Dana Inc (DAN) 2009 Q1 法說會逐字稿

Good morning. Welcome to Dana Holding Corporations first quarter 2009 webcast and conference call. My name is Dennis and I will be your conference facilitator. Please be advised that our meeting today, both the speaker's remarks and the Q&A session will be record for replay purposes. (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 Investment Relations, Steve Superits. Please go ahead, Mr. Superits.

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. Please 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 our 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. Jim will follow with a review of our March financial results, liquidity and other financial issues. Our call will conclude, this morning with a question and answer session. Now, please move to slide number five and I'll turn the call over the John Devine.

Good morning, everyone. Thank you for joining us. Let me briefly cover slide five and then I'll turn you over the Jim Yost. In summary, and it is pretty clear results continue to be weak. Not a surprise to us but still very tough given the depressed global markets. Revenue was down almost 50% from the first quarter of last year and down from the fourth quarter of last year. So, it's a difficult market really. And every market we have both our light vehicle business, heavy truck business off highway business and certainly in North American and in Europe. Despite the weak numbers, we are making progress on internal movements in the company. Significant progress in right sizing operations, cost reductions pricing and working capital improvements. We have had to move quick all to recognize the markets continue to be soft in both the fourth quarter and the first quarter. We've had a difficult, but necessary requirement to reduce our work force by about 5,000 people over the last quarter. We have been able to achieve pricing improvements despite a tough environment and make significant inventory reductions as Jim will take you through in a moment.

For our '09 focus continues to be on the plan, we looked at earlier this year. Again, right size the operations as quickly as we can. We are making good progress and have made good progress on that. We have done it very quickly. That puts us in good position for the rest of the year. Improve our profits and operational performance. Jim will take you through that in a moment, as well. Maintain adequate liquidity and profits. And I would have to say that's proceeding as plan.

On the continued strategic initiatives, just to update you, when we spoke to you last in the middle of March, we said we had looked at three businesses for sale. Our sealing thermo and structures business. At that time, because of the environment, we decided not to proceed with the sale sealing thermal. They are now very much back in fold and running hard. They are part of Dana and will continue to be part of Dana. The same was true with our North American structures business. It will continue to be part of Dana. We did look over the last two months at selling our South American structures business. We had good interest. but as we progressed and finished a couple days ago, the environment continues to be tough. We aren't getting the value out of it. We decided to keep it. It is off the market.

So, all three businesses we looked at and with the weak market, we are not proceeding at this time. We have incorporated these businesses back into our organization. They are all running hard and will be a significant profit contributor to Dana going forward. That said, we are still looking at strategic initiatives for the company. This continues to be a very difficult market but there are opportunities. And as we progress in this year and next year, we think there will be further on opportunities for consolidation. And we'll continue to look at that. But there is nothing on the agenda at this point in time. With that, let me turn you over to Jim Yost to go through the rest of the material.

Thank you, John. And welcome everyone. If you turn to slide number seven, I'll take you through our first quarter results. Before we get into the specifics, I want to point out a few reporting changes that effect current and historical presentations.

First, we have adopted FIFO accounting for our U.S. inventory. This brings our U.S. operations in line with our accounts outside the U.S. and potential adoption of IFRS in the future and I think it also reduces some of the confusion we've had in prior calls on the inventory adjustments. Secondly, we have aligned or EBITDA definition more closely with the debt covenant definition as we've discussed in quarter four. And finally we made changes in operating segment reporting to reflect our new management reporting relationships and revised allocations of corporate costs. For your convenience we included details walks in the appendix of this presentation.

On slide eight is a summary of our first quarter results compared with both first quarter of last year and fourth quarter of last year. Sales were $1.2 billion that's down $1.1 billion 47% from our results last first quarter and down $350 or excuse me, $305 million from fourth quarter. The next slide provides more detail on the year to year change. EBITDA was $16 million down substantially from the first quarter of last year but up from the fourth quarter. We'll also cover EBITDA in more detail later. But I will point out, that in spike of the fact that our sales were down substantially from fourth quarter of last year, we actually had an increase of $12 million in EBITDA. So, all of the cost reduction and restructuring operations and actions we have been taking are continuing to bear fruit and will continue to bear fruit through the rest of the year. Capital expenditures were $30 million. That was lower than last year. And free cash flow was a negative $200 million, very similar to same quarter last year. And we'll provide more detail on cash flow on a subsequent slide.

Turning to slide nine, you can see the detail of our sales change from 2008. Sales, as I mentioned, were off 47% due to substantial global industry decline. This resulted in a volume of mixed variance of about $1 billion. Favorable pricing increased revenue by $54 million. A combination of base price adjustments as well as some material recovery. The impact of the stronger dollar depressed our sales by $120 million year-over-year. Jacqui Dedo will update you on global vehicle assumptions later in the presentation.

On slide ten is our EBITDA walk from 2008 Q1. After adjusting for the reporting changes I mentioned earlier, EBITDA in 2008 was $134 million. In Q1 of this year it was $16 a reduction of about $118 million. And that reduction was more than explained by volume and mixed changes worth about $200 million or about 20% of the revenue change. Higher pricing of $71 was a partial offset. Overall the quarter benefited from about $300 million of identified cost savings driven in large part by head count reductions in both 2008 and the first part of 2009, as well as substantial cost savings in plant operating costs. As John mentioned, the right sizing of our operations is key to on ongoing performance and we expect the benefits to continue throughout the year.

Turning to slide 11, you can see the detail of our free cash flow. The use of $200 million of cash is largely in line with our seasonality and similar to our 2008 results. Although EBITDA was off by $118 million, working capital was significantly improved versus, compared with last year, and we'll get into a little bit more detail on working capital on the next slide. We spent $68 million on realignments and restructurings to achieve the personal and plant restructuring actions that we have been discussing. Essentially the reverse of the reorganization reductions due to emergence. I think, if you can see on the slide, as I mentioned the $68 million. And we expect in the range of another $100 million of cash outflows this year to complete our restructuring in 2009.

If you'll turn to slide number 12, you can see the detail of our working capital changes. We finished 2008 with a much larger inventory than necessary due to the rapid reduction in customer requirements. We have made inventory reduction a key focus for 2009 and has seen a substantial reduction in the first quarter of $224 million. We expect another $100 million reduction throughout the year, as we continue to implement improved inventory management processes through out our organization. Because of the rundown of inventory, we significantly reduced our purchases with a corresponding reduction in payables. We have not experienced any significant changes in our terms with our suppliers. And overall there haven't been any significant impacts to Dana in our operations or our costs as a result of supplier bankruptcies or shutdowns to date. We expect the bad news of payable to basically reverse throughout the rest of this year, as we begin to ramp up our purchases to support continuing growth in our revenue later this year.

On slide 13 is our cash and debt positions as of the end of March. We had $549 million of cash and borrowings of about $1.2 billion for a net debt position of $679 million. The cash was relatively evenly spread between the U.S. and international operations.

Global liquidity is summarized on slide number 14. And we ended the quarter with $687 million of liquidity which includes $412 million of available cash. That's cash less deposit supporting obligations and cash in less that wholly owned subsidiaries. And the available credit lines of $275 million for our ABL facility in the U.S. and our secured facility in Europe. None of that's lines were restricted other than the normal borrowing basis, which of course were lower due to the relatively low receivable levels in inventory at the end of the first quarter. As we mentioned before, we can operate in the range of $250 million to $300 million of liquidity to satisfy our on going operating requirements and normal seasonality intermonth swings of cash flow. So, again, more than enough liquidity to run the business.

On slide 15, you can see that today we are announcing a debt repurchase plan which includes a Dutch auction tender for up to 10% of our existing outstanding term B loan. This tender is being offered through Citigroup and will conclude on May 12th. Pricing is being offered in the range of $0.40 to $0.44. We believe this is a good opportunity for us to repurchase our debt at a significant discount and will significantly reduce our leverage. I'm going to ask Jacqui Dedo, our Senior Vice President of Strategy and Business Development to take us through our new business and market assumptions on the next two slides

Thank you, Jim. On slide 16, you can see our profitable growth focus is off to a great start in the first quarter with almost $800 million of net new business or about $120 million per year, with good growth rates in both Asia and Europe. This is incremental to our $1.3 billion reported last quarter. On slide 17 we look at our view of the markets. As we look at global markets we modified our forecast from Q4 a little in North America. From our Q4 planning we lowered our North American light vehicle range from the low side of $8.9 million to $8.3 million, our medium from from $130 million to $135 million, and our heavy truck from $145 million to $135 million. We made a larger change in our global off highway market look. We are now forecasting that adds will be down year-over-year 40% globally versus 25% previously forecasted and construction 70% year-over-year down versus 45%. Overall, we expect the second half in our total markets to be better than the first half. Jim?

Thank you Jacqui. Slide number 18 is on update on our 2009 operating plans. In right sizing our operations to the new global environment, we are still targeting a 2009 work force reduction of 5,800 people, of which, we completed 4,800 by the end of the first quarter. We are also still on track for $150 million to $200 million conversion cost savings beyond the linear cost savings of $400 million to $500 million, we are achieving as a result of lower volume. So in total, cost savings will be $600 to $700 million this year. Pricing is on track for $160 to $250 million on a year to year basis. The combination of strong operational improvement, the work force reductions and the pricing should enable us to improve our full year EBITDA versus 2008. We are still targeting free cash flow positive, but it is highly dependent upon market conditions.

In summary, on slide number 19, we are responding aggressive all to a very difficult and uncertain global market condition. Our emphasis, that is on what we can reasonably control is on cost reductions, operating efficiencies and cash conservation. We have and expect to maintain adequate liquidity and expect to be in compliance with our convenance throughout the year. We continue to pursue and win new and more profitable business. In summary, in a very difficult environment we've made great progress on our operation overall and look forward to an improved second half. Thank you very much. This will conclude the formal portion of today's call. And I will now turn the call back other to Dennis, our facilitator, who will begin the Q&A session.

(Operator Instructions) And your first question over the phone line is for Brian Johnson with Barclay's Capital.

Good morning, gentlemen. Can we talk about, I'd like to straight drive into the $30 million of cost reduction on slide ten. Is it run rate? Or is it, how can we think about this as run rate versus all in one Q?

I would say that the fundamental run rate is probably in the range of $100 million to $200 million of the $300 million. Some is obviously volume-related facility costs that are more volume-related but there is $100 million to $200 million of structural cost reductions in there.

OK, are there additional cost cuts later in coming quarters to come?

Brian, I think if you take a look at the reductions we've had in the first quarter, a lot of those took place near the end of the quarter. A lot of our personal reductions happened March, by the end of March. So, we really didn't benefit in the first quarter from the vast majority of that 4,800 work force reduction. We'll see the benefit of that into the future quarters. That's why we are expecting somewhere in the range of $600 million to $700 million of cost savings on a year-over-year basis.

Okay. So how do I think about the $100 million to $200 million run rate versus the $21 million in the right column on page ten?

Well including in the volume and mix, volume and mix would have been a lot higher had we gotten some of the structural costs out. What we've done is we've gone back into all of our operations, taken a look at new volumes, have right sized the management team, as well as right sized the operating groups there. So, we've taken out significant structural costs. Volume in mix could have been a lot higher if hasn't done that. If you think about the cost savings, and that's net on top of a bunch of stuff, that's on top of essentially linear savings what are already in the $200 million number. A different way of looking at it, that $200 million number would have been closer to $300 million, probably in excess of $300 million maybe as much as $400 million if we hadn't taken some of the structural costs out of the plants.

And in off highway in particular, construction equipment, what was your expectation going into the quarter? Then what happened during the quarter? Is it specifically regions? Or types of equipment? Is there a market share issue we should worry about?

Yes, we are not seeing a market share erosion. It is pretty much construction's dried up versus the pipe. Right now all the OE's are selling off what's in the pipe as they are beginning to see some returned orders. The biggest hit we are seeing is in Europe

It is deeper than we expected Brian, I would say, but we seem to be amongst good company because everybody we've seen and talked to would say the OEMs in particular, would say it is deeper construction in particular than we could have expected three or four months ago.

Okay. Thanks.

Your next question comes from the line of Rich Fullerton with Fullerton capital.

Yes, just if you could quickly walk us through the balance sheet. Could you give receivables and accounts payable by your three largest OE's, Ford , General Motors and Chrysler?

Rich, we don't break that out.

They are not our three largest OE's.

That's true. I meant on the auto side.

Yes, Ford is. Not even on the auto side. Ford is certainly our biggest account then there is several after that.

Turning to Cap Ex, could you sort of reiterate what you've provided terms of the Cap Ex budget for 2009? And then I was also wondering if you could sort of give us a range that at this point you might anticipate in 2010?

When we came in the year we actually were budgeting substantially higher than $150 million. Our present run rate and our presentations said it would be under $150 million for the year. We haven't really looked at next year yet in terms of what the specific capital requirements would be, but I would expect them to be in the range of $150 million to $200 million.

Okay. Okay. Great. Thank you

You're welcome

Your next question comes from the line of Ashley Manhaven with Redwood Capital.

Good morning. Can you hear me okay

Good morning, you're fine.

Great. Just a question on contribution margins. Obviously, if you look at a lot of the suppliers that reported over the last few days, contribution margins have been closer to negative 20% decrement and you folks did significantly better closer to 10% to 11% contribution margins with the lost revenues. Obviously, a lot of that seems to be related to the cost savings that you implemented and benefited from during the first quarter. I was wondering if you could at least quantitatively discuss how to think about contribution margins for the remainder of the year? Should they be in line with what we saw in the first quarter to the extent revenues continues to decline at a similar pace? Or were there any one time things we should (inaudible) think of as a more normalized contribution margin.

There is nothing specific in the first quarter that would be abnormal. We tend to think of contribution margins varying at the rate of about 20% with revenue, on the assumption that we are able to take out labor and overhead at a similar rate as volume goes down. And we were largely able to do that in a first quarter. Otherwise, if we didn't change the structure in the plants and weren't able to adjust our work force quickly it would be closer to 40% decremental or incremental.

Part of out effort management as well as we talked about last year was to improve the margins in particularly as we losing money at marginal business. So, pricing has been an area there and additional costs and improvements in those areas. So, that accounts for some of the improvement in the first quarter. And hopefully you'll continue to see that going through the year

Just to clarify, the decremental margins during the first quarter were closer to 10% to 11%. It was about $100 million plus decline in EBITDA and on $1 billion dropoff in revenues and I'm not adjusting on a constant currency basis. And so, if you folks are saying that the sort of a normalized is closer to 20%, obviously something occurred in the the first quarter that was disproportionate to what a normalized margin compression should be.

Matt, let me just make it clear. Maybe I didn't make it clear. I apologize. If you look at slide number nine, volume and mix was about $1 billion negative. That excludes pricing. It excludes currency. On a real volume adjusted basis we were down about $1 billion. On slide number ten we have attributed about $200 million of negative impact on EBITDA as a result of that $1 billion. So then again, the 20% that I mentioned, partially offsetting that decline of $200 million was the improvement in pricing of $71 million as well as some non-plant cost savings net of everything else. So, in fact we did have $100 million of other things that offset, partially offset the volume decline. So, when we look at the contribution margin, we look at it just on the volume piece. We don't look at it in total. We are able and have shown here the ability to cross some of the negative volume impact back with pricing and other cost savings. Sorry. My last followup So, conceivably that offset, in terms of pricing improvements and other cost savings could continue for the remainder of the year. And overall contribution margins could be closer to sort of the 12% to 15% range than the 20% that you would just get from cost saves on the labor side? That's fair. I think if you think about pricing, we expect to have pricing in the range of $160 million to $250 million year-over-year. So, If we picked the midrange and said $250 million that would mean we'd need to get $50 million a quarter. And we more than did that in the first quarter

Okay. Great I appreciate the time. Thank you.

You're welcome

Your next question comes from the line of Brian Brickman with J.P. Morgan

Hi. It's Himanshu Patel with J.P. Morgan

Hi

How are you? Couple of questions. Have you guys chose into participate in the treasury supplier receivable backstop program?

Yes, we have. The back ground on that is we did get approval from our lenders to participate in those programs because we previously had 100% of our receivables in the U.S. pledged to support our ABL facility. We received approval to participate in the programs and we have applied for the GM program and expect to participate in that program. We have not applied to participate in the Chrysler program.

Okay. Secondly, I'm sorry I may have missed this. Did you guys provide a full year work in capital guidance?

We didn't but I'll expect that to be positive for the full year. So, we'll reverse that $92 million we reported in the first quarter by the end of the year

Lastly, I just wanted to go back to the 20% decremental margins. Should that change going forward into the year as the mix of the revenue decline changes? Meaning perhaps more of the incremental revenue pressure comes from some of the off highway businesses and your comparisons on the light vehicle side get easier at that point or is that not really a material factor on the 20% ?

I'd say it is hard to call at this point in time. It is not material in the way we look at it. There is obviously some mix in there, but it is really difficult for us to call it. Because it change, not only by segment but by region and by customers. So, it is really hard for us to, we just use the 20% as a rule of thumb. And it is pretty close.

Jim, just maybe a housekeeping question. Slide nine has revenue impact on pricing of $54 million slide ten says EBITDA is more than that. What's that due to?

The difference is $17 million, which on our income statement actually gives classified for income statement purpose into other income. It doesn't get included in revenue. So in slide number nine it excludes the $17 million of some retroactive cancellation costs. We included in pricing because it essentially is a recovery from our customers and that's the difference of the $17 million.

Okay. Then lastly, I'm sorry. I think you may have just covered this. But, did you talk about or could you talk about on slide ten the sort of pricing outlook for the remaining three quarters of the year? The impact on EBITDA?

Sure. We expect to be somewhere's in the range of $160 million to $250 million year-over-year in terms of our pricing. As you can see on the first quarter, whether you look at the $50 million or the $71 million, we are ahead of the game on achieving that. We expect the rest of that to be achieved through the rest of the year. Probably pretty reasonably flat.

You mean spread evenly?

Correct. Exactly.

Very good. Understood. Thank you.

Okay. Thank you

Your next question comes from the line of Blad Shamberg with Realm Partners.

Good morning.

Good morning

Couple of questions. First of all, what's your minimum cash for U.S. and international? I guess you expensed that $250 million is for the company overall. So split that for U.S. international

We haven't split that. I would say roughly 60/40, 40/60, 50/50. We have about half our revenue in the United States and half outside. As a result we probably need about the same mix of working capital inside and outside.

Okay. Is there, can you give us some guidance as far as the cash outflow that you take, for instance, in Q1 how does that play between the U.S. and international?

Not a significant difference. It's probably split 50/50. If you take a look at where we ended up cash at the end of last year and where we have spent the cash. We actually bought some cash back last year into our coughers. So probably a little bit more burned overseas than in the United States.

Okay. In terms of, how much capacity do you have under your revolver that's unused? It is in one of the slides, right?

Total availability under both of our lines of credits in the U.S. and Europe is about $275 million.

Okay. At this point, I guess we are seeing a trend of people just drawing on those. Do you feel there is no need to halt that cash at this point?

Yes. We don't have any plans to draw on that in the near term.

All right. And then, last question is, I guess you are comfortable enough with your outlook for cash flow to do this tender offer for the term loans. Can you just talk me through what your expectations are generally for (inaudible) nine cash flows?

As I mentioned, our expectation, our hope anyway, our target is to break even. And right now we have do a little bit of work to get there, but we are not far off. That of course, excludes this debt repurchase which wouldn't be included in free cash flow.

OK. In terms of the timing, how do you expect that to go for the remainder of the year?

In terms of free cash flow?

Yes.

We expect probably the second and the third quarter to be pretty close to break even. And then in the fourth quarter, as always, it is a normal calendarization as volume falls off in December. We'll get that back some. If I had to say, assuming it is zero, it's essentially been minus $200 million in the first quarter pretty flat in the second and third quarters then probably be flat in the fourth quarter just like we experienced last year.

Great. Thank you.

You're welcome

Your next question is a follow up from the line of Rich Fullerton with Fullerton Capital.

Sorry. I came on the call slightly late. I have wondering if you could help on page seven. Reporting changes. LIFO to FIFO. Did you cover any accounting changes in the text of your call in the presentation?

Rich, I just mentioned we had made the change. I didn't mention anything other than that. We have included, for everyone's use, some fairly detailed attachments and appendices in this presentation which gives you adjustments by segment by quarter for all of last year. And that FIFO adjustment, because it is an accounting change, really impacts last year. So, we are changing essentially the reporting numbers for last year in line with GAAP reporting. And you can see those adjustments in the attachments.

Okay. Great. Actually I see that now page 34-35 ecetera in the slide.

That's correct.

Got it. Okay. Great. Well congratulations on what looks to be a good quarter and good job.

Thank you very much.

Your next question comes from the line of Andrew Newton with Merrill Lynch Hi. Just two quick questions. One is the funding for the buy back coming off the balance sheet the cash?

That would be our expectation, yes Okay. So no outside funding for that? No

OK, and then second, can you just walk me to where you are in the leverage test of Q1?

Yes. We're clearing by a good margin. We don't normally provide any specific detail on it. But, we will be reporting it when we file our Q that we were in compliance with the first quarter and expect to remain in compliance throughout the rest of the year

And just, kind of eyeballing, I guess, EBITDA for last year was kind of call it however, I know calculations between the credit agreement and GAAP and the numbers you provide but $300 million you had a pretty strong Q1 for '08 falling off and obviously a stronger Q1 coming on. Is there something we are missing, some material difference in the calculations for bank EBITDA versus what we see?

Well, there is an impact due to the FIFO change. And then there also a significant impact due to the timing of some of the derivatives. We normally report those in line with GAAP on a mark to market basis, but for covenant purposes. We only report those when the derivative is terminated. With that said, we do expect the second quarter to be a difficult quarter. We will be much closer to our covenant issue in the second quarter.

Okay. Thank you

Your next question comes from the line of Jamie Lister with Sound Post Partners

Hey guys. Good job. What is the thought prospect behind tendering for the bank? I know it is trading in the 30s. Can you now despite directly at that level?

We felt the best way to do this was on an open process giving everybody the opportunity to tender for that rather than trying to pick off a few guys separately. So, we wanted to give everyone an opportunity to participate in the deal.

Okay. And I guess how much comfort do you have that you'll get the full amount done at that price, though

That's a good question. We are reasonably comfortable. We hope it happens but at the end of the day, we'll find out next week.

How do you think about about $50 million in cash or so would be the.

That would be it, yes. About that.

How do you come to that $50 million number? Why not more? Why not less?

Well, the credit agreement allows us to buy back debt under certain circumstances up to 10%. And, so that's the reason why we picked the 10%. It wasn't because we wanted to buy more obviously, we'd consider buying more, but we are constrained to that 1%

Have you asked the banks if they would relax that at some point.

That would require 100% amendment. We felt at this point in time that's not something we'd want to proceed with

Right. Understood. Thanks guys keep up the good work

Thank you.

At this time there are no further questions on the phone lines.

Dennis, I have a couple questions off the internet here. One is, do you need lender approval or amendment for the debt buy back?

The answer is no, we are permitted under the credit agreement to buy back up to 10%.

Another one is, has the company made a decision about the reverse split that was authorized at the annual shareholders meeting?

No, we haven't. Again, just to remind everyone the requirement of the New York Stock Exchange is that one, we maintain a stock price of over $1 on average over a 30-day period. And two, that the capitalization of the company also remain over $100 million given that we have about $100 million of shares outstanding, those two are essentially the same task. We have believe and continue to believe that in today's market our stock price recently has been depressed for reasons beyond our operating performance and expectations for the company. So we did ask our shareholders for the opportunity do that reverse split if for some reason the stock price didn't recover. Given the last couple of days, we hope the stock price will regain its position of being over $1. And we would obviously only do the reverse split if we are required do that. And we have another few months before we'd have to make that decision.

Anymore Dennis, in the queue or online?

No, sir. There are none on the phone lines.

Alright. Thank you all for joining you today. Give us an update if you need anymore calls or any more information. Thanks again for your time today.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.