Dana Inc (DAN) 2005 Q3 法說會逐字稿

Good morning. And welcome to Dana Corporation's third quarter earnings webcast and conference call. [OPERATOR INSTRUCTIONS] I will 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 today. This morning, we issued a news release detailing Dana's results for the third quarter of 2005. We have also filed a copy of the release with the SEC and a current report on Form 8-K. The release and this presentation are available on our website at www.Dana.com. Today's call will include remarks by Dana Chairman and Chief Executive Officer, 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 operations and on an EBIT basis. Accounting principles generally accepted in the United States, or GAAP, require us to prepare our financial statements on a fully consolidated basis. And EBIT is not a GAAP financial measure. Therefore, we have included presentations 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 and also at the end of this presentation.

I would 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 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. And Mike and Bob will answer as many questions as time permits. Now I would like to turn the call over to Mike Burns.

Thanks, Michelle. And good morning, everyone. A lot has transpired at Dana since we hosted our last conference call and webcast in July so I'm certain you have a lot of questions. Bob and I have done our best to anticipate and address them in our prepared remarks and then we will move on to Q&A.

Today, we will be reporting financial results that are unfortunately are now over three months old. We will also be explaining a number of key actions that have been announced over the past six months, since our last earnings call. Because of the majority of our actions were implemented after the third quarter, the benefits of those strategic and operational actions won't surface meaningfully in our results until we start reporting 2006 performance. On that note because of the delay in reporting our third quarter results, our fourth quarter results will also be delayed from our usual reporting in February until the March time frame. As a result Bob and I may not be able to answer or to fully respond to every question but we will certainly do our best. However, I will commit to you that we will return to our normal financial reporting schedule with the first quarter 2006 results in April. We have a lot of ground to cover in the next hour or so-so let's get started.

Dana has faced three very significant financial challenges since our earnings call in July. Bob will provide details on these challenges in his remarks, but I will touch on each of them now. On September 15, 2005, Dana announced it would likely restate second quarter earnings. The scope of the restatements ultimately included financial results dating back to 2000. And when all was said and done, Dana's total net income for the affected periods was reduced by $44 million.

Now three points on the restatements. First, there has been a lot of hard work and a tremendous effort given to get the restatements done. Completing the restatements enables Dana to again focus on executing our plans and improving business results. Second, we have taken and will continue to take steps to prevent them from happening again. Among the steps taken to date are management changes in our commercial vehicle business, where much of the root cause of the restatements occurred. And third, by filing our amended financial statements for 2004, and the first two quarters of 2005, as well as our third quarter filing today, we have eliminated defaults under our financing agreements.

As previously announced, Dana is actively engaged in discussions with its lenders regarding possible modifications to our existing financial arrangements to strengthen our financial position. We also mentioned in our September 15, press release the possibility that we would write-down our deferred tax assets. The actual noncash write-down or more accurately stated, the actual valuation allowance provided against U.S. and U.K. net deferred tax assets during the third quarter was $918 million. While sales for the third quarter of 2005 were 2.4 billion, a 13% increase over sales in the same period a year ago, the Company recorded a net loss of 1.3 billion for the quarter, compared to a net income of 42 million in the third quarter of 2004.

The third quarter 2005 net loss included three unusual items that were previously announced. These noncash items accounted for 95% of the reported net loss. And they included a $918 million evaluation allowance provided against net preferred tax assets that I mentioned on the previous slide, an impairment charge of 275 million that relates to the announced nondivestiture of the three none core businesses and a charge of 16 million related to the sale of our domestic fuel rail business, and a dissolution of our engine bearings joint venture with the Daido Metal Company. Excluding the unusual items we reported a third quarter loss from operations of 63 million. While the operating loss pales in comparison to the net loss, these results are extremely disappointing and quite frankly, unacceptable. On the next slide, and in my concluding remarks, I will address the actions we're taking to improve operating performance in what all of you know is a difficult industry environment. The change in our tax status complicates the comparison of operational performance year-over-year. For an apples-to-apples comparison, Bob and I will both talk about our performance on an EBIT basis later in the call.

Before I turn things over to Bob, I would like to quickly review the key actions that we have announced to strengthen Dana's performance. I will talk more about these later, but want to touch on them here because they address our top financial challenge and goal, which is improved profitability. First, as announced on October the 20th, we are divesting noncore businesses, restructuring certain automotive and heavy vehicle operations, and implementing other actions to reduce cost and increase efficiencies. As announced on November the 22nd, Dana intends to acquire full ownership of our axle and drive shaft joint venture operations in Mexico, which will further enhance our low cost manufacturing opportunities. When the transaction is completed, 100% of these operations will be in our consolidated earnings. But more importantly these operations will provide a base for future additional production in Mexico. And as announced on December 14, we will also be consolidating operations in our thermal products group.

Again, I will go into more detail on each of these after Bob provides the detailed financials. The actions you see here represent the actions announced to date, others will follow, and we continue to make progress on our ongoing efforts to reduce material cost and head count. Bob?

Thanks, Mike. As Mike indicated, on December 30, we filed our restated financial statements for the first two quarters of 2005, and the years 2002 to 2004. We also restated the financial information in the five-year table for earlier periods. By way of explanation, as discussed in our filing, during the second quarter of 2005, we identified an unsupported asset sale transaction in our commercial vehicle business, which we corrected prior to releasing our Q2 numbers. During the third quarter, we initiated an investigation into the matter, found other incorrect entries within the same unit, and informed the audit committee.

In September, the audit committee engaged outside counsel to conduct an independent investigation of the situation. The investigations identified a number of adjustments which were required in both the commercial vehicle business, and in other parts of the Company. The items requiring restatement as a result of the investigations generally impacted 2004 and the first two quarters of 2005. Years prior to 2004 required restatement as a result of amounts that were recorded in 2004 that were attributable to prior periods. Once those years were reopened, we also had to deal with amounts recorded in those years that were attributable to earlier periods. There were also additional entries that were made for items identified during past audits of the Company, and some of the stand-alone audits of businesses that we sold. All of these additional items had been determined to be individually and in the aggregate immaterial to the financial statement at the time they were originally recorded.

If you looked at the impact on the earlier years, in the 10-K(A) for 2004, you would see that the restatement reduced retained earnings as of the end of 1999, by 56 million, and that earnings in the years 2000 to 2003 were increased in the aggregate by 55 million. Again, this was basically just shifting amounts between periods and as you see here, the net impact through 2003 was only 1 million. The investigations that led to the restatement in the first place raised the items which really impacted 2004 in the first two quarters of 2005, and these amounts account for almost all of the cumulative reduction in net income. As part of the work that was done in the investigations and resulting restatements, we were required to reassess the effectiveness of our internal controls over financial reporting.

We ultimately concluded that as of December 31, 2004, and continuing through September 30, 2005, our internal controls were not effective. We identified the five material weaknesses you see here and which are further explained in our 10-K(A) for the year ended December 31, 2004. In item 9-A of that document, and item 4 of the subsequent quarterly filings we discussed the remediation actions that we have taken and will take to address these weaknesses. We have made management changes within our commercial vehicle business, made changes in our financial and accounting organization, and implemented additional internal controls. As we've stated we will also take additional actions in the future. We are fully committed to remediating these weaknesses this year.

Turning to the third quarter, this slide summarizes our results for the three and nine-month periods ended September 30. The net losses in both of the 2005 columns were principally the result of the unusual items recorded in the third quarter of 2005. Here, you see the unusual items in the third quarter, all of which were noncash. On October 10, we announced that we would provide a valuation allowance against our U.S. deferred tax assets. After processing all of the restatement entries and refining the split between the deferred and current tax accounts, the final net effect of creating the valuation allowance, as of the beginning of the quarter, was $918 million. This amount also includes a $13 million valuation allowance against our U.K. deferred tax assets. The valuation allowances were required because the accounting standard is whether we believe that it is more likely than not that we will be able to utilize these deferred tax assets based on our outlook for profitability in those countries, and currently we don't. However, this action in no way limits our ability to utilize these tax assets to the extent that we do realize future profits in the U.S. and U.K.

The second item is related to the announcement we made on October 20, of our intention to divest our engine hard parts, fluid, and pump businesses. At that time, we indicated that we expected to record charges of $315 million, during 2005, in connection with that decision. The $275 million after-tax charge recorded in Q3 is the first part of those charges. The impairment of long-lived assets. An additional charge that will include deferred translation and estimated transaction cost will be taken in the fourth quarter at which time we will reclassify these businesses as held for sale. The total charge will likely be somewhat higher than the original estimate.

As indicated in the last bullet, the final accounting for the impact of the divestiture of our domestic fuel rail business and the wind-up of our joint venture on engine bearings with Daido which we announced on September 1 was a charge of $16 million. The difference between this number and the 11 million we disclosed at that time is simply the fact that the pre-tax charge was ultimately not tax effected as originally assumed. As a result of our deferred tax valuation allowance. The total impact of all three items was $1.209 billion. While I'm on this slide, I might note that since we might be revising our historical statements next quarter to reclassify the businesses that we're divesting we have not gone back and provided quarterly segment detail for all of the recently restated periods. We will do that next time around after the reclassification.

On this slide, we've tried to provide you with one slide that shows a complete reconciliation between the fully consolidated numbers on the income statement that you will find in our third quarter Form 10-Q and was included in the press release, and what the numbers look like with DCC showing on an equity basis and with the unusual items pulled out. The first column shows the numbers right off the statements. The second column takes the DCC numbers and the inter-company eliminations related to the consolidation of DCC, and collapses them on the line labeled equity and earnings of affiliates. This is just a change along the line items so there is no impact on the net income.

In the third column, you see the $918 million effect of the valuation allowance which is $920 million on the tax line, and then adjusts out the $2 million tax effect of the accounting change for warranty. The next column is the impairment charge which was 290 million before tax, and because it includes impairment charges against assets in other countries, had a $15 million associated tax benefit. The 16 million for the third quarter divestitures is, as I said, not tax affected, so there is simply an adjustment to other income for the pre-tax amount.

In the last column, then, you see the numbers that flip to the 63 million operating loss that was cited in the press release. In part this loss is attributable to taxes. In the past, you would have expected about a $13 million tax benefit on the 44 million global pre-tax loss. Now, however, since we don't provide a tax benefit against domestic losses, but still have to provide for taxes payable by those foreign operations which are profitable, we wind up with a $27 million charge. That's a difference of $40 million versus what we would have shown in the past. That said, it doesn't excuse the pre-tax operating loss which Mike will talk more about later by segment, and which is reflected in the low gross and operating margins.

This next slide is set up in the same way as the last slide but shows the nine-month results. There are two additional columns to deal with the unusual items that happened in the first six months. In the third column from the right, we back out the 4 million in gains on the sale of DCC assets. The next to the last column contains two adjustments, first we add back the $5 million one-time effect of the June 30, change in Ohio taxes from an income-based tax to a gross receipts tax that hit us for $5 million, and we talked about this in our July call. And secondly we subtract out the $4 million after tax pickup that was included in our restated first quarter for the accounting change on warranty. That leaves us with a $20 million loss from operations. I should point out that to facilitate your analysis of these statements, we have included the comparable slides for the restated third quarter of 2004 and first nine months of 2004 in the supplemental slides at the end of this presentation.

Moving to the cash flow, this slide shows the quarter and nine months of 2005 compared to the restated periods of 2004, with DCC showing on the equity basis in all cases. Focusing first on the quarter, most of the loss was noncash, so it gets added back. The statement shows a reduction in working capital of 47 million in the quarter, but that includes a current portion of the deferred taxes. The net from operating activities was a use of 157 million. The cash from investing activities is basically the proceeds from the small divestitures we completed during the quarter, and under the financing activities, you can see that we borrowed about $200 million of which $56 million went to increased cash on the balance sheet. The numbers for the nine months aren't directionally dissimilar. Debt is up $488 million, and cash is up $88 million. It is also worth noting that we're trending well under our capital spend budget of $325 million.

Coming back to working capital, last July, we outlined a plan to reduce our working capital in the second half of 2005 by $375 million. The plan by component of working capital as originally presented is shown here. We just finished closing September so we're in no position to tell you where we will finish the year, but we want to make sure that we've at least calibrated your expectations in view of today's circumstances. We will see a major reduction in accounts receivable because of the decrease we always get in the fourth quarter. So we give that one a green check mark. We also expect that inventory will be down. We expect to have a nice reduction in the automotive systems group, but with all of the other distractions, the reduction in inventory in the heavy vehicle side will likely be much smaller than previously expected. So we were directionally okay but since we expect to miss the mark on heavy, we only get a yellow check mark. We expect a big miss will occur on payables. And it wasn't a flaw in the plan so much as it was a consequence of everything that has happened in the last few months.

The combination of our announcements, concerning the restatements the big third quarter charges, and the need for financing agreement waivers coupled with a tough situation for the industry in general, has forced us to spend a lot of time managing supplier relationships. The last thing we wanted to do was to stretch payments beyond the stated terms and further exacerbate the situation. As a result, payables have gone down, not up and by a large amount. So we still expect to see a sizable reduction in working capital in Q4, but we don't expect the total for the second half will be anywhere near what we had anticipated back in July, because of the change in our circumstances, and the changes in the environment in which we operate.

The next slide shows the what for of our debt and equity for the first nine months of 2005 with DCC treated on an equity basis. Starting with the operations column, as we saw on the cash flow statement, short term debt is up $488 million year to date, with most of that coming in the first six months of 2005. This is partly offset by an increase in cash of $88 million, resulting in an increase in net debt of $400 million from operations. In that same column, the $74 million reduction in equity is simply the $20 million nine-month loss from operations that we saw in the earlier slide and the $54 million in dividends paid. The unusual items that ran through the P&L are segregated in the middle column. In the aggregate, they reduced income and therefore equity by $1.2 billion.

In the other column, we show the effect of reclassifying our long-term debt as short term, which occurred in the restated second quarter and was discussed in our 10-Q(A) for that period. The net effect on debt of minus $6 million and on equity of minus 74 million in the other column are largely adjustments resulting from currency translation and swap valuations. As you see, our ratio of net debt to capital increased from 34.7%, to 61.3%. However, it is important to remember that this increase was principally the result of the noncash charges that reduced book equity.

This is our debt portfolio at September 30, excluding DCC. We now have an average maturity of 7.1 years and an average cost of about 6% overall. As shown in yellow, the numbers include 268 million, we have borrowed from DCC. As we've explained before, the reason for the arrangement with DCC is simple. They had excess cash and we were able to pay them a lower rate than we would have had to pay the banks. But a much better rate than they could get on short-term investments.

Here, you see our liquidity position at September 30. We had undrawn capacity on bank lines of 185 million. The reason that the availability under the accounts receivable program doesn't agree with the difference between the amount of the line and the amount drawn is that availability in any point in time is based on our actual receivables outstanding. At September 30, we had about 700 million in cash on the balance sheet, but as is mentioned in the second footnote on the slide, this amount includes 315 million held offshore, and 120 million of cash in pledged accounts.

Shifting to DCC, we continued to whittle away at their portfolio during the third quarter, which stood at 605 million at September 30, 2005, that's down from 640 million on June 30, and 2.2 billion when we started the sale process back in 2001. I've had a lot of questions lately about where we stand with DCC, so I would like to spend a couple of minutes to bring you up to date.

This chart shows the recourse debt on DCC's books at September 30, 2005. They also had some nonrecourse debt but that has already been netted against the portfolio assets. There is a $16 million note payable to Dana Europe that is shown in green. The red is the external debt of 415 million that consists of 15 million that came due in the fourth quarter of 2005, 87 million that comes due in 2006, and the balance that matures in 2007. The total is 431 million.

Combining the information on earlier slides, this is the way we're currently thinking about the remaining wind down. DCC's portfolio assets are 605 million. We have to pay off 431 million in debt between now and 2007, but at September 30, 2005, DCC had available 23 million in cash, and the 268 million loan to Dana. This means that between now and the end of '07, DCC needs to raise another 140 million through asset sales to pay off its obligations. That amount is only 23% of the portfolio assets. So we're comfortable that DCC will be able to generate sufficient asset sales to complete the process on time. The one thing I would add is that while we have reported after-tax gains of over $90 million since we started selling off DCC's asset, a good share of those gains resulted from tax benefits, and we won't enjoy similar tax benefits in the future because of our deferred tax situation.

Finishing up the financials, I would point out that it is important to remember that most of what has occurred at Dana in recent months, the restatements, the valuation for deferred taxes, the impairment charges, has not directly impacted our cash position. With the filing of the amended K and Q's in December, and the filing of the third quarter Q today, we will have cured the issues around defaults under our existing financing agreements and indentures, and by virtue of our current waivers, we have the time necessary to work with our bank group to put in place modified or replacement facilities in the next month or two.

So recapping, the third quarter loss we reported today was largely driven by the unusual noncash items you see at the bottom of this slide. We have also seen that the swing from income of 39 million from continuing operations in the third quarter of last year, to this quarter's $63 million loss, was significantly impacted by taxes. That said, we did see a decline in income at the EBIT level from our businesses and to discuss that further, I will turn it back to Mike.

Thanks, Bob. Overall, the third quarter earnings performance of the automotive and heavy vehicle groups fell well short of our expectations. In the automotive group, we were unable to convert a sales growth of 13% into margin improvement. More than 70% of the revenue increase came from existing and new business growth, with a currency impact of approximately 56 million or about 30%. The big hits on ASG's year-over-year earnings were 10 million in startup costs associated with a new plant and our Actuation Systems joint venture, 5 million additional in steel costs and 3 million related to product quality issues. Factoring out these items, the automotive group's EBIT is still down from a year ago, as other cost increases have outpaced our cost reduction actions.

In the heavy vehicle group, the stronger class 8 market in North America has led to higher sales along with new business in our off highway operation. Positive currency effects added roughly 5 million to the heavy vehicle sales. In the commercial vehicle operation, however, we're working through the manufacturing inefficiencies that became more apparent as production levels of class A trucks ramped up during 2005. As a result, we've incurred higher premium freight and other costs as we deal with the current capacity demands. Steel costs in this group accounted for 15 million of year-over-year drop in EBIT. Steel had a greater impact on the heavy vehicle group principally due to the higher sales volume and higher surge surcharges incurred in connection with purchases of foreign specialty steel in the quarter. Our off highway group profit was also down year-over-year as a result of the realignment actions that we're taking to downsize our Statesville, North Carolina, and Brugge, Belgium, operations.

This slide shows nine-month results for the business units. Sales for ASG were up 470 million over 2004 with a favorable currency impact of 167 million. Where our heavy vehicle sales grew, 296 million, with currency accounting for 30 million of this increase. Looking at the units together, the impact of steel year-over-year was an increase of 143 million. The total EBIT reduction year-over-year was 135 million. But it is not that simple. Higher costs offset the benefits of higher sales volume and the savings we achieved through our lean manufacturing and efficiency efforts. Earlier I shared an overview of the actions underway to improve our operational and financial performance. I would like to take a deeper dive into these now and starting with those in the commercial vehicle group.

Last August, we added a strong and proven leader from Honeywell, Nick Stanage who joined Dana as Vice President and General Manager of the commercial vehicle group. In December his responsibilities were expanded to include our off highway business as well. Nick hit the ground running. He conducted a comprehensive analysis of the commercial vehicle group and from this developed a strong turn-around plan with specific near-term goals. Nick has brought some new people into the commercial vehicle group, including a new group controller, and several operating people. Nick's top priorities now are executing the restructuring actions announced on October 20, reducing manufacturing and material cost, improving inventory management, improving customer quality and delivery, and generally driving a more efficient and disciplined mind set into the entire commercial vehicle group.

There is also a lot of work to do in automotive systems. To that end, we announced in late November our intent to acquire full ownership of several core operations in Mexico. Under the terms of the letter signed with our partner DESC, we will dissolve our joint venture Spicer S.A. Dale will assume 100% ownership of the five plants that are already supporting our axle and driveshaft businesses and in which Dana currently holds a 49% stake. DESC in turn will assume full ownership of the transmission and after market gasket operations in which it has a 51% stake today. This move will give Dana a wholly-owned base for additional low-cost manufacturing in Mexico, whose performance will be fully consolidated into our earnings.

Acquiring full ownership of the Mexico operations was part of our plan when we announced the restructuring of certain automotive systems operations on October 20. This involves closing two facilities in Virginia, and consolidating that production into existing Dana facilities in Kentucky and Mexico. Two production lines from our Lima, Ohio plant will also be moved to Mexico. The other action shown in this slide announced on December 14, was the consolidation of five North American plants in the thermal products group into two existing facilities which will reduce operating and overhead costs. I would like to emphasize here that we are moving aggressively to improve the operating performance of all of our facilities. And our focus is not just limited to the plants you see listed on these slides by any means.

Two other actions that we announced on October 20, were a salary work force reduction of at least 5% and benefit reductions. Together these are expected to generate savings of more than 40 million before tax in 2006. The salaried work force reduction is in addition to reductions associated with announced divestitures in restructurings. We are also pursuing better productivity and profitability through the ongoing use of lean manufacturing techniques. To demonstrate we're gaining momentum, the size of our work force, after adjusting for sold operations, and the shift of certain human resource functions to IBM, was reduced by more than 1,000 people last year, through lean and efficiency efforts. Most of these reductions occurred in the last four months of the year.

The majority of the actions that we have been discussing have been aimed at reducing cost. The benefits of these actions are necessary to restore the performance our customers require, the profitability that our shareholders demand and the competitiveness Dana as an organization needs to survive and succeed in the long term. On the next two slides, I will talk about a sharp -- a sharper business focus through noncore business divestitures and continued success we've had with customers in terms of net new business growth.

Part of our major announcement on October the 20th, was the intent to sell three noncore businesses which you see listed here along with some descriptive information on each. These businesses will be classified as discontinued operations in our fourth quarter 2005 report. And will -- and we expect to complete the divestitures in 2006. The Dana that emerges after these divestitures will be initially smaller. But Dana will still be large and long term more competitive in our core businesses of light and heavy duty vehicle lines, vehicle drive lines, structures, ceiling, and thermal products. These are the businesses where we have size, a footprint and capability and skill as well as a diverse customer base to maintain a leadership position. And we expect to continue to add profitable net new business in each of these areas.

Our updated net new business chart shifts forward to the years 2006 through 2008, and deducts new business associated with the engine and fluid operations to be divested. We expect approximately 900 million in net new business for this period in our core businesses. As an example of customer diversity, Dana products are featured on two-thirds of the worldwide vehicle launches announced at last week's auto show in Detroit. Now, as you've seen before, the third year out in this case 2008 tends to start out as a reduced level and then builds its customer source more for approaching launches. Pursuing a lot of opportunities across our diverse customer base and as I've mentioned before, our product portfolio of drive line structures, sealing and thermal products provides Dana numerous opportunities in the vehicle development cycle to win new business. We plan on continuing to leverage this balanced product mix. And by the way, on the subject of new business, Dana has been selected to join the Ford family of strategic suppliers.

We've faced our share of challenges not only over the past several months, but over the past several years, as our shareholders know all too well. Looking in the rear view mirror, Dana was directionally correct in past restructuring efforts, but in some cases, we didn't execute fast enough or go far enough. Of course, these issues have been exasperated by the industry-wide challenges such as commodity price increases, light duty production mix changes, and our customer's performance in the marketplace. Our job is to restore greater Dana profitability. And I firmly believe now Dana has the leadership team in place to execute our plans. Our job is to show you that we can deliver and I'm confident that we can.

We will execute the numerous actions described today in our recent -- and those in our recent press releases as well as others. In making these happen, we will rely more than ever on the strengths of the Company, the strengths that some may forget, and miss the challenges and bad news of the recent months. We have a strong global manufacturing footprint, a diverse customer base, a strong and balanced product mix with our planned product divestitures, a stronger and more focused business and as illustrated in the previous slide, solid top-line growth potential. In the spring, Dana will host an investor day meeting and reception in New York to give key shareholders and analysts an opportunity to meet and hear directly from some of our key functional and operating leaders.

Before I close, let me say once again that Dana's leadership team realizes our financial results are unacceptable. We're confident that our action plans, when executed, will deliver the return on our shareholder's investment for our company. Now, this will conclude the formal portion of today's call. I will turn the call back over to our facilitator who will begin our Q&A session.

At this time, we would like to begin the Q&A session. [OPERATOR INSTRUCTIONS] Your first question comes from Rob Hinchliffe with UBS.

Good morning, everybody.

Good morning.

Mike, you didn't go into, and maybe you are going to hold this for the meeting in New York, but what Dana's earnings potential or earnings power is going forward. How do you see the Company?

Well, you're right. And I think it gets to the question, are we going to give some kind of a guidance going forward. We're not presently in a position to resume providing guidance and , we will continue to assess that in the coming months, and we will consider when it is appropriate to resume. We will talk more about where we see the Company and its potential in the April meeting.

Can you give something more broad? A lot of challenges, obviously, you went through those, profitable, or are we going to lose money in 2006?

At this time, not -- I don't want to go there. I mean I think that it is important that we got the restatement. As difficult as it was and as unfortunate as it was it is important that we get the restatement behind us and get everybody back on fixing the business. And driving the improvement. I think, what I noted about it in terms of head count coming out in the last four months of the year, a lot of emphasis on material, a lot of emphasis on getting the startup rights, and reducing all of our costs, but I think it is more appropriate to address some kind of a look forward at a later time.

Okay. With respect to the asset sales, one of the things coming out of the Detroit show was that clearly there is a lot, a lot on the block right now. What kind of proceeds can we expect? How easy is it? How easy will it be to sell these assets? And then I assume the proceeds go to pay down debt, fix the balance sheet?

Well, we see, again, and I think we've stated in the past, we expect that we will get these assets sold in 2006. You're correct that there are a number of assets on the market. Our assets have some good traits to them that there is a fair amount of interest. With regard to what we do with the proceeds, obviously, we will use them in the business appropriately.

But directionally you're correct, the bulk of it goes to pay down debt.

You're absolutely right. If you look at what the business needs most, we would approach it in that direction.

Okay. And then the last one, is on the book of business. And is there -- I guess you said '08, there is still time to win business there. If I go back to your presentations from a number of quarters ago, 2007, early in 2005, you had 300 million of new business already won for '07. Out in Detroit, I mean there were some suppliers talking about opportunities to take business away from Dana. Can you comment on that, Mike?

Well, I think first of all, my comments were directed at what happens with the shortened development cycles that many of our customers have, if you recall. We even, in 2005, were adding new business for 2006. So the point being is that the 2008 number, while it may look a little bit small, if you go back in time, those look smaller in the past when we showed you the numbers. The second thing is, and I may have skipped over it too quickly but this removes the so-called discontinued operations, the engine, the pump, and the fluids. So that has an effect on this. We have strong interest from our customers, obviously our customers are very interested in what's going on in our situation. But strong interest from our customers and I don't see a lot of evidence of anything moving away from us.

Okay. Thank you.

Your next question comes from Brett Hoselton with KeyBanc Capital Markets.

Good morning, Brett.

Good morning, gentlemen. How are you this morning?

Okay.

Let's see. I guess my first question is, you can give us some sense as to -- well, the Mexican operations, are they consolidated today, Bob, or not?

No, we bring the income in on the equity and earnings of affiliates line.

Okay. And--.

Brett?

Yes.

Let me just add something. I think it is important. And again, it may have been lost in the subtlety of what we talked about. The Mexican operations that we have, the joint ventures that we have, in the past, if we were going to invest in Mexico, we had to invest through the joint venture. In the area of axle or drive line or sealing or whatever. The other significant piece of this is, this no longer -- with the intent to purchase those assets, this no longer causes that restriction, so we can go and we can go, directly in and wholly own assets and invest in Mexico. That's an important part that we probably didn't emphasize.

Okay. Thank you. As you think about the Mexican operations, and the profitability impact, or the impact on your profits going forward, Bob, do you have any indication as to what that kind of an impact that might have on your EBIT line or your earnings line?

Well, it is obviously positive because it is going to take income that was buried down below the line and blow it up and add to EBIT and EBITDA but we haven't disclosed the amounts.

But does it have any impact on your net income, Bob, as you move it from an equity line into a fully consolidated mode? Given that you're also probably losing some earnings associated with the other portion that is going away?

Well, but it is a net swap essentially, because it was a 49/51 joint venture, we had 49, so we're getting 100% of the half that comes to us, and we're giving up half of what goes away. So it is pretty much a push. As Mike said, though, the real opportunity is to expand it in the future.

Now, Mike, just taking a long step back here, you've obviously announced a number of significant potential divestitures and changes, and management, and so forth, and I guess my question is, as you look forward, things at Dana are likely to become more challenging, you've got the -- I mean Ford trucks, inventory is fairly high, they're going to be challenged with the new GMT900, you also have the 2007 emissions standards on the class 8 side of the business, so as you look forward you've got a challenging two-year period ahead of you. My question to you is this. Are you considering any other, what I guess I would call material actions in addition to or over and above what you have already announced today in order to address some of these challenges that are coming? So for example, Wilbur Ross has expressed some interest in building a metals platform. Would you consider a Lear type joint venture with your structures business, for example?

Brett, I think the answer, I mean we're constantly looking at all possibilities in any way to improve the business and shareholder value. But I mean there is nothing in particular to talk about.

Okay. Thank you very much, gentlemen.

All right.

Your next question comes Chris Ceraso with CSFB.

Good morning, Chris.

Good morning. A few items. First, if we can go back to one of the earlier question, maybe you can help frame for us, Mike, how much business you're actually bidding on that would be able to come on stream in '08, just so we can get a feel for what is available?

Chris, I don't have that. I don't actually have that number with me. I mean we have that number, it would be, typically, it would be a multiple of that. I mean, we typically have a hit rate that is reasonably good, but it wouldn't be unheard of to have several times what that number is. I mean, it could be several -- it would easily be several hundred million dollars. I'm sorry, I just don't have the number with me.

Hey, Mike. Can you hear me?

Yes.

Yes, can you still hear me, folks.

Chris, I can hear you.

I can hear you, too.

Just keep going, then. Keep asking questions.

Maybe you can help me understand, I'm still not exactly clear, on what exactly are or have been the operational problems in the heavy truck business. Is it just too much volume? Is it, -- what were the inefficiencies? Can you kine of boil it down for us to help get a feel for how you're going to fix that going forward?

Well, I guess, if I'm real honest with you, some of the restructuring that was done a few years ago was directionally correct. But it eliminated facilities and consolidated virtually everything in one facility. In terms of actual production. In that facility, there were also some other operations such as the after-market business that we announced that we were moving to Crossville, I'm not sure of the exact date, but probably two months ago.

So the complex that builds the majority of the axles for North America, as you know, heavy trucks, a lot of variation in terms of ratios and different fittings on the axles with regard to the various manufacturers we sell to, so a fairly complex organization from a -- or a complex assembly from the standpoint of building the axles, what we've tried to do, and what we are doing, is simplifying that whole operation, getting the service activity out, doing some other things, in addition to ramping up our Monterrey, Mexico facility at a faster rate. To take a higher load of the axle production that quite frankly, can very well and easily be supplied out of there to some of our western supply points to customers. But in a nutshell, too much complications, too many things into a single point, and not a great job of execution, frankly.

Okay. That's really helpful. So now if you look forward, and let's say two different scenarios, one in 2007, let's say, truck volume is down, or let's say '06 or '07, truck volume is down, only 5% on the one hand or on the other hand it drops 20%, how are the decisions you're making today going to affect your ability to operate under those conditions in the truck business?

I won't tell you everything, but Nick Stanage and his team, they're already working on '07 so they've got one eye on '07 to ensure that they've got plans in place for the end of the year. When that happens, and quite frankly, we're not sure it is going to happen at the end of the year. It is probably going to happen sometime at the end of the first quarter or into the second quarter of 2007, when you start to see those volumes drop off. But suffice it to say, Nick and -- Nick Stanage and his team are all over that, not only trying to fix the current deficiency of the business but also how they're going to handle the decline in business.

Maybe just another quick one, if I can. What is the outlook for deal costs in 2006 based on the contract that have you in place? That was obviously a big drag for both of your businesses in '05.

There are puts and takes, but essentially, we're looking at something that is relatively flat in '06. That's what would be in our current outlook.

Okay. Thanks, Mike.

Okay.

Your next question comes from Himanshu Patel with J.P. Morgan.

Good morning.

Sir, your line is open.

Yes, hello?

Good morning.

Yes, actually this is George Nissan. I have a couple of questions. Obviously it has been very challenging in the automotive industry currently. What has been the financial impact of rising material costs and what's the risk moving forward for major raw materials such as steel, resins, and other raw materials?

We just answered part of that question, but obviously steel has been a significant factor, really, and I've got quite an echo here, it may be your line, you might want to mute your line.

Okay.

But we've had quite a steel increase here over the last two, two years, essentially, back to the beginning of 2004 and middle of 2004. So if you look at it, several hundred million dollars of basic price and surcharge increase. Now we've tried to offset part of that, whether it be through recovery or other means but material costs have been pretty significant. We've also though worked on the material side to save quite a bit and that's offset against that--.

[OPERATOR INSTRUCTIONS]

Hello?

Can you still hear me? Let's keep going. I'm not sure what that is all about. So when you look at it, material costs are actually starting to abate in terms of the increase. We've still got concerns over petroleum-based commodities, obviously natural gas, other things, but it is a somewhat better environment as we go into '06. Did you have another question?

Mr. Patel, your line is still open. He is having some difficulty with his line, noise is coming from his line.

Why don't we go on to the next question then, please.

Okay. Just a moment. Your next question comes from Darren Kimball of Lehman Brothers.

Hi, guys.

Hi, Darren. We worked on that last name a little bit. Sorry about that.

That's okay. A couple of things. First of all is there a new target for the working capital change for the year. I think you were saying 100 million positive back in July.

Like I said, we just closed September. We have to close October, November, and December yet. And all I would say is that we're going to -- we're not going to be close to that last number, because of the payables as I mentioned.

I think it is important to add, though, that we're aggressively working the inventory side of the equation there, Darren.

Okay. I probably can't get to you to comment on whether you -- what the fourth quarter, whether you expect to be positive still.

No, you can't -- we're -- working capital?

Yes.

Yes. As I -- I said that in the -- maybe I wasn't clear. Yes, because you have the big reduction in receivables, you have inventory coming down, so yes, it will be positive in the fourth quarter, but we won't come close to the earlier target for the second half, largely because of the payables.

Okay. Sorry, Bob, there was a lot of numbers this morning, coming pretty fast. Sorry, if you said that.

We had an awful lot of numbers coming very fast.

I wanted to also ask you about, just a follow-up to Chris's questions on the operating side, can you close the loop on the pricing issues in the heavy truck area, I mean what happened, what is happening, are you getting price, why aren't you able to pass through steel cost pressures in that business, I have a little bit more of an understanding of why that might be difficult on the light vehicle side.

I guess the answer to your question in terms of the pricing, and I take it that you're asking with regard to the restatement, just improper timing recognition of those -- of that pricing. You are correct, though, there -- the pricing environment between the heavy and the light side is different and from a steel recovery and price recovery you get a different situation. I would say, though, that -- and I think everybody has the same issue in the heavy -- the commercial vehicle piece of the business. It tends, in many cases to run off of index, so you tend to lag in terms of recovery to the price increase. You understand what I'm saying?

Yes.

So you're going on kind of a retrospective way, versus perspective in terms of indices, so it tends to lag behind.

Yes, I would think you would be catching up by now.

Well, what I'm saying is it tends to lag behind when things are -- when costs are climbing. Do you follow what I'm saying? And we're talking about through the third period here, in a period when costs were climbing.

Okay. I'm sorry, just to make sure I understand what you're saying about the timing issue, I mean, it was a timing issue, but that doesn't look like it rolled into the third quarter, right? I mean this is sort of a price increase that is not ultimately going to happen?

No, I didn't say that. The price -- there are normal pricing increases, it just -- it was -- what I'm saying is it was recognized earlier than it should have been. From an accounting perspective.

Okay, so we did see some of the benefit in the third quarter, despite the otherwise depressed results?

Some of the benefit.

Okay. Last question is on the profitability. In the backlog, I mean what does this look like? Is the backlog meeting some kind of minimum return criteria? Does it make sense for you guys to look at possibly narrowing? I know the focus has been on growing but in this environment, should you be maybe walking away from some of this business.

As we've talked about before, we have a much better process with regard to the business that we take. So we do walk away from business. We're not after business for business sake. So that the metrics that we use to gauge that business are different than in the past. And there are businesses that quite frankly, it could be a customer, it could be a business, it could just be the return in the business, it could be the amount of capital required for the business, there are a number of different items that would cause us to either up select or down select on that business in terms of bidding on it. And I think the other thing that is different here is we've got a lot of visibility to what's coming at us, and Bob and I participate in those price reviews and in those business reviews so this is not an open loop process any longer and it hasn't been that way for, I don't know, over a year.

Thanks, Mike. Thanks, Bob.

Your next question comes from [Monica Keaney] with Morgan Stanley.

Good morning. Hi. I was wondering could you give us what the cash balance was at the end of the fourth quarter?

No.

Can you give us directionally, should it be higher?

No. We didn't disclose fourth quarter numbers. We just September 30.

Okay, from a seasonal perspective, though, should it be better?

Well, you have the working capital coming down.

Okay. And in terms of the 120 million, that you said was pledged, cash and pledged accounts, what is that?

Collateral under worker's compensation programs with some of the states, for example.

I'm sorry, I couldn't hear you.

Pledged collateral accounts for some of the worker's compensation programs in some of the states, for example.

Okay. And does that number fluctuate much or is it always about 120.

It is up, down, it is never less than say 60.

And so that is -- should we be netting that out of your total cash balance then? When we look at the cash?

To the extent that there is restricted cash from an accounting point of view, that would be noted on the balance sheet. If it is significant.

Okay. And then in terms of to the non North American operations of 315, is that a sort of a typical split? Or does that fluctuate a lot quarter to quarter?

That's reasonably typical.

Okay.

And we just noted that because obviously there would be some sort of frictional cost associated with repatriation.

And in terms of the negotiations with the bank, can you give us any more color on what's going on there? Is that going well? Do you expect that to be down sized, or it's just a matter of collateral?

We're just in the throes of it right now, Monica. And I wouldn't want to get out ahead of that. We will keep you posted as it happens. But we're working with our bank group. We have 17 great banks who have been terribly supportive. And expect that you will see a collateralized facility that will probably have a greater capacity than the combined capacity of the current five-year revolver in the accounts receivable program.

So you're saying you think it will be larger than the combined revolver and AR facility currently?

Yes.

Okay and the AR facility right now, is that an independent negotiation from the bank one?

It is an independent facility, yes.

Okay. And are you just looking then for this current bank discussion to replace that AR? Is that what you're saying?

Well, it would probably roll everything together.

Okay.

So that the collateral package would be one collateral package and one facility rather than having collateral for AR, an AR piece, and separate collateral for the remaining facility, like we have currently.

Okay. Got you.

Michelle, maybe we will take a couple more questions here.

We can go ahead and take the next caller.

Yes, sir, your final question comes from Robert Barry with Goldman Sachs.

Yes, good morning.

Good morning.

I just wanted to circle back quickly on pricing. Is the pricing pressure intensifying and what assumptions should we be using as we do our profit walk for price-downs on the existing business?

My answer would be it varies by the various businesses we have, from a light duty standpoint, again, it varies by customer. So it is not an easy answer to give you, and I think what the key thing is, that we're working creative ways to mitigate that, whether it be with value engineering activities, with the customer, to take cost out, and so -- I apologize for these people that keep talking on this line, but -- so, it really varies. It varies among the various customers, but light duty continues to be the toughest to get full recovery on, or majority recovery on.

I mean if we use something in the 3 to 4% range, would that be in the ballpark?

3 to 4% of the total increase? Of material costs?

No, of the price down, the annual price down?

Oh, no, I think, again, you got to kind of look at it in an overall basis, but I would suspect you who be on the high side there.

Okay. And in terms of the negotiation with Ford to be on their preferred supplier list, was there any near-term impact on your pricing in '06 and '07 as part of that negotiation?

No, no, that is just -- that is a straightforward, they look at, as you know, they are now up to 20-some suppliers, they have looked at what people have to offer and what -- and where they've been with them and where they want to go and make the selection, so there is no negotiation, no cost down or anything like that.

Okay. And if you look at the businesses that you're planning to divest on an aggregate basis, are they profitable on an EBIT basis?

Yes, but they're not big contributors, and they're certainly not big contributors on a domestic basis, which becomes terribly important given our tax situation.

And I guess the other thing I would go back to is an earlier question, that someone, I forget who asked but it really relates to this. The idea is to get the Company focused on its strong capability, the idea is not to have a lot of different businesses that we're trying to feed with capital and human resource management, to get this very focused on the things that we know we can do very well, and get the margins up in those businesses. So that is as much as anything. It is to get focused. This is something that we always intended to do and we're doing it a little early.

Yes. And just a last question on CapEx. You mentioned that were you running well below the plan so far this year, do you expect to spend the 325 you targeted, and if not, what are you not spending on? And would that be pushed into '06?

I think that we're obviously, with the business conditions, both internally, as well as externally, we're being very prudent about what we're spending capital on, we certainly aren't shorting programs, but we're not in any other way being loose with capital dollars. So I mean we're watching it very carefully. And again, everything goes to supporting our customers' programs.

So where do you think you will end up for the year then with the CapEx?

Not really giving a number, but the other thing that affects the capital is the purchasing -- the purchasing activity with regard to capital is now really kicking in, and we're seeing better pricing on capital investments as a result of that. And we're leveraging the Company a lot better. But we're not going to provide a number.

Okay. Thank you.

Okay. I think that, Michelle, is the last question. I want to thank everyone again for your questions and for participating in the call, we appreciate your continued interest and quite frankly your patience as we've gone through this restatement activity and we look forward to speaking with you again, and as we've said, we're committed to a face to face in New York sometime in the spring time frame. Thanks so much.

This concludes today's conference call. You may now disconnect.