Dana Inc (DAN) 2010 Q2 法說會逐字稿

Good morning and welcome to the Dana Holding Corporation second quarter 2010 webcast and conference call. My name is Camillia, and I will be your conference facilitator. 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 any background noise. There will be a question and answer period after the speakers' remarks. (Operator Instructions) At this time, I would like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations, Lillian Etzkorn.

Thank you, Camillia.

Good morning ladies and gentlemen. Welcome to all of you who 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 me this morning are; John Devine, Executive Chairman; Jim Sweetnam, President and CEO; Jim Yost, Executive Vice President and Chief Financial Officer; and Jacqui Dedo, Chief Strategy and Procurement Officer. Also in the room are Gary Convis, Special Advisor to the CEO, and Mark Wallace President of Heavy Vehicle Products.

Before we begin, I'd like to review a couple of items. Copies of this morning's 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 Corporation. They may not be recorded, copied or rebroadcast without our written consent. Today's call will also include a Q & A session. In order to allow as many questions as possible within our time frame, please keep your questions brief.

Finally, today's presentation includes 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 filings, including our annual, quarterly, and current reports with the SEC.

With that I would like to turn the presentation over to Jim Sweetnam. Jim?

Thank you, Lillian.

Good morning everyone, and thank you for joining us today. I'm very pleased with the progress that our team and company that continues to make on our plan. We delivered another strong quarter, achieving significant profit improvement and positive net income of $9 million. Our adjusted EBITDA was $154 million on revenues of $1.5 billion. With an adjusted EBITDA margin of 10.1%. Our free cash flow was $137 million, and this is the fifth consecutive positive quarter we've had of free cash flow. We ended the quarter with over $1 billion in cash, which continues our net cash position achieved last quarter.

As we discussed the last quarter, we combined our sealing and Thermal Product Groups into our Power Technologies Group. This quarter, you can see the strong growth in this segment both in revenues and in margin. All of our segments have achieved significant margin improvement resulting in an overall EBITDA margin of 10.1% for the company this quarter. Our South American business continues to be robust, driven by very strong market demand there.

Turning to slide six, which shows you a summary of our margin improvement across our Product Groups, you can see by the chart that all of our Product Groups achieved significant margin improvement this year. Power Technologies, most notably, has increased their first half margin to over 13%. And that's an improvement from break-even levels in 2009. We're very pleased with this, and we look to our Power Technologies business to be an area within Dana that provides opportunity for leading technology and profitable growth.

I'll get you to turn to slide seven. It shows--this is a refresh chart, and shows our revenue by customer for this year, excluding our structures business. Diverse customer mix continues to have a growing balance of automotive and nonautomotive customers in the top ten. With Paccar and Navistar from the commercial vehicle segment and John Deere from our off-highway group. You will also note our continuing expansion of our customer base with the addition of Tata from India as a new top ten customer. This is consistent with our ongoing strategy, which is driving to better balance our portfolio by market and by geography.

I'll get you to turn to slide eight. Consistent with what we have shared with you before, these are our strategic growth priorities. Our key priority is to create profitable and sustainable market growth. We're making progress in several key areas we wanted to update you on. First of all, we are penetrating deeper in the China market through the expansion of our JV ownership in DDAC, and we do expect to close on the transaction by year end. Additionally, we have recently put in place a new leader to drive our after-market business initiatives, and to develop our long-term growth strategy for our after-market business. We have continued our success in the marketplace this quarter. The next couple of slides I'll share with you, will highlight some key product wins that we have recently achieved.

Turning to slide nine, it says "Winning new business." It highlights some of our recent heavy vehicle driveline product wins. Starting with, we were rewarded both the drive shaft and drive axle business in India for the Mahindra Navistar 25-tonne and 31-tonne trucks. These axles were developed and adapted in India to optimize cost and performance for that marketplace.

Additionally, and we're quite proud with this, we were also awarded as the exclusive supplier for axles and drive shafts for the new Navistar Terrastar truck. The Terrastar is Navistar's new entry in the class 4/5, or medium duty truck market.

We were also awarded the axle business in Brazil for the MAN nine-ton light truck. This is the best selling medium duty truck worker platform in the Brazilian market. And we're very pleased with the global diversity of these product wins.

Turning to slide 10 and moving to some of our light vehicle product wins, we were awarded front and rear axles and drive shafts for a future global pickup truck platform from an automotive OEM that will be manufactured in South America, in South Africa and in Thailand. We were also awarded the rear axle business for Foton motors in China--their SUV and pickup truck in China. This is a new customer for us and also conquest business. We believe our ability to provide localized engineering, manufacturing, and sales support is key to success in this region. Additionally, Chrysler has awarded us the front and rear suspension modules for a product in South America.

Turning to slide 11, we're very pleased that our plant in Pune, India was awarded best supplier by John Deere India in their 2009 enterprise product delivery process support category. We're very pleased with this recognition along with the prior ones received this year and we believe that it demonstrates the clear commitment that we have to high quality by all of our employees worldwide.

Turning to slide 12, and our focus for 2010 and beyond. This is consistent with what we have shared with you in the past. We are focused on growing Dana profitably. In the near-term, we will see some softness in the second half of 2010 due to normal seasonality, but we are on track to achieve the goals that we have shared with you. Our focus will continue to be on further optimization of our manufacturing footprint, our supply chain and material costs, and to continue reducing complexity in our operations and in our entire value chain. We have refocused our technical and marketing resources on reinvigorating our product portfolios across our business franchises in order to create clearly differentiated products to help our customers compete their respective marketplaces. We do plan to pursue attractive business and growth opportunities, primarily in Asia Pacific, but also pursue specific growth opportunities in other geographic areas. All this with a strong focus on improving margins while maintaining a strong balance sheet.

Let me now turn this over to Jim Yost for the financial review.

Thank you Jim, and if you turn to slide number 14, we can go through a summary of the quarter's financial results. As Jim noted earlier, we had another strong quarter achieving a significant operating profit as well as a positive net income of $9 million. Sales for the quarter were about $1.5 billion, an increase of $300 million compared with last year and slightly improved from the first quarter. Adjusted EBITDA of $154 million is a significant improvement over both Q2 of last year as well as the first quarter of this year.

I'll cover sales and adjusted EBITDA in subsequent slides. Capital expenditures were relatively low this quarter. We still continue to expect to spend in the range of $135 million to $155 million for the year, and this range is a little bit lower than previously discussed. Free cash flow at $137 million for the quarter was particularly strong, and the significant improvement over last year and the first quarter. It is also the fifth consecutive quarter with positive free cash flow. Additionally, as you will see in a few slides, we ended the quarter in a net cash position again for this quarter.

On slide number 15, we cover our sales for the quarter versus 2009. At $1.5 billion, we're up $336 million, or about 28% overall. The sale of most of our Structures business lowered revenue by $113 million, and we still have--expect to close the sale of the remaining structured business in Venezuela later this quarter. Volume and mix contributed $438 million of sales improvement, and that's about a 40% on an adjusted second quarter of 2009. Pricing was essentially flat, and is in line with our full-year expectations. Currency was slightly favorable due to the dollar weakness compared with the dollar in 2009. While the growth has been very strong this quarter in the first half of the year, we do not expect this rate of year-over-year increase to continue in the second half due to normal seasonality of the business.

Slide number 16 covers the change in our adjusted EBITDA for the quarter, which is up $60 million from last year. Volume and mix were favorable by $77 million on the sales increase of $336 million. That's about an 18% drop-through. The impacts of currency and pricing were essentially neutral. The sale of the structures reduced EBITDA about $5 million. Conversion costs savings continue to be strong at $36 million on a year-over-year basis. We did incur non-cash pension expense of $8 million in the quarter, and higher compensation in benefit costs of $13 million. This is consistent with our expectations, and as you will recall, it's consistent with what we discussed in December of last year when we gave guidance for 2010. These costs will continue throughout this year. As you also may recall in the second quarter of last year, we had a number of one-time favorable items totaling about $23 million because these do not repeat, deteriorated, or year-over-year costs by about $11 million in total.

On slide 17, we've shown a comparison of first half 2010 adjusted EBITDA to first half results of last year. This year, the year-to-date total is $262 million, which is an improvement of $152 million versus last year, a very significant improvement. Volume and mix contributed $134 million of the favorable variance. Pricing was unfavorable by $21 million, primarily due to the non-repeat of an $18 million lump sum payment we received in the first quarter 2009 that actually was recorded in our income statement as other income, not in sales, but we include it here because it was essentially a pricing action.

Cost savings and others were $40 million favorable for the first half, and driven largely by our conversion cost savings at are plants of $84 million. Consistent with what you saw in the second quarter slide, we did have higher pension costs, which again, are not cash of $14 million, and the compensation and benefit cost increases for this year, compared with last year, were about $18 million. Additionally, as discussed on the previous slide, there were some one-time favorable items in the second quarter of last year that did not repeat. Currency and structure sales were essentially zero impact, and we continue to be on track to achieve our full-year efficiencies and cost reductions.

On slide 18, you can see the trend of our adjusted EBITDA margins over the last 10 quarters, and we're particularly proud of the progress we've made since the end of '08 and the beginning of '09. Our margin improvement continues to be very strong as we completed very significant structural reductions in our operations and volume has improved. This quarter's EBITDA of 10% is in line with what our full year margins expect to be, and we've given guidance there about 8% to 9%. The reason why we expect them to be a little bit lower in the back half, as I mentioned early, normal seasonality of sales suggest that sales in the second half will be a little bit less than the sales we have seen in the first half. But it does demonstrate our ability to achieve 10% margins as we go into next year which is, in fact, our expectation.

Turning to free cash flow on slide number 19, you can see the strong performance for both the quarter end of first half of 2010. Free cash flow for the quarter was a positive $137 million. That's $64 million better than last year. As I mentioned, fifth consecutive quarter of positive free cash flow. The cash flow in this quarter was somewhat inflated, however, by a number of factors. We did benefit from the early payment from one of our customers, about $25 million, and capital expenditures continue to be a little bit lower than what we expect as our run rate. Both of these will reverse in the third quarter.

Although capital expenditures were a bit light in the first half, we expect to catch up in the second half, although not quite as much as we previously estimated. So, again, our guidance is slightly reduced from where we were. Additionally, we are on track now to continue to incur about $100 million of restructuring costs for the year, and again, the majority of that will be spent in the second half. Nevertheless, we now expect our free cash flow to exceed $100 million where previously we were saying we'd be probably only be about break-even So, we've continued to see very good performance on working capital, and we congratulate our team for bringing that cash to the bottom line.

Slide number 20 you can see the trend of our free cash flow over the last 10 quarters. In 2008, we experienced significant cash outflows of $381 million due to the very abrupt drop in industry volumes. In 2009, we generated $109 million of free cash flow, in spite of a very significant decline in the first quarter due to the substantial reductions in our payables. Since then, we've been free cash flow positive.

Turning to slide 21, as you can see, we continue to be net cash positive this quarter with a net cash balance of $120 million. This is an improvement of $35 million since the first quarter even after the payment of the bankruptcy tax settlement, which we made to the IRS in the second quarter of $75 million. We finished the quarter with over $1 billion in cash, and total debt of less than $940 million. There are some specific uses of cash that we anticipate in the near term, however. The board recently declared payment of two quarters of preferred dividends. These will be paid in August. We still have three quarters of payments about $24 million in arrears. We now anticipate that our incremental investment in DDAC joint venture that Jim talked about earlier, will be about $120 million due to the improved business outlook since the initial contract terms were finalized in 2007. We believe we will close the transaction by the end of the year and we're looking favorably on increasing our participation in that joint venture. As discussed in prior slides, we will have higher capital expenditures and restructuring costs in the second half compared with the first half.

On slide number 22, you can see our liquidity continues to be very strong, standing at over $1.3 billion at the quarter end, an improvement of $215 million since the year end of 2009.

I will turn this over now to Jacqui for a sales and marketing update.

Thanks, Jim. In the global market segments we serve, we're more optimistic about the light vehicle, and medium and heavy truck markets than we have been. We've seen solid performance in North America light vehicle market in the first half, and our view for the full year remains unchanged. We continue to believe that we will see modest improvement in the second half of 2010 for both the medium and heavy truck vehicle markets. We've modestly increased our expected range for the heavy truck market to between 130,000 and 150,000 units for this year, up from a previous range of 122,000 and 145,000. In off-highway market, we're seeing strengthening with a continued improvement in orders from several customers. As a result, we've increased our production outlook for both agricultural and construction equipment, global markets for the full year. Overall, we do not expect year-over-year growth to continue as strongly in the second half of the year as we experienced in the first half. We are, however, happy to confirm an overall revenue outlook to be a full-year improvement of greater than 15%, including both the market improvement and our net new business. Jim, back to you.

Thank you, Jacqui. Turning to slide 24, again, we'll give you an update on our key financial targets for 2010. And these are consistent under the plan column with the data we gave you in December, adjusted for the sales Structures. We are on track to achieve all of our financial targets. We have modified two of the outlook items. One was free cash flow, as I mentioned earlier. We now believe we'll be in excess of $100 million of free cash flow for the period, and our capital expenditure targets, we've reduced the top end of that range of $185 million to $155 million in line with what we expect to spend. Overall, we continue to be on track to achieve our positive net income in 2011 along with adjusted EBITDA margins greater than 10%, and we continue to believe we will be in the range of 8% to 9% full year for adjusted EBITDA as a percentage of sales for 2010.

I'd like to turn it back to Jim for some closing remarks.

Thanks, Jim.

In summary, looking at slide 25, we are on track to achieve our plan for 2010. We are pleased with our progress during the past quarter as evidenced by the swing to positive net income, and achieving positive net free cash flow for a fifth consecutive quarter. The balance of the year will be solid, but normal seasonality will reduce production and earning potential from the levels we've experienced in the second quarter. We're also pleased with our ability to continue to achieve key business wins in the marketplace globally. We will continue to improve our core business and grow it profitably. I'd now like to turn the call over to our moderator for the Q&A sessions.

At this time, we would like to begin the Q&A session. (Operator Instructions). Your first question comes from Himanshu Patel of JPMorgan.

Good morning, guys.

Good morning, Himanshu.

I'm just curious on slide 24, your guidance for full-year EBITDA is unchanged from where it was in Q1. Obviously, you had a fairly good quarter. You raised some of your industry volume guide, and I presume the outlook for raw materials costs is probably more benign now than before. What's holding you back on potentially revising out that guidance figure?

Himanshu, if you take a look at the slide that you put in that Jim talked, about through the first half, our EBITDA margin was 8.6%. For to us get into 10%, we would have to generate in the range of 11% to 12% EBITDA margins in the back half of the year. That's unrealistic for us at this point in time. We do expect to have very strong margins in the back half, but just an arithmetic basis, it would be very hard for to us achieve more than 9% in the full year more than 9% in the back half of the year. So, that's the reason why we didn't take the guidance up. We still think we'll be within the range we projected.

Okay. Then two smaller questions. How does the revenue mix for Dana for frame- based light trucks change with the divestiture of the structures business?

Well you can see, I think on slide number seven, we previously Ford was running 20%, 21%. You can see as we pulled Structures out, even though Ford was a fair amount of that business, we have picked up other market improvements, the Super Duty, for example. So, we've seen some growth in Ford strength in the other business. So, in fact, it's only impacted us 1% or 2% overall.

1% or 2% of total Ford revenues, I understand that, but do you have the data to just look at particularly pickup trucks and frame-based SUVs. I'm just wondering. I presume your exposure there went down with the divestiture. I'm trying to understand the magnitude of the decline.

Went down largely due to the F-150 where we had the structures business. The strength of the Super Duty obviously added a bit. So, we're down net-net in North America on pickup business. But globally we're not down substantially. In fact, if you take a look at the numbers, we're really up year-on-year on Ford absolute business, in spite of the fact that we spun off the Structures business.

Last question I wanted to shift to the off-highway business. You know at a high level, it looks like the revenues were up $30 million sequentially, but your earnings were up only about $4 million on an EBITDA basis, sequentially. That's a pretty modest--it looks like 13% or 14% contribution margin. I'm curious, what are the cross currents going on in that business that's preventing a more robust contribution margin occurring there?

Well, we, in fact, did have a fairly significant increase in contribution margins in the off-highway business, and we ended up at about 8.5% in the first half compared with 3.5% last year. So, it is up significantly. First quarter--or excuse me, second quarter was 8.7%. So, as you pointed out, the margin didn't increase that much. When you get down to fairly small changes, Himanshu, there's a huge impact due to mix that tends to impact that. So, I wouldn't read too much into that. We have taken our guidance for the whole off-highway segment up, but it's not up substantially on a year-over-year basis. And so, fundamentally, we don't expect--we expect the last half of the year to be better, but not that much better. We've also added additional engineering resources and people to support that business as we come back. So, there's a little bit of drag as a result of that.

Okay, and then just related on off-highway. I think that division has some of your, or most of your European exposure. Can you just talk us through, Jim, how you think about foreign exchange there? Obviously, there's adverse currency translation, but is that a fairly large exporting business that maybe the FX transaction impacts could offset the translation negative?

No. The bulk of that business stays within the Euro region. As we said before, we don't have huge cross-border exposure one way or the other. So, there will be some impact, but I think the bulk of the impact in that business is just going to be the translation for currency. We've obviously seen, in the last couple of weeks, the Euro strengthening a bit, not huge. We don't expect it to be massive, but we do expect it to continue to recover as long as there isn't any significant sovereign risk default in the Euro region.

Thank you.

Your next question comes from Patrick Nolan of Deutsche Bank.

Good morning, everyone.

Good morning.

Just had a few questions on the off-highway business. Could you talk about, geographically, how the improvement--is the improvement in the outlook, is it similar in Europe versus the rest of the world? Or is Europe lagging the improvement?

The off-highway business, we've definitely seeing an uptick in orders on the Ag side, and the construction side. A lot of that is in Europe. So, actually we don't think that Europe is lagging. We see some improvement, too, in South America, but you do have to keep in mind that the big chunk of our after-market--sorry, our off-highway business is European-based.

Just on the seasonality of business, it's a little hard to tell given the volatility we've seen in the past two years, is that business typically seasonally lower in the back half, revenue-wise?

Yes. I think there are two impacts. One is, Ag tends to be front-end loaded because most of the northern hemisphere countries tend to order their Ag equipment in the first half of the year. We also see, particularly because of Europe, the August shutdown period in Europe tends to reduce production as well as the December shutdown. So, there's more--there's fewer work days in the back half of the year, particularly because it is affected by the European concentration there. But there also is normal marketing seasonality due to the mix of the business. Now, we are seeing a sequential pickup in that business. So, orders are coming in a little bit stronger, but we won't see that overwhelming some of the fewer working days.

Got it. And just lastly, on the SG&A line, it's been kind of volatile the past couple of quarters. Is it actually down $10 million, sequentially, quarter to quarter in Q2? I would have thought it could come up somewhat given the better--better sequential results. Could you just maybe give some color on that?

I'm not sure there's anything I would read into that. We had a few minor one-time improvements there. Probably going to swing back around in the third and fourth quarter.

Have raw materials declined to the point where they could actually be a tail wind for you as you move into 2011?

We're still expecting on a year-over-year basis for commodity prices to be up in the back half of the year versus '09. Earlier this year, we discussed the risk of significant increases, and we saw some increases in the second quarter. I think there was an overreaction to the risk of that, and those risks have abated. We're seeing some modest softening of the commodities market, but on a year-over-year basis, we'll still be up in the second half versus the second half of last year. So, we will bring into 2011 levels pretty much where we are.

Thanks very much. I'll get back in the queue.

Your next question comes from Patrick Archambault with Goldman Sachs.

Hi, good morning.

Good morning, Patrick.

Two questions. Number one, your light vehicle margins were higher than we've seen them, I think, in the post-restructuring period. Obviously, enormously sequentially, and year-on-year. How much of that impact, or how much were they impacted by the ramp up of the Super Duty over the past quarter, which I know is a big program for you? Is there an element that might not be sustained in addition to just the regular seasonality of production in light vehicles?

Patrick, I'll respond to that question. It's not specifically driven by that program. Really it's driven by tremendous improvements in our operating efficiencies within the business on a global basis, and continuing to win new businesses at higher margins versus a specific program that drove it up.

Okay. Would you have considered--it's a Super Duty, would you consider it a material program, though, right? Isn't that one of your biggest?

It's a large material program, but it's not materially more profitable than the other programs that we're running and selecting.

Okay. So, as we plow through, you have seasonality, but of course as the new business rolls on, that's sort of better economics. You would expect that to, all things equal, to continue to able to grind higher.

All things equal.

Okay. The other question I had, getting back to Himanshu's question, on not raising the EBITDA guidance. I understand why you wouldn't raise the margin guidance based on the arithmetic, but it does seem that you've taken up your outlook, right, in terms of a lot of your end markets. So, even holding that original margin guidance constant, one would have expected that maybe that EBITDA might have come up. Is there sort of something else on the content per vehicle front that we should be thinking about, or are you just being conservative, which given the macro back drop might be understandable?

I think it's fair to say that we're cautiously optimistic on our business globally. It is unclear what's happening in Europe. If you look at the GDP results, they're not stellar. Earlier this year, there was a fair amount of optimism in North America. That's somewhat abated with the continuing high unemployment. And I would say, as we always have been, we are cautious in our projections because we intend to beat--meet and beat our objectives. So, I think at this point in time, are we feeling better now than we were feeling in the first quarter? No question about it, but are we ready to raise guidance? I think we'd like to have another quarter under our belt before we get too confident.

Okay, great. Thanks a lot, and congratulations on a good quarter.

Thank you, Patrick.

Your next question comes from Brian Johnson of Barclays Capital.

Yes. Let me get it off. Two questions--a strategics operational one for Jim, and then further guidance from the financial team. I just want to get a sense of what you did differently this quarter versus the past in the power division, what we used to think of as Thermal, Sealing. In particular, you had similar sales 1Q to 2Q, but the margin expansion was quite impressive. Was this a pricing issue? Was this just factory closure that got done, or what's really driving that?

Brian, great question. Here's the way we see it, and we're thinking about it. In the Power Technologies business, as you recall, we ran them as two separate businesses Sealing and Thermal. And we made the decision that we would put them together, and run them as one business, and we've renamed it the Power Technologies business. So, from a running of the business and extracting out overhead costs, that has certainly helped, number one. Number two, within the running of the business itself, we've become much more efficient with our drive with DOS, and efficiencies within our operations to be more profitable on a running basis. Then, I'd say the third piece, is that we are winning and continuing to win some nice pieces of businesses within that business sector that are coming in at much higher margins. So, really, the combination of those three things that's happening in the Power Technologies business, and we're very pleased with the performance improvement.

Should we be thinking about this as a low teens margin business, or was there something--

I'm sorry Brian. We're having--we're struggling a little bit to hear you clearly.

Should we be thinking about this as a low teens margin business?

I guess I'd like to say you should be thinking all of our businesses eventually as a low teens business.

Given the Deltas, should we be thinking it's high teens?

Brian, that's our CFO becoming aggressive.

Okay. Second question, just housekeeping around the free cash flow. What is the base you used in the first half for the free cash flow guidance of greater than $100 million? And is the joint venture investment of $120 million in that in the expectation, or really apart from that?

Second question first, is the joint venture investment is not included in our free cash flow because we exclude investments, either dead equity or in joint ventures, and so forth. So, it's not included in that number. The basis for our greater than a $100 billion. Year-to-date, we're in the range of $174 million. As I said, we've got some half-over-half increases in the second half for restructuring, for capital expenditures. As I mentioned, we did have a little seasonality on some payments. So, we're saying that previously we were looking at pretty close to break even. Now, we're saying we know we're going to be over $100 million positive. And we'll see how sales and working capital run along the rest of the year, but we may not be able to keep up with the same pace we had in the first half. Just as a comment, we also excluded from free cash flow the dividend payments to the preferred shareholders, some minor debt repayments, and did exclude from free cash flow that bankruptcy claim payment to the IRS of $75 million.

Would it be fair to say you're not forecasting negative cash flow second half, but just less cash generation than you had first half?

I guess I would say we always drive towards positive free cash flow. We've been very successful in the last five quarters. That's our goal. I would like to believe we could maintain that, but that right now, we're not sure where we're going to be in the back half of the year until we see third quarter results a little bit more carefully.

Okay.

Your next question come from Tim Denoyer with Wolfe Trahan.

Hi, good morning.

Good morning, Tim.

Quick question on the Navistar Mahindra, can you give us a sense of when those truck programs begin production?

We think that's going to be--we're not quite sure on that yet, but we think that's probably going to be early next year.

Okay. Thanks. And then longer term, just more strategic, can you give us a sense of how long you expect the elevated D&A related to fresh start accounting to continue, and by extension, when we can potentially return to EPS as more of a performance measure?

Well, it varies. The step up on depreciation is in line with the expected life, which is probably five to ten years. So, there's still a significant amount of step up that needs to run off on the depreciation for our plant and equipment. On the amortization side, we still have a significant amortization of those intangibles. Not the good will, but the intangibles that will continue for probably another seven years or so. So, you can think five to ten years before that step up for depreciation and amortization will run off the income statement. It is obviously all non-cash, so that doesn't impact our cash flow. And we hope people take into account that when they look at our earnings.

Yes. Sounds good. Thanks very much.

Thanks, Tim.

Your next question comes from Brett Hoselton of KeyBanc.

Good morning. It's Matt Mishan in for Brett.

Good morning.

Good morning, Brett.

My question involves your backlog. I believe last year, when you recorded third quarter results, you gave a backlog of 2009 through 2012 backlog of about $900 million. Is the way we should look at your net new business target of $650 million to $700 million, on top of that $900 million backlog?

That's correct, and we'll be, as we mentioned before on earlier calls, we will be announcing our detailed achievement to that plan at the end of the year, and we're on track.

Okay. So, you will be updating 2010 through 2013 backlog at the end of the year, or January, or when you report third quarter?

It'll be at sometime at the end of the year, either fourth quarter, January, we're still working out those details.

Okay, great. Thank you very much.

Your next question comes from Derrick Wenger of Jefferies.

Yes. Three questions. First of all, what is letters to credit drawn, and then availability on the facility? And then the balance of the term loan net of the OID, those two components, and then how much restricted cash is there?

Let me see if I can--could you go back to slide number 22? We've indicated there the restricted cash of $43 million. Those are deposits supporting obligation. The net debt net of OID is shown on the slide $939 million. I'm just trying to--hold on a second. Let me look up. Why don't I get the answers to those questions, and I'll look it up and announce it later on in the call.

Okay with the letters of credit drawn and the availability as well?

The detail of that, by the way, will be available on our Q that we are going to file later today. I'll look up the specific information.

Great.

Your next question comes from Vlad Shteynberg of Realm Partners.

Hi. How are you?

Good morning, Vlad.

A couple of questions--so, I have updated my spreadsheet, which basically feeds off your slide 24, which goes to the individual submarkets. My conclusion is that the range of your revenue increase, based on the figures that you provided, going off a range of 11% to 21% to 14% to 23.5 %, with a mid-point of revenue increase going up from 15.5% to 18.5%. So, the first question is, is there a statement that you are effectively raising the revenue guidance. You are just not explicitly stating it.

That would be one way you could say that. We're not raising the revenue guidance. We are positive on the revenue increase that we're seeing in the market, and nothing unchanged in the market, in the back half. We would say that's probably a reasonable way to look at it, but we're still concerned about some inventory growth we're seeing in June, jobs outlook and seasonality. So, we'll continue to watch it.

Right, but it's not constituting itself in your provided figures out, but for these individual subsegments.

That's correct.

Okay. And to take it a step further, this roughly 3% to 4% increase in revenue that I derive, based on the figures you provide, is roughly $150 million of incremental sales, and at incremental margins of 20% to 25%. That's roughly $30 million, $35 million of incremental EBITDA, potentially. Is that fair to state as well?

We've not done that analysis or provided that guidance.

Okay. And then separately, can you talk about incremental margins in a little bit more detail, particularly versus Q1, and then also looking at--into the second half?

On incremental margins, is you see the results of the first half on a year-over-year basis, but we're expecting those margins as we grow to be incremental 20%, 25% flow through to the bottom line as we get more efficient.

Okay. So, in the second quarter, so year-over-year, it didn't quite get out there, right? But it was very impressive on a sequential basis. Can you take me through that differential?

It's just a function of the mix of the businesses, and which ones grow in the margins in the underlying business. There's nothing more to it than that.

Okay. So the 20% to 25% is more on the annualized basis, and it's, quarter-to-quarter, it's kind of lumpy?

Yes. You have to be careful of the quarter-to-quarter based on what happened. Yes, correct.

Okay. Thank you.

There are no further questions at this time. Do you have any closing remarks?

Let me get back, if I may, to the question on the letters of credit drawn under the facility. And obviously, when they're drawn, it's not a cash draw. We have no cash draw under our USABL. We have $146 million of drawn LCs, outstanding. And just in terms of the net debt, we've got about $47 million of amortization of OID still included in that number. Hopefully, that answers the questions that were asked.

With that, I would like to thank everybody for joining us, and we'll conclude our call. Have a nice day. Thank you.

This concludes today's teleconference. You may now disconnect.