Is there any long-term harm to your commercial truck business as a result of that or now that the parts are flowing freely again it's just back to normal?

You know if you look at our book business and if you look at our demand in the commercial truck business, I think we're -- I think we -- we're through that period pretty well and I'm pretty confident with our market share gain.

Okay. Thanks Mike. Thanks, Bob.

Okay. Next question. Did we lose Marisha? Marisha? Marisha, are you on the phone?

I'm sorry. Our next question is coming from Kirk Ludtke of JP Morgan.

Hello, guys.

Hi, Kirk.

Hello.

Hi. I got on the call late as well so I'm apologizing if you've talked about this, but does your guidance reflect the reduction in the Ford schedules that they announced today?

Yes. Our guidance, you know, if you look at the Ford thing, a lot of that was already built into what we expected. You know, the -- I don't think there's anything there that would cause us to change guidance.

Okay. And did you mention what the cash requirements would be for the tender in Brazil?

No, we didn't.

No, we didn't.

Are you going to -- are you sharing that --?

[multiple speakers] the thing Kirk.

Is it not a --?

[multiple speakers] never will we. Nor will we.

Oh, really? Okay. Is the 60 million for Dongfeng is that a cash number are you contributing assets or how does that work?

[multiple speakers]. It's mostly cash.

Mostly cash. Okay. Thank you very much.

Okay. Thanks.

Thank you. Our next question is coming from Diana [Monetis] of [Lumas.]

Yes, hi. I -- this is the first time I've looked at Dana so I apologize for the very basic question. But just looking at the steel prices, I mean clearly steel is up year-over-year for the first quarter, but I'm surprised to see the expected increase for the full year. What kind of steel are you buying and is this purely on the spot or do you enter long-term contracts?

We -- this would go back some way but, Diana, we'll try to bring you up to speed here quickly. We buy rolled, we buy castings, and we buy bar stocked or forged-type of steel. So we really buy in all different quantities.

Obviously, we are a big steel user so we have long-term contracts in place with multi -- you know, with a number of different companies. So this is -- if you follow this industry at all, this is -- this has been an issue for the last nine months and continues to be an issue with regard to steel escalation and its function of scrap steel prices. But also coke coal, alloys, nickel, molly, I mean, you know everything is -- and energy prices. So it's something that clearly we've seen a ramp-up since, say, June, May/June of last year. I'd say that we're -- we think we're at somewhat of an inflection point or certainly at the top-end of things. But I don't think we can count on it dropping like the steel -- like the scrap steel prices. This has some stickiness to it.

I guess just a follow-up. I'm looking at the hot rolled coal prices on Bloomberg for the quarter -- you know, the last 10 quarters. And I am a steel analyst and it looks like we are past the peak. And if you have long-term contracts, I mean, are the bulk of them 3-year contracts or are they 1-year contracts? Are you averaging up to a higher price because of when you renewed contracts or --?

Many of the contracts are indexed, so what happens is we tend to follow it up with a lag and then hopefully follow it down with a lag.

And a lot of our steel usage, you have to understand, we have a variety of different setups, we have pass throughs on some things. A lot of our steel are alloy-based, in other words, melts for axles or drive shaft-type yokes and so on. So it isn't -- I don't think you can look at the rolled steel index and really determine a whole lot.

Okay. Because you're using so much specialty steel that it is priced at a much higher level is what you're saying?

And includes components like molly and nickel that if you looked at those indexes you would see -- have driven remarkably higher than a year ago. Okay?

Right. Just one last follow-up question. You said that there's a lag -- that a lot of your contracts are indexed to some of the underlying raw materials but there's a lag. What sort of lag should I expect? A quarter or are we talking a couple of quarters?

No, it's more like a quarter.

Okay. Thanks a lot.

Okay.

Thank you. Our next question is coming from Rich [Class] of Wachovia Securities.

Good morning. Just wanted to ask about the heavy duty business. It seemed like -- that you mentioned freight charges and overtime necessary again and that seems to be the trend here. Wanted to get your sense when that will ease up, how close are you to kind of not having to incur those charges and improving -- increasing margins even more in that business?

I think what -- one of the things that happened in the second -- in the first quarter had to do with the component shortage. And if you think about this business and where our customers are from the standpoint of their production schedules, they lose a vehicle very difficult to capture it back just because of their capacity. So, you know, as a result of the component shortage, we went to extraordinary means to be sure that when we had the available components that we were running them and getting them to the customers. So I think the first quarter, quite frankly, disappointing from the standpoint that because of the component shortage it drove our costs up.

In the past we've talked about it and if you'll recall in the fourth quarter we said that we thought we were starting to move out of that. Prior to that it was really the tightness of the steel market and the ramp that occurred on heavy-vehicles that drove a lot of that. So are we moving out of -- are we moving out of those excess premium and overtime positions on costs? Yes, I think we -- I think those are more behind us than in front of us.

Okay. And then with regard to the purchasing initiatives, you know, the IBM thing should provide some relief here going forward. What other types of initiatives whether -- you know, outsourcing initiatives could we expect? What areas within the firm could you really make some headway with that type of setup?

Well, first of all, the IBM activity, it really hits around the transactional activities of HR. And trying to get a better leverage on those from the standpoint of costs. And by the way, don't -- you know, those things, as you know, they take a couple of years to materialize from the standpoint that your costs are -- your savings are more loaded after the first year. In other words, they start to occur more and increase after the first year because there's some transitionary costs.

In terms of other functions like administrative costs, I mean we've got the same kinds of activities in finance and elsewhere that are transactional costs. You might take a little bit different approach as to how you go after them, but again, we're trying to lien out all parts of our business. So not only the administrative side but also the plants. And if you -- you know, we've talked about lien activities, we've talked about value engineering. Effectively we're aggressively going after all parts of our cost structure.

All right. Thank you.

We'll announce -- you know, we'd announce anything else as it occurs.

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

Hi, Chris.

Thanks, good morning. Just a couple of quick ones and, again, sorry if you've gone through this, but this gets back to the question you were just talking to which is the operational issues, things that maybe are not related to the component shortage. Can you talk about what the plan is going forward, what specifically are the issues and how do you fix them?

Well, I mean when you get away from the material issues of energy and steel and commodity prices, I mean, on those you have to fix them with obviously it would be great if they all dropped in price, but that -- you know, we can't count on that. So there's a lot of activity around the value engineering component of this. In other words, analyzing and trying to take -- in most cases with the customer trying to take costs out of them. On top of that, we have a large operational activity, trying to lien facilities out, taking a look at process streams and doing things that allow us to take costs out whether it be labor or overhead, whatever it might be.

So you know, if you looked at this -- if you went to any of our facilities you'd see major actions and major initiatives to take costs out of the process. And we obviously use Black Belt, Six Sigma, [Chiasson] techniques, lien techniques, process streaming. I mean, there are hundreds of things going on to improve the cost structure of the business. As Bob said, this takes time to wick-up so you see that. You'd see ever-improving cost reduction as you go through the year and into next year and so on. But I mean, we're not leaving any stone unturned.

So just so I'm clear, within the heavy-vehicle business away from material costs and component availability, it sounds like there are not any specific operational problems that you're having, it's more just attacking the efficiency of the business? Is that right?

Exactly. And the component shortage caught us, but we've moved through it rather quickly. So yes, that's exactly right. And on the automotive side it's the same situation. We're aggressively attacking the cost side of the business and as you know that business model is quite different than the heavy from the standpoint of pricing capability and therefore, you know, it's a tough market. You've got to take costs out both material, as well as labor and overhead.

Okay. And then just one follow-up. With regard to your guidance for the full year, is there anything baked into that specifically in the second half that relies on some kind of favorable resolution on price discussions that may still be pending with your customers?

There's nothing extraordinary in there that it relies on with regard to price.

Okay. Thanks, guys.

Okay.

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

Hi, David.

Hey, good morning. One quick question for Bob. If I'm not mistaken you have some sizable NOLs in the U.S. will you be a cash taxpayer this year?

Not in the U.S.

Okay. So the cash tax rate will resemble the -- whatever the -- the 33%?

It will -- the cash tax rate will look a lot like the effective tax rate in the first quarter; zero. But the effective tax rate overall including all the foreign taxes and deferred taxes will be 33%.

And that shows up in your cash flow walk through. That shows up in the "other" category?

Yes.

Okay. Thanks a lot.

Sure.

Thank you. Our next question is coming from Michael Kender of Citigroup.

Yes. I was wondering if you could tell us how much you had drawn under your revolver and also your AR facility at the end of the quarter?

Oh, it was 75 on the bank revolver and 80 -- oh, wait, that was the increase. Excuse me. Hang on. Yes, it was 75 under the bank agreement and 100 under the AR facility.

Great. Thank you.

Sure.

Marisha, let's take one more question.

Thank you. Our next question is coming from [Glenn Kalosey] of [indiscernible] Capital Management.

Yes. Hi. Good morning. Two things. One and I apologize if I missed it, you cited a component shortage did you quantify that by any chance?

No, we didn't quantify it nor did we tell you who it was with.

Okay. All right. And my second one is -- I mean you guys are still sitting on a sizable amount of cash and you project to generate free cash flow around 150 at the lower part of your range. Have you seriously considered repurchasing any of your long dated debt?

No. We bought some long dated debt last fall, but we believe that it's prudent at this point in the cycle to focus on maintaining a strong balance sheet and to hold on to our investment grade rating.

All right. Fair enough. Thank you very much.

Thank you. We'll turn the call back over to --.

Marisha, is that the end?

It is, sir.

All right. I'd like again to thank everyone for the questions and for participating in the call today. We appreciate your interest and -- in the Dana Corporation. Look forward to speaking to you again soon. Have a good day.

Thank you. This does conclude this morning's teleconference. You may disconnect your lines and enjoy your day.