Dana Inc (DAN) 2008 Q4 法說會逐字稿

Good morning welcome to Dana Holding Corporation Q4 2008 web cast and conference call. (Operator Instructions). I will turn the call over to 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 the presentation deck. As referenced on this slide, I would like to remind everyone the topics discussed on this call will include forward-looking statements. Take a moment to review our Safe Harbor statement. Call is being recorded and a conference call on supporting visuals are the property of Dana Holding Corporation. They may not be recorded, copied or rebroadcast without written consent. Our web cast system allows you to direct questions 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 Chairman and CEO, John Devine and Chief Financial Officer, Jim Yost. John will begin today's presentation with an update on some key issues and initiatives and Jim will follow with a review of our December 31 financial results, liquidity and other financial issues. Our call will conclude this morning with a question and answer session.

Please move to slide number five and I will turn the call over to John Devine.

Good morning everybody. Thank you for joining us. I will cover a couple of slides here quickly before I turn it over to Jim to go through the numbers. You've been seeing this page five all year, throughout '08, on our priorities for '08. I'd say it's a mixed score card, obviously our financial performance and plans were below what we would like to see given the lower volumes we saw and higher steel costs. That said and despite a very difficult year, we made important progress in 2008. Around rebuilding our team, jump-starting our operations, including manufacturing, business development, a number of operations throughout the organization. Right sizing the operation began, so at the end of the day I felt good about what we achieved in '08 and for '09 we have to improve that performance based on a lot of the things we got done last year.

If you turn the page six and really, the key for us in 2009 is a plan that I briefly describe here and Jim will describe in more detail later. Our focus is very much on achieving this aggressive plan, we've had to right size operations to what we believe are conservative volumes and we are doing that right now. That will be largely done by the end of this month. We're focused on improving profits and operations despite lower volume this year. That really requires more cost reductions at our plants, more cost reduction activities around the Company, reducing fixed cost in all activities. In margin improvements, both through cost and pricing, with real focus and a continued focus from '08 on our loss and low return business. We made good progress last year and expect to make better progress this year. Throughout the year we focused on maintaining adequate liquidity and profitability. Both are very critical in this environment. Jim will talk more about that in a moment. On our strategic initiatives, as you might recall last year we said we were exploring our options for three of our businesses -- sealing, thermal and our structures business. We're announcing today that we determined it's not an attractive environment, no surprise, to divest our sealing and thermal operations. We remain committed to maintaining their competitiveness, their strong brand reputation and the performance of these businesses and to the customers they serve. While we did have strong interest from buyers in these businesses, but the current environment created a number of impediments to executing attractive transactions, so we are going to keep them and run them hard and work with customers going forward. On the structures business, we're still exploring strategic options and we will update you there as quickly as we can.

With that, let me turn it over to Jim.

Thanks John.

If you would turn to slide number eight for a review of the 2008 results. On slide eight we've summarized both our fourth quarter and full year results. On the sales front, we ended up the year at about $8.1 billion, that's down $600 million from '07, and the fourth quarter came in at a $1.5 billion, also down $600 million, you could see through nine months, our sales were comparable to '07 but the short fall for the full year was equal to our short fall in the fourth quarter. EBITDA we finished at about $300 million, that was equal to the guidance we provided to you in the third quarter call. Given that the fourth quarter volume and revenue was down substantially , we finished with a essentially a flat EBITDA for that quarter. We will have a slide on that in a second. Capital expenditures totaled $250 million for the year. With about a quarter of that falling in the the fourth quarter. On free cash flow we finished a little bit worse than we hoped; we hoped to break even in the fourth quarter, ending up with about a $350 million negative. We came out just a little bit worse than that and again I will have a slide for that in a second.

Please turn to slide nine which shows our fourth quarter sales results. As I mentioned, sales were $1.5 billion, down $636 million. And that was more than explained by the volume and mix short fall; about half of that was in the light axle group and if you wish, you can look at slide number 32 for the detail and the back up. Currency was unfavorable by about $106 million, and that was essentially the result of a stronger dollar. We did improve our margins by pricing actions to the tune of about $66 million which included material recovery as well as some improvement on some unfavorable contracts. If you turn to slide number 10 you can see the results for the full year down from the $8.7 billion we had in '07 to the $8.1 billion, again about $600 million year-over-year. Volume in mix was more than $1 billion in that short fall and the only business that unit that increased it's sales year-over-year was the off highway group. Overall, our margins improved through pricing actions by about $140 million, and for the full year, currency actually was favorable due to the weakness of the dollar in the first nine months of the year.

If you take a look at slide number 11, we've shown you the impact on EBITDA of those lower sales in the fourth quarter, where we were essentially flat, down about $115 million. And again, that was more than explained by the decrease in volume and mix. Steel costs negatively impacted us by about $60 million in the quarter. And we had pricing improvements of $66 million, of that $66 million, $54 million was to offset those material cost increases, so we had a net steel impact of minus $6 million. Cost savings totaled about $15 million.

We want to take a look at slide number 12 and see the full year EBITDA results of $300 million, down from the $450 million in '07. Volume in mix was off $245 million, and our steel costs were unfavorable by about $167 million. Total pricing was $140 million for the year, of which $114 million of that was to offset the steel costs, so for the full year results we had a negative $53 million impact due to steel. Our cost savings totaled $123 million. We had hoped for a bit stronger result there as you can see in the fourth quarter, we only had $15 million, essentially with the rapidly declining volumes, we were not able to achieve the level of cost savings that we had achieved in the first nine months.

Turning to slide number 13, we've outlined our free cash flow for both the fourth quarter and the full year. As I mentioned earlier, our fourth quarter free cash flow was a negative $50 million. Our seasonality on our working capital actually generated cash for us of $177 million. Capital spend $86 million, interest and taxes totaled $46 million, and then we had realignment which is a restructuring cost, as well as reorganization and other costs totaling about $90 million for the quarter. On the full year we were negative by about $381 million, working capital was pretty flat. We had actually hoped to do a little bit better on working capital but we ended up the year with about $900 million of inventory, which was substantially higher than what we had planned but given the rapidly declining volumes, we were unable to use up our inventory, our raw materials as fast as we had hoped and we had ordered and we made a very strong effort in the early part of 2009 to reverse that trend; it is a significant focus for us in the new year.

If you turn to slide 14 you can see our net debt position, we finished the year with $777 million of cash. Total debt was $1.25 billion for a net debt of $474 million. That equates to about 1.6 times EBITDA. Still a reasonably good level of debt for us. The lower loan balance in the fourth quarter compared with our third quarter, reflects the $150 million paydown associated with the amendment we received to that term facility in November.

Slide number 15 shows our liquidity at the year end; we finished with $866 million, of liquidity, which is more than sufficient for us to manage our global operations. The major changes since Q3 are the debt paydown, and then the reduction in our lines of credit in both the US and Europe, due to lower borrowing base as well as a partial restriction of the use of those lines due to our leverage covenants. We expect to have some continual restriction of our availability of those lines of credit as we get in to this year, due to our leverage tests. Our borrowing base will continue to increase as the receivables climb in to March and April.

Slide number 16 you can see our debt maturity profile and as we mentioned before, we have no significant debt maturities until 2014, so no cash impact for that.

On slide number 17, we summarized our US pension and OPEB status. As you may recall, our US pension liabilities were frozen, during our Chapter 11 proceedings. So we have no on going service cost accruing there. At the end of last year our plans in the United States were funded at 92% very good result for us. You can see below the asset allocation at the end of the year and the minus 4.6% return on our portfolio last year, was a very good result largely driven by our liability driven investment strategy which put most of our assets in to fixed investments. We have no cash or profit expense in 2009. Nor do we have any retiree health liabilities due to funding of the FEBA at the emergence of our Chapter 11.

Turning to slide number 18 you can see our diversified revenue base as we finished up 2008, over all about 42% of our revenue last year was in non-automotive. And even within the automotive area, we are very well diversified. Ford was our largest customer, 17%, with much of this revenue overseas. We had significant contributions from Toyota, PACCAR Navistar, Daimler, including its commercial vehicle brands, Volvo, also commercial vehicles, Nissan and Fiat and Fiat, of course, includes CNH. On the right you can see some of our key platforms, the largest platform is no higher than 3% of our revenue. So again, a very diversified revenue base with no significant exposure to any one platform.

Let's take a look at 2009, we outlined on 2009 production assumptions on slide 17. You can see on the right hand side our planning range for 2009, we started out at higher levels in this, I think all of us did. We are planning at the low end of this planning range in terms of how we are gearing our operations and resizing our operations, that low end of the planning range really reflects the most pessimistic of outside third party forecasters. As I mentioned, we are restructuring our operations to meet the lower production levels. In North America we've completed a detailed platform by platform analysis of the 20 key platforms we have, to which we are exposed and we are comfortable we are planning the correct assumptions for these platforms in our operating plans.

John laid out some of the key elements of our 2009 plan and on slide 20, we provided a financial perspective on these. To right size our operations, we will reduce the global work force by an additional 5800 employees in 2009, from the already reduced levels in 2008. You may recall on the third quarter call we talked about a 5000 person reduction. These levels are in addition to that 5000 reduction we announced at that time. Most of this reduction will be achieved by the end of this month, and these will represent a 35% reduction versus our year end 2007 head count. And I will show you that on the following slide. Although volume is uncertain, within our planning assumptions we expect EBITDA to be slightly higher in 2009 than we had in 2008 and to do that, we are driving our conversion cost savings in the range of $150 million to $200 million, largely on the back of those work force reductions. In addition, we've got significant margin improvements already planned; of the $160 million to $250 million range you see there, we have already booked and achieved the $160 million improvement which includes material costs recovery, some recovery of past claims from our customers, as well as margin improvements and $110 million of that $160 million is carryover from last year. CapEx is expected to be about $150 million this year, and we expect to be break even or better in free cash flow. We will manage our operations to drive that free cash flow to the extent we can and we will manage our CapEx within that capability.

You can see on slide number 21, the trends of our hourly and salaried employment since the end of 2006 and the see the substantial reductions we have planned in 2009. As I mentioned the bulk of our reductions will be achieved by the end of this month, so this isn't just planning, this is actual taking out the structure that we have. We will be down about 35% at the end of 2009 compared with the end of 2007, about 12,000 people globally, in line with the reduction in revenue from 2007 through 2009 of about 33%.

No Company can survive on cost reductions alone, so we are continuing to push for new business and on slide 22 you can see our summary of net new business, by region, by year. In total, last year we booked about $1.3 billion of net new business; that's new business on existing and new platforms in excess of those platforms that runoff. As you can see we are continuing to have significant growth in Asia and in Europe, and are doing well in South America.

Turning to slide number 23, you can see in summary, we made good progress in 2008, despite a very difficult climate, a particularly difficult climate in the fourth quarter. We have aggressive plans in place to manage 2009, and have contingency plans in place if the environment continues to deteriorate further. A key priority is to manage our profitability and cash flow this year while continuing our strategic and growth initiatives.

This concludes our formal portion of today's call. I will now turn the call back over to Dennis, our facilitator, who will begin our q-and-a session.

(Operator Instructions). The first phone question comes from the line of Brian Johnson with Barclays Capital.

Good morning gentlemen. On the 8-K press release, can you talk about the $25 million that's between of other income, slash expense that was a positive item between segment EBITDA and overall EBITDA, what's in that?

Let me try and take a quick look at that and get back to you in a second, Brian, I don't have that handy.

Would you like to move onto the next question, sir?

The follow on to that was going to be related to that, the LIFOFIFO accounting on commodities, how did that play out in the fourth quarter versus the third quarter

Overall, we ended up the year with about a $14 million LIFO reserve, that reserve came down during the fourth quarter.

Okay. So that has -- will that be hitting in Q1 as that inventory goes out?

Yes.

Okay. Then the cost saves, if you go back to the plan of reorganization, how much of the cost saves, in particular with regard to labor or other items, were really variable in nature? That is, reducing the variable cost per unit so the aggregate dollars are going to be lower if production is lower. Secondly given that, how do you get comfortable, how could we get comfortable with the cost saves in 2009?

Fundamentally, Brian, the amount that we are showing for conversion cost savings is all in excess of the variable cost reductions associated with lower volumes. We are going to have overall, in excess of $400 million of year-over-year cost savings, but a lot of that is traded out through decreases in volume on a year-over-year basis. So what we have shown you for conversion costs, are those savings in excess of linear volume reductions that we need to take to hold our margins.

My question was the other way, which is how much of the big cost savings target assumed a certain production level, say you have a thousand workers and you are going to save $600 dollars per worker, but if you don't have those thousand workers any more because you are not producing that amount, do the cost saves go down or are we double counting, having gotten that person out but still expecting the cost savings on a run rate basis.

The numbers we are showing assume the level of production that we put in to our planning assumptions. So I'm not sure I'm answering your question.

Okay.

Basically we are planning, as I mentioned, to the lower end of that planning range. We have then calculated our results assuming that volume level, therefore we had negative volume and basically we have to take out people associated with that volume, on top of that, we are taking out $150 million to $200 million of cost on top of that.

Okay.

There is no double count.

In terms of the pace of cost reduction, some of the other parts companies talked about where they are with the European plans and either far ahead or not so far ahead in getting flexible work weeks and other cost savings measures there, how would you characterize the state of restructuring in Europe, as we speak?

Europe is more difficult environment in terms of taking costs out than in North America and even in South America. So we have been working with each of our operations to identify cost savings that they need to take to maintain their profitability at the lower levels. It's a combination of short work weeks where we can take down time, a combination of that as well as government support. So we I think are in pretty good shape overall in identifying the plans and we are in process of implementing that throughout Europe.

When do you expect to get flexible work weeks implemented.

Implementing it as we speak.

Okay. Thanks

The next question from the phone lines comes from [Akshe Maladen] with [Red Foot Holding].

I have a small presentation related question. As of 3Q '08 the segment EBITDA in the off highway business was $119 million. I couldn't get that number to reconcile with the numbers in the 4Q '08 presentation, both in terms of year to date as well as quarter. I was hoping you could explain that or whether that's a movement of numbers between different segments. For instance, if I look at the full year '08 off highway segment EBITDA, I believe the first nine months was close to $120 million. I was wondering why that number was as low as it was.

We noticed that too, this morning and we're following up on it. We can get back to you if we have to smooth the numbers out a little bit we will republish those.

Great, thanks very much.

At this time there are no further phone questions.

We do have a couple from the internet.

One is, how are you going to manage R&D investment to respond to the US governments' goals with the US auto industry?

We are very conscious of the need to change our investment and change our products over time, so we are looking at carefully, obviously in this environment as you saw before, we are cutting CapEx, we're working on a number of products despite those restrictions, that we think will pay dividends for us in the future. I don't want to go too far in to it. One thing that's not totally clear are the US governments'p goals. Directionally we understand what that is, but I think that will evolve over the next year or two. Certainly in our mind we, have to get through this year but have to recognize we have to change our product portfolio. Every supplier and every OEMS can say the same thing, recognizing the focus on hybrids, electric, fuel efficiency, not only here in the States and not only globally but in every business we have. Certainly the automotive business, heavy truck business and off highway business. This is something that's going to evolve over the next several years. But right now, we are changing our R&D investment until we know a lot more about where that going to go. We are looking at a number of different options. But now I wouldn't say there is clarity as to what the government's goals are.

Another one, can you please detail the global backlog dollar amount by year?

I don't have the details numbers with me but it's about $300 million in 2010, growing to about $350 million in 2013, with the important shift taking place,,e that you can see on these graphs, with short-term, larger growth in North America and as we move through the next several years, our large growth is coming from Asia and Europe as a percentage of our current revenue.

That was Jackie Dedo, our Vice President of Business Development.

Let me get back to the question Brian asked first up, the other income in fourth quarter, essentially two major pieces. As you may know, coming out of reorganization, we segregated our asbestos liability into a separate entity. There were reductions in liabilities there of about $12 million, which came through in income, because we do consolidate the results there in to our corporate results. We also had some legal settlements that totaled about $10 million on some pending cases. So the combination of that explains most of that $25 million. Dennis, is there anymore questions?

There are no further questions.

Okay, if there are no more questions, thank you very much for participating in the call.

Thanks.

Ladies and gentlemen this does conclude today's conference call, you may now disconnect