Dana Inc (DAN) 2009 Q2 法說會逐字稿

Good morning, and welcome to Dana Holding Corporation's second quarter 2009 webcast and conference call. I will be your conference facilitator today. Please be advised that our meeting today, both the speakers' remarks and Q&A session, will be recorded for replay purposes. All lines have been placed on mute to prevent some background noise. There will be a question-and-answer period after the speakers' remarks. (Operator Instructions). At this time, I would like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations. Lillian Etzkorn, please go ahead.

Good Morning, ladies and gentlemen. Welcome to all of you that are joining us either by phone or webcast. On behalf of the entire Dana management team I'd like to thank you for spending time with us this morning. With us this morning is John Devine, Chairman; Gary Convis, Vice Chairman; Jim Sweetnam, President and CEO; Jim Yost, Chief Financial Officer; and Jacqui Dedo, Senior Vice President, strategy and business development.

Before we begin, I'd like to review a couple of items. Copies of this morning earnings release and the slides that we will be using have been posted on our website. Today's call is being recorded and the supporting materials are the property of Dana Holding. They may not be recorded, copied or broadcast without our written consent. Finally, today's presentation includes includes some forward-looking statements about our expectations for Dana's future performance, Actual results could differ materially from those suggested by our comments here. Additional information about the factors that could affect future results are summarized in our Safe Harbor statement. These risk factors are also detailed in our SEC filing, including our annual, quarterly and current reports with SEC.

With that I would like to turn the presentation over to John Devine.

Thanks, Lillian. Good morning, everyone, thanks for joining us. Before we get into the key issues and then ask Jim Yost to go over the details of the review, I'd like to welcome Jim Sweetnam. Jim has been with us for a month or so. Obviously we're delighted to have him, he's a welcome addition here. I think as we've talked about in the past we've been working hard. In fact, one of my top priorities is to beef up the management team. We have a terrific team, as we've established it over the last year-and-a-half and we're delighted to welcome Jim as the new CEO. Jim takes the CEO title from me, but as we've discussed in the past, I'll continue to be very involved, as will Gary Convis.. So we believe we have enough to do on Dana to getting through the current tough conditions, as well as rebuilding the Company going forward, and Jim's role will be very crucial to that going forward.. So welcome to Jim. You'll see a lot of him in the future and we'll ask him to handle this conference call in the future.

Let me ask you to turn to page 5, Second Quarter Summary. Obviously we have a -- we felt better about the second quarter. We were improved compared to the first quarter, despite an expected sharp decline of revenue 49%, very tough conditions certainly. I'll talk about that in a moment. We've made good progress on right sizing our operations. Jim will cover that in a moment, as well. Significant cost reductions and improved pricing. I would like to point out on the pricing side that this is not it across-the-board price increases. That doesn't happen in this environment.

Our focus has really been two areas. One is to recovery of material cost, largely from last year. And then secondly -- and we talked about this in the past, as well -- we've been very focused on fixing loss and low-return business. And that continues, although we've made good progress there and we're close to being done, I'd have to say. We made good improvement in working capital and generated positive free cash flow as a result. We've achieved our second quarter financial covenants and we've been able to reduce our debt while maintaining good liquidity.

On page 6, just to highlight on the overall market, clearly revenue continues to be weak, pretty much flat with the first quarter. The global industry is somewhat mixed, The light vehicle market appears to be improving. You're seeing that day-by-day, certainly in North America, some improvement in Europe. Commercial vehicle market, we're not seeing any indication of recovery there. The decline has stabilized, but a very low level. Last month was some indication up in Class 8, but it's still very weak. And the off-highway market, continues to weaken. Our off-highway market was down over 60% year to year while the overall market down by about half.

Despite that, and our improved profitability, we are generating new business in each of these products segments. As the recovery happens and we will think -- we think it's going to happen eventually, we're be in good position. It's true in the light vehicle business, commercial vehicle and off-highway. We have secured profitable new business -- I would stress profitable -- both replacement and incremental during the second quarter and I'll ask Jacqui to talk about that in a moment. And importantly for all of this, GM and Chrysler did a superb job of getting through very difficult restructurings and it seems they're back on track.

Page 7, the highlights of our internal operations, and you'll see more detail in a moment. While we continue to roll out the Dana operation system I would point out that Gary and the manufacturing team, including Mark Wallace, have been driving this hard. We clearly have borrowed a lot of this system from Toyota with Gary's background. We think we have the best manufacturing guy in the business with us in Gary and that's helped us a great deal in driving this right throughout our many plants around the world. Despite the headcount reductions and the improvement in productivity we've also been able to take out 30% of the management structure in these organizations.

We have a number of new tools in place and that's been a very successful, accomplishment over the last couple of months. We've also achieved $200 million of inventory reduction. We're not done yet. But again, a number of tools in place that have permitted us to really go after that hard. That'll continue.

On the supplier front, obviously a difficult environment for everybody. Could say so far so good for us, we've had minimal disruption. We tracked about 1,000 suppliers very closely, about 17 of those we categorize high risk, but nothing that's costing us any substantial amounts of cash or cost at this point in time, but it's something we're watching very closely. We've had to continue to reduce our workforce very substantially, aligning the organization to the lower volume levels. And we've also achieved -- and I think this is the interesting piece for us -- in addition to the volume reduction is a permanent structure reduction by improving productivity and profitability on top of the volume production. Jim Yost will cover that in a moment.

So that let me turn you over to Jim Yost to go through the complete financial review and then Jacqui will cover the market update.

Thank you, John. Overall, as John said, we had a very good quarter in a very difficult environment. We improved our EBITDA substantially from the first quarter. We improved and reached break-even net income, although that was on the basis of a very substantial benefit from the reduction in our debt. We generated significant free cash flow, we remained in full compliance with our debt covenants and we reduce our leverage, so overall a very, very good quarter.

If you turn to slide 9 you can see the summary results of our second quarter compared with second quarter of last year, as well as compared with first quarter of this year. As John noted, sales of slightly less than $1.2 billion were down both in the first quarter -- a little bit -- and 49% from last year's second quarter, so a very, very difficult environment. EBITDA, however, was significantly up from the first quarter, as well as, as it was down from last year. As I mentioned, net income was break-even, we did have a $40 million gain from the sale -- or the pur -- buy back of our debt. And during the quarter we generated $73 million of free cash flow. That was a significant improvement versus second quarter last year. Obviously given the very difficult first quarter we had, a very, very significant improvement from the first quarter.

So let's get into a little bit more detail. Slide 10 check shows you the change in sales versus last year's second quarter. Last year's first quarter was about $2.3 billion, second quarter of last year was $2.3 billion. We then -- third quarter of last year was $1.8 billion, fourth quarter was $1.5 billion, and quite honestly we thought maybe at the end of fourth quarter we'd reached the bottom, but the first two quarters of this year have been very difficult. About the same, about $1.2 billion, second quarter slightly lower. Compared with last year the $1 billion decline $1.1 billion decline was essentially all volume and mix, as our global industry sales were down across all of our segments. Some more than others. I'd comment off-highway was down over 60% year on year, we're continuing to see some weakness there. The light vehicle sales were down a little bit less than that, about half as much on a percentage basis and those seem to have firmed up. And we'll talk a bit more about that on the coming page.

Pricing, as John mentioned, we're continuing to work on fixing some of the low-profitability or - negative-profitability contracts. We put in place a number of material cost recovery programs with our customers and that $60 million is about one-third the result of material recoveries and the rest is working to improve our margins on some of those weaker contracts. Currency was unfavorable. Last year you may recall the Euro was a bit weaker in the second quarter, this year it's a bit stronger.

If you want to turn to slide 11, you can see over the next three slides we'll provide some comparisons on EBITDA. The first slide here on 11 is a comparison of the second quarter of this year with the second quarter of last year. On the sales decline on $1.1 billion our EBITDA was down only $70 million. So again, in a very difficult environment I think the team did a great job of minimizing the impact of the volume decline. $200 million, about, was the impact on volume and mix, and as we'll talk later, we've been able to essentially right size our operations pretty much in line with the volume decline, otherwise that number would have been substantially higher. We have offset about two-thirds of this pricing -- excuse me, volume and mix decline with the pricing and the cost savings that we achieved.

I talked about the pricing. If you take a look at the cost saving in others we improved on a year-over-year basis by about $70 million -- $78 million, and half of that was in conversion costs, structural cost savings at the plants that John talk about earlier. We had some very significant SG&A savings, not only in operations but significantly at our corporate operations. We've seen continued reductions in warranty cost. We actually have a high average cost in second quarter of last year and we benefit from the year-over-year comparison, but over all the quality is improving and we are able to report that in lower warranty costs as we go forward. There are a couple of items, that environmental and the asbestos liability adjustments, which are one-time things that we were able to benefit from in second quarter. And quite honestly, those benefits offset some other -- the weakness in the quarter.

We did get impacted to the tune of about $15 million associated with the shutdowns of GM and Chrysler, so those were one-time bad news. And on the comparison basis we had some good news last year on pension, which didn't repeat this year. So although we had some good one- times this year we also had some comparison bad news year over year. We also saw in the second quarter still a little bit of carryover of the material that we were carrying at the end of the fourth quarter.

You may recall we reported a very high inventory level at the end of the fourth quarter, about $900 million, b ut we've been able to reduced that to about $700 million of inventory through the second quarter. But because we are now on FIFO and not LIFO, we are carrying some of the higher cost of that material as it rolls through cost of good sales associated with the purchases made last year that we weren't able to shut down as quickly we'd hoped due to the rapid volume decline. You'll see second quarter is better than the first quarter, but obviously a little bit worse than last year.

Let's turn to slide 12 and you can see the significant quarter-over-quarter improvement. We indicated in the last call that we expected this; in fact, we came in largely in line with what we expected when we spoke last time. Volume and mix was down about $10 million with sales down about $30 million, mostly due to a little bit higher mix decline. Although we continue to improve our margins through the pricing and material recovery, the pricing was slightly lower in the second quarter than the first quarter, basically due to the impact of the material recovery contracts generating slightly less recovery than they did in the first quarter. Costs and other savings continue to improve with material costs overall down $33 million and better conversion costs, again structural cost savings of $23 million. SG&A was favorable and you see the impact, again, of those one-time items of environmental and asbestos liability and then some warranty benefits.

So overall, a fairly -- very, very good improvement in overall EBITDA, even in spite of slightly lower sales, and we believe the $90 million level is probably a good run rate level for us at the current sales level. So that we expect to go forward. In spite of those one-time actions we obviously had some one-time bad news items in quarter, too.

If you turn to slide 13, this summarizes our half-over-half results, so it picks up the results of the first two quarters. You can see on a substantial decline in volume, $400 million of decline, again that's about 20% on the sales decline of $2.2 billion. As I mentioned, that would have been much, much higher if we hadn't been able to resize our operation and I'll touch on that on the next slide. Pricing year to date was favorable by $131 million. Again, about one-third of that is due to material cost recovery agreements that we have.. And then you can see the structural cost savings and other improvements, about $113 million. Now we'll touch later on it later in the presentation on our outlook for 2009 full year, but both of these elements, the pricing as well as cost savings, are fully in line with what we expect to see full year, so it gives us confidence that we will be able to achieve the full-year results that we expect.

On slide 14 you can see the results of how we've continued to manage of labor cost through this downturn. With revenue down in the second quarter 49% versus last second quarter we've actually been able to reduce our labor costs by slightly more than 49% through a combination of employment reductions, furloughs, short work weeks, as well as taking advantage of some government support programs, particularly in the European arena. Overall our world-wide employment levels are now down 22,500 people, down over 12,000 since last year's second quarter, with about half of that reduction happening at the end of last year and about half of that happening in the first quarter. So one of the reasons, again, why we saw such a dramatic improvement quarter over quarter in the EBITDA second over first was because of that substantial workforce reduction, as well as savings in SG&A throughout the organization. And we thank everybody who worked very, very hard on our team to achieve those results.

Turning to cash flow on slide 15, you can see we also had a very good quarter here, overall free cash flow positive of $73 million. That was substantially better than the same period last year and obviously a lot better than the approximately $200 million cash burn we had in the first quarter. So essentially we've clawed back about one-third of that first quarter negative and I will expect in the last couple of quarters to essentially get that back, although some of that will depend upon the industry sales level. Capital expenditures were $24 million, a little bit below what we expect on run rate full year. We did spend $31 million cash on realignment and that's down to about half from the first quarter and we expect that number trailing off in the second -- or third and fourth quarters. And then you can see the major driver of our free cash flow benefit was the $91 million of favorable working capital and we'll cover that on the next slide.

If you take a look at that slide 16, it provides the detail of our substantial improvement in working capital quarter over quarter. Now second quarter tends to be a little better for us than first quarter in any case, but the one item I'd really like to point out is the inventory reduction. In the first quarter we had over $100 million reduction in inventory, we achieved almost a $100 million reduction in second quarter and expect just continue to see reductions of inventory, probably in the range of $50 million to $100 million throughout the rest of this year, in spite of the fact that we do not expect to see any further decline in revenue overall. Receivables and payables generally track with the sales volumes. Obviously in the first quarter we had some abnormal reductions in payable as we essentially shut off the purchasing pipeline because we had excess inventory. $63 million was probably still a little bit higher run rate in terms of the reduction that we would expect, but essentially that $251 million you see there in the first half is not indicative of the full year. We expect that to level out, but -- and if we can keep on working and we hit -- hope to achieve a free cash flow level of about break-even for the full year.

Turning to slide 17, this is just a summary of our debt reduction actions. Last quarter we announced a Dutch auction tender for our term loan. Through that action and additional open-market purchases and small paydown at par, we actually reduced our term loan by $125 million in the quarter, while only using $77 million of cash to do that, so we had a very, very good result from that buydown. We also booked, as I mentioned, a $40 million gain to net income as a result of those purchases, a one-time event. These debt reductions, I should comment, were clearly opportunistic on our part in terms of trying to pick up debt at attractive rates. Since we did the Dutch auction our has debt traded up fairly substantially. And also like to comment that none of these debt reductions were required for us to meet our covenants for the second quarter. We did meet those that covenants in the second quarter, as John mentioned, and we expect to be in full compliance this year and into the foreseeable future.

Turning to our cash and net debt on slide 18, you can see we finished up the quarter with $553 million of worldwide cash. That's actually a slight increase in cash on a quarter-over-quarter basis. We essentially used the free cash flow that we generated in the second quarter to buy down that debt. So essentially, we used our good cash flow to reduce our debt and leverage, leaving cash essentially untouched during the quarter and improving our net debt position to about five and a half -- or $546 million, down about $133 million from the second quarter. So we continue to level a little bit in this environment. That's been good for us without hitting either our cash or liquidity.

On slide 19 you can see our liquidity. We finished the quarter at about $664 million of liquidity and that is just down slightly from where we were at the end of March. So again, the debt buyback did not impact any of our operational requirements on the liquidity side or the cash side. We did move a little bit of our -- improve our cash a little bit by releasing some deposits that we had securing some obligations and replacing them with lines of credit. That action, as well as just the reduced overall volumes, have limited our borrowing base a little bit and that's why our lines of credit are down on a quarter-over-quarter basis. But obviously, as volume begins to pick up the availability of our borrowing base under our agreements will increase and we see no issue in terms of funding our operations going forward.

With that I'd like to turn the presentation to Jacqui Dedo to discuss our industry outlook and our net new business.

Thanks, Jim, and good morning. Turning to page 20, we see the last quarter light vehicle market forecast tightening in North America, with medium heavy truck markets reduced in all regions versus our previous forecast. Going forward, we are cautiously optimistic that there will be a light upturn in the second half in light vehicle, while the medium, heavy and off-highway we're obviously still tracking and watching to confirm that a solid bottom is reached across the regions.

Turning to page 21. This slide shows we won approximately $1 billion in cumulative net new business. This is based on good, profitable growth in all regions and across all products, with strong growth rates in key markets of Asia and Europe. So we're proud and pleased to see the growing confirmation of our product value equation being confirmed by our OE customers with net new business wins on an ongoing basis. Also, where end users have a choice at the vehicle and part level our strong global brands are continuing to prove strength as they draw share.

Jim, back to you.

Thanks, Jacqui. Turn to slide 22 and again, as I said, I'll give you an update on our outlook. The plan is just as we discussed, last time. Obviously we're continuing to work on beating that plan and some cases we are clearly ahead of that plan, but we haven't changed any of those numbers. But I have updated, as you can see on the right-hand side, our outlook. In terms of right-sizing operations we're actually ahead of schedule in terms of our workforce reductions and we've been -- needed to do that given the fact that our sales have been a little bit weaker in the second quarter than we expected, and as I mentioned, we've seen some very significant workforce reductions since last year.

So overall, the team's done a great job in right sizing our operations and essentially creating a labor cost, which is largely variable. In terms of improving the operations overall, the structural improvements, we're still expecting to see $150 million to $200 million of those structural improvements in conversion costs supported by the improvements we've seen in the first half. On the pricing side, a combination of material cost recovery, as well as some other pricing -- selective pricing, we're on track, as you saw, to go over $160 million, so we're green on that. And because we've been able to realign our operations to volume, buried in those volume and mix numbers for the full year will be some very substantial savings on labor and other costs on the range of $400 million to $500 million.

Unfortunately, because of a slightly weaker sales outlook than what we thought in the first quarter, we no longer expect our full-year EBITDA to beat last year's number of $349 million, but we still expect that the -- in spite of the less-attractive sales in the back half, we still expect to continue to perform well in the back half of the year. Capital expenditures will be under $150 million, as you can see, based on the first half. And as I mentioned, right now free cash flow is just a little bit too close to call. We expect to be about breakeven, but a lot will be dependent upon where we think would be on sales in the full year, but obviously, if we can beat some of the inventory reduction targets we have, we'll hopefully be back to report some positive results in that front.

So that's the summary, that's the overview in the second quarter and just summary, we're on target to achieve our 2009 plans and you can see that on slide 23, right-sizing operations, improving our profits and operational performance. Again, we're probably going to miss our improvement in EBITDA, but still good performance on the operational side. We continue to maintain adequate liquidity and the profits are sufficient for us to meet and clear our covenants in the near future and we're continuing to look at opportunities to grow our business. We have shown the ability to continue to win profitable business in this tough environment going forward.

With that I'll turn it over back over to our coordinator to take questions and answers.

(Operator Instructions) Your first question comes from Brian Johnson with Barclay's Capital. Brian, please go ahead.

Yes, good morning. I have several -- a couple - a few questions. First, the 5,800 headcount reduction, how would you roughly allocate that between what's needed to keep incremental margins to about 18%, which is what looks like. What's in conversion costs and what's in SG&A?

I have to admit, Brian, I'm not sure I can give you a quick answer to that but I guess I'd say probably in the range of -- two-thirds of that is going to be just due to volume reduction, maybe half to two-thirds. Obviously, as we come back on volumes we're going to take a hard look in adding anybody back that we've already laid off. We have some temporary layoffs, we have some furloughs, which have contributed greatly to the -- and the short work week which have contributed greatly to the labor cost reductions. But my hope is we don't add a lot of that back as we come up on volumes, we've become up more efficient in our operations.

So how should we be thinking about decremental margins versus incremental margins, hoping that production at some point rebounds?

Well, I guess I would say probably in terms of incremental margins, as we come back out the other side, somewhere in the range of 20% to 30%. It's going to depend a lot upon where we see it. Obviously our of-highway business is a bit more -- has a much higher margin than some of our light business, so if that volume comes back I'd expect the margin improvement to be more like 30%, but if it's mostly light then it's probably closer to 20%.

Okay. Secondly, the $33 million in other income is -- the low segment income, is that counting towards the EBITDA in the leveraged covenant calculation?

Yes, it is.

Okay. And how do we think about the other income line, modeling that going forward. How much of what we saw in the swing in that line is due to the warranties, is due to one time things, how many are likely to reoccur and reduce what historically has been negative income statement item?

Yes, Brian, we probably had -- if I were to take a step back and look at it in total we probably had about a $30 million summary of one-time items that hit us -- or we took the benefit of, I should say, as it relates to some of the warranty items; the asbestos and the environmental actions. Those -- obviously we wouldn't expect those to continue going forward, but we also have other items up in the cost impacts that were one time that we wouldn't expect. Obviously, some of our negative material year over year isn't going to repeat, some of the negative comparisons on the -- year over year on pension isn't going repeat. As I mentioned, we actually were impacted on a bottom line basis by about $15 million due to the GM and Chrysler shutdowns, which we don't expect happen. So in terms of modeling income I would say pull $30 million out but we also expect to have continuing cost improvements on an incremental basis to more than offset the combination of that going forward. So again, as I said, at today's second quarter kinds of $1.1 billion, $1.2 billion sales level I don't think it's unreasonable for us to be generating $90 million of EBITDA.

Okay. And the $15 million, is that above the 18% to 20% variable contribution the lack of that production had, or is that what that --?

It was included in that, Brian.

Okay, thanks.

Okay. Thank you.

Your next question comes from the line of Himanshu Patel of JPMorgan. Himanshu, please to ahead.

Hi.

Hey, Himanshu.

Good morning, guys. I have two questions. I think on slide 12 you mention materials was a $33 million sequential favorable to EBITDA. How should we think about that Q3 and Q4 sequentially?

Sequentially I would expect there to be a continued improvement in Q3 and Q4. I suspect in total we'll probably show somewhere around $50 million to $80 million of year-over- year improvement in material net, net, net. So, you've seen probably half of what we would see in the full year.

$50 million to 80 million --?

And some of that, quite honestly, is just a non-reoccurrence of the run- up we had last year. As you know, we got impacted very heavily in the third and fourth quarter due to the high material prices. It's a little bit confusing because we switched from LIFO to FIFO, so when we did that we essentially ended up carrying a lot higher inventory valuation at the end of the year than we would have under LIFO. So essentially the first quarter of this year was negatively impacted by the carryover of that material cost that were running out. Second quarter was a bit impacted and then you'll see the third and fourth quarter, the cost savings we are getting in our material costs downs, efficiency and so forth, as well as a non-recurrence of that bad news you'll -- I'm guessing somewhere in the range of $50 million to $80 million full-year benefit.

Okay. And then, Jim, as you look at on the light vehicle business, the forward production schedule, is there anything in your platform mix that would suggest that Dana's light vehicles revenues sequentially should not grow in line with more or less North American Industry trends for the next couple of quarters?

Himanshu, this is Jacqui. Not for the next couple of quarters. We're seeing nice growth in our key platforms as the orders are beginning to come in. We are cautious about the orders, but we're seeing the same industry potential that you're seeing.

Okay. And then just going back to the earlier comment, we should think about sequential revenue changes on the low light vehicle side as $0.20 on the dollar and more on the off-highway commercial side as $0.30?

I think that is fair.

Okay. And then lastly, I know Europe's not big as business in the light side, can you tell us on a constant currency basis how did your European light vehicle revenues fair sequentially Q1 to Q2? I'm just trying to understand how you guys would have performed relative to industry.

Just give me a second, I'm taking a look at it here. Yes, we went down. Yes, light vehicle was probably pretty flat when you adjust for currency and so forth. I don't not have the number. I didn't have it cut to that fine of detail in front of me , but it's probably pretty flat.

European industry production sequentially was up on the order of 25% to 30%. Any thoughts on what were the key puts and takes on platforms that would have led to that underperformance?

Yes, I'd really -- we're going have to cut that data because we have total Europe and it's heavily weighted by the off-highway downturn. Jim's right, we had some up due to currency, but I'm sorry, Himanshu, I don't have light vehicle Europe in front of me.

Understood, understood. Okay, very good. Thank you very much.

Your next question comes from the line of Richard Fullerton with Fortune Capital. Richard, please go ahead.

Yes, a quick question. On page 32 of the slide looking at segment analysis and so forth, EBITDA light vehicle drivetrain, $40 million on $455 million in sales, is there anything going on in there that's one time?

There were some one-time items. Most of the one-time items that I talked about, however, didn't pop through that level but there is some significant improvement in warranty costs, as well as some of the pricing very favorably impacted that. So yes, there were some less than linear volume adjustments. But I will say that those operations are improving very substantially in a quarter-over-quarter and a year-over-year basis that is driving the bulk of that improvement.

Okay. Thanks a lot. I will turn it back into the queue.

Your next question comes from the line of Jeff Rosenbaum with York Capital Investors. Jeff, please go ahead.

Hi, good morning. I'm, sorry if I missed this, it looks like you bought $120 million or so face value of your bank debt back in the quarter, should we expect you guys to continue your rich cash position to take advantage of that bank debt below par?

Well, we are limited on our credit agreement to 10% of the total value. We did not get quite 10%. We expect to be able to get the remaining 10% in the third quarter so there will be a little bit more buy-back. We don't have any other specific plans right now to continue to buy-back debt at par, but obviously to the extent that we want to end think it's a good thing to do we'll take a look at that on an ongoing basis.

Okay. What's the additional capacity?

About $15 million.

Okay, great. Thank you.

Your next question comes from Andrew Newton with Merrill Lynch. Andrew, please, go ahead.

Hey, just a quick question, I think it's back to the first question, but Q2 EBITDA was $94 million with the others, so I guess the question goes to Q3 with some the sequential improvement in the US and with Ford and Europe light was relatively small. How should we be thinking about commercial and off-highway sequentially Q2 to Q3 and if the one, one, one, one, two revenue you mentioned is realistic for Q3?

I think what we've said is that we expect some pickup in sales in the light vehicle side of the business. We already have seen that, there is production being added by our major customers so we're expecting to pick up a little bit on the light vehicle side. Heavy is a bit difficult to call, the CV business is a bit difficult to call. We're hoping that it's bottomed out so we're hoping that revenue will be pretty flat. Off-highway is the big question as to whether or not we're going to see a continuing decline. Most of our business is in Europe, the bulk of our business is in Europe. They're down, obviously, for August so revenue will be probably a little bit weak there and we'll see when they come back whether they come up. Overall we're expecting largely flat sales on a quarter-over-quarter, third-over-second basis. We'd probably like being up, maybe there's some opportunity overall. Commercial being relatively flat and hopefully off-highway being relatively flat.

So sort of the bridge to get where you need to be on the covenants, which is a little north of what you did in Q2 with sequential cost savings still have to run through and some materials, I guess?

Yes, that's exactly right.

And you guys feel rel -- obviously relatively good about those two things?

Yes, we do feel good.

Thank you.

Your next question comes from the line of Akshay Madhaven with Redwood Capital. Akshay, please go ahead.

Good morning, thank you for taking my question.

Good morning.

The first question was I was hoping you could give as the perspective on the lost Navistar business and how you saw it play out and whether that was a profitable business and possible to give us some semblance of the order of magnitude that was as a percentage of revenues?

I would be happy to. First, Navistar is a long-term, important customer to us and we sell a wide variety of products to them -- axles, driveshafts, (inaudible) fittings, tire pressure monitor, management system seals, so it's a wide, deep, long relationship. This particular announcement that was made was not our around our loss of business but rather [Arvin] being added as a player standard in the axle business where they were not even optional before. I'm sure you're familiar with the databook process, it's an event happens twice a year. They've now been added as an offering and there are many places where they're standard, we're optional, we're standard, they're optional in the various heavy truck relationships. From an impact standpoint, it's tough to judge, the end users have a lot to say in the various fleets about where they pull optional, where they pull standard, so it's tough to predict. If you really want a number for this year, we're roughly guessing it could have an impact of $25 million to $30 million in revenue. But we'll see. From an optional position, you can often pull more than half share. We've done it before in these fleets so we'll see what happens.

Just to confirm, that was both on the medium truck side as well as the school bus side?

Yes, they've been added in the medium side. which covers both medium trucks and buses as a player where they weren't offered as an option before.

Okay. Great. The second question was -- I didn't know if I missed this in the press release, but the other items, the $33 million, were they broken down by line item or was that just what you referred to in part of the Q&A?

We did not break them down by line item, I referenced a couple of them on -- the environmental, the asbestos savings and some warranty savings.

Okay. And I suspect they'll be disclosed in the 10-Q on a line item basis?

There'll be some additional disclosure, yes.

Okay. I guess the real question here is were those add-backs as taken as add-backs in prior quarters on those line items, as well?

Well, they're not add-backs, they're profit improvements. They're bottom-line profit improvements, they're not add-backs or anything.

Okay. Were there profit improvements taken -- or seen in prior quarters and reflected the EBITDA numbers in prior quarters?

To the extent that they were applicable. We didn't -- these are basically one-time items so the nature of them being one time, they didn't happen in prior quarters, but we've had other one-time items in prior quarters. We always have one-time items, both pluses and minuses, it just happened to be that we benefited greatly from the vast majority of the one-time items being favorable in this quarter.

And there's no limitation in the credit agreement about those items, I suspect?

No, it's a bottom- line calculation.

Great. And the last question, which is on free cash flow, I just want to make sure that I understand the flow correctly. If the Company expects to be free crash flow neutral for the year they would to generate $131 million of free cash flow in the back half of the year, is that the right way to think about that?

That's the right way to think about it.

And I guess the second part would be, it seemed that there will be production increases in most parts, of the world for the third and fourth quarter, it would seem to suggest that inventory and more generally working capital would have to be a source of cash, could you explain how that would happen in an increasing production environment?

Because we're going to be becoming even more efficient in our use of inventory by reducing our raw material requirements and decreasing our in-process inventory and finished goods. So essentially, in spite of a -- we don't expect the environment to be substantially higher and we've been able to continually reduce our inventory, we expect to be able to reduce it going forward, even in spite of slightly-higher sales. Obviously, if sales doubles we wouldn't be able to do that, but given that we don't expect the environment to be substantially higher in sales, we think we can continue to reduce inventory significantly.

Thanks for taking the questions.

Your next question comes from the line of Vlad Shateynberg with Realm Partners. Brad, please go ahead.

Hi, this is Vlad Shateynberg, how are you? A couple questions.

Good --

Couple of questions, first on the backlog. When I look at the slide 21 and compare that slide to last quarter's slide, there are some big shifts. First of all, the total number is up roughly $300 million, but then when you look on specific subsegment of that North America is up -- is down from $359 million to $134 million, South America is up from $19 million to $362 million, so I wanted to understand. What's going on behind those numbers?

Thanks for the question. In North America -- well, first in the chart in general we track new net business so we're showing you going forward new wins netted out by any replacement losses in our base so you get a real feel for where we're growing and how. In North America, since the la -- well, in net we've grown, as you can see in the totals, about $250 million to $300 million, in each region and product line it varies. In North America we have lost in future years actually three relatively-large programs that have gone in-house at the customers'. As people are evaluating what they're doing with manufacturing and downsizing. Some of our products were chosen by our customers to be built at their facilities. That's the major shift in North America. And in South America we won a number of new programs in the last quarter and now we're increasing our net new business in South America.

Okay. Great. new business in Europe is up from $210 million to $384 million, is that new wins as well?

That's correct. And new wins in Europe across our various segments.

Okay. And is there also a shift in terms of your expectations of production levels that's implied in here?

No, these charts, as we say in the bottom of this one, is based on quoted volumes for the customer and then when we bring them into the planning phase , then we adjust them for our perception of the market.

Okay, got it. Thanks. On the working capital front you mentioned that inventories will be reduced by and $50 million to $100 million for the rest of the ye -- is that for the rest of the year or per quarter?

For the rest of the year.

Okay. The revolver availability between Q1 and Q2 dropped off significant things from $275 million to $152 million, can you take me through the reasons for that?

As I mentioned, there were two actions. One was we replaced some cash deposits that were securing obligations that we had with letters of credit so that reduced our availability under our credit facilities. And then the second issue is there's been a substantial reduction in our overall borrowing base. Our borrowing base is based on both receivable and inventory and as we take down our inventory we obviously have a substantially lower borrowing base. and you can see that the receivables were actually down. So fundamentally, the major impact was the reduction in our borrowing base because our receivables and our inventories were lower than the prior quarter and then there was a small piece related to the use of letters of credit. So smaller borrowing base and a slightly higher usage due to letters of credit. Now --

How much are your LOCs as of the end of Q1 and Q2?

I don't think we've ever disclosed that number.

Okay. All right. And then on the off-highway business, can you split -- it's split roughly between agricultural and construction for of 2008, for instance?

Agriculture would be about 60%, 65% and construction and material handling would be the rest.

Okay. And last question is just on the term loan buy-back, you mentioned that you bought some at par. What is the reason for that?

We just decided we'd complete what we thought we were going to do, a 10% reduction in our debt at the end of the second quarter.

Okay, so you paid that back --

It's just basically to further reduce our leverage, that's all.

Okay. Okay, thanks.

You're welcome.

The next question comes from the line of Barrett Eynon with Brownstone Assets. Barrett, please go ahead.

Are you saying that if you continue at the same sort of revenue number you expect to do $90 million per quarter on ongoing basis?

I think that's a fair judgment, yes.

That is a fair -- okay. And then of the EBITDA this quarter what's included in that $33 million of other you have in there?

As I mentioned that includes some of the one-time items, environmental reserve adjustments, the asbestos, item.

Okay. And that's all below operating income line?

That is correct, yes.

And then on the cost savings you've gotten so far you laid out the prices that you've achieved, but you how much of the cost savings have achieved, so far? I'm assuming of that's in the volume number.

I'm sorry, I'm not --

The cost savings target that you have.

The other side of what?

How much have you achieved year to date, not counting the price increase just the cost savings? You could probably to $550 million to $700 million for the year, I'm just curious how much you've gotten so far?

Well, as we showed on slide number -- let me just go look at -- slide number 13, We have gotten structurally about $113 million of overall cost savings and profit improvements. Realistically, you take the $60 million of conversion costs, you take the SG&A, and you take the warranty and essentially about $120 million of structural savings that we've gotten through the first half of the year. We ex -- again, a lot of that was second quarter so we expect the savings to be even higher on this in the third and the fourth quarter because we didn't get all of that in the first quarter. So on a run rate basis we're going to be higher than that.

Right. Your second half you have a lot coming through still?

Should be some additional increases, yes.

All right, okay. I didn't catch it, what was your exact leverage test number, for the quarter what the actual number was? I know the test is 6:1, just curious what you actually came in at?

Yes. See if I have this in front of me, I'll have to find it. Let me look that up. I think the number was about 5.80 something, but -- or 5.28 something. Let me just look that up and I'll get back to you before we get off the phone call.

Sure. And then one last question, if you don't violate a covenant nothing happens there. Does your LIBOR floor fall away after January 31st of 2010?

That's correct.

Okay. Thank you.

Let me just, while we have the open line, follow up on that question. It was 536 -- 5.36 was our leverage test results for the second quarter. And let me answer two other questions that came up. One was we do disclose the total letters of credit outstanding $189 million which was a question earlier. And then as we take a look at the revenue in Europe on the light vehicle side, I was mistaken when I said it was relatively flat. It was for a number of our businesses, but actually on the light vehicle side that we're talking here, the driveline business was actually up substantially on a quarter-over-quarter base. Up about 50% on a quarter-over-quarter basis. Now it's not a big number. The biggest number in Europe is off-highway so it really gets -- it gets overwhelmed by the changes in off-highway, but it was still up so with the support -- it's consistent with the increase in the industry.

Dixie, we have time for one more caller.

Your last question comes from the line of Tyler Greiss with PSAM. Tyler, please go ahead.

Yes, I think my questions have been answered. Thank you very much.

There are no further questions at this time.

Then I think at this point, we'd like to thank everybody for joining us and have a nice day. Thank you.

Thanks, all.

Thank you.

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