Dana Inc (DAN) 2010 Q3 法說會逐字稿

(Operator Instructions). Good morning. Welcome to the Dana Holding Corporation's third quarter 2010 webcast and conference call. My name is Kanicia, and I will be your conference operator. Please be advised that our meeting today, both the speaker's 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 speaker's remark, and we will take questions from the telephone only. (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, Ms. Etzkorn.

Thank you, Kanicia. 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 would like to thank you for spending time with us this morning. With me this morning are 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 Marty Bryant, President of Light Vehicle Products, Mark Wallace, President of Heavy Vehicle products.

Before we begin, I would like to review a couple of items. A copy of this morning's earnings release and the slides that we will be using have been posted on Dana's Investor website for your reference. 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 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 filings, including our Annual, quarterly, and current reports with the SEC.

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

Thank you Lillian. Good morning everyone and thank you for joining us today. We delivered another outstanding quarter, achieving positive net income of $46 million. Free cash flow was $59 million, which is the sixth consecutive positive quarter for us. Our adjusted EBITDA was $148 million, on revenues of $1.5 billion, with adjusted EBITDA margins of 9.8%.

We ended the quarter with over $1 billion in cash, which continues to keep us in a net cash position. Additionally, today we are raising our 2010 full year adjusted EBITDA guidance to $530 million to $550 million. And we are also raising our full year free cash flow to $275 million to $300 million. This reflects our strong performance this quarter. We are on track to achieve our net new business target this year, and continue to conquest new business.

Our aftermarket organization continues to take shape, and we are targeting future revenue to be about 15% to 20% of total sales, up from about 10% today. I am pleased with the progress our team is making on our plan, and I am very proud of our Dana colleagues and of our leadership team in achieving these results. Turning to slide five, and for the next several slides we have added some additional product group detail, to help provide further transparency into our diverse business groups. This slide we show the light vehicle drive line group continues to be a strong performer, contributing $67 million of segment EBITDA at over a 10% margin. This segment continues to grow outside of North America and in growing market segments. As you can see from the customer base graph, Ford is our largest customer in the segment, and there is good representation of global automotive manufacturers. We are pleased with this diversity.

Turning to slide six, it highlights the international scope and innovation of our light vehicle drive line business. We will be providing the entire drive train for the Tata Aria four wheel drive crossover vehicle. This incidentally is the first electric disconnect front axle in India, and it launched earlier this month. Additionally in this segment, we were awarded the front and rear axle module for a future SUV in Venezuela.

Now turning to power technologies group on slide number seven, the power technologies group continues to excel at developing innovative products for the changing market. Over 90% of new business is in growing market segments, and about one-third is in innovative products, such as battery cooling, fuel cell components, and active warm-up units. Adjusted segment EBITDA was $33 million delivering a strong 14% margin, an improvement of almost double that of 2009. As you can see from the customer base, power technologies has a broad reach across several market segments, but customers from the automotive, commercial, and off highway markets.

Turning to slide eight, we are very pleased to have received the F-cell award for Fuel Cell Technology for our metallic bipolar plate technology. This recognition along with the prior ones received this year, is really a testament to the clear commitment for innovation by all of our employees worldwide. Dana will also be providing battery cooling technology for a future electric vehicle program, which brings the total that we have won to three. It is important to note that all three programs have unique technology, again highlighting the strength of our engineering capabilities, and leading innovation in what is an emerging market.

If I can now get you to turn to slide nine, commercial vehicle group. Our commercial vehicle group continues to be the drive shaft leader in South America. We are pleased that the majority of our new business awards have been outside of North America this year, and has also focused in the specialty and military segments. Adjusted EBITDA performance was $33 million on revenues of $362 million. The customer base similar to the other groups is also quite diverse.

Turning to slide ten, fuel economy is becoming increasingly important in the commercial vehicle market. There is new legislation coming that will increase future fuel economy requirements. Our engineering and technology focus for this market targets improving fuel efficiency for our customers. We recently launched a new Spicer Diamond series prop shafts at the IAA Commercial Vehicle Expo in Hanover, Germany, a couple of months ago. These prop shafts provide significant weight savings, up to 70 pounds, or 40% which allows for better fuel economy. Additionally, the design allows for reduced complexity for the truck manufacturer, and lower insulation costs for our customers. Field units of this new product are planned with customers in 2011.

Turning to slide 11, and our off highway group. As you can see by the revenue of $271 million this quarter, we are seeing an improvement in this segment. We achieved $23 million of adjusted EBITDA this quarter, and an 8.5% EBITDA margin. We are seeing strong growth of new business in the ag market through partnerships with our customers. Our largest customers in the off highway market include John Deere, AGCO, and the Fiat group.

Turning to slide 12, as I mentioned in the prior slide, we are experiencing strong growth of new business in the ag market. This quarter we won programs with John Deere, in both Europe and in South America. We will be providing gear boxes and axles for sugar cane loaders, and axles for mid-sized tractors.

Turning to slide 13, 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, and delivering shareholder value. 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 in their respective marketplaces. You are seeing the results of these efforts through our product wins and our technology innovations. We will continue to pursue active business and growth opportunities, with a strong focus on improving margins while maintaining a very strong balance sheet. Our goal is to deliver shareholder value.

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

Thank you, Jim, and if you turn to slide number 15, you will see a summary of our financial results for the quarter. As Jim noted, we had another terrific quarter achieving a significant operating profit, as well as a net income of $46 million. Contributing partially to this positive net income for the quarter, we had a reversal of $16 million in tax valuations allowances, as a result of reorganizing our business operations in Brazil. Sales for the quarter were $1.5 billion, and that is an increase of $187 million, or 14% over last year on an unadjusted basis. After adjusting for the sale of our structures business, the increase is about $330 million, or about 28% to 30%. Adjusted EBITDA of $148 million is also a significant improvement over 2009. And I will cover that as well as sales in subsequent slides.

Capital expenditures were $36 million for the quarter, which brings our total year-to-date to $62 million. We now expect to spend between $120 million and $140 million for the full year, a slightly lower range than previously discussed. As Jim mentioned the free cash flow was $59 million positive also very strong in the quarter. And is the sixth consecutive quarter with a positive free cash flow. As you will see in a few slides we have increased our net cash position in this quarter.

On slide 16, you can see the change in our sales for the quarter versus 2009. At $1.5 billion, as I mentioned, we were up $187 million, with increases in all of our businesses of course except structures. The sale of most of our structures business lowered our revenue by $140 million in the quarter. And we are still expecting to close the Venezuela piece later this quarter. Volume and mix contributed $333 million, or about a 30% increase over our adjusted third quarter level. Pricing was slightly up in comparison to 2009 and that is in line with our expectations for the full year. And currency was slightly unfavorable due to the fact that the dollar was a little bit stronger this third quarter than last third quarter.

Slide number 17 explains the change in our adjusted EBITDA for the quarter was up $47 million from last year. As Jim mentioned earlier, the margin was 9.8%, essentially the same as Q2. Volume and mix were favorable by $61 million on the basis of that $330 million increase in revenue as I mentioned before. That is about an 18% drop through. The impact of currency was essentially flat, and the sale of structures reduced EBITDA by about $16 million year-over-year.

On cost savings we continued to be at very strong conversion cost savings at $26 million, and we are totally on track to achieve our full-year conversion cost target. Material costs was up $5 million largely due to slightly higher commodity costs. We incurred a pension expense of $6 million in the quarter, which as we have mentioned before is non-cash and higher compensation and benefit expenses compared with last year, when we had actually cut some of the benefits, had furloughs, and other actions to conserve cash and improve our profitability. This is consistent with our expectations, and totally in line with what we discussed on prior calls, and these costs will continue into the fourth quarter.

On slide number 18, you can see the trend of our adjusted EBITDA margins over time. We have shown you this a number of times. We continue to have margin improvement as we have completed substantial restructuring of our business, and volume has continued to increase. This quarter's EBITDA as a percentage of sales was $9.8 million and we are pleased with this performance and now are increasing our expectations for the full year EBITDA margin to be about 9% from our previous range of 8% to 9%. We continue to expect to have margins of at least 10% in 2011.

Turning to free cash flow on slide number 19, you can see the strong performance for both the quarter and our year-to-date results. For the quarter, free cash flow was positive $59 million, and as I mentioned and Jim mentioned sixth consecutive quarter of free cash flow. Working capital was negative in this quarter, primarily due to an inventory increase to support some production moves and higher volumes. Capital spending at $36 million was up this quarter versus prior quarters, and we expect to see an additional increase in the fourth quarter. So that we will be somewhere in the range of $125 million to $140 million. We still expect restructuring to approach $100 million for this year, and on the basis of the very strong results in the first nine months, $230 million of cumulative free cash flow, we are increasing our outlook for free cash flow to be between $275 million and $300 million for the year.

On slide 20, you can see the trend of free cash flow over the past 11 quarters. As we discussed before 2008 was a difficult year for us. But starting in 2009 in the second quarter, we have consistently delivered free cash flow and our expectation is we will continue to generate good cash flow going forward.

Turning to slide 21, you can see our net cash position of $184 million at the end of this quarter. And that is an improvement of $64 million since the second quarter results. We did finish the quarter with over $1.1 billion in cash, and a total debt of about $950 million. On the next slide I will take you through our capital structure thoughts and some long term strategy.

On slide 22, as we have indicated before we have several near term uses for our cash. We do plan to make the investment in DDAC, we expect a signed agreement by the end of this year, but likely complete the actual transaction in the early part of next year. Yesterday we announced that we were declaring, the Board declared a dividend on the preferred stock of $34 million. And that catches us up for all of the payments that were in arrears. As I mentioned on earlier slides, we have higher capital spending and restructuring in the fourth quarter, and beyond these items we also expect to begin some cash contributions into the pension fund next year. Probably $50 million to $75 million.

For our long term strategy we will prioritize our cash to support the operations. That includes increasing our product development efforts as we did this year. Continued restructuring although probably at a lower level next year. And potential bolt-on acquisitions as we have discussed previously. We are targeting a BB credit rating in the longer term as our performance improves, and as we have discussed also, over time as it permits, we will transition to more unsecured debt, and try to align our absolute debt levels with the footprint we have in our regional operations.

Turning to slide number 23, you can see our financial targets for the year 2010 in the middle under plan, it is consistent with the December guidance that we gave adjusted for the sale of our structures business. As I mentioned earlier, we are raising several elements of our full year guidance. We have increased our full year revenue expectations to about $6 billion, and Jacqui will take you through our market outlook in a couple of minutes. We have also increased our full-year adjusted EBITDA guidance to $530 million to $550 million, and cash flow to a range of $275 million to $300 million. That pegs our EBITDA margin at around 9%. Additionally we now expect capital spending to be in the range of $125 million to $140 million as I mentioned earlier. We are on track to achieve positive net income for 2011, along with an adjusted EBITDA margin of at least 10%, and very well along the way in achieving all of the objectives we laid out for this year. With that I will turn it over to Jacqui for a market and sales update.

Thanks, Jim, and good morning.

Turning to slide 24,in the global market segments we serve we have seen modest improvement this past quarter, and as a result, have increased our full year production estimates for several markets. We expect full year North America light vehicle production to be between 11.5 and 11.8, an increase from our prior estimates of 10.9 and 11.4.

We continue to believe that we will see improvement in 2010 for both the medium and heavy vehicle markets. We have modestly increased our expected range for heavy truck market to 140,000 to 150,000 units this year, up from our previous range of 130,000 to 150,000. We have also seen some improvement in the European light vehicle market. This is dampened by some weakness in their medium and heavy truck market though. Asia-Pacific has also shown strength and we have then created production outlook for both the light vehicle and medium truck and heavy truck market in this region. Overall, as Jim said, we now expect total revenue for Dana to increase to about $6 billion this year.

Turning to page 25, as we all begin to turn our attention to next year, we thought it would be helpful to share with you some third party forecasts we are studying for the key markets in which we participate. I would caution you that these are general market views, and the specifics as they would apply to Dana could be materially different due to vehicle mix, especially in the light vehicle market. We will provide more details on our full financial and market outlook in January. Slide 25 highlights expectations for the light vehicle markets across the globe. Modest growth is projected in all of these markets over the next several years, with Asia-Pacific having the highest projected growth at 14%.

Turning to slide 26, in our commercial vehicle markets, significant growth is projected in both NAFTA and western Europe over the next several years, recovering from trough levels in 2009. South America and Asia are projected to have modest growth, neither of those regions experienced the dramatic NAFTA decline that Europe and NAFTA saw. Finally as shown on slide 27, the global off highway market is expected to continue its recovery over the next several years in all major markets. However, it is not projected to achieve 2008 production levels even by 2012.

In summary, on page 28, we are seeing growth in all markets and segments. We are continuing to win new business across all our segments, and are on track to achieve our full-year target. We will provide more details on our 2011 outlook, our market expectations and summary wins in our January report. Jim, back to you.

Thanks Jacqui. In summary, we are on track to achieve our 2010 plan. We are very pleased with our progress this year, as evidenced by the positive net income on a year-to-date basis, and achieving positive net free cash flow for the sixth consecutive quarter. This has enabled us to increase our full year guidance. We are also pleased with our ability to continue to achieve key business wins in the marketplace, and believe that this speaks to our competitiveness. We will continue to improve our core business, and grow it profitably. I will now turn the call over to our moderator for the Q&A session.

(Operator Instructions). Your first question comes from Brian Johnson from Barclays Capital.

Good morning. I have a question around the geographic mix in each business, which hopefully you can answer. If not, we would love more details. And then second a more longer term strategic one. We would like the pie charts by business segment that was where the business is, is there any way you can give us segment by segment the geographic exposure, so we could tie it into some of the slides Jacqui gave us around end market growth?

Brian, this is Jim Yost. We don't have that specifically available today. We will think about how we will best communicate that information . I think we have said in the past some of the geographic distributions of our business were off highway is, predominantly in Europe, and our CV businesses mostly in North America, with a significant presence in South America. Light vehicle is much more predominant in the North American region. Power technology is pretty much spread between Europe and North America.

Okay. So again, light vehicle was North America and some South America, or mainly just North America?

North. A little color on light vehicle. Light vehicle right now is running at you could say 40% to 55% North America, with then another 20% both South America and Asia, and the remainder in Europe with the lightest presence for us in Europe on light vehicle drive line.

And how about South America and within commercial vehicle? Just again, very roughly. Think about the implications of the dramatic growth there.

We have seen dramatic growth wins and a very hot market this year.

Right. Do we start off with about a third of your commercial vehicle business, or less than that?

Less than a third.

Okay. And the second question is, the guidelines have just been out long enough, just a few days now. But as you think through the new fuel efficiency requirements, 2014 and beyond, what do you think it means for your product line, your competitive positioning, the types of initiatives you want to be taking with your OEM commercial vehicle customers?

Brian, it is Jim Sweetnam. I will respond to that one. We actually quite honestly think and feel that this plays to our strength. The requirements for 2014 as they effect the commercial vehicle space is forcing, or will force the truck manufacturers to be more fuel efficient, and for them to be more fuel efficient they have got to have either better performing equipment, more efficient, or they have to reduce weight. And those are exactly the two things that we have been working on, and all of our engineering and technology work is focused on that sector. The product that we showed you here in the slide speaks to, that is one of several products that is going to be coming out that helps to do that. So we think we are very well positioned, Brian.

And in terms of is this something because it is a new product you could look at the margin enhancement on, or is it the same product you have been running for years?

We certainly hope and plan to do that, Brian.

Okay. Thanks.

Thank you.

Your next question comes from Himanshu Patel from JPMorgan.

Good morning, guys.

Good morning, Himanshu.

Many suppliers have seen pretty nice upticks in their backlog, just because of the reinstatement of previously deferred and canceled OEM programs, and I guess this is mainly relevant for the light vehicle side. I am curious, are you starting to benefit from that as well, or should we think about hearing that in some of your future updates on backlog?

As we indicated we'll give you an update on that at the year end. As we indicated in our outlook, we are on track to achieve our objectives. So we are benefiting obviously from all of the activity going on. And we will give you a full update when we announce our full year results.

And then on 2011 that you have signaled for a couple of quarters now, that margins would be greater than 10%. I am wondering if you could at least start helping us with maybe bracketing kind of an upper end or lower band on that, just given the impressive exit rate that you have in the second half of this year. Do you have just some directional views on kind of where long-term margin range is for the business?

Well, on the first half of the question, we are going to give you an update in January. So I would like to defer any comments to that. We are still working on our plan and we'll finalize that in the month of November, probably in December. So I will hold off on the specific numbers for 2011 until we finalize that. Regarding longer term margins we are pretty confident that as the industries around the globe get back to more normal levels, and as we continue our margin improvement rolling out new products, winning new business that we think a 12% EBITDA margin is a reasonable longer term target.

And do you have a view on sort of what type of light vehicles SAAR, and what type of class 8 production that would be roughly consistent with?

Probably somewhere in the range of 14 million on the light vehicle side, and probably around 240, 250 on US commercial vehicle.

And then Jim, if I could go back to slide 17. The pricing benefit on EBITDA was $13 million. Pretty impressive number this quarter. What is kind of the outlook for that? Was that a comp issue, or how should we think about that going forward?

Well, I think our whole team has done a very good job of managing the revenue side of the business this year, so congratulations to them. Some of that Himanshu is from material recovery. Then there is a modest amount of adjustments on some of our contracts. So I think you should look at that on the basis of, that we expect to be pretty much break even for the full year on pricing as we have indicated. And going forward, that would be our expectation on pure pricing. Again, separate that from new model introductions where the margins might be better supported by better technology.

And historically, if I could just sneak in one more. Dana several years ago had some issues with steel costs, and it sounds like in recent years you have been more successful in getting recoveries on that. As we kind of enter into maybe another period of commodity inflation, any sort of general guidelines you can help us with on how to think about that? Should we generally expect most of these costs to be passed on to the customers, and maybe there is just a one or two quarter lag?

Well, we have a desire and we have been able to accomplish greater coverage for material recovery in our contracts as we renegotiate those. And I think we have got very reasonable customers who understand that they can't continue to assume we will be able to offset 100% of commodity increases, so we are working with our customers to come up with a fair balance on how we manage those costs. Obviously, there will be some variations quarter to quarter. But we are about 75% covered right now with either specific contracts or general practices where we can pass through those commodity costs. Obviously, to the extent there is any substantive increase, then we would go back to our customers on a one-off basis to discuss adjustments for that.

Great. Thank you.

Your next question comes from Patrick Nolan from Deutsche Bank.

Good morning, everyone.

Good morning, Patrick.

Just a couple of questions. First, on the Q4 margin guidance, it seems to imply a weakening of margins in the fourth quarter. Could you maybe give us some color on that? Are you just being conservative, or is there something that you see out there that should cause the margins to weaken sequentially?

I would say Patrick, on a normal basis our fourth quarter margins tend to be a little bit lower. Sales tend to be a little lower in the fourth quarter due to shutdowns, and our costs are a little bit higher in the fourth quarter. So I don't know that you would read too much into that one way or the other. We obviously are targeting to do the best we can. But yes, you are correct in reading that it could be a little bit less than the third quarter.

And when you think about you have guided into the 12% long term EBITDA margin, I think the traditional thinking was the off highway and commercial vehicle was more profitable than light vehicle, but the recovery you have seen in the EBITDA margin there has been pretty spectacular. Do you see these businesses as being as profitable as the off highway and commercial vehicle market going forward?

Yes, I think the effort that has been put forth by both of the light vehicle teams, both in drive line as well as power technologies has been remarkable and tremendous. We combined the sealing and the thermal business and getting a lot of synergies on product development. A lot of good new products rolling out. Tremendous effort on those teams to improve their performance.

Both of those businesses, both the drive line business as well as the power technology business in the first quarter of 2009 was at zero EBITDA margins, so the performance improvement on both of those has been great. We do not see any reason why inherently those businesses shouldn't be globally as profitable as the commercial vehicle and the off highway market. I know there has been some historical situations in the past where that hasn't been the case. But we believe with a very strong technology portfolio, with a very balanced customer and geographic mix, we see no reason why those businesses can't be as profitable as the heavy business going forward.

That is very helpful. Just two quick housekeeping ones. What is your restructuring cash then you expect in the fourth quarter, and can you remind us what the split of the off highway business is between ag and construction?

I will answer the first and let Jacqui take care of the second. We have spent about $50 million year-to-date cash on restructuring. We expect the fourth quarter to be upwards of $50 million. It is still, we will see how it comes out, we still have a few decisions to make. Maybe a little bit less than that. But we are still expecting it to be closer to $100 million than not. Jacqui?

Yes, on the split of ag and construction, ag is higher about, it is about 60%, construction is about 40%.

Got it. Thanks very much.

Your next question comes from Patrick Archambault from Goldman Sachs.

Hi, good morning.

Good morning, Patrick.

I guess I had a question just on the issue of capacity. Can you give us a sense of the utilization you are at now, and also would love to get a sense of how that walks forward, given the restructuring that you are doing. It sounds like there still is some consolidation to be done, some efficiencies, and ultimately I am just interested in finding out where you expect to be once you are through most of that in terms of capacity on the commercial truck side. Where will you be 250,000 or 300,000 units before you would start to have to kind of look outside to outsource?

Patrick, it is Jim Sweetnam. Patrick, great question. With respect to capacity speaking for all of the segments we are operating in, we have to remind everybody that the levels at which we are operating today, whether it is in light or it is in commercial vehicle or in off highway, they are still below and in some cases well below where we were operating in 2008, when markets were really running hard. In the restructuring work that we have been doing, our teams have been very focused on how do we restructure to make sure that we put manufacturing capacity in the right locations around the world, versus taking capacity out. So we are actually quite, right now we kept capacity neutral, so we have the ability to ramp-up in each of the businesses as the market needs, and we don't have a capacity constraint. We have the ability to move up and respond to the markets. Hopefully that answers your question, Patrick.

Yes, I guess, you wouldn't be willing to put a specific, well two follow-ups. You wouldn't put like a specific amount of trucks number that you are targeting, and secondly, related to that, maybe you could also describe a little bit of how you see the health of the supply chain? Because clearly it is one thing for you guys to be able to handle the volume, but can the folks you rely on also handle it if you do for some reason go to 250,000 next year?

Well, quite honestly, Patrick, we would welcome a market with 250,000 trucks.

It is a hypothetical, but I thought I would throw that out there.

But we have already responded and supplied a market of that size, again back to my previous comment, we have not taken capacity out. What we have done in our structuring is to reposition to make sure it is in the most competitive locations. So there is not an issue with us supplying a 250,000 market. In terms of the supply base, obviously that is something that we and others like us, we have to keep our eyes on that one. And we are certainly working that channel to make sure that our suppliers can ramp up when we have to ramp up.

Okay. Great. That is helpful. And then I guess my other one was just on the commercial vehicle segment. You saw a pretty good increase in sales there year on year, and I might have missed it, but your EBITDA margin improvement was only 20 basis points. In some of the other segments you saw much steeper year-on-year improvements such as in light and in power. I was just wondering why that didn't from a year-on-year perspective see a bigger delta?

Great question again, Patrick. There are a number of things going on here, and let me just take a shot at responding to your question. First of all, we have a lag that is occurring, and will naturally occur between what happens with commodity increases as we absorb them into the business. And being able to get recovery with customers, depending on the contracts if it is a couple of months or six months, but there is a lag between increases and getting recovery. So there is some of that going on here.

Second, quite honestly, margins in North America, not as good as we really would like them to be. And we are working on improving that. Thirdly, and I think very importantly, in terms of focus for this business as we have been explaining before sort of four key pieces, focus, we are working and we have been winning new business in the specialty and military market segments, which is higher margins. Second, we have described to you the geographic expansion as we explore China and DDAC, which we hope, well, we plan to sign before the end of the year. India and South America, great opportunities for us that we are feverishly working on. We are also working very hard on the aftermarket side to improve our structure there for commercial vehicles, and then last and very importantly is the technical and engineering spend, which is focused on providing customers with fuel savings technology. And we are leveraging a lot of the work we had successfully done on the passenger car side into the CV side. A lot of these things going on and that is a long way of responding to your question, but a lot of stuff is happening in the background.

Okay, great. I guess just one follow-up there. In terms of some of the, is it like raw material recoveries, and it is the timing of those things that was your first point that sort of impacted you, said another way, maybe those recoveries were like below average this quarter, that is why the delta might not have been as big as in past quarters. Is that kind of the idea?

Yes. We have also seen a drop-off on the military segment that we serve, and that has been very high margin business for us.

Okay. Great. Thank you very much.

Thank you, Patrick.

Your next question comes from Matthew Mishan from KeyBanc.

Good morning. Most of my questions have already been asked. But just to follow-up on some of the commodity cost increases, you did give a year-over-year commodity increase of about $5 million. Could you do that on a sequential basis, where you can say what the commodity cost increases were 3Q versus 2Q?

I don't have that information readily available. It is up a bit t. Third quarter over second quarter. I don't have the exact number at hand, however, sorry.

And do you expect commodities to be a headwind heading into 2011, a small headwind, medium headwind, or a big headwind?

I think our general view is it will be a small headwind. We don't see any huge increases. There are some commodities that are up substantially but overall, they tend to go with economic activity. We don't see any huge increases in economic activity.

As Jim mentioned before when we forecast that kind of an increase, we start negotiating with our customers in anticipation of it. And the customers at this stage are beginning to get used to it and being very fair about the recovery negotiations.

And then on the commercial vehicle recovery, can you talk a little bit about what you are hearing from customers and when you may be seeing an inflection point particularly in North America? Is that inflection point in production at least in 4Q, or are you thinking more first half of next year?

This for everybody is a bit of a guessing game. There is no question the markets in CV and North America in the class 8 market has seen and continues to see modest improvement. I think the frustration that everybody shares is that probably it hasn't moved fast as we have seen in previous cycles where the class 8 market which tends to be highly cyclical.

Having said that though, we have gone for a very long period of time between the low of the market and the next peak. So while I am not a guessing person, we do expect that we will start to see some kind of an uptick on the CV Class 8 markets next year. I think that is what we are also hearing from our key OEM customers.

Okay, great. And just lastly, I will throw this one out there, and give this a shot. As I am looking at your 2010 outlook, and specifically in your production ranges, would you in light vehicle as far as North America goes 11.5 to 11,8, Europe light vehicles 17.4 to 18, it does appear as if we are kind of on track for the high end of that. Is that what you are seeing as well? And would that initially translate to the high end of your adjusted EBITDA guidance as well?

From this year to next year we are still looking at where things are climbing for just this year into the fourth quarter. We are continuing to anticipate a ramp and that is what you are seeing in our forecast. But we are still paying attention to some of the fundamentals like the economies, GDP and jobs, as we are finalizing our forecast which we will discuss with you in greater detail in January.

Great, thank you very much. Nice quarter.

Thank you.

Your next question comes from Jeff Rosenbaum from York Capital.

Hi, nice job. Two quick questions. One, Venezuela, should we expect any material proceeds or balance sheet adjustments related to that?

No, they are not material. It is a small single-digit kind of number.

Okay. And then related to your guidance, can you just clarify looks like structures year-to-date has been a 20 Bip drag on margins. Is your current guidance for the year and outlook for next year include or exclude that stub piece that is in there?

I may not be understanding your question correctly, Jeff, but the numbers we have included here are exactly what is being reported in our financials. So it includes the structures business as it was in the early part of this year before we sold it, as well as the continuing piece of structures business that we have retained both here in the United States as well as a Venezuela piece. So it includes --

If you back that out, that is like a 20 bip drag?

A bit, it is a small piece, yes.

Okay, longer term you mentioned 12% margins. Have you not factored in this desire to get to 20% aftermarket?

I guess I would say at this point in time until we get farther down the road, it is our expectation that that will help us get there. But we haven't put a specific target out for that yet, Jeff.

Okay. So it would be safe to say that that's not really embedded in your 12% target?

Partially, maybe.

Okay, great. Thanks, again.

Your next question comes from Derrick Wenger from Jefferies & Company.

Thank you. Can you just elaborate on how you plan to transition to unsecured debt over time, and what is the ability on the revolver?

The plan for us to transition to unsecured debt would basically be at some point in time to replace our existing secured term loan facility with unsecured debt. We need to begin to pay that back starting in 2013. And our ABL facility which is tied to that would come due about that same time. So some time between then and now obviously we will be needing to replace that. And when we have a specific plan, we will go ahead and announce that. We have nothing to announce at the present time. Regarding our credit lines, we have got about $334 million available on our credit lines as we stand.

So what is drawn now?

There is no cash draw, there is about $140 million drawn for letters of credit.

140, okay. Thank you.

Your next question comes from Vlad Shteynberg from Realm Partners.

Congratulations on the good quarter. First of all, what is the cash usage going forward? Any updated thoughts on that front?

Well, as we indicated earlier, we expect to have positive free cash flow in the fourth quarter and it is our expectation that as we put together our plan for 2011 and going forward it will continue to be positive each year.

Right, I mean the utilization of the cash as you are building that cash balance?

I guess I am not sure I understand the question. What is the utilization? We talked a little bit about some specific cash usage.

Let me refer you back to slide 22 where Jim took you through the capital structure and long term strategy for our use of cash, both in the near term and the long term. Hello?

I guess we lost him. Do we have any other calls?

There are no further questions at this time.

Okay. With that then, I think we will go ahead and conclude our call for today. Thank you everybody for joining us, and have a nice afternoon.

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