Dana Inc (DAN) 2005 Q2 法說會逐字稿

I would like to welcome you to Dana Corporation's second quarter conference call. I will begin the presentation by turning the call over to Michelle Hards, Dana's Director of Investor Relations. Please go ahead, Michelle.

Good afternoon everyone, and thank you for joining us today. Earlier we issued a news release detailing Dana's results for the second quarter of 2005. We have also filed a copy of this release with the SEC in a report on Form 8-K. This release and the 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. The 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 operations. Accounting principles generally accepted in the United States, or GAAP, require us to prepare our financial statements on a fully consolidated basis. In order to be fully compliant with GAAP we have included a presentation of the most comparable GAAP financial measures and reconciliations of the differences between the GAAP and non-GAAP measures at the end of our earnings release. Supplemental slides reconciling specific non-GAAP measures along with certain other financial information have also been included at the end of this presentation.

I'd like to remind everyone that today's topics discussed 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 reports. Today's call is being tape-recorded. This conference call and its supporting visuals are the property of Dana Corporation. They may not be recorded, copied, or rebroadcast without our written consent. 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 afternoon everyone. Today I'll provide an overview of our second quarter results which will include comments on net new business and operational performance. I'll also share some market updates and revised production outlooks for Dana's key markets covering the remainder of the year. Bob Richter will then provide a detailed review of our financial results and discuss our 2005 guidance. I'll then wrap things up with a few comments on our second quarter performance and our outlook for the next six months.

If you would, please move to slide 3. This slide summarizes our second quarter and six-month financial results. Second quarter sales totaled 2.6 billion compared to 2.3 billion during the same period last year. We recorded net income for the quarter of 51 million or $0.34 per share compared to net income of 110 million or $0.73 per share for the period in 2004. Net unusual charges for the quarter were $2 million. This included a net charge of 5 million which resulted from a change in the basis of Ohio corporate taxation which was enacted on June 30. I'm going to let Bob explain this in greater detail in just a few moments. This charge was partially offset by a 3 million gain from the Company's ongoing divestiture of Dana Credit Corporation's assets. Excluding these unusual items second quarter 2005 net income was 53 million, or $0.35 per share. The second quarter of 2004 included 51 million of net unusual gains associated with the sale of DCC assets and income from discontinued operations relating to the after market business that we sold in November 2004. Excluding these items, second quarter 2004 income from continuing operations was 59 million, or $0.39 per share.

Now, if you move to slide 4. We're pleased to report another quarter of strong new business growth. We were awarded 215 million in net new business for the 2005 to 2007 time frame during the second quarter. The majority of this was for light vehicle driveshaft and frame programs with Japanese OEMs. Also included are other light vehicle and off-highway programs, and 35 million of this new business is for the current year, which I think is important. As you know, our product portfolio includes larger components and systems, such as axles, driveshafts, and frames, as well as a wide array of smaller engine, fluid transfer, ceiling, and thermal management products. Together these products provide Dana with numerous opportunities in the vehicle development cycle to win new business. The 215 million of new business secured in the second quarter has pushed our incremental net new business through 2007 to 1.3 billion and these wins are supporting the drive to diversify our business.

Now for more detail let's move to slide number 5. Of the 1.3 billion in cumulative net new business for the 2005 to 2007 period approximately 70% is outside North America. And approximately 80% is with customers other than the traditional big three. In short, our business wins are supporting the growth areas we've targeted. Our work is not done here, of course, but our more strategic and coordinated approach to business development has clearly generated solid results to date and has strong momentum going forward.

Now, if we move on to slide 6. This slide better illustrates the success we're seeing in customer diversification. By the end of this year we expect about 10% more of our consolidated sales to come from customers other than the traditional big three when compared to 2003. And based on the net new business results I just shared with you, the trend towards a more diverse customer base will only continue. Greater customer diversity makes Dana a stronger company which in turn makes us a better supplier to all of our customers. Our customers understand and agree with this.

Slide number 7, please. Now, I'd like to address a topic which we've become all too familiar, the price of steel. Shown here are four steel-related indicators from the American metal markets. As you see, prices of these materials have been rising for two years or more. Finally, prices appear to be subsiding, and if these trends continue our industry should see some relief in the months ahead. But there is a lag time between price decreases and bottom-line impact, which can be several months. The reason for this lag is two-fold.

First, most of the steel we purchase, either as raw, flat-rolled steel from the mills, or steel parts from our suppliers, are steel alloys with a higher percentage of ingredients such as nickel or molly. The prices of these premium ingredients have risen much higher than common flat-rolled steel and have been slower in coming back down. Secondly, it takes the manufacturing system, which is our plants and those of our suppliers, time to consume the steel purchased at yesterday's prices. Dana and its suppliers alike purchase steel ahead in order to meet the customer's production requirements. Now, let's talk about the impact of steel on our performance and our outlook for the remainder of the year.

For this please move to slide number 8. Our net income was negatively impacted by 27 million more in the second quarter of 2005 than in the same period last year due to higher steel prices. For the six months, steel costs have had an adverse impact on the net income of 59 million more than in the first half of 2004. As you recall, the after-tax impact of steel for the full year of 2004, net of customer recoveries, was a negative 55 million for continuing operations. We are raising our estimated 2005 full-year steel impact to 125 million from our previous estimate of 110. So an additional 70 million over last year, of which 59 million has been incurred in the first six months. Doing the math, the 34 million and the 37 million in steel impact we reported in Q1 and Q2 respectively imply a full-year impact of approximately 140 million. Our outlook of 125 million underscores the point that we're expecting some price relief in the months ahead. While no one can say for sure where steel prices will ultimately stabilize our business planning assumes that steel and metallic-based commodities will not return to 2003 pricing levels.

If you will, let's turn to slide number 9. Looking at the performance of our business units second quarter sales were up 10% in the Automotive Systems Group compared to the same period last year. Positive currency effects added roughly a third, or 62 million to ASGs sales. Operating profits for the group, however, fell 15% compared to the second quarter of 2004, as this group continues to bear the brunt of higher steel costs. As shown here, steel costs for the group were 30 million in the second quarter versus 7 million for the quarter last year. Strong commercial truck and off-highway vehicle markets pushed sales for our heavy vehicle group up 21%. Favorable currency effects accounted for 11 million of the increased sales. Profits for the group were up 19%. Steel costs reduced the group's operating profits by 4 million versus the year-ago period. With the changes in the industry from a year ago, such as higher commodity prices, it's probably more relevant to look at our second quarter results on a sequential basis where we saw the favorable impact of operating performance, cost reduction programs, and continued sales growth.

For this, let's move to slide number 10. Quarter on quarter sales for the automotive systems group increased 5% despite steel's additional impact of 6 million the group showed a 53% improvement in operating profit, reflecting its robust markets, the Heavy Vehicle Group sales were up 6% quarter on quarter with a 48% improvement in operating profits. This component shortage -- or the component shortage in commercial truck that we spoke about during the first quarter is fully behind us, and the burden of steel on net income due to price recoveries from customers actually dropped 3 million from the first quarter. On a company-wide basis we are encouraged with our quarter-on-quarter profit improvement and believe that there is opportunity to achieve additional cost savings and process efficiencies as these efforts intensify.

Now moving to slide number 11. Our outlook for North American light vehicle production has been revised downward to 15.5 million units. As you know, there is uncertainty surrounding future production schedules and the longer term impact of the recent incentive programs. Reduced production coupled with the change in product mix has adversely impacted our light vehicle business as Dana is weighted much more on the sport utility vehicles and pick-up trucks than passenger cars. Current forecasts show a slight uptick in the third quarter light vehicle production over last year. But the full-year 2005 production is expected to be down nearly 2% compared to last year. Year to date production in the U.S. and Canada has dropped two and seven tenths of a percent versus 2004, while light trucks are down four and two tenths of a percent and passenger cars relatively flat. Bringing it closer to home, platforms with significant Dana content, many of them again, being SUVs and pick-up trucks are down 8.5% while other platforms are actually up one and two tenths percent.

Moving to slide 12. For class A trucks we see just the opposite trend. Truck builds have been even stronger than anticipated and as a result we're raising our North American 2005 production estimate to 310,000 units from our previous forecast of 293,000. Our 2006 forecast remains unchanged at 337,000 units. Our 2005 estimate for medium duty production is still 256,000 units. Likewise, our expectations for our off-highway markets, which continue to look very strong, remain unchanged at this time.

Now moving to slide 13. I'll turn it over to Bob for the financial review of the quarter. Bob.

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 13 which details our second quarter performance. In the first column you see the numbers that foot down to the 53 million in net income before unusual items. In the next two columns you see the unusual items for the quarter. Mike made reference earlier to a change in the basis of Ohio corporate taxation. Actually we were on track for a pretty clean quarter right up until the last day when Ohio enacted a new piece of legislation that replaced the previous income-based tax with a new gross receipts tax. This had an impact on our deferred tax accounts because we were carrying the expected benefit of loss carry-forwards from prior years as an asset. While the new legislation does include provisions that will permit us to use most of these assets as credits against future taxes the accounting for those credits changes. Since the tax is no longer technically an income tax the accounting is no longer governed by FAS 109 which allowed us to hold 100% of the benefit of these credits as an asset.

Now we can only carry the discounted present value of the credits as asset. Essentially, the 5 million net effect in the second column on this slide is the impact of discounting the benefits to present value. It's a little more complicated by line item because we end up charging off the value of the old asset to income tax expense and setting up the new asset through a credit to SG&A expense since the new tax is not an income tax but an administrative expense. I've got to tell you, as you look at this treatment, it's really tough to believe that one of the goals of the accounting profession is to make financial statements more understandable to investors. In the third column you see the unusual item, which was 3 million on the equity and earnings of affiliates line that represents the after-tax gains on second quarter sales of DCC assets. In the last column are the numbers as reported including the unusual items.

Please turn to slide number 14. This slide simply shows the impact of unusual items on the first half numbers. There were a couple of DCC-related items in the first quarter that affected some of the line items but they netted to 0 so the bottom line of both the second and the third column are the same as on the previous slide.

Please turn now to slide number 15. This slide compares our income statement with DCC shown on an equity basis for both the second quarter and the six months to the periods last year as reported with all of the unusual items included. Let's walk down the quarterly numbers by line item. Sales in the second quarter of 2005 were 2.6 billion. That's up 13% from the 2.3 billion we reported last year. And currency accounted for 73 million of the increase. Other income is up by 12 million. The two items that account for the bulk of the difference are interest income, which is up 5 million, and the fact that last year we had transaction expenses related to DCC asset sales of 4 million that were charged against other income. The other 3 million of the difference is the net effect of a whole laundry list of little odds and ends.

Cost of sales was 2.4 billion resulting in a gross margin of 7.6% this year versus 9.6% last year. As Mike mentioned higher steel costs impacted us by 27 million more after tax in the quarter than in the same period last year. The pre tax equivalent of this number is 44 million. And if you adjust the cost of sales by this amount the 2005 gross margin would have been 9.3%.

On the next line you see SG&A expenses. The 126 million was 4.8% of sales in the second quarter which compares to 5.3% last year. To be fair, though, you really need to adjust this number by the $9 million positive impact on SG&A of the Ohio tax law change. The resulting ratio to sales is 5.1% which is still down from last year. Operating margin -- that is, gross margin less SG&A expenses was 2.8% this year versus 4.3% last year. If you make the adjustments to this line for steel and the Ohio tax thing it would have been 4.2%, about the same as last year.

Interest expense was 33 million down from last year's 39 million as a result of lower debt levels. Income before tax declined from 74 million to 66 million as the positive variances weren't enough to cover the higher cost of steel and other materials. The tax provision looks high but that's because of the effect of the Ohio tax law change. If you do the calculation based on the numbers excluding unusual items that were shown on slide number 13 you'll find that effective rate was 23% which reflects a favorable mix of income by country. While it may not be quite this low for the rest of the year I think you can plan on an effective rate in the high 20s for the second half rather than the low 30s we've been talking about previously. There's no change in the minority interest line. The decline in equity in affiliate earnings is explained by the change in DCC's income. Dana's equity in DCC's earnings is down 20 million, reflecting the lower level of assets this year and the higher level of unusual gains on the sale of assets last year.

Summing it up, income from continuing operations in the second quarter of this year was 51 million, including the 2 million in net unusual charges in 2005 versus the 75 million in 2004 that included the 16 million in unusual gains. Of course, in the second quarter of 2004 net income also included 35 million in income from discontinued operations. This consisted of 18 million in operating income from the automotive after market businesses that were sold in the fourth quarter of 2004 as well as 17 million in anticipated tax benefits net of expenses associated with that transaction. The explanation of the differences between the numbers for the first six months of 2005 and 2004 are pretty much the same as for the quarter.

So let's go to slide number 16. This slide compares our cash flow statement with DCC shown on an equity basis for the same periods shown on the previous slide. Again, I'll address most of my remarks to the quarterly figures. We've already talked about net income. At 75 million, depreciation is down from last year because the cash flow statement for 2004 includes the results for the after-market businesses that were sold last November. There were no asset sales or divestitures of any consequence during the quarter. On the changes in working capital line you see an increase of 12 million in the second quarter of this year against a decrease of 65 million last year. That brings our total working capital increase for the first six months of this year to 262 million. And I want to come back to that number a little bit later when we talk about our full-year outlook.

In the section of the quarterly comparison showing uses of cash the only variance that merits a comment is on the line labeled net changes in other accounts. Two of the big items that affect this line are both related to DCC. The first is the change in their earnings. This is is the line where we subtract the unremitted earnings of affiliates, and because DCC's earnings were lower this year, both from operations and from asset sales, there's less to be subtracted. This accounts for 20 million. We also received a $50 million dividend from DCC during the quarter.

The third item that affects the variance is a large change in deferred tax that occurred last year, much of it related to that anticipated tax benefit from the sale of the after market businesses that hit the income statement as an unusual item. Bottom line, our net debt declined modestly during the quarter, not unlike last year's second quarter. If we look at the six-month numbers in the last two columns, which include, of course, the seasonal increases in net debt that occurred in the first quarter of each year, we see that the increase in net debt for the first six months of this year was $248 million.

Please turn to slide number 17. 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 the increase for the first six months of 248 million from the preceding slide. In that same column the 33 million change in equity is simply the increase in our retained earnings. The other notable number on this slide is the change to equity in the third column. The decrease of 110 million is primarily due to an increase in deferred currency translation which in turn is the result of the strengthening dollar. Despite the seasonal increase in the net debt for the first half and the hit to equity from deferred translation, our ratio of net debt to cap remained under 40%.

Let's go to slide number 18. This is our debt portfolio at June 30, excluding DCC. We now have an average maturity of 8 years and an average cost of 5.95% overall. You should also note that at June 30, we had 246 million borrowed from DCC. The reason for that arrangement was simple. DCC had excess cash, and we were able to pay them a lower rate than we would have had to pay the banks but a better rate than they would get on short-term investments.

Let's go to slide number 19. This slide shows our liquidity position at June 30. We had undrawn capacity on bank lines of 440 million, as you see in the third column. As in previous quarters, to be conservative we've reduced this amount for purposes of this slide by the amount of the DCC loans to show availability as if we had to reimburse DCC immediately, but frankly DCC isn't going to need that money back any time soon. They only have 15 million in debt maturing this year, 87 million next year, so we don't expect to be repaying most of this money to them until sometime in 2007. In any event, between our bank availability, the DCC cash, and our own strong cash position, we are plenty liquid.

Please turn to slide number 20. The reason DCC has 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 DCCs portfolio assets by a further $115 million with after tax gains of 3 million. In total, since December of 2001, when we decided to exit the businesses, DCC assets are down almost 1.6 billion, and we've reported over 90 million in after-tax gains along the way. Our plan, as we've said before, is to essentially complete the active sale process by 2007 when the last of the DCC debt matures.

Please turn to slide number 21. As we said in our press release today, as we look ahead to the balance of the year there's some puts and takes from where we were a quarter ago, but we're leaving our full year earnings guidance unchanged at this time. We're showing net income excluding unusual items, of 196 to 219 million or earnings per share of $1.30 to $1.45.

Let's go to slide number 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, and we expect that this amount could be further supplemented by asset sales. Looking at the line items, depreciation should be about 300 million with the after-market businesses gone. We still intend to achieve $100 million reduction in working capital over the full year. I'll comment on this more in just a moment.

Our forecast for CapEx and restructuring payments are unchanged at 325 million and 45 million respectively. 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 this forecast and our strong balance sheet, we should have plenty of cash available to support our strategic initiatives. As you recall, we have about 60 million earmarked for investment in a joint venture with Dongfeng in China, that should go out in Q3, and we also expect to complete the previously announced purchase of the majority -- or minority interest in our Brazilian subsidiary Dana-Albarus during the third quarter. That transaction will require about 35 million. The other important use of free cash, of course, is for dividends, which at our current rate of $0.12 a share would require 72 million on the year.

Please turn to slide number 23. Like to elaborate a bit more on our goal of 100 million reduction in working capital for 2005. In the first six months as you saw in the cash flow statement our working capital increased by 262 million. This means we need to shed $362 million over the next six months which begs the question of how we expect to do that.

And that's shown on slide number 24. As you see here we plan to get there by a $200 million reduction in accounts receivable, a $25 million increase in accounts payable, and a $150 million reduction in inventory, this would provide a 375 million reduction just a little ahead of the goal. The easy part is the receivables. If you just look at what's happened seasonally to our receivables in the second half of the last several years you'll see why I say this. You go from a strong sales quarter ending in June to a weaker sales quarter that ends with the Christmas holidays and receivables drop like a rock. The payables thing is a little trickier but it's a small amount, we can easily get that done. The real key to hitting the target is the inventory, we're looking to take $50 million out of the Automotive Systems Group inventory and 100 million out of heavy vehicle. We know that the automotive guys can do that because they just took 44 million out of inventory in the second quarter. And we believe the heavy vehicle number is doable because they're currently sitting on about 55 days of inventory, well above our average. I'd also tell you that most of that inventory is in raw materials and purchased finish components so it shouldn't hurt us in terms of lost absorption when we take it down. It isn't going to be a walk in the park but we do intend to make this reduction happen. Please turn to slide number 25 and I'll turn it back to Mike.

Thanks, Bob. Before taking your questions I'd like the review the key points of our presentation starting with some comments on the second quarter. After earnings of just $0.12 in the first quarter and leaving our guidance at the range -- in a range of 1.30 to a 1.45 in earnings per share we clearly needed to raise our performance to a higher level. Quarter on quarter we did that. Sales grew 6% and earnings for the automotive systems and heavy vehicle groups were up 53% and 48% respectively. While strengthening current performance we also worked hard to secure more profitable net new business for the future. Net new business in the second quarter valued at 215 million pushed our cumulative net new business for 2005, 2006, and 7 to 1.3 billion. And as I mentioned this new business supports our drive to diversify our business both geographically as well as by customer.

Now, let's look at the next six months. Please move to slide number 26. Our heavy vehicle group will clearly benefit from the continuing strength of our commercial and off-highway vehicle markets. Both business units but particularly automotive systems should benefit from reduced steel costs which, of course, would take some pressure off of our earnings. On the downside, uncertainty with North American light vehicle production remains a reality especially with the very real possibility that the current employee pricing incentives are pulling sales forward. We also have to keep an eye on the strength of the U.S. dollar.

All of these positive and negative variables are just that, variables that for the most part are out of our control. What we do control and what we plan to continue pursuing aggressively are operational improvements and more cost reductions. Execution of our plans remains our top priority regardless of what happens in the marketplace. Operational efficiencies and cost savings began dropping to the bottom line in the second quarter and execution remains the key in the third and fourth quarters as well.

If you'd turn to slide 27. This will conclude the formal portion of today's call. I'll now turn the call back over to Matt, our facilitator who will begin the Q&A session. Matt.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is is coming from Chris Ceraso with CSFB.

Hi, Chris.

Good afternoon. Got a quick ones here. First on this topic of steel and the potential benefit as prices come down we learned yesterday and today that both GM and Ford are having major cost problems in North America. So my question is, to the extent that steel does come down how much of that do you think you get to keep versus how much are GM and Ford going to try to gobble up to help their cost problem?

Well, I guess the quickest answer is, we didn't get a lot from them on the way up and we wouldn't expect to give them a lot on the way down.

On slide 11 you talk about the outlook for production in the second half in Q3 and Q4. Can you compare what that looks like for programs where you have a lot of content as opposed to on an overall North America basis?

I'm looking for the exact chart, but I really kind of gave you an idea. Actually it's at the bottom of that chart. Gave you an idea of what it would look like in terms of -- we tried to do an adjustment for Dana content versus other, so.

Is that first half or is that second half?

It's really -- this is really the first half this is really the first half. Second half, Chris, it's kind of hard to call, only from the standpoint that the two employee incentives, those at Ford and Chrysler, just went on. It's hard for us to call and really make the call with regard to just how much that's going to affect production the second half of '04. Bob, you want the add anything to it?

No, not really. Most of the -- if you look at it year on year, the numbers for Q3 and Q4 that drive you to 15.5 for 2005 are about the same as they were in 2004. So most of the year on year decrease has already happened. You'll recall the latter part of last year wasn't very robust.

Right. Okay. Then the last one I have, the new business is very encouraging. Do you think there's additional CapEx either this year or into next year that you'll need to support your growing backlog?

I think the way I'd answer that is, there's obviously some CapEx associated with a certain part of that business. In some cases we can leverage capital that we already have employed. A lot of our facilities are six-day-a-week facilities, or whatever. So moving from five to six or six to seven to do some of that, but there will be some. And I think that's to be expected. So I don't think it's -- there's nothing that's -- that tips the boat over, so to speak.

We always make some allowance for it, Chris. Our forecast at the start of this year for this year's CapEx was 3.25. It's still 3.25 even though we've added new business. I don't know what it's going to be next year but it's certainly not going to shoot up to some crazy number like 500 million.

I think the other thing, Chris, is the way we're running the business today we get the leverage of running the business as a total business rather than separate businesses and we also have the purchasing effect in there.

Thank you very much.

I'm not overly concerned.

Thanks, guys.

Our next question is coming from Michael Bruynesteyn with Prudential.

Sorry for the pronunciation of your last name, Michael.

I'm sure it won't be the last time. Could you explain how -- maybe I'm just missing the math here, but you've got significant Dana production programs off 8.5% in the first half of the year and a backlog of only a couple percent and yet ASG revenue is up 10%. Am I missing something? Is it just FX or is there more?

It's the new business, too.

Right. But the new business is a couple of percent, right? Or is it over weighted to this quarter as it rolls on?

There wasn't that much of it in the first quarter. You remember last time we talked about how the new business was going to roll on in quarters 2, 3, and 4.

Right.

So some of that is coming in here.

Okay. So that and FX are really the explanation?

Yes, and most of the volume down draft was in Q1. On a year on year basis.

In terms of these key programs for Dana going forward, what do you think is going to happen?

Again, I think it goes back to what happens with the sales incentives, how much that causes people to put production, some production back in. A little too early to call in the near term I think. You know our customer mix, two of our largest customers just put those in place.

Sure. Are there any specific programs you can point to and the increase in the backlog?

I could probably give you a little more color that truck programs for the non traditional big three. In other words, outside of the traditional big three, axle, frame, we also had a nice growth as you can see in the commercial and off-highway.

Right. But I'm a little puzzled how you can get axle and frame and driveshaft business at such notice. Are you actually winning a program away that's in mid-cycle or?

No, but what's happened is two-fold. The engine products -- well, let's start over here. The commercial and off-highway moved at a quicker cycle than the automotive light duty. The second thing, in the light duty the engine products and the associated products, thermal, ceiling, and so on, they move at a faster rate in terms of from the time from business award to the time they go into production than say an axle program or a driveshaft or especially a frame because the frame goes so much into design of the vehicle. It's a combination of all those things. I think the interesting thing is, the same as last year we still picked up business in 2005 at this point. So in that case probably -- I can't call it off the top of my head but my guess is probably in the heavier off -- or heavy off-highway or commercial business is where that came in.

Okay. So then -- because you said at the beginning of the call that the bulk of it was driveshafts and frames. That's really then the stuff in that '07 time frame probably?

Yes, if you go to the chart that showed the cumulative net new business you can kind of eyeball that and see that somewhere -- well over a third, maybe 40% of it is the heavy off-highway and commercial.

Thanks very much.

Okay.

There's a supplemental slide, Mike, if you're still listening, slide number 29 that kind of points that out.

Thanks a lot.

Thank you. Our next question is coming from Rod Lache with Deutsche Bank.

Hi, good afternoon, it's Mike Heifler for Rod.

Hi, Mike.

Just a couple of questions, Mike, can you share your thoughts on 2007 in terms of the commercial vehicle market? Where do you think volumes are going to go for Class 8?

I really don't think I've changed. It certainly hasn't changed from what we've projected in our charts. I think what probably is going to happen, we'll probably see some of the new engines and the new emission requirements we'll see them get on vehicles in '06. I don't think the manufacturers want to go through the cycle any more than anybody else does. So as I've said before, I think we'll see some of those engines pull into '06, people will get more comfortable with them. And as a result of that I'm not, here's still going to be a decline in '07 for sure, but I'm not sure it will be as deep as some people think it is. The other thing that's really key to us in this whole process of the heavy business is growth outside of North America. And we're getting that, and that's important in both in commercial and off-highway because of that diversity in terms of geographic diversity really lowers the risk and lowers the cycle piece of this. The world and the heavy business doesn't move together. Do you follow that?

Thank you. And maybe one for Bob. On the cash restructuring, are you guys anticipating any additional cash out beyond the $45 million this year?

No.

Okay. Just one last one. What was the reason for the lower tax rate again?

Just a mix by country. As much as anything, in certain countries we have lower effective tax rates than we do here. We had the ability to utilize loss carry forwards.

Okay. Thank you.

Nothing more than that.

Thanks.

Our next question is is coming from Kirk Ludtke with JP Morgan.

Just a couple. One, with respect to the JVs, is the Brazilian JV already consolidated?

Yes, so what we're doing is buying out the minority interest.

So now you own -- you will own 100% of it?

Yes.

Okay. Are there other JVs that you plan on taking control of here? Should we be -- is this kind of a trend here that we should think about?

I wouldn't want to scare any JV partners, but obviously this one happened to make a heck of a lot of sense because in this particular case, the minority interest was publicly traded, and had a lot of expense associated with listing requirements that we're able to eliminate ultimately.

Okay.

So the answer is we'll tell when you and if something happens. I mean, not to be cute, but that's not something we would project here at this point.

Okay. And on Dongfeng, is that it for awhile on the 60 million, or is that something that you would expect to grow and to continue to invest cash in as you move business over there?

You mean the investment in Dongfeng?

Yes.

Well, the idea would be that that's the initial investment this thing should be able to generate some of its own cash to handle its growth.

Okay. And then on the inventory reduction how much of that is just solely attributable to your forecast for lower material prices, of the 150?

There may be a piece of it but for the most part there's not a lot there, is there?

Not much.

I think -- it's true inventory reduction. Better turns.

Thank you.

It's just using up that raw and purchased finish, in most cases it's sitting out there.

I remember you built some inventory because of the shortages earlier in the year. Do you plan on, as the market frees up reducing those excess--?

That's the idea.

Yes. And not wanting to throw eggs at myself, but you'll also recall we said we had hoped to burn more off than we did in the second quarter. So it's still there.

Okay. Great. Thank you.

Thank you. Our next question is coming from Robert Barry with Goldman Sachs.

Hi. Thanks for taking the question. Couple of questions. One, whenever you talk about the significant Dana content I think in the past you've listed some top-ten Dana platforms. Are you able to quantify that as a percent of revenue or a percent of North America revenue?

I don't think we have. I'm not sure that I could give that to you off the top of my head nor do I think we've given it in the past, have we, Bob?

No, we haven't.

Just to give us some sense of what the exposure is at the SUVs in the key platforms.

Well, I mean, you know our product mix. We're fairly significant in structures, frames for Ford trucks and SUVs, drive lines strong drive lines from the driveshaft and axle on trucks and SUVs. So, I mean, there's exposure there. I think what you have to -- what people have to remember about Dana is that 40% of our business is off-highway and commercial. So we're not a pure play on light duty only. The other piece of that is the growing exposure -- not exposure, but growing sales outside of North America. But, I mean, it has an effect but you also have to keep in mind that the customer base we have and the strength of some of the products that we have including transplants.

A high-content vehicle for us would be something that's got $750 or more in content on it, if that's helpful.

Yes. So would the--.

On the light side.

On the light side, right.

On the last call the top ten platforms that you highlighted then would all have at least 750 in content per vehicle?

I'd have to go back and check the tenth one but I know the first one did.

Just on the margin side, if you put the effect of steel aside can you just give us some update on what the progress has been on improving the margins? I know you've highlighted purchasing and IT initiatives in the past. Are you also doing a certain amount of outsourcing of some lower margin business on the commercial side to try and mute the impact of when that business falls off?

I think -- Bob walked you through the margins. So you've got some idea had of where things are, but behind that, obviously steel -- a pretty stiff headwind, and really a lot of other commodity prices. Certainly the energy based, petroleum-based products, fairly heavy price increases around those products as well as things like aluminum and brass and copper and the kinds of products we use. So the purchasing activity that we started the lean and value engineering and Six Sigma activities have picked up pace significantly. The issue is one of running into a stiff wind of ever increasing commodity prices. Now with the start of steel, that kind of gives you the reason that we fee that the second half of the year, from a standpoint of our earnings range and everything, also are achievable.

Okay. Thank you.

All right.

Our next question is coming from Rob Hinchliffe with UBS.

On the cost cutting, following Rob's question, it looks like you've got to pick up the pace a little bit in terms of second half to hit guidance. Industry volumes on the light vehicle side you're lower in steel a little bit worse, commercial truck volumes higher, how much of a role is cost cutting playing in the second half to reaching your guidance?

A big role. You remember, unfortunately we don't have it again, ast quarter we showed you a sort of a walk forward from what it would take to get from the first quarter to an average quarter of 63 for quarters 2, 3, and 4, which is what it would take to hit the mid range of our guidance, and the biggest single part of that walk forward was cost reduction initiatives. You could give Michelle a call later if you want and we can rewalk you through that.

Where do you stand now on that, Bob? How is cost cutting in this quarter and what does it have to be now in the back half?

Well, what we were saying was that compared to the first quarter we'd need -- my eyes are getting terrible -- an $18 million improvement after tax in terms of cost reductions. There were a whole lot of other little items on this walk forward, and if you walk forward from the 18 to the 53 we just did the biggest variance here is the steel. We didn't get it in the second quarter. Didn't get the steel reduction that we thought we'd get compared to the first quarter, so basically the walk forward to what we need now for Qs 3 and 4 is about the same as what you saw. We'll need a titch more in cost reductions, we get a little help from new business, affiliate earnings, and a lower tax rate.

And we're expecting, as we said, we're expecting steel to improve.

Okay. Second one, just on commercial truck, I know Axle Alliance was trying to carve out a spot for themselves at Freightliner. I guess Dana had been taken out of the order books for Freightliner. With some management changes at Axle Alliance does that change anything with respect to your relationship with Freightliner?

No, I don't -- I mean, I guess the question would be are we in -- we are in the order books, or we do have orders from Freightliner, so I think that probably taken out of the order books during the commodity problem that we had in March, that might have affected it, but that's it.

But the head of Axle Alliance leaving doesn't change, doesn't give you an opportunity to maybe grow again with Freightliner?

Obviously, our people are working on that constantly. I don't think that that individual, per say, makes any difference.

Thanks, Mike.

Okay.

Our next question is coming from Monica Keeney with Morgan Stanley.

Hi, Monica.

A surprise.

I had a question. In terms of the working capital, that 100 million which you walked through, the AR, which you said was a seasonal -- the reduction in AR of 200 is that just pure seasonality? That doesn't really necessarily entail much improvement in operating metrics?

No, it doesn't. That's just seasonality.

Okay. And in terms of--.

That's why that's the easiest part of the three.

Right. Okay. That's what I thought. In terms of the payables, I mean I see that that's a small number. But I was wondering -- do you think there's risk though that that potentially is worse than you thought just given the situation lower down, sort of the tier 2s and 3s potentially, or are you just not seeing that that you have certain troubled suppliers?

Well, we're certainly seeing that, but I think part of the thinking behind that 25 target, if you look at our $325 million of expected capital expense and you look at where we are year to date, we're well under half of that. So the capital spend steps up as you go to the balance of the year and you get the payables associated with that. And most of the inventory we've already got is paid for.

Okay. But in terms of also the health of your supplier, is there anything on the horizon or you feel pretty comfortable right now?

I think the health of the tier 2 suppliers is always a concern, but it's -- I don't think that alone is going to prevent us from doing this in payables, nor do I think that what we've got as a payables target is dependent on stretching out payments to the weaker tier 2s.

When I look at the contribution margins in the heavy-duty business, even if I back out the steel, while the improvement sequentially, it's still somewhat less than what you would expect from historical, should that start to abate now that we're seeing steel essentially coming down although there's a lag?

You'd certainly expect it to improve, and I think probably the best way to say it is I'm expecting it to improve. I'm never -- I'm never satisfied with -- at these kind of levels that you would expect the improvement in the business to continue.

So even if we don't have the growth next -- as much growth next year, potentially in '07, should we see these numbers improving on an EBIT basis, or on a margin basis just directionally?

Probably the best way to answer is if they don't we probably haven't done our job.

Okay. Thanks.

Our next question is coming from David Siino with Gabelli & Company.

Just a couple of housekeeping items for Bob.

Good.

Tax rate, you said the low 20s in the second half?

No, I said it was low 20s in the second quarter and high 20s in the second half.

And that high 20s is what we should use going forward?

Yes.

Okay. Did you give a currency effect on EBIT in the quarter?

No, I didn't, but I could probably guess at it. At the EBIT level it's probably 7ish. 7 million.

Okay. Great. That's all I had. Thanks.

Yes.

Matt, any more questions?

Our next question is coming from Darren Kimball with Lehman Brothers.

Hey, guys. How are you? Bob, could you just go over that Ohio tax thing again?

You want to wind Bob up?

No, I'm serious. No I'm kidding. Listen, on the guidance, so you're -- I don't want to sort of ask Rob's question all over again, but the math suggests -- you did this walk where you had to earn 63 million for the back nine. It looks like that walk is like 68, 69 million for the back half per quarter, right?

Yes, it'd be about 68 to hit the middle of the range. Remember, that was based on coming in at the middle of the range.

And after doing 18 and 53 or 51, I'm not sure how you're counting it, and cutting your light vehicle production forecast, getting hit on the steel cost side, I guess some -- the tax rate positive, CVS positive, seasonally the second quarter is always better than the third and the fourth quarter, right? How do we still get to those numbers?

Well, you still got the new business coming on, and as we talked last time the cost reduction programs build in the third quarter you get everything you did in the second plus an incremental layer from the third, then the third you get everything you've done in the second and third plus an incremental layer in the fourth. I guess you could say it positively, Darren, and you could say, well, gee, you tripled your profit going from Q1 to Q2. If you keep tripling every quarter you're going to blow by the guidance, but we're not going there.

I think the other thing, Darren, the off-highway commercial is a little bit different than the light-duty in terms of seasonality. Less down time, and especially with the volumes -- the schedules they have.

Okay. And I just wanted to ask also on the steel side, this is your second upward revision on the net hit that you're taking on steel within a few months, and I'm just -- isn't your second half assumption looking more and more like a stretch, or do you really have specific knowledge of what your steel costs would be? Your working capital story is that you're over inventoried on the raw materials and I would just think that higher cost steel still has to flow through, or no?

A lot of that has been varianced out already, Darren. When we bought the steel. Most of the premium went through the variance as the inventories climbed.

Okay. Is that the whole answer?

Well, that's the biggest part of it. That's the biggest part of it. I could throw in Ohio taxes again.

Okay. I'll leave it at that for now. Thanks.

We probably have about time for maybe one more.

Thank you. Our next question is coming from Brian Johnson with Sanford Bernstein.

A couple of questions. First, Dana Capital Corp, could you elaborate a bit more on the type of cash you might be able to extract from that over the next year or two?

Well, there's $640 million worth of assets, and they've currently got I think about $470 million worth of debt outstanding, and so we're going to have to take the cash we have and raise other cash out of that remaining portfolio of assets to pay off the $470 million worth of debt. There's some tax leakage, but the rest is ours. Does that help?

Right. So it could potentially be up to 150, 170 million extracted, assuming the assets could be sold?

At the end of the day, but we've been kind of prudent about taking dividends out, and until we're certain that we have the transactions lined up to generate sufficient cash to pay off the debt on schedule we're going to continue to be prudent.

Okay. On steel, how much of your purchase is, they're in categories, one, direct, two, part of OEM programs, and three, passed on to you by your tier-end suppliers? Do you have a rough idea of the breakout in those three buckets?

I'm not sure that we want to go into that much of a specific of the number. There is a portion that -- there is a portion that we essentially buy through a pass-through. Those tend to go towards our structures business, our frame business to the large part. And you're correct that we do have two different buys of steel, one being that we buy direct for our own use and our own fabrication, and another for -- that we buy through a supplier. Could be a forger or something. In some cases we may support the cost of that steel and really just do value add on that. But to break it out I don't think we're going to go to that detail.

Okay. And final question. In addition to cost cutting, are there any other opportunities to expand margin in heavy vehicle given the fairly robust growth of sales there?

Obviously better use of assets. In terms of cost cutting, getting -- from a productivity standpoint, more for the same amount of time but, I mean, you pretty much know that it's a fixed asset game where you're trying to get additional sales on the same basis of fixed assets whether they're human or capital.

Right.

And obviously we'll continue to work the materials side of the business. You saw a little bit today that we worked the quality side of the business from the standpoint of better warranty performance that comes back to us in terms of cost improvement. So I think those are the main things.

Okay.

Okay?

Thanks.

All right. I think that probably wraps it up. Thanks again everyone for your questions and for participating in today's call. We appreciate your continued interest in the Dana Corporation and look forward to speaking to you again soon. So with that, we're going to end today's call. Thanks, everybody.

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