Dana Inc (DAN) 2008 Q1 法說會逐字稿

Good morning and welcome to Dana Holding Corporation first quarter 2008 webcast and conference call. My name is Celeste and I will be your conference facilitator. Please be advised that our meeting today both the speakers remarks and the Q&A session will be recorded for replay purposes. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer period after the speakers' remarks. (OPERATOR INSTRUCTIONS)

At this time I would like to begin the presentation by turning the call over to Dana's Vice President of investment management and investor relations, Steve Superits. Please go ahead, Mr. Superits.

Good morning, everyone, and thank you for joining us today. You should now be on slide 3 of the presentation deck. As referenced on this slide I'd like to remind everyone the topics discussed in today's call will include forward-looking statements. Please take a moment to review our Safe Harbor statement. Today's call is being recorded. This conference call and its supporting visuals are the property of Dana Holding Corporation. They may not be recorded, copied or rebroadcast without our written consent. As a reminder our webcast system allows you to direct questions to us via the internet. We will answer as many questions as time permits.

Moving to slide 4, today's call will feature remarks by Dana's Executive Chairman, John Devine; Chief Financial Officer, Ken Hiltz; and Chief Executive Officer, Gary Convis. John will begin today's presentation with an overview of the first quarter, Ken will follow with a review of our quarterly financial results and Gary will provide comments on our new Operations Excellence initiatives. Following a few closing remarks from John our call will conclude with a question-and-answer session.

With that I'd like now to ask you move to slide 5 and I'll turn the call over to John Devine.

Thanks, Steve. Good morning, everyone. Thanks for joining us. We have a lot to cover today so we'll get started. Slide 5, as you have in your deck first quarter highlights, I think you all know we emerged from reorganization January 31st. It's certainly given us a major step up on being more profitable, but we've been very clear, not profitable enough. We have more work to do here. Importantly it's a clean balance sheet start, good liquidity. We're conservatively capitalized, which gives us a lot of flexibility going forward. As we emerge from chapter 11, though, it does create a lot of complexity in our financial statements. Ken Hiltz will follow me and explain that in some detail, so I'd ask you to bear with us for a bit just to go through that.

One of our top objectives this year, number one, was rebuilding our management team. We've been working hard on that. I think you saw the announcement that Gary Convis has joined us about a month ago. Gary's background at Toyota is a very strong background for what we have to do with Dana. Just to be clear I'm still very much involved with Dana. Gary and I are working very well together with good chemistry, good background, good fit. And this morning you might have seen we announced our new Chief Financial Officer, to replace Ken. Jim Yost is coming out of Hayes Lemmerz. He's been there for the last several years, done a terrific job there, and before that he worked at Ford where I knew him. I've worked with Jim in the past and I think he's going to be a terrific addition to the team and we're looking forward to having him start. He'll be in a transition mode with Ken for a brief period of time and then he'll be taking over.

Importantly, also this quarter we have a new compensation plan in place. We worked very hard to get that done. It's an important driver of the business, we believe. The focus here is very simple; it's profits and cash flow and it's really everybody at Dana has a single focus on both profits and cash flow for the Company. I'll let Gary talk about Operations Excellence in a moment. The reason we're doing this is because we need to run our businesses better; not only manufacturing but right through the organization. But also this is, in our view, a very focused way and an important way of driving cost out of our structure and we'll be talking more about that in a moment.

On page 6 and 7 I'd like to briefly cover two significant challenges for us this year. Certainly as we walked into 2008 we expected a number of issues internally with Dana but the external environment has given us a couple more. One is obviously a very weak market in North America and the second is commodity, which for us is really steel impact. Page 6 talks about the market outlook and just to cut through it, on the top of this page you can see what it means for Dana in total revenue. Our first quarter revenue finished at $2.3 billion. It's up 8% over the first quarter of last year. In fact that's largely foreign exchange, but I think in this environment, that's -- that's a pretty good outcome. We'll go through a lot of pieces and obviously welcome your questions on the total for the year, but just again to cut through it, we believe our full-year revenue is on course at about a $9 billion plus level. That compares with $8.7 billion in '07. So again I think it's going to be a reasonably solid revenue year in what is obviously a tough environment.

Net new business I know gets a lot of attention. A lot of people do this differently. We thought I would give you some indication. In our view we have a solid revenue base going forward. We have new business wins. We can talk about those in more detail if you want, but we have a solid revenue base going forward over the next couple of years. That said, we are having and making sure that we have a very strong discipline in the Company to ensure our business wins and our business prospects provide acceptable returns, very important for us. In some cases that has not always been the case in the past and we want to make sure that all of our business is profitable and we're working very hard at that.

On the market outlook on the bottom of this page, no surprise to you. You know where first quarter was. I think on the full year North America's clearly down. In our projections right now we're looking at a production number for North America of 13.7. That's down from just higher than 14 for the year earlier in the year. That would correlate with the U.S. sales number of about 15 million, so obviously a weak North American market, weak U.S. market,and we don't expect that to change. That said, the rest of the world is going strong. And if you look at total global production in the automotive business we'd expect '08 to be stronger than '07. '07 was about $70.7 million and we'd expect the production -- total global production about $72.6 million. So global is still going to be up despite obviously a very weak North American; weak in terms of volume but also weak in terms of mix.

Commercial vehicle no surprise to you first quarter. Our commercial vehicle business is largely North America and the North American downturn hurt us badly in the first quarter. We still expect that to improve in the second half of the year. So from a medium standpoint -- a medium truck standpoint we'd expect North American volume to be about 220 versus 206 last year and class A 230 versus about 204 last year. So we are still looking for an improvement, obviously focused later in year, not the first half of the year. Off-highway continues to be good growth, North America is weak because of the downturn, the recession and construction in particular is weak, but we're seeing good growth and a large part of our footprint in off-highway is outside of North America.

The second big issue challenge we have is obviously steel. We're really seeing steel increases at unprecedented levels. I've never seen anything quite like it in my career. In the first quarter scrap and out rolled steel is about up roughly 30%. That's first quarter '07 to first quarter '08. More importantly those prices are continuing to climb. By the end of April the scrap steel, which we focus on, is about $600 and most recently the last couple of days it's reached $700. So this has been an amazing growth in steel. Obviously a big challenge for us. We purchase about 1.5 million tons of steel a year, both in steel and products with steel content. We don't buy a single source of steel. We buy it globally, we buy it in different markets, we buy it in different types. It goes into a range of products we have. And again, from a customer standpoint we have a number of different arrangements by customer and by business that lets us mitigate some of the cost exposure.

We're really doing three things to had mitigate our exposure on steel. One is on the supply side, working with steel suppliers. We get some lag before the steel cost gets to us, working at sources, working in a number of things in that area. The second area that we're now focused on is recovery actions with our customers. This is tough business in a tough climate, but frankly we have to be aggressive with our customers. We're doing it in a positive way, but we really need to work with our customers to get some relief on steel pricing. And then third, we're continuing to work on additional cost actions outside of steel in manufacturing and overhead and supply chain. So all three areas are very important to us. This has turned into our number one priority right now to offset the cost of steel, so obviously very important to Dana.

To give you some idea of the scope of this we outlined in our 10-Q quite a bit of detail on steel, probably more than you're used to seeing, but because of its magnitude for us we thought more was better. We don't know what the rest of the year is going to look like on steel cost and we're suggesting here that if steel prices average $525 -- the end of last year they were $300, first quarter, a little over $400, and if scrap steel prices were $525 -- now remember, there are a number of variables before the steel actually flows into our products. There's a timing issue, type of steel in the recovery. Obviously in the recovery there's a number of variables, as well. But a reasonable estimate is steel scrap prices average for the year $525 that would cost us net about $70 million to $100 million. If steel stays at $700, as it has been the last couple of days, that's going to be another $100 or so beyond the $525, so that would increase our exposure beyond this another $25 million, $30 million. Those are recovery actions. We'll keep you updated, but we thought it was important to give you some idea of what it meant to us. But most importantly, our focus on reducing and offsetting those costs, either by cost actions or by pricing actions going forward.

Just a brief update. On page 8 and 9 just to remind you again something about Dana. Diversification is an important strength for Dana. Page 8 we show it in some detail. We've talked about this in the past. We're diversified globally, although obviously a big footprint in North America. Diversified by customer. Our three largest customers are Ford, GM and Toyota. And then, diversified by product. As you can see here off-highway and commercial are important businesses for us, in addition to the automotive side, and 38% of our '07 sales were nonautomotive markets. That was about 42% in the first quarter of this year given the weakness in automotive. Another cut of our business on page 9 is interesting. Our product mix is also diversified. We've talked about in the past and we'll be glad to talk more about it. We have seven product groups, we run those on a global basis. This is a different cut. It just shows you what products we make. Obviously we're heavy into light axles, heavy axles driveshafts, structures, sealing and thermal, as you can see this has businesses, but we thought we'd give you a reminder that we are diversified Company, both by customer and by product and also by geography.

Let me stop there and I'll turn it over to Ken Hiltz and go through the financial information.

Thanks, John. Good morning and thank you for joining us. Our 10-Q for the first quarter of 2008 is a complicated document. It captures our final month of operations in bankruptcy, our emergence from bankruptcy on January 31st and our adoption of fresh start accounting and the first two months of post-bankruptcy operations. In our presentation today I will try to simplify some of the complexities of the presentation and provide some insights into our performance and the effects of our emergence from bankruptcy on our financial reporting. Turning to slide 10 let's take a look at the income statement for the first quarter. On slide 10 we've started with our reported results for the quarter and removed the effects of our emergence from bankruptcy and fresh start accounting. In our 10-Q we are required to break out the preemergence activity from the postemergence activity. This is in recognition of the fact that we were a different legal entity after emergence. Future presentations of 2008 results will continue to separate the preemergence activity from the postemergence activity in this manner. For purposes of this presentation, we've combined the activity for the quarter then removed the accounting effects of the emergence and the adoption of fresh start accounting.

Although the income statement reporting effects of our emergence from bankruptcy are few they are significant. The largest effect is in the reorganization items, which reflects the recognition, the cancellation of indebtedness income and other charges related to reorganization. In the column headed "Fresh Start Adjustments" we show the removal of some of the amounts charged to income after the adoption of fresh start accounting. The first of these is $19 million charged to cost of sales, which includes approximately $14.5 million for the amortization of the write up of inventory taken in fresh start accounting. This amount amortizes over the first turn of the inventory following emergence. This emergence is almost complete at the end of the first quarter. Also included in cost of sales are additional amounts for the amortization and depreciation of certain assets resulting from asset revaluations under fresh start accounting. The $12 million represents the amortization of customer contracts. The adjusted 2008 column represents the results for the quarter without the effects of emergence and fresh start, thus making it more comparable to our results reported in prior years.

Turning to slide 11 we can see the results of the first quarter on an apples-to-apples basis with 2007 and 2006. Focusing on income from continuing operations before realignment, interest, reorganization items and income taxes we can see the continued improvement in the business on a year-over-year basis reflecting the implementation of our comprehensive restructuring program reported over the last several quarters. The charge for realignment reflects our continued commitment to our manufacturing footprint optimization program and the acceleration of some of those planned activities. As additional MFO opportunities are identified and approved for implementation additional realignment charges may be incurred. Also in the quarter, we see the reorganization items of $30 million, representing mostly the professional fees associated with the end of the bankruptcy. Amounts for on-going professional fees, for claim settlement and other trailing matters from chapter 11 are not expected to be material.

Our income tax expense continues to reflect the tax expense from jurisdictions where we pay taxes without the offsetting credit against the parent's taxes, as our tax loss carry forwards remain subject to a full valuation allowance. To the extent we realize such tax benefits in the future they would be credited to income until such time as the valuation allowance is removed or the benefits are exhausted. Moving on we see the significant reduction in losses from discontinued operations reflecting the sale of the last of these operations in January of 2008 and an adjustment to retained liabilities. While a few customary post-closing adjustments remain open under the divestiture contract any future impacts from these discontinued operations should be immaterial.

Turning to slide 12 we see the sales and EBITDA comparison by product group. The year-over-year improvements are being driven by the continuing impact of the improvements to the business realized under our restructuring initiatives undertaken while in bankruptcy. Significant contributors to the improvement were the gains from customer pricing of $21 million and the labor initiatives which added $27 million. The pricing initiatives were mostly implemented in the first half of 2007, so future quarters should show less of a year-over-year impact. The labor initiatives, on the other hand, should continue to show a favorable year-over-year performance for the remainder of 2008. We begin realizing limited benefit from our labor initiatives in the second half of 2007; however, the majority of the initiatives did not take effect until our emergence from bankruptcy on January 31st of this year. Thus the first quarter only shows what is effectively two months of cost reduction from the initiatives that took effect both emergence.

An initial look at sales indicates that sales were even or up in all product groups except our commercial vehicle product group. The sales decline in 2008 reflects the unit volume reductions that began in 2007 driven by changes in emissions requirements for trucks in the United States. Although the new regulations took effect on January 1, 2007 the effects were not seen until several months later, as truck manufacturers were able to continue to sell inventories of engines produced under the prior standards. These effects began to be seen in the second quarter of 2007 and sales have been slow to rebound under the current economic conditions in the United States.

What is noteworthy is that our management team was able to mitigate the impact of this significant decline and then to maintain profitability. Overall, our sales increased by $167 million over the first quarter of 2007 versus the first quarter of 2007. Currency gains accounted for most of the increase, with overall organic improvement of $18 million. The relatively small organic improvement reflects the weak North American commercial vehicle and light truck production, including the effects of a labor strike at a major American tier 1 supplier offset by approximately $78 million of organic growth outside of North America.

On slide 13 we present our first quarter cash flow, with cash flow used by operations adjusted for the effects of emergence and fresh start. As expected the emergence process used cash operationally as the Company funded its obligations to the VEBA trust that was established by the unions and retiree committee to provide future healthcare benefits to Dana retirees. These payments fulfill Dana's obligations for healthcare for its U.S. retirees and eliminates both Dana's cost and funding obligations for these benefits going forward. As you can see from the slide, the effects of fresh start have no cash impact.

Looking at slide 14 we can see the comparisons of cash flow for the first quarter with 2007. The increases -- increases in working capital were a significant driver of cash used by operations. Several factors account for the increase. First, the use of working capital is normal in the first quarter to the effect -- due to the effects of traditional year-end shutdowns by many customers, which result in seasonally-low levels of working capital at year end. With respect to the comparisons of 2008 to 2007, the net use of working capital in the first quarter of 2007 benefited from an aggressive effort in 2007 to collect past due accounts that existed at December 31, 2006. Overall, the increase in our investment and working capital is consistent with the changes in sales between the periods.

On the basis of working capital turnover, our trade accounts receivable are unchanged from the same period last year while a slightly slower turnover in inventory has been offset by improving terms in our accounts payable. The effects of a labor strike at a major North American tier 1supplier and volatile production schedules at our customers have had a disruptive effect on our production and resulted in some increase in inventories. We view working capital improvement as an opportunity to increase our liquidity and have focused management attention in that area.

We are continuing to press our suppliers for better payment terms and manage our inventories and accounts receivable to keep our capital working investment at reasonable levels despite difficult market conditions. The remaining increases in working capital are largely attributable to increases in other accounts receivable from a variety of miscellaneous activities. These include accounts receivable from the sponsors of the newly-established VEBAs, as we transition the processing of retiree healthcare claims, an increase in our receivables from insurance carriers as we establish new coverage and process claims, and an increase in receivables relating to value-added taxes -- similar taxes in several European jurisdictions.

Slide 15 provides a comparison of cash used for operations in the first quarter of 2008 and 2007 after removing the reorganization and related items. While the 2008 number is the same as we saw in the previous slide, the 2007 number is a bit more comparable since it excludes the effects of reorganization from both periods. With respect to the rest of the cash flow statement, the $101 million source of cash from other investing reflects the release of restrictions on the cash balances at Dana Credit Corporation, as the DCC obligations were paid in full at emergence. The $205 million cash provided by financing shows the net effect to the various exit financing transactions net of original issue discount of $114 million.

Slide 16 addresses our current liquidity position, which continues to be strong around the world. As the schedule indicates, we had over $1.6 billion in global liquidity at the end of the quarter, including approximately $880 million in the U.S.. A significant portion of this liquidity is provided by our revolving credit facility, which we entered into at emergence from bankruptcy. To date there have been no funded advances against this facility. During the bankruptcy we established numerous avenues for the efficient repatriation of cash from our key operations around the world and have the flexibility to move cash internationally if needed. During the last 14 months of the bankruptcy we were able to provide over $400 million in liquidity to the United States through our cash repatriation program. We continue to expect to repatriate cash from our overseas affiliates as their businesses grow and they develop other sources of liquidity.

Moving to the balance sheet, on slide 17 we see the most significant effects of emergence and fresh start accounting. Conceptually this is the same as what was covered on a pro forma basis in our year-end 10-K and our conference call in March, so I will be brief in my comments. The reorganization adjustments include the cancellation of the old shares, the issuance of new common shares and settlement of the prepetition debt, the issuance of the new preferred and funding of most of the exit term loan, net of original issue discount. The fresh start column includes the step up in value to reflect the reorganization value under the approved plan of reorganize and the related recognition of intangibles assets. The significant increase in noncurrent liabilities includes deferred taxes relating to the step up in values.

Moving to slide 18 we can see the balance sheet at the end of the quarter reflecting our fully-emerged state. The key changes that occurred between emergence and the end of the quarter were the final borrowing under the term loan, which you see in the long-term debt net of OID, and the funding of the trust for union VEBAs. Now that we are emerged there are no liabilities subject to compromise. On slide 19 we summarize the key financial reporting areas that will be affected by fresh start accounting in the future. The inventory value was increased by $169 million under fresh start accounting. Ordinarily this entire amount would be reversed to cost of sales over the first turn of the inventory after emergence. Because the Company is on LIFO accounting for its U.S. inventories, only the portion related to its non-U.S. inventories will be reversed at this time. We recognized $14 million of this in the first quarter and will recognize the remaining $1 million in the second quarter.

With respect to the intangibles described -- as described in note 7 to the -- to the 10-Q, the Company capitalized various intangible assets with a range of useful lives. Certain of these are being amortized. The Company expects amortization charges of approximately $22 million per quarter for the next several years until certain of these assets become fully amortized. Similarly and described in note 2 to the 10-Q, the Company had its property and equipment appraised and adjusted the values and remaining useful lives based on the appraisals. Depreciation is expected to be approximately $6 million higher per year based on the adjusted amounts. Prior to the emergence the Company had significant net operating loss carry forwards for U.S. income tax purposes. As described in note 18 to our 10-Q, the reorganization reduced these NOLs to approximately $300 million available after emergence. Furthermore, these are subject to an annual limitation of approximately $87 million. The Company believes that its funding of the VEBAs of $733 million postemergence may qualify those payments for reductibility without regard to the annual limitation referred to above. Please refer to note 18 for further details.

The accounting rules regarding the recognition of future tax benefits do not permit the Company to recognize these potential benefits as an asset at this time. Unless the reserve against the Company's tax assets is reversed future benefits, if any, will likely be recognized in income when such benefits are actually realized. Finally, the remaining noteworthy postemergence accounting matter is goodwill. As described in note 7 to the 10-Q, the Company has allocated a portion of their reorganization value to goodwill in accordance with the requirements of FAS 141. While goodwill is not subject to amortization, the Company is required to assess the carrying value in light of changes in the business and assess the need to recognize any impairment in the carrying value of the goodwill. While impairment is difficult to predict, the presence of recorded goodwill presents the risk that an impairment charge may be necessary in the future.

Thank you. Like to turn it over now to our new CEO, Gary Convis.

Thank you very much, Ken, and before I begin I'd like to say that when I joined the new board in December of '07 and learned more about Dana, this important auto manufacturing American company with a strong heritage I got excited about the possibility of getting more involved to help Dana regain its core strength and become a premier leader in providing high-quality components to the auto industry. As you can see on this slide, my focus has been on jump starting our operations, starting with manufacturing, our core and largest business activity. We're realigning resources internally, as well as bringing new people with deep knowledge and experience of the Toyota production system to support our new initiatives and today I'll cover three specific initiatives in some detail; shared metrics, the Dana operation system, and footprint optimization. While Dana's a global and highly-diversified company with over 100 manufacturing plants, employing numerous principles from my Toyota experience I expect to enhance and strengthen the capability of the thousands of dedicated men and women who work very hard for Dana every day. And on the next slide let me start with our new shared metrics.

You can't improve what you can't measure so our effort here is to create plant-controllable shared metrics with targets across the entire enterprise. We call these key performance indicators or KPIs, and they have been developed with the full participation and input of our manufacturing operations leaders. Thankfully safety and quality have made great improvements over the past few years and we'll continue to focus o in these areas. But really our strong effort and this whole effort globally is to reduce cost. We'll focus on productivity, operational equipment effectiveness, things such as premium freight, inventory, utilities, the plant-controllable cost that are available for us to dramatically reduce. We'll provide standardized review cadence. We currently have 14 pilots underway in our plants. We will evaluate those and then roll them out globally in June. Our whole effort here is to make things visible; clearly grasp our conditions are, share it with all the employee that is can make a difference, and engage them for their improvements. And then work together as a team to make good things happen.

On page 22 for the first time in several years we gathered our key manufacturing operations heads from around the world to openly discuss and develop a shared vision of dramatically strengthening and sustaining our manufacturing capability. Together they developed and agreed on deployment steps for the Dana operation system. This will be utilizing many tools and concepts derived from experience at Toyota. A commitment to train people on various tools, processes and rules to enable continuous improvement and the understand that we will learn this by doing. It is kind of like riding a horse. You can read all sorts of books but only when you get on the horse will you really understand what to do. And I'd like to very much value and encourage the perseverance requires on the shop floor to make these kind of improvements. In phase 1 we will roll out the focus in North America, where our greatest opportunities exist, and then follow that with global roll out later on.

On page 23, I'd like to discuss our manufacturing footprint optimization. This point is that throughout the last several years there's been dramatic industry changes going through; unprecedented moves, plant closures and a change in the landscape. Based on that we need to continue to continuously evaluate our footprint and are we positioned in the best places for the products to best serve our customers. On page 24, to provide consistent leadership to this important core business we formed a new organization at a presidential level directly reporting to me. Its function is as a support organization and it's formed to expediate progress in the three areas and other initiatives that I mentioned earlier.

This group is led by Gilberto Ceratti, who is President also of our structural products and driveshaft products groups. He's a Brazilian with over 30 years in Dana and strong manufacturing experience with high energy and passion for manufacturing. With him we are bringing in house strength, as well as some outside new talent, such as our new Vice President of North American operations, Marty Bryant, who has extensive Toyota experience. The team will engage the plant leadership and union partners to own and drive changes necessary to win in today's highly competitive marketplace and truly support their efforts. My vision is to strengthen Dana's Kaizen power, their capable of continuously improving and grow our own capability internally.

On page 25, although I've been discussing our manufacturing operations improvements primarily, my opinion is all of Dana must improve their operational effectiveness. The Dana operations system principals and tools will be used actually across our organization to improve efficiency in our support organizations also, such as supply change management, the human resources, information technology, finance, engineering, et cetera. Our goal is to drive out waste in all the systems and business processes. The whole focus here is, who is my customer, what is my product, is it exactly what the customers need, what they want and what they expect? So I think the real test is, when we ask ourselves as an internal supplier if my customer were free to select other providers would they still want me and would they still select me?

Thank you for your time and now I'd like to turn it back to John.

Just the last page to wrap up here, page 26. We lay out again our key priorities for 2008, We discussed these the last time we spoke earlier this year. Priorities are the same, they will remain the same the rest of this year. I won't go through the recent actions. We've talked about these during the call. You can see our focus for the balance of the year. Again, I'm not going to cover those in detail unless you have questions. I would have to say we think we're off to a reasonable start, although clearly we have much more to do in just about every part of the business. We're going to keep you updated on progress. 2008 as we discussed, as well, is a tougher year than we expected in many respects, but it is almost standard procedure for the auto business these days. So our focus remains the same. Our focus is very clear. Our top objective is to drive value over time. That's what these priorities about, that's what everything in the foc -- on the focus of Dana is these days and our aim is to drive that value over time and demonstrate that in the market and we think we can do that.

Now let me stop there and turn it over questions.

(OPERATOR INSTRUCTIONS). Your first question comes from Brian Johnson with Lehman Brothers.

Good morning.

Morning, Brian.

Pick up the phone here. A couple of things. First strategically and then we've got some housekeeping things around the modeling. Strategically, what's your reaction to the ARM surcharge announcement and how does that fit into your thinking on steel?

Well, we are watching --

Yesterday afternoon they announced they were imposing surcharges on their shipments to pass on steel costs.

It's interesting. We are going to watch and see what happens. I wish it were as easy to get our customers to accept them as to put them on, so we're going to watch it with interest. We're really looking at what -- when we talk about steel, when we talk about our own business issues, we're approaching had on a customer-by-customer basis. We have different arrangements with different customers, so we don't think a one size fits all works for us. But obviously we have to be aggressive about it and we have to do it in a year that's tough for everyone. But the size of the steel increase is so unprecedented that we have to go after it and we are.

Second question on -- I think you might have mentioned this, something after 1Q -- I mean 4Q, where are you on new business backlog, what with you going to be sharing with us and just if you don't have numbers, what's been the trend and have you seen an up tick since you've rejoined the ranks of the publicly traded?

Yes, in terms of the last couple of years we've held our business well so there -- it wasn't a case where we lost a lot. There isn't a case where we have a big hole coming. I think the thing -- the last couple of months we've been focused on driving new business but also driving new business and old business that's profitable, because it's easy to put on business that doesn't make any money and that's not what we are about. If you look at our new business wins, this is pluses net of minuses, the last 12 months plus, say the early part of '07, we've added about $200 million of new business. That's a plusses net of wins. So our win to loss is about two-to-one to three-to-one.

About 76% of that is outside of North America, not a surprise given the normal cycle of big programs in North America, they don't come up every year. There's an interesting pick-up program we're working on in South America, a lot of frame and prop shaft business. An engine application in Europe that's very be interesting. A new product for us in our thermal business called thermal acoustical protection shields. These are basically heat shields, but a new business for us and interesting business. So we have a number of wins in at that area. I don't want to go through any more than that. Obviously our North American business is still very important to us. We're pushing very hard, but again, as I mentioned before, our new business wins have to be predicated on profitable business.

And then a couple of things around some of the details in the numbers. Could you reconcile the interest charge in the income statement to the exit financing terms? The exit interest rate we thought was 6.75%, which even after you add the amortize of the OID it would seem to get us to a number below what was reported.

You also have some of the amortization of debt issue cost in there. There are some other noncash interest charges that show up in there. We have the interest from the -- from the European credit facility. I don't have a full break out of interest expense in front of me. We can certainly get back to you on that, but --

Why don't we give you that detail, Brian, so you --

Yes, we'll follow up and just try to make sure we understand what was one time --

Yes, that's no problem.

-- and what's the run rate. Then you also had $17 million of realignment charges, $30 million of reorg charges, what's like to be the rate of that going forward?

I don't think the reorg charges should be material going forward. Most of that work is behind us at this point. There may be some continuing legal cost, but wouldn't -- obviously without the process in place it won't be nearly as significant as it has been in the past and we will not be funding the expenses of all parties engaged in every process going forward either. So, that amount should be immaterial going forward. In terms of realignment, the realignment is really more driven by announced MFO-type activities, plant shutdowns and things like that. We've -- and relocations. As we sit here I can't tell you what level of announcements may or may not be forth coming. I think as you heard from Gary's presentation and from John's comments, we're very focused on getting the cost profile right here, making sure we've got the optimal manufacturing footprint on a global basis, and as the market continues to change and we continue to look at that, I think it's fair to expect some changes but it's very difficult to give specific guidance as to what those changes might be.

Right, until you get the plan.

Yes, and that -- you would see a charge there but typically when you see a charge there you would see an announcement that goes along with that if it's any kind of a significant charge. So you would see that coming and understand that -- generally when we have those charges there's a pay back associated with that investment. It's made for a reason. It's made because we see a better way to produce in that future that justifies that action, so it comes with up side.

Okay, final question. In terms of -- if we were to think of a First Call GAAP net income for 1Q, ex a lot of the restructuring items, have you taken a cut at that or where would you broadly guide us what should be in and what should be out?

First quarter GAAP net income I think I'd look at what we showed on slide 10, which you'll be able to go back and get. I think that's a fairly close approximation of what that would be.

But in terms of how other companies often report in terms of adjusted pro forma GAAP net income or non -- so we'd say non-GAAP income on a pro forma basis?

Well, we can look at the -- given the complexities here there are a number of different metrics that you could focus on, and so we've tried to be pretty conservative, I think, in just pulling out the reorganization and the first start items. Obviously as we walk through the items that I mentioned before you do have reorg in there, you do have realignment in there, you do have loss for discontinued operations.

And what kind of tax rate should we think about against those if we want to back those out of net income? It was easy to back those out of pretax income, but the question we're getting from some people who are modeling in detail as well is, what what would be the tax impact of those?

I think the realignment would depend on where it would be since it's -- if you assume that it would be North America there wouldn't be much tax benefit associated with that. The reorg items are predominantly North America, U.S., so there wouldn't be much tax benefit associated with those and the discontinued operations really shouldn't be material and it could happen -- there's both a European component to that that and a U.S. component to that, as well. So it's -- it'd be tough to say but I don't think that that's going to be a material piece to it.

Okay. Thank you very much.

Your next question comes from the line of [Robert Fraley] with Fortress Investment Group.

Good morning.

Hi, Robert.

Just a couple of question. First on the commercial vehicle side, should we just look at this -- particularly in heavy truck, should we just look at this business as going forward one that's cyclical with the market or do you see that as a growth area beyond that?

I think it is. The nature of the beast it is cyclical. The emission regulations have enhanced that cyclicality. It was always cyclical because of business cycles and then the emissions have made it worse. We have an emission requirement coming up in '10, I think. We're not expect that to be as pronounced in terms of the volume effect as it was last year, but we're still going to get that. We like the business a lot, we think it's a growth opportunity. We are very focused on North America, so part of our game plan will be to look at opportunities outside of North America, namely China, but elsewhere as well. So we like this business, we think we do well at it and it's a business we'd like to grow and the cyclicality will be part of it. And the game plan for us is to make money even in a down year, and I think in the first quarter we demonstrated we can do that. So we do that in a down year you take a lot of the cyclicality risk off of the table.

Okay, thanks. Then just a couple of other items here. The other income, which is something you've been reporting for a while and has generally been a pretty significant number. can you just give us a sense of what's in there, because I think there was some confusion on our part as to whether or not certain items should legitimately be included in EBITDA and I think some includes FX and I think some includes interest income. Could you just give us a break down of what's in there?

Bear with me, so hang on just a minute. Thanks. Yes, we have -- the largest piece of that is the foreign exchange gain, it's about $18 million in total adding the two together. There's a $40 million -- looking at the first quarter 2008 and combining the two periods as they're presented in the Q, the foreign exchange income was about $18 million of that, we have interest income of about $15 million, and the rest are relatively small pieces.

Okay.

Robert, all of that is in note 19 in the 10-Q.

Yes, it's described in note 19.

We haven't pushed it down by business, Robert. You could argue we should and maybe we will over time, but we haven't pushed it down by business.

Understood, thanks. And then just the last couple questions. One, do you have an updated CapEx number that you're expecting for this year? I noticed the first quarter was at $45 million but I think you had previously indicated that you thought $300 million to $350 million was a good number to use just as a sustainable CapEx number. And then the last question is just on the -- when are you going to have an answer on the deductibility of the NOL for -- related to the contribution to the VEBA?

We haven't changed our outlook for CapEx. We'll obviously monitor it so as it gets tougher -- the economic climate gets tougher this year we can take a --we'll take a look on it month by month, but we're still looking at the same projections we had earlier in the year. On the NOL?

We're still in the process of looking at that. I don't have a timeframe yet. It hopefully will be in the very near future. We, I think, put a fairly open discussion of that in the footnote in the Q. We'll try to maintain that. But regardless of the decision that's made there it won't affect the current reported earnings because we have a full reserve on our U.S. tax loss carry forwards anyway, so there's --

We'd like to get that resolved, though, as quickly as we can.

Great, thank you.

Your next question comes from the line of [Brad Schitenberg] with Lehman Brothers.

Yes, (inaudible), good morning. A couple of questions. First of all, is there -- can you discuss how much benefit could be expected from operational excellence initiative and what sort of timeframe are we looking for in terms of improvements?

It's a bit too early to put those numbers out. We're obviously continuing to work on those, but clearly we expect this to be a major driver of cost. As we looked at our cost structure there's a lot of things we don't like about it and we have do more. The issue is really how you drive it out, so the reason -- and Gary has really been leading this charge -- the Operations Excellence makes a lot of sense because it's a very clear way to drive cost out of the system while we improve the business. If you take cost out the wrong way you can destroy businesses and destroy value over time, so you have to do it carefully. And of course, coming out of a couple of years of bankruptcy and some other issues we had some areas, frankly, that weren't performing for a variety of reasons, machines weren't kept up, that sort of thing. So we have tor create some savings so we can get that up to a par that's going to make it work for the Company. But bottom line, we're not ready to put that on the table yet, but we'll make sure you understand that going forward as soon as we can.

Okay, and the time frame?

We're looking at sooner versus later, so we haven't put a time frame on, but -- Gary, I don't know if you want to talk about it, but obviously sooner is important here.

Yes, it's hard to put a time frame on these kind of things. It's kind of like building a house. You need to build a foundation first and so that's what we're all about. Building the foundation and things that the plants control, making the reality of what we actually are doing visible to everyone, transparent. Setting targets in those areas and aligning our resources to go in and achieve those targets. So, as John said, depending on which plant you go to -- and we have a variety of not only products but just different regions, which is both a strength and sometimes a challenge. But I can tell you there's a sense of urgency in the Company, I can feel a sense of energy that's coming out of this initiative, and I expect it to come to the bottom line.

Okay. At some point are you going to become more specific once you get your hands around it?

We haven't made that decision yet, but we'll obviously -- let's get some progress first and then we can talk about it more.

Okay, got it.

We understand you'd like to see more specifics.

Yes. On the working capital expectations, going back to the plan coming out of bankruptcy, in the first year I believe you were expecting an improvement of roughly $250 million. Have those expectations changed at all, in particular given Q1.

There's a lot going on in the $250 million that, in the plan. I think in part because there's a lot of reorganization stuff in there, so you've got to wash out the reorganization stuff. I think -- and we really don't want to keep going back to the plan and certainly don't want to be updating the plan, but I think the comment -- the underlying business assumption in the plan was for no real improvement in the -- in the key working capital components of receivables inventory and payables, so that does remain as an opportunity. I think the increase that we're seeing here in the first quarter is a seasonal change and we would expect that to reverse itself and follow the seasonal trend and, of course, will be impacted by volumes and currency effects and steel prices and other variables like that.

Okay.

And the -- it's a difficult comparison because while we had reorganization things in the -- in that plan we did not have fresh start in there, so a lot of those values are different.

Okay. Just strategically, I think on the last call, John, you talked about the seven businesses operating mainly as stand-alone businesses. Can you talk about how synergetic they are, how much potential is there for improvement from maybe better integration and how do you think about this portfolio of businesses going forward?

We're going through that very exercise to make sure where can we create some opportunities, and think of it two ways. Think of it as the Operations Excellence piece, how do we drive cost out of the system, and then as an overlay, how do we think about various opportunities to do better than that strategically. So we're looking at both of those. In fact, between our businesses there's some overlap, and we're looking at that, but a sealing business is different than axle business. They're completely different. What can be done differently is our manufacturing approach. So in many cases the Operations Excellence is really taking a look at manufacturing operations on a global basis.

Gary described the roll out plan. We're starting with North America first. We want to start with our axle, light axle and driveshaft businesses first. That's our top priority for a variety of reasons, but we'll roll that out to the Company. So on manufacturing you really can look at it across businesses. But our businesses are different for the most part. Even our axle business, our light axle business in terms of customers, in terms of what we have to do is different than our heavy business. So, they're different for a re -- they're businesses that are separate for a reason. That said, we're continuing to look at a number of different options and we'll keep you updated as that progresses.

Okay. And then, lastly, regarding the backlog, in terms of the new wins versus the programs that roll off, what's the net margin impact from -- your backlog is net positive impact on revenues. What's the expected margin impact?

We haven't laid that out, but I'll tell you any new business we're putting on is going to be profitable.

Okay. And last -- and just one more, on taxes, any guidance?

I really can't give any further guidance than what we've already said. We have got -- until we're generating taxable income in the U.S. we would not get any benefits from the NOLs and that's fairly complicated because it ties into our repatriation program. If that's in the form of dividends it creates U.S. taxable income, so there's a lot of moving parts that can go into that. But it's very difficult as we sit here to give you any kind of direction that the tax provision is likely to take, other than I would expect it to continue the way it is until we see some significant changes in the U.S..

I think clearly the this NOL that we described, this second NOL from the VEBA-related contribution, very important to us, a lot of potential tax benefit there. So we're working very hard to make sure that's real and we can take it over time.

Okay. Thanks.

Your next question comes from the line of [Bob Sales] with L&K Capital Management.

Just a couple balance sheet questions first. The $1.1 billion of inventory on March 31st, can you give us a sense of the impact on -- of the steel prices on the total inventory, so as steel goes up what will be the impact on inventory there for working capital?

I don't think we can lay that out for you [until the bought[, but it does have an impact. obviously. In our structure's business, for example, we buy steel through the customers and that gets a higher in inventory (inaudible). We have frames in inventory, that value will be higher because of steel. So you're right that there will be an impact. We can't tell you how much that is today.

Okay.

We'll try to work that out over time.

Of the $1 billion in other noncurrent liabilities on the balance sheet, can you break that out in a little bit more detail?

The biggest piece of that, as I briefly alluded to, is the step up in taxes that we have. With the write up in assets that went along with the fresh start we had to recognize approximately $270 million of deferred taxes to go along with that and so that's a big chunk of the -- of that. It also includes a number of employee benefits, such as the pension -- the pension plans. We still have some underfunded pension plans in Europe mostly. There's a breakdown of most of that in the 10-K. We don't go into as full of a breakdown, but the components basically have stayed the same except for the large increase in deferred taxes.

Okay. And then, you gave some detail on the impact -- I thought you said the impact of today's current steel price would add another $25 million to $30 million in incremental cost and I think you quoted a steel figure in there. Can you repeat what you --

Yes, those are hypothetical numbers so who knows what steel prices are going to be. We're kind of watching it like everybody else. We said -- the numbers we put in our Q and the numbers we have in this presentation, we said that if scrap steel prices are $525 for the average year -- and remember, they were a little over $400 for the first quarter, takes a little bit of time for the new steel prices to work through so you don't get an immediate impact -- but at $525 average year we said in the Q that that would give us an impact, rough numbers, $70 million to $100 million. And the reason they're not as precise as we'd like is because there's a number of variables; timing, type of steel, how much we get on recovery, but we thought it was important to give you some indication and we did that.

Now, most recently, last couple days, steel has jumped another $100 -- this is scrap steel I'm quoting now -- up to $700. Now, is it reasonable to expect it's going to be $700 for the rest of the year? Who knows. Our expectation is we'll hit a peak and then we'll back down. Normally commodity markets tend to overshoot, but we don't -- we're not experts on steel prices. If they did remain at $700 for the rest of the year it would probably add another $25 million to $30 million. These are rough numbers, so the numbers before. Again they're very dependent on timing and type of steel, recovery, a whole host of issues that can walk through there, but just so you know what we're talking about.

Most importantly on steel -- and I think we made this point before -- we're working on three approaches to mitigate that. One is in our supply side, our purchasing people are working very hard to mitigate that. We're working on pricing recovery with our customers and we have to work on that very aggressively. And then we're continuing to work on other cost offsets, which we, frankly, would have liked to put on the bottom line but we may have to use to offset some steel costs. So there are things we can do to offset them, but it's a major impact and we thought it was worthwhile to highlight it and tell you everything that's on our mind on steel so at lease you can -- you'll recognize it as we go forward. That said, we're working hard to get through it and I think these things happen in our business. They seem to happen a lot the last couple of years, but that's what it's about in terms of driving value.

There's a more fulsome explanation than has been in our Qs previously. It's in the MD&A under a section entitled "Commodity Costs." There's a full background on that.

Okay. Thank you very much.

Your next question comes from the line of Simeon Wallace with Evercore Asset Management.

Simeon, are you there?

We are not hearing anything.

Next?

And our next question comes from [Greg Cass] with Imperial Capital.

Hi, guys.

Hey, Greg, how are you?

Good, Thanks. Just on follow-up question on steel impact. I don't want to beat a dead horse on this one, but I'm just trying to understand why there may not be a linear impact for steel prices on -- as they move past the higher end of the, the spectrum. I guess what I'm alluding to is that the $525 you stated in the Q as an assumption, which who knows whether it is right or not at the end of the day, is a 70% increase and the impact you guys gave as a bracket of $70 million to $100 million seems to be a little bit more severe of an impact than the next 55% up based on what your comments were earlier where that would hit you by about half as much in the --

Well, we're talking average year now, so if $700 were the number for the rest of the yea that would add about $100 to the $525, so the $525 would go up to just over $600. So that's what -- now on linearity, there are variables that could be fairly widely -- could widely separate those numbers. We said timing in terms of when the steel price costs get to us, when our customers reimburse us. Type of steel makes a difference here and we buy a range of steel; forgings, castings, bar steel. And then our recovery plans with our customers and in some cases that recovery is very clear contractually, on the other case it's a negotiation. And I don't want to -- I don't want to forecast exactly what that's going to be because it's going vary by customer. So there is a fair amount of range in those numbers, but we thought it was important to give you our best guesstimate of what those are in Q and we've done that.

Okay, and I definitely understand that. I guess my -- with all of the other variables thrown out I was just trying to figure if there was a nonlinear impact as steel prices moved higher. It seemed like -- because $175 delta between $525 and $700 didn't have a --

No, my point is -- my point is that an average year effect would not be $175. For this year a $525 average year, the best you could do would be $100. You'd [walk] that impact in next year, so a going-forward number would be, but the impact on us for '08 would be about $100.

Okay.

So it is linear roughly, but there's a lot of spread in that linearity.

Got it. Okay. Maybe I will follow up with you guys and see if I can get a better clarification.

Hey, listen, if you can understand it I'd welcome.

All right, thank you.

Any insight on steel would be more than welcome.

Appreciate it and that's it.

All right, thanks.

Thank, guys.

And our ne question comes from Simeon Wallace with Evercore.

Hey, Simeon.

Is he there?

Hi. You've noted that most of the business is outside of North America. Can you just remind us how much of it is North America?

You mean your existing business?

Yes.

North America is -- of total business is about 55%, North America.

I'm sorry, within the off-highway business.

Oh, off-highway business. It's about 20 -- 20%, 25%. Most of it is Europocentric.

Okay, that was my next question where -- outside of North America how would you split it up across geographies?

I don't have that information here. I'm looking at Bob Fesenmyer, if he has any detail, but it's roughly -- the biggest markets would be Europe and North America but we sell product around the world. And obviously we'd like to sell more in Asia han we have right now and it's move tag way. Russia will be a market over time. It isn't a market for us today. And we see growth prospects on the off-highway stuff clearly driven by what you're seeing on commodities, so agriculture's very strong, mining. The two big parts of the off-highway business are construction, which is temporarily detailed in North America because of the downturn, but agriculture's still strong, construction will come back. This market, in our view, will continue to grow in the coming years.

So you would -- one of the questions earlier was about the commercial vehicle group and they ask -- was asked about whether it's cyclical or growth, you would throw this more into the growth category; is that fair?

It is right now. A couple of years ago we might have said it was cyclical and it was when you look at the agricultural business, but I think right now, the last couple of years and certainly in my view for the next several years, we're going to see growth in the off-highway business, and it's one that we feel strongly about and we want to take advantage of.

In terms of your manufacturing footprint for off-highway, is it primarily in Europe if most of the business is there or is there a lot of transfer in terms of manufacturing in North America?

There's more transfer than we'd like, but yes, it's more Eurocentric but there's still more transfer than we'd like and our footprint in the off-highway business has to improve so that's one thing we're going to be working on.

And is it fair to assume that in terms of your steel purchasing for off-highway you're able to pass through more of the cost in the off-highway business than you are in your other segments?

Generally that's true but it really customer specific. Some of the big off-highway customers are as tough as any of the manufacturers on the automotive side. But it is a different customer dynamic in general and my expectation is we'll do that but we 'l have to see.

What would concern you in this business?

In the off-highway?

Over the next year or two.

Yes, I think that what's the issues we're focused on are how do we grow the competitive dynamics, what do we do to be successful, how do we run the business better. Those are the issues we're focused on in this business what, frankly, are the right ones to be of concern. In our North American business, certainly in the automotive -- light automotive businesses, on the other hand, it's much more about how to make those businesses more profitable than they are today. It's a different dynamic.

Okay, thank you very much.

Sure.

Your final question comes from the line of Pierce Crosby with Davidson Kempner.

Morning.

Pierce, your line is open.

Oh, sorry. Hi, guys.

Morning.

Could you quantify for us what the incremental savings from the labor deal would have been if it had been implemented before the quarter had begun?

I'm not sure we can do that. The --

We realized about $27 million in savings for the two-month period. We had seen some benefits -- and I don't have the numbers in front of me -- from what we reported in the second half of last year as the benefits.

Can I prorate that or is that going to be double counting certain things?

In our last conference call we talked about labor benefit costs realized of about $170 million in our total -- in our total program. That would include some of the savings that we achieved last year and I'd have to go back and look at the numbers to see that actual number was. Clearly the bulk of the savings did not hit in '07. We began seeing them in the second half of '07 with benefit changes, with changes for the nonunion folks. Most of the union benefits kick in at emergence and -- so I think a simple test would be to prorate that realizing that some of that benefit is going to dissipate in the second half when you get to comparisons with '07 where we actually had (inaudible).

Sure, sure. Okay. With respect to the footprint optimization plans that you're laying out in today's presentation, do you consider that additive to the MFO figures that were always discussed during the bankruptcy? And a follow up to that, the $45 million number that you had as incremental MFO benefits in your bank presentation, is that still a reasonable number?

This is Gary. I think the MFO that I was referring to is new opportunities. This is -- over the last few years things have changed dramatically and so we need to continuously look at our -- where our customer base is and where our supply base is, how we can take advantage of the skill base in various physical locations. Leverage all of that for best cost optimization going forward. So it's kind of a dynamic but we are talking about additional opportunities.

Okay, great. Last question, from an investor relations perspective, do you guys you'll be doing a road show to increase the number of people like me who listen in on these calls and are interested in the stock any time soon?

Yes, we will. We haven't figured out a timing for it, so -- We've been busy on inside stuff but certainly later this year we'd like to get to that.

Okay, thank you.

And any input would be welcome.

The sooner the better.

All right. (LAUGHTER) All right. Well thank you all for joining us today. Looking forward to talking to you soon. Thanks, again.

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