Dana Inc (DAN) 2008 Q2 法說會逐字稿

Good morning and welcome to Dana Holding Corporation's second quarter 2008 webcast and conference call. (OPERATOR INSTRUCTIONS).

At this time, I would like to begin the presentation by turning call over to Dana's Vice-President of Investment Management and Investor Relations, Steve Superits. Please go ahead.

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

Moving to slide number four, today's call will feature remarks by Dana's Executive Chairman, John Devine; Chief Financial Officer, Jim Yost; and Chief Executive Officer, Gary Convis. John will begin today's presentation with a brief overview of some key issues. Jim will follow with a review of our quarterly financial results and Gary will provide an update on our operational excellence initiatives. Following some strategic direction and summary remarks from John, our call will conclude with a question and answer session.

With that, please move to slide number five and I will turn the call over to John Devine.

Thanks, Steve. Good morning, everyone. Before we talk about Dana and that is the bulk of what we want to talk about today, just a quick note on 2008. The good news for this year is that it's two-thirds done almost. The tough news is certainly 2008 in North America is a lot more difficult than any of us would have expected at the beginning of the year. In fact, in my career which is longer than I like to think about, I can't recall a more difficult year. We used the word "significant head winds" to describe '08. That's probably understated for a lot of reasons. When you step back and look at North American market today, the automotive market, there are four, at least four things going on maybe more.

We were getting a cyclical downturn, we've lived with that before, but this is different. Because now we were getting a structural change driven by high gas prices in the segment shift and that's had a significant impact on the light truck business in North America. Not only in '08 but certainly going forward. Add to that the financial pressures on many if not most North American companies both OEMs and suppliers. And then add on that the technical changes that are going through the business. Really the drive for better fuel efficiency what that means in the boast supplier in the OEM communities are very significant changes. I would have to say this is nothing short of revolution. And I would like to say it's limited to 2008. But it isn't. We will live with these trends for sometime. Creates risks for companies but also opportunities and our game plan at Dana is to take advantage of those opportunities while we at least mitigate the downturn.

It certainly -- certainly as we talk about Dana, we have made progress. I would describe our second quarter as reasonably good performance given what's going on. As you look at the operational changes we have made this year, very consistent with the priorities we set out early this year. We are strengthening our management team. I will show you more on that in a moment. We are spending most of our time on the North American operations and fixing that. Gary will talk about that in a moment. We have a strategic plan in place and progressing and I will cover that in more detail later. And financially we maintain a very strong cash position and strong balance sheet, which I think is a real plus in this environment.

We put at the top of our hit a parade given what's happened on steel and lower North American volumes, a response plan you can see that on page five driven by pricing recovery on steel. Dressing upside down contracts. We will talk more about that later. Right sizing North American operations in this new environment and we will talk about that more as well and obviously we have to do and will do more cost reductions both this year and next.

When you step back and look at the environment and I will talk more about steel in the next slide, I won't go through the volume scenario. I think you know that. Certainly a combination of light trucks down sharply. Class Five-Eight trucks are down as well. I would characterize the commercial truck business different than the automotive business. Commercial truck business certainly going in North America a cyclical downturn and we seen that before. Certainly impacting us this year. It's probably some impact on construction has impact there as well. We expect that business to bounce back. And bounce back reasonably quickly next year. Both five through eight.

On steel prices, we aren't assuming we have a reduction. We are assuming that continues for sometime. And really if I could ask you to turn to slide six we will give you our latest view on steel prices. We talked to you at end of the first quarter. And you can see on that slide we are looking at $550 a ton for the remainder of the year. And the bottom of the page you can see that our initial projection for '08 was more continuation of where steel wound up at the end of last year, $300 a ton. I would point out this is scrap steel. We use as we explained many times a variety of different steels and we were focusing here on scrap steel because of just to make it simple. But we use a variety of steel and everything castings and forgings and so on. But you see what's happened to steel from $300 at the end of last year, the '08 actual is continued to climb well beyond the $550 projection we had at the end of the first quarter and now looking at $850 a ton for the rest of this year.

What that does to our profits is shown in box in the middle. You can see in the first half that it costs us about $27 million net of recovery. There is some scrap in there and some pricing. We were getting a higher impact in the second half of the year for two reason's. One is steel prices have gone up and even though recovery is shown at 50%, we were still lagging with a lot of our customers. We don't get immediate recovery on steel. I will talk about that later today. For the year, we are looking at a net reduction and profitability of $127 million. We described that as $70 to $100 at the end of the first quarter. It's higher than we expected last quarter. And this recovery is 48%. I would tell you on the 48% recovery, that's not nearly where we want to be. Our target here is full recovery. And our issue on steel is to stop the trend line going up, to that extent that's possible. We think it will stop at sometime. And then getting a recovery back in line so we do get full recovery on steel over time. Obviously ahead for thus year and it's more than we expected.

On the next page, page 7, just a quick update on management team. This has been a top priority for us and continues. You probably saw the note that you Keith Wandell has joined our Board. He is COO at Johnson Control. Terrific guy. A nice help. And a welcome addition to the Board. We welcome him. Jim Yost has joined us. We spent a lot of time at Ford together. He was the CFO at Hayes Lemmerz for several years before he joined us. Another welcome addition. And Gary and the team have been bringing in a number of new people. Approximately seven new operations leaders who are very experienced. Really made an instant addition to the team. We brought in new head of engineering for the commercial vehicle group. A number of things here. This is not to say we don't have good people in Dana. We have a number of good people. I think we have a strong team. But it is important that we add selected talent. We are doing that. There will be more to come throughout this year.

With that, let me stop and I will turn it over to Jim.

Thanks, John. Appreciate everybody joining us on the call today. If you turn to slide nine, you can see there are second quarter highlights. On the financial side we achieved an EBITDA of $128 million. That's down a little bit from 2007. We will have a slide on that later to bring that into focus. The net loss was $140 million. And that included an $82 million impairment in our drive shaft business. That's an impairment to goodwill as well as some of the intangibles. We have positive free cash flow of $38 million with was good driven largely by reductions in working capital. Cost savings totaled over $60 million compared with 2007 and that was better than what we projected at the last conference call and as a continuation of our efforts to restructure and reduce our cost across all of our businesses. Driven to a very large degree by the work that was done while we were in reorganization.

We finished the quarter with a very strong cash position of $1.2 billion and liquidity worldwide of $1.6 billion and will cover that in a little more detail later. In addition to the financial improvements we made, I mentioned we had some significant working capital reductions about $70 million. Gary will talk a little bit later about the manufacturing footprint and head count reductions which we have underway. And we are -- have been able to and continue to bring back cash from our overseas operations as we deem appropriate. And we continue to have very good capability to do that to support our cash needs here in the United States.

Turn to slide number ten, this is a numeric summary of the financial results in the second quarter of 2008. You can see their sales were higher than $2.3 billion. That's up 2%. We will cover that in a bit more detail in the next slide. Again, EBITDA will cover it in a little bit more detail later on. Capital spending was a little bit down versus last year, $47 million. And as I mentioned free cash flow was very strong in the quarter at $38 million. And we have defined for this purpose cash flow that's really cash flow from operations excluding any Chapter 11 claims less capital expenditures. So it excludes any financing actions.

Turning to slide number 11, we summarized our sales results for the quarter and you can see there again we are up about $44 million, overall 2% or so. And that was driven largely by a decline in the volume and mix. A little bit of pricing in there net. But that was more than offset by currency adjustments. Translation of our sales overseas back into the weaker dollars. For the quarter, we were very strong results from the offhighway business. It was up commercial vehicle and ceiling were up for the quarter. And light Axel and structure were down because they are primarily driven by North American results.

Slide number 12 shows our change in EBITDA, as I mentioned we were down about $15 million quarter over quarter. But that was more than explained by currency trends transaction income. That was $26 million less than it was last year. Last year we had in the second quarter an $18 million one-time gain on intercompany loans due to a substantial decrease in the dollars. So we booked $18 million of gain last year in the second quarter on the intercompany loans which were classified as short-term. This year because the dollar actually strengthened a little bit in the second quarter, we booked about $8 million of losses. So overall a net change $26 million year to year. But if you exclude that $26 million, actually EBITDA was up about $11 million. You can see the explanation of that was primarily due to the very strong cost reduction actions of $64 million. Gary will get into that in a little bit more detail. But that more than offset the impact of steel costs which is $25 million net. Gross cost of steel increase of $38 million offset by $13 million of pricing. And then obviously we had declines in volume and mix of about $22 million.

Pricing overall for the quarter including steel as well as other pricing changes was about $7 million favorable. That unfavorable pricing of $6 million was primarily due to a one-time favorable pricing action last year. Overall we had no declines in pricing effectively during the quarter but actually increase of about $13 million due to steel pricing increases. On the cost savings item, in 2007 we picked up about $200 million of reorganization related savings and that's when we discussed in the annual call. We expected to pick up a little bit more than that $200 million this year, so if you take it on a quarterly basis that we expected about $50 million based on the work that was done last year. Since we emerged in January, we continued to push for additional cost reductions. And we have been reducing head count. As a result, we actually have achieved a little bit better savings in this quarter than we expected at the beginning of the year. Again, a pretty strong result there.

Slides number 13 shows our segment reporting results for both sales and EBITDA. And you can see there the ups and downs on sales. The EBITDA largely tracks by segment the results of our sales changes year to year. Below the line there on the net EBITDA, you can see shared service and administration. These are not only our corporate expenses here in Toledo but represent some of our shared service activities globally which actually support the operations but which we have not historically charged those expenses out to the operations. You see there are significant reduction in those costs. We continue to go after not only operational costs but administrative costs. We talked about the foreign exchange.

The other item there on other income is primarily due to the FIFO to LIFO adjustments. All of our segments report on a FIFO basis, but we report corporately on a LIFO basis on a consolidated basis. With a significant steel price increases, the adjustment in the second quarter five toe to LIFO was about $20 million. Obviously, if we reported on a FIFO basis, our second quarter results would have been better by that $20 million. Again, showing that our results in the second quarter were pretty good. Everything considered. And I will just mention that most of our peers do not report on a LIFO basis. So actually we have a better result compared to most of our peers as a result of that.

Slide number 14 shows our net debt position. We ended the quarter with about a billion-two in cash split evenly between the US and our international operations. We had been able to bring back plenty of cash from the those international operations. Back to the US to serve as debt and other requirements. If you take a look at our total debt on a balance sheet basis, that's about a $1.4 billion. Our net debt was just about $200 million. Again, a very strong result. Debt is down about $80 million since the end of the first quarter and that's primarily due to a reduction in the use of our European securitization programs. We have been able to reduce debt, cash remains strong. So net debt is fairly small.

On slide number 15, you can see our global liquidity, status. If you take that $1.2 billion of cash and then reduce that for the amount of deposits we have supporting our obligations, letters of credits and things like that as well as cash in our less than wholly owned subsidiaries by which we don't have immediate access, we have available cash globally of over $1billion. In addition to that cash, we have two programs; a borrowing base revolver in the United States as well as a significant line of credit in Europe based on securitization and receivables. Those total a little bit less than $600 million as well as some other miscellaneous lines of credit. In total we finished the quarter with over a $1.6 billion of global liquidity and that's more than enough for us to manage our operations globally. And I will comment that we have no cash borrowing under our US facility and only about $19 million borrowed in our European securitization facility. As I mentioned, plenty of liquidity and plenty of cash and ability to move that around as we see fit. That finishes the financial section.

I will turn the mic over to Gary.

Good morning. I would like to give you an update on the Dana operating systems that we are working on very vigorously. As you might imagine, it's patterned after the Toyota production system. Very simple purpose to provide our customers with the highest quality parts and very competitive prices.

And really at the heart of this is also a develop our people and a culture within Dana that is sustainable for ongoing continuous improvement. It really is about problem solving, raising issues. And being able to attack them by energizing the entire team. What this does is energize an organization that begins to understand team work, respect, and involvement. First we have to stabilize our organizations and we are doing that I think aggressively. This can then lead to the improvements that are mentioned already. This is the long-term transformation. It's not something that you do overnight. We were doing it through meaningful metrics with transparent reporting and visualization in the plants. And very importantly full involvement and support, to do that we are building a core team of highly qualified leader that can help the plants where they might struggle and training and in actual floor support. And to this point, quite frankly, I'm pleased with the acceptance and the capability strong initiatives of the entire team members and the management that I seen in the plants.

The next slide 16 shows you some broad metrics that were following. We have 17 sub components that we measured but nothing really outstanding or unusual here. But what is different is when they are all plant controllable factors. They are also very standard. We were rolling this out not only the visualization process but the management of them globally and expect to have that in place fully by October 1. The transparency helps people understand and attack problems for good team work. And we are reporting this in a cadence that is both daily, weekly and monthly at various levels.

The next slide shows progress and various key performance indicators that we achieved. When you compare the first half of '07 to the first half of '08, this give you a few snapshots. Safety one of the most important aspects of managing the plant. Significant improvement both in OSHA recordable incidents and as well as loss time accidents down 48% and 68%. Also the customer delivered quality very proud. Is that benchmark level of 25 problems per million parts. And this is a first time I think we overall company reduced our problems to the customers to this level and now we are working on sustaining and continuous improvement. Additional premium freight has dropped over half. So that's a very significant cost reduction. We are enjoying.

And I will give you an example of some great progress at limeo, Ohio. Which has been a difficult plant for Dana. Honestly, the team members there and the management team today are producing more than 2000 heavy duty drive shafts. Perfect quality and in service kits which we have a very strong aftermarket business. We improve from May around 6,000 in that month to over 108,000 in the month of July through their activities. Also we have been running the numbers of the Dana operating system pilots throughout North America primarily and have enjoyed about a 15% to 30% improvement in those pilots.

On page 20, I would like to give you a brief update on the Chapter 11 activities. We are in the process of closing several plants as was enacted during Chapter 11. We pulled ahead to the Ontario plant about three-quarters or beginning to see progress financially from those activities. Also in St. Mary's plants on schedule both. We are relocating some very important assets down to South America and India that will support new business that we've got in those regions.

On the commercial vehicle business, we were shifting production to Mexico and in India. Some of our low cost country initiatives. At the same time we are installing great practices in places like Humboldt and Henderson, Kentucky, and generating significant savings in both housing and gears in that area. The new action that we pulled ahead and aggressively executed was the closing of a foundry in Venezuela. Both cutting operating expenses and logistics cost and the risk of supply. We were also studying wide range of other actions. And we were going to take quick action based on what we see both beneficial for us and our customers. And we are rightsizing our work force. Is that difficult and challenging activity and overall in 2008 we are targeting about a 3,000 hourly and salary work force reduction in our plan to achieve that.

And now we will like to turn it back to John who will give you a wrap-up and a summary.

Thanks, Gary. One more item we like to cover before we turn it over to questions. And that's a view on our strategic direction.

Before I do that, I want to emphasize that Gary and the team and the bulk of the efforts here at Dana this year have been focused on this operational excellence. It's fundamental that we approve our manufacturing and our production capability throughout the world. It drives costs. It drives our productivity and drives our revenue, our own competitive position. Obviously was an issue for us as we walked in the door. Gary and the team are addressing very aggressively. And we talk about strategy. I don't want you think that we are worried about that. But we have to fix the operations and that's been a very top objective and frankly from my stand-point I think the team has made good progress there.

On the strategic direction, this has been an issue for us and probably an issue for you as well. Where do we want to drive company going forward. Look on page 22 and look at present Dana and I will give you more detail on this in a moment. We have seven business lines today in a number of components. Drive line plus structural components and engine components. That's been thinned down over the years. But we still have a fair amount of diverse businesses. We served three markets. The automotive and the North American automotive business we talked about certainly in the revolution we discussed. Commercial truck much different market and we think in beyond '08 we will perform well. Offhighway has been booming. With the exception of construction we think that will continue as well.

Important as well from Dana cultural standpoint. We run these seven businesses quite independently. One from the other with multiple processes. That probably worked at some time in our past but doesn't work today for cost reasons. We aren't as quick to our customers. Our costs are too high. That has to change and we were in the process of doing that right now.

When you look at our future direction, there are three elements to it. In terms of our focus it will be on drive line products. That's our 100 year heritage. We do it well. We think that market despite the technical changes coming in the marketplace will continue to do well in a variety of different markets. We believe the way we run the business today is correct. Based on the three global markets talked about before. The automotive business and this has been admittedly basically like truck. Commercial truck and off highway. Our goal here is to get common business and operating processes as soon as we can.

The second element on the second page and page 23 of our strategy is to fix North American automotive business. This is our view early in the year. I think it's more pronounced given the chaos in the North American market this year and expecting to continue. And we are looking at two options here just to be very direct. We either have to consolidate as others will as well to reduce costs and generate cash in the North American business. We want a North American business that could well be slower but it has to generate cash. And that is a very important goal for us. Of all of the things to do, this is a tough one. Probably more difficult now than it was thought to be earlier in the year. But very important to get this done and we will move aggressively here.

Then the last part of the equation is to leverage our growth opportunities. We believe we have several. On the automotive side in Asia, namely China, India, South America, we have good growth and we can continue there. Commercial truck in North America, but certainly in Asia we talked about China in the past. We think we have substantial opportunities there and we are pursuing those. And off highway and several different markets. It's really a case of clear direction, fix some of the business and grow other parts and that's our game plan. The game plan we want to make considerable progress with this year.

I have attached next couple slides a little more background for you in Dana. You have seen some of this before but it's important to refresh your memory. On slide 24 we show our Dana revenues. This is the first half of '08. So this has changed a little bit with the weakness North America. And chose it by region and business line. On the regional side you can see about half our revenues in North America that was a little higher than last year, about 31% in Europe, South America and Asia/Pacific and we think question grow that Asia/Pacific mix. On the business line basis as we covered before we have seven businesses. Obviously light Axel was the biggest business off highway 21%. Commercial vehicle was 14%. But I would point out that about half of our drive shaft business is in the heavy side. If you lump that in with commercial vehicle as it belongs, that's 40% of our business in off highway and commercial vehicle.

Thermal ceiling structure business are important to us as we talked about our focus going forward, I'm sure you a lot of questions, what's the story with those businesses. I would say first of all we regard these as good businesses well run. We are pleased with them. We are saying that we are evaluating our strategic options in these businesses. We are going through that process right now. We have not made any decisions yet and will tell you as soon as we do.

The last schedule I think is also important. Dana revenues by customer. Point here is I think we have diversified customer base. Ford continues to be our largest customer and an important customer in the commercial side Paccar would be our largest customer. Very important for us as well. But it is a diverse group that I suspect will change over time.

Then the last slide on page 26 our summary. Again, to cap what we said before. We think we had a reasonably good quarter. Despite high steel costs in North America and volumes. We aren't expecting a big change in those areas. We are reducing our revenue outlook for this year from the $9 billion we talked about it in the first quarter to what is now a range of $8.6 billion to $8.8 billion. Near term focus very clear to respond to the steel costs and lower North American volumes. We were looking for full recovery on steel. We were being aggressive on that. We are right sizing North American operations still work in progress but we have to be aggressive in that as well.

We have to resolve upside on contracts. These are contracts frankly that have been in a loss position for sometime. They have been the loss has been magnified by steel price increases recently. Those are things that are not sustainable so we are pushing those very hard to get those resolved. Across all of our business activities despite some progress on cost our view is this is a good start. We have a lot more to do.

We laid out our '08 priorities earlier this year. Those are the same. We were pushing those hard. Rebuilding the management team. Rolling out of the operational excellence. Fixing North American operations. Executing strategic plan I just talked about. New business and growth markets and particular places like China and Brazil. And overall in every business we have our focus on earnings cash flow and maintaining a strong balance sheet which I think is very importunate kind of markets we are looking at today.

We will stop there and I will and operator begin the Q&A session.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Himanshu Patel of JP Morgan.

Good morning, guys. The 3,000 workers that you announced would leave Dana in fiscal 2008, first of all, what percentage is that of the '07 ending North American head count and number two, how much of that is incremental to the prior cost savings plan?

The percentage is around 17% of our North American workforce. And I don't recall what we had said earlier. But people reduction --

I think respectively it's all incremental.

It's all incremental as far as I recall.

We would have done some of that, but obviously given the magnitude of the volume changes we have to go after it more aggressively as just about everybody else as well.

Do these heads pretty much all come out in the second half of 2008? Or would there be a tail to this where some of this goes into '09?

We have been accelerating the rate of this activity through June around 1,000 of the 3,000 were accomplished. And then in the last month another 600 to 700. And we expect most of the remaining reductions to be done in the third quarter.

And would a --

That's our objective.

And could you help us just ballpark sort of the savings associated with this?

I don't have a number calculated in my mind. We could get back to you and give you some detail on that.

We will lay it out every quarter. There is no guidance scenario as you can see. So we are reluctant to lay that out. There are still a lot of pieces but we want to give you an indication of the head county. You can probably do the math yourself.

Second question, John, on the discussion about what is core and what is noncore in the business, can you just for the businesses that were identified, I guess as being noncore, can you give us a sense for where you are in your thought process on that? Have you had discussions with other parties to potentially either sell these businesses or maybe partner them with someone else? Or is this still very early stage where you haven't even got than far in the discussion?

I don't want to say too much in this. We are working this process hard. I don't want to go through too many details or hear those separately. I don't want to go through too many details. We wanted to lay out where our thinking was. We are going through the process. I would emphasize we haven't made any decisions yet and the decisions we make are based on one criteria. How do we achieve the best value for Dana going forward? These are good businesses. We like them. Good teams. But like everything else, you to make hard calls about where your focus is and where it isn't. We will keep you up to date as that progress.

One last question. You know have a lot of cash on hand as is relative to some your peers. And maybe some of these strategic actions would generate even more cash. What is the plan for proceeds or even the excess cash longer term? Is it to simply pay down debt?

I think if we do make any divestitures, the plan would be to use those net proceeds to pay down debt.

Okay. Great. Thank you very much.

Your next question comes from the line of Brian Johnson of Lehman Brothers.

Good morning.

Your line is open.

How are you?

Good morning. Can you help us understand going forward the FIFO to LIFO translation adjustment. And just scenario of steel stabilizes what does that look like if steel goes up and then steel goes down. What would those scenarios look like so we can think about how to model this?

For us, we obviously have recognized in all of our inventory the impact of steel as the end of June. So that was the reason for the $20 million impact. Obviously that's as we reflect that both in inventory and then in our cost of goods, we actually essentially recognized the impact of that steel in our production through the quarter. We will see some continuing increases in steel costs through the third quarter, but clearly a lot less than what others would recognize. So compared with our peers we actually had higher costs in the second quarter than they have had. And then in the third quarter our costs would be lower than their costs would be on a cost of goods sold basis.

Okay. Because you taking the head inventory?

Right. Well, any of our sales, obviously, on a LIFO basis have a higher cost to goods sales in the third quarter as a result of the higher steel costs.

The big factor which is you know as well as we do is when does that line stop growing. And we aren't here predicting steel prices. But we will have to see. We assumed it's flat. I suspect it will be more volatile than that where we are watching it intently. Who knows. We need to see that line flatten out or go down a bit as it has in other commodities. But we aren't predicting that yet in our financials. We are assuming it's flat. If we get any relief that will help us.

Does that mean that next quarter we will be seeing a squeeze in the steel costs heading the segment EBITDA line but then being backed out at the bottom?

I think you will see --

Trying to figure out how this isn't double counted.

That's what will happen. You will see that the segment results will be depressed a bit and then there will be -- I won't say they are necessarily will be a reversal at the corporate because that depends on what the steel level actually is. We might still see overall net increase in steel costs flowing into the third quarter on a LIFO basis, but you are correct in assessing that the segment results would be lower due to that.

Okay. Second question is around kind of off highway business and then the backlog. Are you still comfortable with -- can you off highway continuing its growth rate and then on the backlog is any of that reflected -- you have an updated backlog number for '09 or 2010 yet?

We didn't put one in there. It hadn't changed a great deal on the backlog since our March report. In March we said our '08 to '10 backlog was $200 million. It's about $270 million right now. Most of that or a lot of it was outside of North America. China dry shaft and India off highway work and Europe and South America. We have a big contract with Volkswagen in South America. So it's up a little bit from last time. It hasn't changed that much.

In terms of the -- The offhighway business continues to do well. When you look at myriad of marks in that business and as you know it's a number of them, we are reasonably selective but we still have a number of businesses. It's been weaker no surprise in the US on construction. We were seeing a little bit of reduction in Europe on construction. But agriculture is still doing well around the world. As you know, agriculture on construction is about 70% of our business. We are doing well and pretty much across the segment. As we look at growth opportunities my personal belief is that that's an important area for us and we were pushing it very hard. Not only today but think being products and markets and people on how we grow that business going forward.

Brian, I wanted to make one clarification. I know there are many different definitions of backlog and net new business and everything, I want to make sure that you are clear on what John said. That's a net new business number just the way we reported it last quarter. That may differ from other people's definition of backlog.

We we have been conservative in how we define that. You will have a variety are the of definitions as you probably know.

Okay. Thanks.

Anita, we have a couple of questions over the internet. I would like to read a couple of those and then get back to the people on queue.

Yes, sir.

The first one is for Jim. And it's your bank term loan has a 4.5 interest covenant which will be tested December 31. Do you expect to reapproach lenders to reset this covenant given the six month EBITDA is $275 million?

At the present time we don't have any plans to go back and approach our lenders. Obviously given the volatile situation, that could change going forward and depending upon what happens with any divestitures we will still need to go back and address those issues with our lenders. So present time we are -- we don't have any plans. We have the ability to pay down some debt as we go because we do have some excess cash. No plans at the present time.

The next one is a little bit of a confirmation of something Jim said earlier. EBITDA had an other loss of $24 million in the quarter. What is it from? What's the run rate for these charges? Same question for the $8 million currency loss.

As I mentioned, if you look at slide number 13, there was a $24 million loss that was other income loss and that was primarily due to the impact of FIFO/LIFO adjustment in corporate that wasn't in the reporting segment. I think we covered that. And the same on the foreign exchange. The $26 million variance was due to a one-time gain last year of about $18 million in the second quarter for the gain on intercompany loans. Due to a weakened dollar and in the second quarter this year we had an $8 million reversal of that. Overall a change of $26 million due to foreign exchange gains and losses on intercompany loans.

One more right now, Anita, from the internet. For John. Please provide more detail around your request to end your relationship with Chrysler. Is the auto maker demanding cost cuts or refusing to pay increases?

Well, first of all I don't want to say more than what we said on our press release. To be clear, we aren't looking to end our relationship with Chrysler. Chrysler has been an important long-term customer to us. We would certainly want to keep maintain a long-term relationship that works for both of us. We are not out here to pick a fight with Chrysler. We have enough things to do. That said, we have a business today that is in a significant loss. And we need to address that. We have a dispute with Chrysler on the best way to do it. We have filed a lawsuit in an attempt to resolve that dispute, as quickly as we can. And we will let it play out. Again, our intent with Chrysler is to have a good strong long-term relationship. That's our intent. This is a dispute. It's a tough one and we have to get it resolved as quickly as question.

Anita, question go back to the queue now.

Your next question comes from Roger [Powell] of Clover Lake financial. Your line is open.

Good morning. I was wondering if you quickly bridge the change in revenue outlook I noticed price increase and volume p. I was wondering what you are factoring in terms of the new lower price revenue outlook -- I'm sorry.

For '08?

I'm sorry?

Are we talking about for '08 or beyond?

For '08.

We said we had been in a revenue outlook of $9 billion at the end of the first quarter. That was our outlook. Given what's going on in North America, we are now looking at $8.6 billion to $8.8 billion. Business outside of North America is held up well. We don't see a big change in that. We were looking at some of the North American production volumes and then you see them down 30% sometimes more. And some of the segments we participated.

Okay. Thank you. And a question on the commercial vehicle side. I understand cyclical. I was wondering if you elaborate more on the drivers that you see like happening or catalyst events happening to bounce back in '09?

I think again the commercial business is different than what's going on in the light truck and overall automotive business is the reason I talked before. This is a cyclical downturn. You can argue and I would agree that the construction downturn has hurt this business certainly in the class five to seven. Fuel economy has hurt it. So people kind of delay purchases. We have seen at least the downturn before to give you some numbers. In the class eight business we were looking for 230 or so this year earlier in the year. I don't they that was unrealistic. That's below normal kind of a standard level which is 250, 260. Class five to seven, we were looking at initially of 220, 220,000 units. We are now looking for class eight something close to $200,000, 205,000. And the class five to seven is down to 186,000.

It's weak this year but I think it's a normal cyclical adjustment. We are still expecting next year to bounce back. Although I would say the bounceback is not exceptional. We are looking at a class eight number next year of about 260,000. Which is about normal replacement volume. It's not extraordinary. And class five to seven, just a modest uptick from what it is this year, maybe 193,000. Some of the construction issues we talked about this year will extend next year. We expect that business to bounce back. But I would not describe that as extraordinary at all. But it's good business. We do well on it. We like it. And we think it has future growth for us.

Thank you. And one last question. On the cost savings of $64 million, I was wondering if you could write that down for us a bit. Get a gauge how much is from cost cutting or how much is that from to optimization.

I would say probably in the range of a third of that is due to some pricing actions we take in. The bulk of it is labor and SG&A savings and some manufacturing footprint savings that we have. So the bulk of it is labor and SG&A savings.

I would say two additional things on the cost side. We aren't at all satisfied with our pace on cost reductions. We have more work to be done there. And secondly importantly the efforts that Gary has been leading on the production system and the overall Dana operating system are important but they aren't bearing the fruit yet. That's in the front of us. And that's not a surprise to us. That's pretty much with a we expected. We are pleased to have cost reductions that we had in the first half of the year. That's a good start. In our mind we have a lot more to do here. We have to put a target on that yet. But you will see that going forward.

This is Gary Convis. Just bit more clarification. You can imagine the dynamics going on in the light truck business in North America. The OEMs of have been very -- they going through some very difficult times and unprecedented times. Things that were we delay launch of a wonderful new truck suddenly for a couple months or shutting down factories for several weeks. These are very unusual and our guys react to that quite frankly in a very business-like and orderly way to try to offset those costs. A lot of energy is gist in the dynamics of going through the changes that are happening structurally in this industry as well as working on building the foundation for the Dana operating system. Just a little bit more color on it.

You have a rough outlook for '09 as the cost savings will flow through?

We are working on it.

Thanks, that's all.

Next question comes from the line of Greg [Paths] with Imperial Capital. Sir, your line is open.

Hi, guys. Quick question on in terms of the capacity rationalization. Issues that are facing you ahead in North America. You mentioned 3,000 incremental head count. We have 1,000 by June. You said 600 to 700 probably done in July. And the remaining in the third quarter, is that a moving target that could grow? Or is that baking in a specific estimate for 2008 and 2009.

We think that pretty good estimate of what is going to be required, but as John has outlined, this business is not normal. So we will have to see how the economy goes. How steel price goes. How the recovery of the industry overall looks and respond to accordingly. Right now this is our best targets and reaction to what happened so far.

On the cost side of that, can you guys give an estimate what's spent to date in terms of any kind of buyout severance and is there chance of cost to grow or could be more complicated with unit issues as you decide to cut more North American capacity.

The hourly people we have the ability to do almost immediate temporary layoffs. When we do that that doesn't cost us any money. So we have done that. And done it very quickly. When you talk about longer term restructuring and exiting people on a regular basis, that's a different issue. So we haven't done a lot of that. We have done some of that in some of the plant changes we had so far. Obviously in this industry we have to look at a number of things. We aren't looking at our footprint going forward. What do we need in North America. What is the volume in North America and what do we have to do to compete. Our strategic plan is we have to have a business that North American automotive business to cash flows. It's fundamental. That's with a we have to get to. And we are working on it. We were looking at the market every day. We were looking at our plans and we were trying to get the resolved as quickly as we can.

The 3,000 temporary layoffs were to become permanent, you have a cost associated with that and --

Don't get ahead of us here. We will tell you on that as we get closer. Obviously a lot of discussions with our people and with unions and so on that we have to be careful with.

I understand. That's all have I for today. Thank you guys.

Thanks.

Your next question comes from the line of Chris [Flaring] of [Goldpoint Capital]. Sir, your line is open.

Good morning, guy.

Hi, Chris, how are you?

Good, how are you? You said you had more than sufficient liquidity. I wondering what you thought was minimum level to run the business?

Quite honestly we haven't fully assessed that yet. We were taking a look at based on revised projections, working capital requirements and so forth. Just as a guide post generally speaking 10% of revenue was more than sufficient to run a company of this size. So I would think significantly below $1billion would be a minimum of what we need to run the operations. We haven't come up with any specific number that we feel comfortable with at this time.

All right. Thank you.

Our next question comes from the line of Nelson [Cumin] with Greenlight Capital. Sir, your line is open.

Can you say what EBITDA for the North American operations was in the second quarter?

I think we highlighted that. We looked at it. We haven't highlighted that. We don't have a an easy number for you. I have gone through the numbers by region. We don't have it handy.

It's negative, though?

No. No. It's positive. The issue on our North American business is very much around our North American light truck business. It's a problem. We aren't happy with it. We are making money on the commercial truck business and our off highway business and every region we have.

Thanks.

When you think of our business, 40% of our revenue is commercial truck and off highway, that's performing pretty well. We have more to do and more cost and so on and more growth. That's a different issue. Our issue was the North American light vehicle business that is a problem. Interesting this business has gone from a couple years ago to the most profitable in the world to what is knew problem for us but a problem for everybody that I'm aware of. And it's going to take more work and more restructuring. To sort out the demand and the right cost structure.

Thank you.

Your next question comes from the line of Himanshu Patel of JP Morgan. Sir, your line is open.

Just a couple of follow-ups. Any outlook on working capital for the second half?

Historically we use working capital our requirements goes up in the first quarter and you saw that in the first quarter. Second tends to dip a little bit because production volumes at the end of June is so down. Normally there is a working capital increase in the third quarter. Unclear what's going to happen this year with the decreased volumes because we are -- do have positive working capital that tends to be driven by volumes, I'm not sure what is fully going to happen in the third quarter, probably not a significant move. And then in the fourth quarter we normally have a decline in working capital. So I would say in the second half we would probably expect somewhat no change to somewhat positive working capital in terms of improvement of cash flow. I would say there is a reduction in the second half. Not sure we will have to see how we come out on the volume decline at the back half of the year.

This is something Himanshu, we are pushing very hard as our focus is on profitability and cash. Working capital all the components are an important piece of it. And operating system we talked about the financial focus is really putting the right pressure on working capital to thin that out as much as we can.

Okay. And then I'm just looking on slide 13 at the sub units in terms of EBITDA and external sales. Can you just help me understand a little bit on what's happening with margins in the off highway business to directionally it looks like revenues are up sharply year-over-year.

It's called steel.

Mainly steel.

Yeah. I mean, we have some other issues there. I would say that we are still not performing and that business. We like it. It's profitable and doing well. Our profit performance has to improve. But the two periods you are looking at in terms of what happened is called steel costs. We have -- our goal here is full recovery on steel for every customer we have. But we do get a delay and we are working through that delay right now.

Okay. One last question. Arvin Meritor had a noncompete with Carlisle in the off highway business which expired and they talked about getting back into that business. Have you guys sort of thought that through in terms of what that could imply for your business? Any sense on sort of which segments they are looking to get into and do you guys have overlap or do you think that's largely a nonevent for you guys?

Listen, any competitor is an event for us so we take them all seriously. There is a lot of competition in that business today. There is a lot of overlaps and underlaps. Again, when you break apart that off highway business there is enormous complexity. Listen, we think competition makes us a better company. Think that's fine.

Okay. Then John, you said 70% of off highway was ag and construction. Can you break that down?

It depends on the year. It's about 70% of the revenue is in the agricultural segment and the construction segment. There is a lot of other categories. Mining and so on. The big volume is agricultural and construction. Agricultural is still booming. Construction is down in the US as you expect given what's going on in the construction business. A little softness in Europe. But all in all the overall business continues to perform quite well.

What about between ag and construction, is it half and half?

Approximately. I don't have those numbers. It depends on the year. They both have been growing pretty well the last several years.

Okay. Great. Thank you.

All right -- Well, thank you. We will talk to you all soon. Thanks again for your time.

This concludes this conference. You may now disconnect.