Dana Inc (DAN) 2010 Q4 法說會逐字稿

Good morning, and welcome to Dana Holding Corporation fourth quarter and year end 2010 web cast and conference call. My name is Trinity 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 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.

Thanks, Trinity.

Good morning, ladies and gentlemen. Welcome to all of you who are joining us 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 John Divine, Executive Chairman and Interim CEO. Jim Yost, Executive Vice President and Chief Financial Officer. Jacqui Dedo, Chief Strategy and Procurement Officer.

Also in the room are Marty Bryant, President of Light Vehicle Products, and 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 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. This may not be recorded, copied, 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 to turn the presentation over to John Divine.

Thanks, Lillian. And good morning, everyone. Thanks for joining us.

We will start on page 4, 2010 came in pretty much the way we expected. And the guidance we provided to you last month. Good momentum in 2010. Net income of $10 million. Up, not sufficient yet but its good to make bottom line money. Adjusted EBITDA of $553 million on revenue $6.1 billion, and EBITDA margin, an important metric for us, up at 9% for the full year. Free cash flow very strong at $242 million. And importantly, for us, the second quarter of positive free cash flow.

Some of the other highlights, and I will cover these in further detail in a moment, we are making good progress in Asia Pacific this is a top priority for us, more to be done here but we have announced the increased ownership in DDAC I would not say that not approved yet by the Chinese government and obviously an agreement between ourselves and Dongfeng. And we are establishing tech centers in both India and China.

We're making good progress in growing our business across all regions we serve. All of our business segments. That is important.

And we're also making good progress on our aftermarket organization, and I want to share with you some of our thoughts and how we're going to grow that business going forward. Some more on that in a moment.

Through this presentation, we also wanted to provide some additional detail on our business by market segment. So, that really starts on the next page, page 5. So, this is more detail than I think we provided you in the past, so the presentation is a little longer today. I won't spend a lot of time on these individual pages, but you will have it for reference if you need it.

Light vehicle drive line business continues, good improvement there. As you can see in the bottom left-hand box, the $2.5 billion business, EBITDA margin is improving 6.5% to 9.3%.

Our customer base, reasonably diversified Ford of course is our biggest customer, and you can see, you can tell the platforms, 250 and 350 at Ford an obviously the number one, we have a lot of Jeep business as well. Nice business, continues to improve. This is --a we're not done with this business. It has been a very nice recovery.

Page 6, you get some flavor for some of the new business we're winning. Very diversified. Really with all of the regions and the world.

The top note is the Ford 350 in South America, nice business for us, in South America. The U line SUV in Asia. And importantly, the Ford Ranger. Sometimes known as the T6 program, which Ford just recently announced, we have the front rear axles and the prop shaft. This is a global business. And it is in South America, South Africa, and Thailand.

Our power tech business on page 7 has been a very nice business. This is a great story. We used to have the business split into a Sealing and Thermal business. We combined it the last several years. It has given us --

(Technical difficulties)

We will continue with the audio portion? If everybody is still on the line, can we confirm everybody is still connected?

Yes, sir. Everyone is connected.

Sorry for the interruption, everyone. I will start on page 10. I understand the streaming of the slides might be a bit delayed, but I will go through the presentation so we can get into your Q's and A's.

Commercial vehicle, nice recovery here. We think there is more to come. The US market is continuing to expand. We will talk about that in a moment.

We finished the year at $1.3 billion. EBITDA margin, nice improvement from 7.6% to 9.7%. More to be done here, and this is before we've added the business in South America.

And our business in DDAC, we will talk about that in a moment. And the expansion we expect in the market.

So, this business is going to grow substantially in 2011. On page 11, you get a little flavor of some of the winning business we're getting.

Again, our business in South America is strong. Before SIFCO And we're now, we think the premiere company in commercial vehicle in South America. There is a couple of examples of some products with the Agrale and Accelo in Brazil.

On page 12, again a couple of examples of some winning businesses.

Important company based in China, making construction equipment, large growing company, they're an important customer of ours, we've been awarded a Platinum Strategic Supplier award, and it is a nice feather in our cap. More to be done here, but this is nice to see this.

Page 13, I want to talk a little bit more about our growing commercial business in South America. I think as you saw a few weeks ago, with the addition of the SIFCO business, we have become the leading full-line drive line supplier in South America, in the CV market. We will be adding the truck and bus steer axles to our existing product offering of front and rear axles, drive shafts and suspension. It is about $150 million acquisition. It adds about $350 million in annual revenue.

And that is in the '11 numbers now, but it is not in the 2010 numbers. It just happened.

The market in Brazil, as most of you know, is very wide, so a range of customers there. Basically, European. Very strong competitive dynamic. And we can serve this well.

And our business in South America, with this addition, will be well over $1 billion. So very nice business for us. And one we can grow.

We have also done the last couple of months important improvements in Asia-Pacific. Our focus here in particular is India and China. Although, we have a nice business in Thailand and some other markets as well.

But in India, we think we've laid an important foundation for us, expanding this business, with the new gear, and new gear plant, and testing center. That is a very important piece for us. And a new tech center that will really serve our global engineering needs.

In China, the new news, as we announced a little while ago, was our increase in ownership with DDAC to 50%. This deal has been approved between us and Dongfeng. It still has to go through for Chinese government approval. We're expecting that in the second quarter.

You can see on the right here, some of the DDAC profile. Interesting that Dongfeng is the second largest CV customer manufacturer in China. And of course, I think as most of you know by now, the commercial market in China really is larger than the rest of the global market combined. So, this is a very important relationship with us. We have more to be done here.

We think we can grow this business with Dongfeng, improve the profitability. We start with revenue of about $1 billion. So this is an important acquisition for us. And the other point we're making about China, commercial vehicle business, is important here, but we will have other businesses to expand going forward.

And just one with just a small flavor, in our business, we are providing the drive shafts, replacement drive shafts to the existing high speed trains in China, and this recent order was for about 700 drive shafts, so by itself it is relatively small, but in this area it is a big piece of business and one we can work on to expand later.

So growing business, really in a number of different business segments, and in all regions around the world. Our after-market strategy, we've been talking to you about this, the last few months, I want to give you a little more flavor here, so you can -- we share our thinking with you on how we plan to grow in after-market. This is a business frankly, we have not paid sufficient attention to over the last several years, but we're back and we're going to be back strong here.

Our strategy is a couple of different things. First of all, we want to get into going after and recapture our installed base. And that's an important start for us, because we have a lot of competitors eating away at that installed base already. And then next, we want to go after new products, markets and partners. The all makes business, rather, is important for us.

We are not really competing well there today. We will in the future. We're launching a Tier II offering for the price sensitive segment. We want to go after selected specialty markets, motor sports and military in particular.

Re-manufacturing business is an important business here and we want to go after that as well. And we can leverage a number of our existing assets including manufacturing sites. And importantly, this new Dongfeng relationship where they have after market service centers set up throughout China.

Our goal here is pretty simple. We want to grow this business from a 15% share of our total business to 20%. We want to do that as quickly as we can.

And to give you some scope of that change, with the overall growth in our business, it means we're going to have to get that 20%. We're going to have to double the after-market business from 2010. So, that is a tough objective for us. One we think we can do and one that is going to be an important attribute for our growth strategy going forward.

Page 16, before we turn it over to Jim, we want to continue to talk about how we're looking at the business going forward. And what we're focusing on. Again, number one, we want to continue to focus on operational improvements.

We've shifted our site here a little bit, so we're going after complexity now in both our product and supply chain. Those are big areas for us. We think we have a lot of opportunity.

We don't have much more to tell you about than that today, but we will tell you more about that during the year. Improving manufacturing footprint continues to be something we focus on as well.

Growing the business, this is relatively new to our story at Dana, but it has been an important story and will continue to be going forward. It starts with reinvigorating our product portfolio. We're looking at attractive opportunities and some acquisitions globally.

And the bottom line, we expect to grow our overall business by 50%, possibly more, over the next five years, including the market growth.

Again, our pockets of growth here will be our organic business, our market growth, after market, and our growth in Asia, and new initiatives including some acquisitions. Nothing of a major nature, as far as we can see right now, but I would describe those as some fill-in acquisitions where they're attractive.

And then the last piece of our focus going forward, we have to continue to improve our margins, while we maintain a strong balance sheet. We obviously want to improve our EBITDA margin, you can see that is 12%, by 2013.

Jim will cover this in a moment, but going forward, we are also raising our guidance from 2011, from the guidance we gave you last month. So, I will let Jim cover that in more detail.

Thank you, John.

You turn to slide number 18, I will go through the financial summary. As John noted, we had a terrific full year, achieving a operating profit as well as a positive net income of $10 million. And these 2010 results are essentially the same as we disclosed to you in early January.

The last quarter of 2010 was another strong quarter for us. With sales being about $50 million higher than the third quarter, and adjusted EBITDA again exceeding 9%.

Our full-year sales were $6.1 billion, and that was an increase of $881 million, or about 17% over the prior year. And I will cover that in a little bit more detail in a second. The adjusted EBITDA, $553 million, is also a significant improvement over 2009.

Capital expenditures came in as we expected at about $120 million, and free cash flow for the year at $242 million, was very strong. And a substantial increase over 2009.

We generated $12 million of positive free cash flow in the fourth quarter, even after making a $50 million voluntary contribution to our US pension fund. And that was the seventh consecutive quarter of positive free cash flow.

On slide 19, you can see the change in our sales versus 2009. We were up $881 million, or about 17% overall. With increases in all of our business segments, except for structures.

The sale of most of our structures business lowered revenue by about $460 million, and we closed the final piece of that sale to Metalsa in the fourth quarter. Volume and mix contributed $1.237 billion or about a 24% increase over 2009.

With increases in every continuing segment. Pricing was modestly up compared with 2009, again in line with our expectations. And currency provided a favorable $71 million due to the dollar weakness compared with last year.

On slide 20, you can see the change in our adjusted EBITDA for the year, which was up $227 million, from last year, and full-year EBITDA margin, as I mentioned, was at 9%, and that is up from the 6% we had in 2009. Volume and mix were favorable by $236 million, due to the sales increase of the $1.2 billion I mentioned earlier. And that is about a 19% drop-through.

The impact of currency was essentially flat versus the sales increase I mentioned before. And the sale of the structures reduced our EBITDA by $38 million.

You can see in the cost savings box there, conversion costs were very strong at $124 million, with about half of that due to carry-over impact from '09, and the other half, $66 million, or so, due to new actions in 2010, and many of those which will have a carry-over impact into 2011.

We incurred pension expense of $23 million-- or $24 million, all of which was non cash, and higher compensation and benefit costs of $46 million. And these are both consistent with our expectations that we discussed in prior years, as well as the guidance we laid out in December of 2009.

You may recall from earlier conversations, that we had a number of one-time favorable actions in 2009 totaling $19 million. Because these don't repeat, our year to year costs were unfavorably impacted by that amount. But overall, we had positive cost savings contributing to the bottom line.

On slide 21, you can see the strong free cash flow performance for both the quarter and the full year. For the quarter, we were positive $12 million, as I mentioned, full-year $242 million.

Although sales were up significantly, we were able to keep working capital fairly neutral in 2010. A year ago, we did benefit from working down some of the higher-than-expected inventory as sales declined at the end of '08.

The restructuring of $71 million is slightly lower than we had previously planned, and reflects some items that we deferred into 2011. We expect to spend about a $100 million in 2011 for restructuring actions.

We elected to make a $50 million contribution to our US pension fund. And as shown in the appendix, the funded status of our plans improved by $20 million, versus '09, in spite of a significant decline in the discount rate that we use for our liabilities.

Although, we did achieve seven consecutive quarters of positive free cash flow, we do not expect the first quarter of 2011 to be positive, due to a number of working capital items as well as some timing of payments in the first quarter. As we will discuss, however, the full year, we do expect to be positive.

On slide number 22, you can see a summary of what we did in the end of January, beginning of February, as it relates to our balance sheet and our capital structure. We refinanced our senior debt in January, replacing the $750 million -- replacing our term loan with a $750 million unsecured debt deal which included $400 million in eight years at 6.5%, and $350 million at 7.5% for 10 years. At the same time, we reduced our debt and the effect of this was to eliminate all of our maintenance covenants that were part of the term loan.

In addition, we established a new five-year, $500 million revolving credit facility, so we extended substantially the existing ABL facility we have. And as a result of all of these actions, we received upgrades from both Moody's and Standard and Poor's. All of these actions have greatly improved our capital structure, allowing us great flexibility to organically grow and do some bolt-on acquisitions as we go forward.

Slide 23 highlights our strong liquidity and our net cash position at year end and we also memo'd here the pro forma impact of the repayment of the term loan, and the issuance of the secured notes. At the end of last year, we had a net cash balance of $187 million in global liquidity, a $1.4 million. With the refinancing, and the payment of that term loan, and extinguishment of the OID, the pro forma cash at the end of the year, net cash, goes down to $134 million.

Now, as we noted in the bottom box there, we do have some significant uses of cash in the first half of the year. As John mentioned, the SIFCO transaction was completed in the beginning of February, for $150 million. And we expect to complete the DDAC transaction for $120 million in the second quarter. So, we will in the first half of the year, dip into a negative debt position.

Slide number 24 summarizes our key financial targets and the results for 2010. As we mentioned earlier, we exceeded or achieved all of our targets, and that was the second year in a row in which we gave guidance a year in advance that we did in fact achieve all of those successfully.

So now, I would like to turn it over to Jacqui for a market and sales update.

Thanks, Jim.

Turning to slide 25, we achieved $846 million cumulative 2010 to 2014 net new business awards in 2010. This exceeded our target of $650 million to $700 million substantially. The chart illustrates the revenue volumes by year, with the incremental piece detailed below.

The next several slides will provide more detail of these compensations of these net new business awards. Turning to slide 26, it provides an overview of the net new business awards by region, consistent with your request for transparency. As you can see, we are winning with a diverse set of products awarded globally, and have a wide range of expanding customers.

On slide 27, we highlight the mix of awarded net new business by product group and by region. About 35% of the 2010 net new business awards were conquest. With 65% awarded on new customer platforms or vehicles. We continue to diversify our region and product mix through the new business awards, with 20% of the awards in the rapidly growing Asia-Pacific region and 34% in South America. In total, 80% of the net new business awards were outside our home market of North America.

Turning to slide 28, this slide provides you with our expected line of sight on growth. As we shared with you earlier this year, we see a CAGR on total revenue of about 10% over the next five years. This includes the award of new business, the bottom two slides of the mountain chart, which provided baseline improvement. Of both businesses we have been awarded and business we plan to win this year.

In addition, we are growing our after-market business, which is very profitable business. As John mentioned earlier, we are targeting to grow this business to be 20% of our total revenue.

Finally, there are new initiatives we have planned and now have in place, primarily DDAC and SIFCO. Any additional initiatives would increase revenues even further. We are confident in our ability to deliver the growth (inaudible).

Now turning to the present year production outlook, please move to slide 29. In the global markets we serve, we have seen healthy improvement this past quarter and into 2011.

As a result, we have increased our production outlook for several of the key markets we participate in. We expect full-year North American light vehicle production to be between 12,600 and 13,000, an increase from prior estimates of 12,300 to 12,900.

We continue to believe that we will see improvement in 2011 for both the medium and heavy vehicle markets. We have increased our expected range for heavy truck markets to 235,000 to 245,000 units this year, up from our previous range of 215,000 to 235,000, significantly up from 2010.

We have also seen some improvement in the South American commercial vehicle market. And have increased our expected production to 215,000 to 230,000. Up from 180,000 to 200,000.

The off highway market has also shown increased strength. We now expect strong recovery of 15% to 20% year-over-year improvement in the construction equipment market, and improvement of 8% to 12% in the agricultural equipment market. Overall, we now expect market growth of 12% this year, over 2010.

With that, let me turn it over to Jim to go through our overall financial outlook.

Thank you, Jacqui.

In early January, we outlined our plans for 2011, which you can see in the middle column on slide number 30. Since then, we've experienced the strong global market as Jacqui described and we closed the transaction in Brazil.

As a result, we are improving our guidance for sales, now up at least 17%, EBITDA to a range of $740 million to $760 million, and diluted EPS, up $0.20, with free cash flow up another $50 million. Margins and CapEx are on plan.

Just as a note, the EPS does not yet include the impact of DDAC. It does include the impact of the SIFCO transaction. And we will add the DDAC deal as soon as the deal is completed.

For your reference, on slide number 38, we summarize the EPS number for 2010, and we will use the same process for our 2011 numbers.

Finally, we want to reiterate our plan to achieve a 12% adjusted EBITDA margin in 2013. And on slide 31, you can see our continued growth and our continued focus on improving margins from the 4% in '08, to the 6% in '09, 9% last year and our plan to do at least 10% this year, with the expectation and the projection that we will achieve 12% by 2013.

With that, I will turn it back over to John for some closing remarks.

The issue for us is to continue the progress we've been able to achieve over the last couple of years. We beat our 2010 plan. We're raising our guidance for 2011. And our plan is to continue that momentum. Building on the strong foundation and our focus on growth.

You're hearing more and more about that from us. With our continued focus on operational improvements, our focus on growth, continue to improve margins and maintain a strong balance sheet and our future strategies are all directed with a clear focus in delivering shareholder value. That's where we are. And we will continue to keep you updated.

But now let's turn it over to questions.

At this time, we would like to begin the Q&A session. (Operator Instructions). Your first question comes from Brett Hoselton with KeyBanc.

Good morning.

Hi, Brett, how are you?

Great. How are you?

Good.

A couple thoughts here.

First of all, if I understood you correctly, the guidance that you have for 2011 does not include DDAC. And so once that is wrapped up, it would suggest that 50% of $1 billion, I'm assuming you consolidate that, you potentially increase your revenue by a $0.5 billion in 2011?

Again, depending on the timing and all the other good stuff like that? Is that conceptually correct?

Not exactly, Brett. Because it is 50/50 and neither party will have full control, we will not be consolidating that into our income statement on a line item basis. It will come in to our equity and affiliates.

So, we will be basically having to do a couple of things.

One, it will just be a partial year, once we close the deal, so that will obviously impact it. We will have to go through purchase accounting on this. So, what we will actually get into the bottom line will be a little bit different than you might expect on a normal acquisition.

So, we're going to be going through that process, as we are closing the deal, making that final, we need to go through the financials, convert them to US accounting, do the purchase accounting, and as a result of that, it is going to take us a little bit of time before we give you a specific estimate on the impact. We will be reporting that as an EPS item later on in the year.

We will find some way, Brett, to show the revenue numbers because it is an important revenue for us. We just can't consolidate it.

We will find a way to show that on a memo basis, so it is clear to you and others exactly what our plans are and our results are in China, including Dongfeng. But our intent, as we talked about it, is to do more than Dongfeng in China.

And do you plan on bringing or adding the equity income into your EBITDA calculation? And if so, well, anyway.

I think the answer to that is, as John said, we're going to show a way to display it, so you will get the impact of it, you will be able to understand it. It is such a big number that we will be doing something to try to help you on that.

But just from an accounting standpoint, it won't throw through. But we will memo it and show it so you understand what the impact is.

And then are you looking at a pretty substantial increase in margins as you go from 2010 to 2011 and I was hoping you could bucket the major puts and takes, operating or contribution margins, versus raw material costs and so on and so forth.

Okay.

Overall, the major impact on the year to year improvement is volume. Volume is up substantially on a year to year basis for us. And we do drop that through about 20% year-over-year. So, that is going to be the biggest impact in terms of improve can our margins.

Overall, we expect the pricing to be pretty flat. We expect that the material cost increases in commodities that we've been seeing, and I will just comment that when we gave the original guidance in January, we did assume some significant increases in commodity costs, year-over-year. We've now assumed they will be higher than what they were when we put the original plan together.

In spite of that, we don't expect material costs to be a negative impact for us because of all of the fairly significant cost reduction activities we have planned and are executing.

So overall, material cost is not a net increase to us. Pricing is pretty flat. And then obviously, we're going to generate more conversion cost savings. So, that will be an additional piece of the savings for us on a year-over-year basis.

And then finally, as far as the recoveries are concerned, what kind of a time lag, is there a difference between the input cost increase in raw materials versus the recoveries? Is it fairly short, IE, one quarter or is it actually multiple quarters?

Well, they range -- some contracts we have adjust on a monthly running basis. And we do have at least one contract that doesn't adjust for a full year.

I would say the average range between three to maybe six months, so you will see the impacts in the first half, being recovered largely by the end of the year. But anything that happens in the second half to the fourth quarter tends to get then recovered in the following year.

Great. Thank you very much, gentlemen.

Your next question is from Brian Johnson with Barclays Capital.

Hi, Brian.

Yes, good morning. A couple of questions.

First, can you just talk through the sequential development of the light vehicle sector and sort of the revenue and the EBITDA trend there?

Are you speaking specifically fourth quarter, Brian?

Yes, fourth quarter, versus third quarter.

Yes, fourth quarter tends to be historically for us, a little bit of a weaker quarter. I think we tried to indicate that to you in the third quarter call and in our guidance at the beginning of this year.

It tends to be a weaker quarter, basically because of the downtime we see in December, and we shut our plants down, we have continued costs, associated with our personnel, even though our plants are down. So, basically, we see sales being a little bit weaker normally. Everything else being equal.

And then we tend to have slightly higher costs for year-end bonuses for year-end downtime where we've got to continue to pay particularly the salaried people who -- and the hourly people who are not working.

So, it is seasonality, which we might not have seen recently, just given the volatility overall in the market over the last couple of years?

Yes, there is nothing else specific in there that would suggest any trends.

And the second question is I think I get the -- I understand the award of new business, the net new business, on slide 25, but could you maybe explain for a second time the incremental NNB versus 2010 line, more of a housekeeping issue?

Yes, I guess the way we tried to lay this out, we had talked in 2009 about $750 million or so of new business, and you can see that in the red. And then we talked about last year's $846 million, which was significantly better than we had planned. And what we tried to do, by stacking this here, is to give you an indication of the impact.

We did it versus '09, just to show you the impact of the business we won in '09. But if you take a look at the memo, at the bottom, you can see the impact of that, essentially we got $100 million in '10, so if you're doing an '11 over '10, the real incremental if you will new business is about $200 million.

So that is -- and you can see then, on the memo, going out, essentially in '08, we didn't have a huge focus on new business last year, or in '09, it was really when we put a big push on it. And Jacqui and the rest of the business development team did a great job.

Some of the run-off you see there, the drop in '12 and '13 is business that was running off, although we were slightly positive, we weren't as positive as we were -- as successful as we were in '10, in terms of offsetting some of the business that was running off.

Okay.

So, in terms of modeling the revenue line, the $198 million would be the amount to include in 2011, over and above growth of the base business coming out of 2010?

That's a correct way to look at it, yes.

Okay. Thanks. That gets us to a similar place where many of the other companies report. So, that is helpful, thanks.

Your next question comes from Patrick Nolan with Deutsche Bank.

Hi, everyone.

Hi, Patrick.

Just a couple of questions.

Just first, a little clarification on the commodities. So, on a full-year basis, when you factor in recoveries, you think commodities is going to be a wash for '11? Or if you look at it '11, and then you recover a little bit in the first half of '12, that's a wash?

We will probably be positive, if you include pricing, and recovery.

Okay. And that's including the recoveries that could go into 2012?

No, that is just as it would incur in 2011.

Just to be clear, we have cost increases we've known about, we've expected it, we have had significant cost saving actions that are independent of the commodity increases that we expect to offset all of those cost increases, on top of that, we will get normal recovery for the commodity increases.

So net-net, we will be positive.

On the working capital line, I know you said it is going to be a drain in the first quarter, and on a full-year basis, what is your expectation for working capital?

Probably be about $50 million, an increase in working capital.

Got it.

And just I know you gave some overall color on the fourth quarter margins versus Q3, but when you look specifically at the light vehicle axle margin, that one came down -- that margin came down a little bit more significantly. Was there any significant changes in mix we should be thinking about? I'm just trying to figure out what is a good run rate to be thinking where other businesses are actually running.

Well, I don't think the fourth quarter would be a good basis to calculate a run rate. I think if you take a look more at the annual kind of number, for that business, and that's more of what we expect. And maybe even a little bit better, as we go forward.

You do know that as we've won new business, we put it on a significantly better margins, so over time, we're going to see some of the business that was less attractive run off. So, a combination of cost reductions the conversion cost savings, as well as some of the new business we will over time begin to bring that margin up.

But fourth quarter tends to be a little bit lower margin for us historically, compared to third and fourth quarter -- third and second quarter, when we're running our factories at more full capacity, well, not full capacity, but at a higher level of production.

And just one last quick one. Can you just refresh us on the off highway business, what is the approximate split between AG and construction?

It is about 40/40 AG construction with about 20 being other products.

Okay. Thanks very much.

Your next question is from Himanshu Patel with JPMorgan.

Good morning, Himanshu.

Hi, good morning.

I think Jim, you mentioned there that there was opportunity to improve or maybe it was John, you mentioned the opportunity to improve profitability at DDAC. Can you just kind of expand on that a little bit?

Maybe directionally, could you help us understand where the EBITDA margin profile for that business is right now before purchase accounting, adjustment, and then a second related question is presuming that, that is kind of a business where you're going to be looking to expand it from where it is now, what kind of dividend payout levels should we think about from that joint venture?

Himanshu, I know you have questions on DDAC, but why don't you put a pin in those until we close the deal, and then we will be a little more transparent.

Okay.

On profitability, and it is too early on dividends. Obviously, we would like to keep the money in the business, if we can grow it, and that's our first intent. So we will see.

But I don't think -- it is a bit too early for us to lay that out for you. We want to close the deal, make sure the government is okay. We expect that to be a non issue. We will do it in the second quarter. And then we will lay out more going forward.

Okay.

If we jump to slide 25 again, the net new business slide, I had two questions on this. First, just to clarify, the way to read this is there is a $198 million incremental revenue increase '10 to '11 excluding market volume change and then should we think about a decline from '11 to '12 of about, what is that, $50 million or so?

And if that is true, my follow-up question really is, what is the ability for you to still influence the '12 net new business number? Meaning could that still be revised up at this stage?

The way you just described it is the correct way to look at it, Himanshu. I think also, if you take a look at the slide number 28, I think we're indicating to you that we're establishing another plan to start growing, to add on top of this.

So, this is just the business that has been awarded. You can see in the yellow, on slide number 28, our plan to grow the business with new business this year. So, we would expect '11 to be again, we've done $37 million -- $50 million -- on average $50 million in the year, within the year, and you can see we have been able to add $100 million to $200 million each year after that.

So, I expect when we come back to you at the end of the year, when we do this chart for you, and Jacqui talks about it, she is the one who does all of the hard work, not me, the number will be bigger and we will fill in that gap, so we would expect it to be a little bit up. 2010 hopefully is the more traditional profile for us going forward.

Does the commercial vehicle business just have shorter lead times relative to the light vehicle business? Means if you want something on the light vehicle side, I would imagine it takes two, three, four years, before it is kind of on board. Is it fair to say you can do it much quicker on the commercial side?

I think that is fair to say, yes. Because normally, the light vehicle, they're engineered specifically into the product, and it takes longer, development time for the OE's to do that, yes.

And then one last question. The after market comment was interesting. You talked about sort of doubles that business.

A few questions on that, number one. Any sort of time frame you could provide on sort of when you would expect to be able to do that? Number, does that require acquisitions?

And number three, that's generally a higher margin business I think for a lot of suppliers. I'm curious if you could comment on kind of the margin profile on that business today versus the corporate average.

We didn't put a timing plan on that. We have one internally.

We will lay it out for you but I think it is a little early to be public with our timing plan because there are a lot of moving parts to that, so we obviously want to get to the 20% number as quickly as we can. Mark Wallace and his team is driving that hard, so we have some internal timing. We will lay that out when we make some more progress there.

On acquisitions, I think we will look at -- I would describe them as small fill-in, but we can leverage our existing products, manufacturing capability, distribution, we have to do some more, certainly as we get into new distribution areas, we have to do some more there.

That's going to be some extra inventory. Some extra people. Which we're adding. But we can leverage our existing resources quite well here. So, it is not like we have to make big acquisitions.

So, in our mind, we're going to do ones that make sense, that we can buy it, and make some money at it, grow it, manage it, and that is sort of the way we're looking at the business. That is certainly how we see it today.

Okay. Thank you.

And margins, listen, I think it is fair to say, 20% to 30%, it depends on the business. They really range quite a bit.

Your next question is from Patrick Archambault with Goldman Sachs.

Yes, hi, good morning.

Good morning, Patrick.

A couple of quick ones.

The free cash flow guidance you have, for '11, does that include any large pension contributions? Or is that excluding that?

I'm assuming we will spend probably $30 million to $40 million in pension contributions this year.

Okay. So that is in the $150 [million] already.

That's correct. It is in.

Okay. Got it.

On the time -- is there any kind of guidance or anything you can say about the likely approval time line for DDAC? Just given where the process is?

It is going to take a couple of months. I mean again, second quarter is about as accurate as we can call it right now. We don't control it. We're obviously pushing as fast as we can. But it is out of our control.

Okay.

And then I had a couple of questions, just on the SIFCO acquisition. It sounded like the way you had it in the press release, the $350 million in sort of acquired revenue was like distribution revenue, right? That was, IE, you know the products, the products that -- the products would be manufactured by SIFCO, you would distribute them, and then obviously you do manufacture some drive line products in South America already, clearly.

But that $350 million would sort of be distributing products that were manufactured by another organization. Is the margin -- what are the margin implications of that? Is it fairly similar to your consolidated margins despite the fact that it is a bit of a different business?

And then I guess number two, how much was SIFCO a role in your raised guidance? Clearly, volume seems to be a very big piece of it, but you said that it was now included, so I was wondering what the impact was there as well.

Well, I will start with the latter piece. We're going to be consolidating about $350 million of revenue, so it is around 5%. So, essentially, you add the 12% that Jacqui talked about, the 5% for SIFCO, and that is the 17%.

So, if you think about it, in two buckets, market going up a couple of points and the acquisition going up most of the rest. So, essentially, that is on the revenue side. The change.

Just let me make it a bit more clear. If it is confusing on exactly what the transaction in Brazil was. We are buying not just the distribution, but we are also buying some assembly assets.

We're going to be taking over the engineering. We will be doing our own engineering. We are already -- I should say, as you probably know we do steer axles in the United States already. We assemble steer axles. Mostly from components purchased outside. So, we buy most of the components assembled we provide in the United States.

We are essentially replicating that same business model that we have in the US and Brazil. It is -- I will call it an asset light type of manufacturing engineering, and a type of process, so we are buying some assembly assets, we will be providing those fully dressed axles to our customers, and continuing to purchase components, some of the major components from SIFCO.

We do expect the margins to be comparable to the rest of our business in CV and South America. So, this is not just a small distribution profit. This is essentially a full-fledged product for our customers.

And just if you will, if I can push my luck here, actually what I meant to really ask was the impact on the EBITDA guidance for 2011 that this had.

I guess I would say it is proportional to the -- if you think about our contribution margin, stop through of 20% on the incremental sales, as well as then normal margin, so essentially, the SIFCO business is coming in at our average margins. The incremental margin associated with the market increase is coming through at the normal 20% contribution margin.

Okay. Great. Very helpful. Thanks a lot.

The next question is from Tim Denoyer with Wolfe Trahan.

Hi, Tim.

A couple of questions on -- I'm wondering if you can give a little bit more color on the margin outlook for 2010-2011 by segment. Specifically, in terms of commercial vehicle, and off highway, a couple of specifics there.

It seems like the leverage on commercial vehicles hasn't been that great. And I'm wondering if you're expecting that to improve next year, as commercial vehicle volumes go up.

I guess the question is, is that incremental volume above or below the overall company incremental? And then with off highway, do you see any pre-buy in Europe ahead of the tier four admissions standards in the fourth quarter? And do you think that might be a head wind at all in the early part of 2011?

To answer the second question, I'm not sure we saw any impact of that. So, I would say for us, it hasn't -- we haven't seen it.

Regarding the margins, normally, we expect about a 20% drop-through on incremental volume. If you take the essentially the four segments, light vehicle line, as well as off highway, come in pretty close to that 20% on average, depending upon the mix of the business, and the markets. On the power technologies, our experience is, it comes in considerably higher than that. The profitability of that business is a lot higher.

And then conversely, on our commercial vehicle business, particularly in North America, our drop-through on incremental volume is below that 20%. We would expect that to continue. As we said, on previous calls, that is an area, North American commercial vehicle profitability is a keen focus for us. The profitability of that business is not where we want it to be. The incremental margins are not where we would like them to be. And we're working very hard to improve that.

So, I would expect that what you have seen in the last couple of quarters, on incremental volume, will continue, going forward, into the near future. Until we can get that fixed.

Okay. Great.

And just can you remind us in terms of the commercial vehicle revenue, what proportion of that in 2010 was say North America and how that changes with the additional $350 [million] from SIFCO?

It was probably about 60% revenue in North America. And that will move to about 50% or so. And then if you throw in DDAC, as we start reporting that, it will probably drop to about 40%.

DDAC won't be consolidated, but analytically, in terms of a proportion of our business, it will be about 40% of the commercial vehicle business.

Got you. Great. Thanks.

Trinity, we have time for one more caller.

Yes ma'am, your last question comes from Brian Sponheimer with Gabelli and company.

Hi, good morning. Very nice quarter.

Thank you.

As we're thinking about the commercial vehicle market and your ability to handle the additional volume with US sales 110 this year, going to 175, and then maybe 240, how much capacity is in place to handle that incremental volume? And is it something where you're going to need to up CapEx, let's say in the '11 to '12 time frame to handle that?

As we look at the market and we're working very hard to make sure that we can meet our customers' demands as they do increase, we do see any need to add any capacity in Dana. We're comfortable with what we see going forward.

As you know, we were running at substantially higher volumes, not too long ago, so we're comfortable that we have the capacity. We are working on a continual basis to confirm that all of our suppliers had their capacity.

And I think that is where we will run into some problems. We have seen some spotty issues here and there.

We've had to work around situations where suppliers don't have the full capacity. So far, no hiccups, but essentially, it won't be us that will need to add capacity. It won't be us that has to add capacity. We will just have to manage as best we can with the supply base, and making sure we can get adequate supply from them.

Any issue there, as far as adding premium freight in order to keep deliveries on time?

I think the premium freight will be more a function of how the variability and the order rate comes rather than specifically an ongoing basis. If orders drop in at the last minute, we could probably have some, but we don't expect that to be a major issue at this point in time.

All right. Thank you very much.

Okay. With that, we would like to thank everyone for joining us. And have a nice day. Thank you.

Thank you all.

Thank you.

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