Dana Inc (DAN) 2011 Q2 法說會逐字稿

Good morning and welcome to Dana Holding Corporation's second quarter 2011 webcast and conference call. My name is Carmen and I will be your conference facilitator. Please be advised that our meeting today both the speakers' remarks and the Q&A session will be recorded for replay purposes. All lines are 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, Ms. Etzkorn.

Thank you, Carmen. 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 Roger Wood, President and Chief Executive Officer and Jim Yost, Executive Vice President and Chief Financial Officer. Also in the room are Mark Wallace, Executive Vice President and President of On-Highway Driveline Technologies and Jacqui Dedo, Chief Strategy Officer.

Before we begin, I would 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 Dana's investor website for your reference. Today's call is being recorded and 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 to turn the presentation over to Roger Wood.

Thank you. And good morning, and thank you for joining us today. This morning we announced our second quarter 2011 results, which show continued and overall positive momentum in our business units and our markets.

New business shows the value we provide to customer through our driveline and Power Technologies, our business diversity and our global footprint. Going forward, our priorities will be to continue to be new product development, growth in emerging markets, and focused business unit operations.

This quarter we achieved positive net income of $68 million. Our adjusted EBITDA was $201 million, on revenue of $1.9 billion, with adjusted EBITDA margins of 10.4%. Free cash flow was $44 million, which brings our year-to-date cash flow to be positive.

As we ended the quarter, with over $1 billion in liquidity, so the financial performance for the quarter was solid, and our balance sheet remains strong. Importantly, we used cash in the quarter primarily to support our continued expansion in growth markets, including China and India and last quarter for South America.

As you now know, we increased our ownership in Dongfeng Dana Axle Company or DDAC, a joint venture that gives our commercial vehicle business unit direct access to the world's largest commercial vehicle market. We also began construction of a new technical center in China, to support our other businesses there, including Power Technologies, Off-Highway Technologies and Light Vehicle Driveline.

We also completed our acquisition of the axle drive head and final assembly business from Axle's India, which help us establish a broader food print in this important growing market and our after market group launched a new value line of products called SVL for both on highway and off highway customers. Clearly a highlight of the quarter is our continued progress in introducing new technologies that help to improve fuel efficiency, reduce vehicle operating costs, and comply with new regulations. As a result, we were successful in winning and even conquesting new business. I should also mention that we announced earlier this morning we reached agreement to the best interest in 2 of our joint ventures, GETRAG Corporation and GETRAG all-wheel drive. Dana will receive $136 million in cash for the equity stakes. The sale of our interest in these businesses represents a divestiture of nonstrategic assets. Our ongoing focus is on our core strategic products in on- and off-highway driveline technologies and Power Technologies.

As I round the corner on my first 90 to 100 days here at Dana, our strategic direction has come into sharper focus. We can and will use technology leadership with a focus on fuel economy and regulatory conformance to satisfy customers and win new customers.

We are advancing technologies in a couple of key areas. As I mentioned, to support green power advancements, improve fuel economy, meet regulations or address customer demands in emerging markets. And we are continuing reenergize the Dana organization around our products and our customers. Specifically, our on-highway businesses in Light Vehicle and Commercial Vehicle Driveline. Our Off-Highway business that serves customers in the agriculture, construction, mining segments, among others, and our Power Technologies that is having great success in building businesses in thermal and ceiling technologies.

You may have seen a press release we issued last week on the Power Technologies work in green power, with examples of how we are developing advanced technologies that are rooted in some of our traditional areas of expertise, such as battery cooling.

I'm proud to announce some new product introductions for Q2, including the launch of our long passive and active warm up units, a thermal management technology that helps improve fuel economy and reduce emissions that Dana will be supplying to some major OEMs in a number of vehicles. This technology reduces the cold start phase of internal combustion engines when fuel consumption is often at its highest. Early testing of active warm-up units show fuel savings of up to 4%. The Spicer E-Series Steer Axles which helps commercial vehicle customers comply with a US regulation taking effect next month that requires 30% reduction in stopping distance for heavy trucks, and we also introduced the Spicer TZL-16 powershift transmission to construction vehicle manufacturers in Russia and in the Commonwealth of Independent States. This transmission assembled by a Dana operation in Wuxi, China improves vehicle ride and performance of big front-end loaders while reducing fuel and maintenance costs.

And finally, we launched a new line of SVL drivetrain components for the automotive, commercial vehicle, and off-highway aftermarkets offering quality replacement parts for older, post warranty vehicles. The SVL line of service parts supplements Dana's highly regarded genuine Spicer service parts.

Turning to slide 6, I would like to emphasize the importance of Power Technologies in Dana's strategic portfolio. It is a hub for advanced technology, which fits with our strategic direction, and we believe there is a significant potential to grow this business around the world. So as part of our effort to align the organization structure to support our key customer groups, Power Technologies will now report directly to me.

Battery cooling technology is a prime example of opportunity for us. Our know-how in this technology is allowing us to expand into green power here. Our liquid and air-cooled products are helping auto makers bring electric and hybrid electric cars to market.

For the quarter, segment EBITDA was $37 million on sales of $269 million, delivering about a 14% margin. The margin is slightly down from the prior quarter in 2010, as a result of a warranty charge which was related to prior year claims. As you can see by the customer base, Power Technologies has a broad reach across several market segments with customers from the automotive, commercial and off-highway markets across the globe.

In the second quarter of this year, Dana's technology and market leadership has been recognized in a number of ways. Perhaps there is no better way to highlight this, though, than to review the many profitable new business wins that we have recently secured. In the Power Technologies business group, our battery cooling for electric vehicles continues to gain traction. During the quarter we gained an additional European OEM customer, bringing to 16 the number of electric and hybrid electric passenger car and light truck platforms that utilize or will use Dana's thermal management technology.

Earlier I mentioned our passive and active warm up units as a new product introduction. I am pleased to say that we have already secured contracts with 2 major auto makers for this patent pending technology that improves fuel economy and reduces emissions.

So turning to Off-Highway drive line technologies on slide 8, the strong agriculture and construction market growth continues. Europe has been the traditional market for Off-Highway. But this quarter more than 50% of our business wins have come from outside of Europe. We achieved $51 million of segment EBITDA with a 12% margin. This is substantially up from the margin last year, and the first quarter of this year.

In our Off-Highway market, we are also pleased to announce that we'll be providing rigid planetary axles in Europe and North America for Caterpillar front-end loaders, MacLean's mine support vehicles and JCB telescopic handlers. These axles are specifically engineered to handle maximum load capacities offering reliable power and durability. They are designed to meet the rigorous demands of Off-Highway applications and offer the customer minimal downtime for maintenance. This technology illustrates the breadth of our Off-Highway capabilities from construction and mining to material handling.

Turning to slide 10, we have aligned our Light Vehicle Driveline and Commercial Vehicle Driveline operations into On-Highway Driveline technologies. Light Vehicle Driveline continues to grow, and we continue to gain business with new customers. We are expanding this business geographically with more than 90% of new business awards in the quarter outside of North America. Light Vehicle Driveline contributed $60 million of segment EBITDA at about 9% margin in the second quarter.

Second quarter earnings and margin are a bit lower this year, primarily as a result of a pricing settlement that we received in 2010, not repeating in 2011. Even with a $45 million impact in the quarter, due to the earthquake and aftermath in Japan, sales were up $33 million from last year. Light Vehicle Driveline continues to be a strong performer. New business wins for the second quarter include supplying AdvanTEK front and rear drive axles for a future small truck platform for General Motors.

Additionally, we will be supplying AdvanTEK rear drive units with limited slip differentials for a future Jaguar program. These high performance axles are a prime example of our efforts to address efficiency, power density, fuel economy, torque-carrying capacity and weight.

Turning to the Commercial Vehicle Driveline business on slide 12, in the Commercial Vehicle market, we achieved $55 million of segment EBITDA and a 9.4% EBITDA margin. This is a sequential improvement over the first quarter, and I will provide more detail in a few slides on a North American improvement plan and expectations going forward.

Our Commercial Vehicle business is quite diverse, with over 50% of the sales coming from outside of North America. This global diversity will continue to increase as we expand in growth markets, including South America, China, and India. We are now the leading full driveline supplier in South America and SIFCO results are ahead of plan. Additionally in this quarter, we closed on the transaction to increase our ownership stake in DDAC and the acquisition of our commercial axle business in India.

Earlier this month, Dana shipped its first drive axle to Blue Bird Bus, which has been a long time customer for Dana's driveshafts. This is conquest business for Dana and aligns well with our strategy to grow our specialty and bus business. Navistar also recognized our expertise by selecting our Spicer steer axles and driveshafts for the 9800 vehicle in Brazil. By selecting us as their exclusive steer and driveshaft supplier on this vehicle, they are able to leverage our strong footprint in emerging markets and gain valuable local content.

As I previously mentioned, we successfully increased our ownership of the DDAC joint venture to 50%. Making DDAC our largest axle manufacturing operation. This is an important step in our drive to continue to invest in China. The Chinese vehicle market has rapidly growing and will continue to be a strong market but it is down in 2011 from 2010. DDAC is well positioned to support this growing segment, offering a complete range of truck and bus axles. This range includes drive axles, steer axles, tandem axles and hub reduction axles to light, medium and heavy duty trucks, as well as for buses. This business is part of our overall Commercial Vehicle strategy in China, which is focused on leveraging Dana's engineering and manufacturing and assembly expertise to improve DDAC's performance and expanding our driveshaft business.

As part of the agreement, we will be appointing several key leadership positions in DDAC, including the CFO and the General Manager. The financial results of DDAC will be accretive to Dana and we are pleased with this investment. Additionally, we see significant opportunity to drive improvements, going forward.

Turning to slide 15, last quarter, we discussed that we were working to improve margins in our North America Commercial Vehicle group. There are 3 key elements to the profit improvement plan, and we are well on the way to achieve them. As you saw in the modest margin improvement this quarter. The first element is revitalizing the product portfolio, through complexity reduction and portfolio simplification. Additionally, we are introducing new products, which provide the end customer with greater fuel economy and efficiency. We are also improving cost performance through increasing efficiencies and reducing material costs. Finally, we are improving pricing on existing business which is below our acceptable financial targets and winning new business that meets our financial expectations. We have had several recent successes on this front. Through these actions, we expect to improve the overall Commercial Vehicle margins by about 100 basis points, to about 10% by year-end 2011, and we will achieve at least 12% adjusted EBITDA margins in 2013.

With that, let me turn it over to Jim for the financial review.

Thank you, Roger. If you'll turn to slide 17, I'll start with a financial summary. Overall as Roger said we had another good quarter, achieving $68 million of net income. Year to date our net income is $38 million, which of course is net of the $53 million costs we incurred in January for restructuring our debt. Sales were $1.9 billion for the quarter, an increase of almost $400 million, versus last year. Adjusted EBITDA of $201 million is also a significant improvement over Q2, 2010. And I'll cover both sales and adjusted EBITDA in subsequent slides.

Diluted adjusted EPS of $0.45 is also up significantly versus last year. And we have included a GAAP reconciliation in our appendix. Capital expenditures of $38 million are higher than last year but lower than we expected. We now see that we expect to spend between $185 million and $225 million for the full year. This is a slightly lower range than we have previously disclosed and discussed. Free cash flow was $44 million for the quarter, down from last year due to higher working capital this year to support the continuing growth in our business.

On slide 18, you can see the adjusted EBITDA by business group in summary. Overall, we achieved a 30% growth in adjusted EBITDA versus last year, with the greatest increase in Off-Highway Driveline technologies and Commercial Vehicle Driveline. It is also notable that these 2 non-automotive groups now make up over 50% of our adjusted EBITDA in the quarter.

On slide 19 is the change in sales versus 2010. We have continued to see a significant increase in our sales revenues. At $1.9 billion, we are up $407 million or about 26% overall versus lasted year. Volume and mix contributed $298 million, about a 20% increase over last year. Included in that is about $100 million of sales attributable to the acquisition we made in Brazil in the Commercial Vehicle market related to SIFCO. Pricing was up slightly in comparison to last year and currency was favorable by $103 million due to the dollar weakness compared with last year. We have seen double digit declines in the US dollar versus our primary currencies of the Euro, the peso, and the British pound.

Slide 20 explains the change in our adjusted EBITDA of $201 million for the quarter which as I mentioned earlier was up $47 million from the last year. The margin was 10.4%, and that is up sequentially both from the first quarter of this year of 10.1% as well as the same quarter last year at 10.1%. Volume and mix were favorable by $35 million on the sales increase of $303 million, which represents about a 12% drop-through. The drop-through was less this quarter than you would expect, primarily as a result of mix. That is a disproportionately higher growth of our North America Commercial vehicle OE sales, which as we have discussed previously have lower margins than our other businesses. About half of the overall $400 million increase represented sales growth in the CV business. Pricing was positive at $6 million for the quarter as I mentioned earlier and that includes $16 million of material recovery. The $10 million pricing negative you see on the slide relates to the non-repeat of a lump sum settlement we received in 2010 as Roger mentioned.

On the cost side we have seen continued strong conversion cost savings. In this case $11 million. We were, however, adversely impacted by a net $9 million of material cost increases versus last year. And that was more than explained by commodity cost increases of $23 million partially offset by material cost savings of $14 million. We discussed previously the material costs are continuing to rise, commodity costs are continuing to rise. And we expect those to be in the range of $90 million to $100 million on a year-over-year basis 2011 versus 2010. And although we continue to have strong material cost savings, we expect them to be a little bit short of those commodity cost increases at the end of the year. They will be ramping up, however, in the back half of the year, and we expect commodity costs to moderate in the back half of the year. So instead of having a negative on this, we expect to see a positive flip on material in the back half of the year. As we continue to see the high commodity costs, as we go through, we are also able to begin to recover those costs. And as you can see here we had a $16 million cost recovery in the quarter versus the $23 million increase in commodity costs. So in this quarter, we recovered about 60% to 70% of the material cost increases. We expect that to improve in the back half to 75% to 80%. So overall when you take a look at the impact of material to us for the full year, commodities, cost savings and pricing, we expect it to be, continue to be a very significant contributor to the year-over-year profit increase. And lastly, the impact of our currency impacts in revenue was slightly positive to the bottom line by about $8 million.

Turning to free cash flow on slide 21, for the quarter, it was a positive $44 million, which, although lower than last year, was still very strong. Year to date, we have a positive $9 million. As expected with the higher sales level, we did incur higher working capital in the quarter and you can see that at $91 million. And so far, in the first half, to support our customers, we have incurred increases in working capital of $242 million.

As I mentioned earlier, the $38 million of capital spending was a little bit below what we expected, year to date we are at $71 million. And we expect to see this increase in the second half, although we will be to a lower level than we previously anticipated. Year-to-date cash taxes were $20 million. That included a $16 million refund from one of our overseas affiliates. We now expect cash taxes for the full year to be in the range of $90 million, reflecting much stronger sales and profitability in our overseas operations, where we do not have NOLs to offset that tax increase.

We expect full year restructuring costs to be in the range of $90 million to $100 million, and that is cash costs. You can see year-to-date here, we are only at about $24 million. Given the improved outlook, however, we now expect to achieve a free cash flow of at least $200 million for the year.

Turning to slide 22, we highlight here our very strong liquidity and net debt position. During the first half, we used about $150 million of cash for the SIFCO transaction, about $70 million of cash for debt reduction and $124 million for the DDAC acquisition and finally $13 million for the axle's India investment. That still left us with a substantial liquidity of $1.2 billion and a very small net debt. Not included in any of our financials are the transaction that Roger mentioned earlier on the sale of our joint ventures in GETRAG. So if you were to include that money from that sale, we would be essentially at this point in time breakeven on a net cash net-debt basis.

Overall, we are very pleased with our capital structure and have sufficient capital to continue to grow and pursue bolt-on acquisitions as appropriate. So looking forward and turning to slide 23, you can see our global production estimates. In the global markets, we currently serve, we continue to see strength in most markets and improvements in some others. In North America, we believe we will see modest improvements for both the medium and heavy vehicle markets and we have increased our expected range for the heavy market to the 260,000 to 270,000 unit range. That is up about 20,000 units at both ends of that range.

Europe continues to show strength and we've modestly increased both our light, medium and heavy projections for the year. We have, however, reduced production expectations in Asia Pacific consistent with everybody else's expectation, and results of the impact of the earthquake in Japan earlier this year.

Our Off-Highway market continues to recover nicely and is in line to increase at the same rate we previously expected, 25% to 30% year over year on a construction market and about 15% to 20% on the ag market. Taking all these into account, overall we now expect market growth for Dana markets to be about 20% for the year. As Roger mentioned, we did close the DDAC acquisition in June.

On slide 24 we have included some additional information relating to DDAC. I should say, we will be putting out as part of an SEC filing within the next couple of months, full detail on DDAC full financial statements. But this just gives you a highlight of the preliminary estimates as we take those results and convert them into US GAAP, as well as reflecting the impacts of purchase accounting adjustments that are required before we put these on to our income statement.

In 2010, DDAC earned $31 million of net income on revenue of about $1 billion with adjusted EBITDA margins of 5.8%. During the first half of 2011, DDAC earned $15 million of net income on about $500 million of revenue and obviously, these numbers have been adjusted for differences in exchange where the Chinese currency has been revalued versus the US dollar.

Margins this year are running a little bit lower, primarily as a result of rising material costs which have not been fully offset by pricing, we do have pricing agreements in place for recovery from DFL to parent. They are lagged however which is consistent with our other CV practices. There is less of an ability to price in the non-DFL customer base.

As Roger mentioned we are putting in place some key management at DDAC and we will be working with their team to improve the business and deliver higher returns. Our second half 2011 results will include the 50% share of DDAC earnings. Obviously the first half did not include anything. Assuming DDAC's second half performance is similar to the first half, and taking into account the estimated purchase accounting impact, we expect DDAC to add $0.02 to $0.03 to our second half EPS, and those numbers are included in our revised financial guidance, which I will cover in a second. As Roger mentioned earlier, overall the financial results of DDAC will be accretive to Dana and we are very pleased with the investment.

So turning to slide 25 and our full year guidance, given the strong second quarter results and our view of the overall market, we are increasing guidance on several key financial elements. We now see full year sales to be up at least 25% versus last year. This includes both the market growth as well as exchange and acquisition impacts. But as previously discussed will not include DDAC and because the GETRAG joint ventures were not consolidated either, there will be no impact on that divestiture on the top line.

Additionally, full year adjusted EBITDA is now estimated to be $760 million to $780 million and diluted adjusted EPS of $1.60 to $1.70 per share. The revised EPS estimate does include our share of DDAC results as I mentioned but does not yet exclude any of the GETRAG impact. We do not know when that will close. We are expecting it to be somewhere around September and once we know that we will roll that into our EPS guidance. With the reduction in capital spending, we now expect full year free cash flow to be at least $200 million.

So in summary, we have delivered another strong quarter, building on growth and operational performance. We have increased our full year guidance, and as we execute our plan, and continue to focus on our technologies and our customer, we'll look for additional growth opportunities to drive shareholder value.

With that, I would like to turn it over to Carmen to begin our Q&A session.

Carmen, can we begin our Q&A session, please.

Thank you, and at this time, we would like to begin the Q&A session. (Operator instructions)

Brian Johnson, Barclays Capital.

A few questions both over all and around the Commercial Vehicle segment, two on Commercial Vehicle. How should we be thinking about incremental margins on the North American side through 2011 and how that changes as some of these improvement programs kick in through the year?

Brian, this is Jim. I think for the rest of year we are going to continue to see incremental margins below 10%. They will be single digit. Obviously, as we get into next year and some of the actions that we are taking, from the product complexity and cost side, we expect those margins will continue to grow. For the rest of this year, they will probably be a little bit weaker than we'd like.

And PACCAR, both reduced it's retail sales estimate for Class 8 and cited pressures in the supply chain, flagging of course, tires and chassis components. What is your view on that? Because I head similar noises from Navistar during the quarter and is that part of the weaker margin part in North America or there perhaps maybe overdone by the OEMs?

I think, what they were referring to was clearly some shortages of certain components to them. We were not short in any thing we supply to them, so were not constraining them any way. There has been obviously some difficulty in this whole supply chain in CV. We have experienced some difficulties at times. It has not been without pain to get to satisfy our customers, but we have not prevented any of our customers from building units based on their orders to us.

We have incurred occasional cost to get around battle necks and to improve our delivery time. We have some changes in orders, due to some of the constraints at the OEs. We've seen some changes in orders last minute, so we have had to incur some premium cost and some overtime to supply those. But so far, we have been able to meet all of our customer's requirements.

Patrick Archambault, Goldman Sachs.

Yes, hi, good morning. I just wanted to, looking at the DDAC margins, they are lower I think than your consolidated margins on the On-Highway segment. Is there in that, an acquisition cost that's temporary or there are structural issues that just make the level of processability -- profitability, excuse me, lower in that region. How do you explain the gap? They seem to be almost half of what they run in North America?

There is no purchase accounting or any impact in those numbers that I showed you today, Patrick, related to the acquisition. Those are the clean numbers, out of DDAC adjusted, however for US GAAP. But essentially, there is not a significant change in those. The margins in that business are a little bit lower than we believe we can achieve on an ongoing basis. One of the reasons why the acquisition was attractive to us beyond the obvious benefit of adding some revenue and profits through the bottom line, which were accretive, is we think there are some opportunities to improve the efficiencies there, and to improve the operations. So that, we think we can drive the profitability up. And that is clearly one of the reasons why we saw it attractive to make the acquisition to increase the equity.

Yes, thanks, Jim. Patrick, this is Roger. Coming into the organization, I took a look at that and I see a real opportunity, from what Dana has been able to do over the past year or 2. The Dana operating systems inside of our facilities around the world, to utilize those processes and help our partner in the operations that they were controlling prior to this increase in equity. Now, we can help them and be a real partner to expand the improvements we have made in the rest of Dana, over to the organization that's there in China. So, we are real optimistic, as Jim had mentioned, that we are in there at the right time. It is accretive the way it is, but we feel it can be better for us and that is what our focus is.

Great. And I guess, can you talk a little bit -- is there, how much of an ability is there to leverage that business on the light side?

As we have said before, we think there is a big opportunity for us to continue the partnership that we built there which has been very good and well received to help DFL on its automotive side. We have had some meetings and discussions with them and, obviously, we are going to continue to look at opportunities to support them. Beyond the Light Vehicle side there is also a big opportunity we think in the aftermarket side of the business and we think we can also, one of the reasons why we are in that partnership is to bring technology. And we think we can bring technology to DFL that they otherwise would not be able to achieve that would give them the opportunity to provide a higher value products to their customers, which should drive higher margins also.

Okay great. Thank you very much.

Patrick Nolan, Deutsche Bank.

Two quick ones on the On-Highway Commercial Vehicle business. First, the breakdown geographically is helpful. It actually looks like your content per vehicle in North America went from about $2,400 in Q1 to almost $2,800 per vehicle in Q2. Is that a function of customer mix? Or do you, based on your assessment of the market are you taking share?

I think the answer is both. We continued to, as I said, we haven't had any supply disruption in terms of our customers. We work very hard to make sure we gave them the supply, and we have had some opportunities to increase deliveries above normal levels to some of our OEs. Due to the scarcity of the products to our customers. We've talked a little bit about improving the product mix, we have improved the product mix and there has also been some modest pricing in there. So, a number of opportunities for us that have driven that essentially content per vehicle, as you say.

And of the steps that you have outlined to turn around the North America Commercial Vehicle business, what is going to be the main driver of the I guess 60 basis point improvement that you have between now and year end, for this year?

I think there will be a combination of a couple of things. One, there has been some margin improvement we have been able to get through some of the pricing actions and mix actions we've talked about. We have introduced some new products. Those products carry much higher margins than some of our previous margins and our customers are very interested in those. So, that's good as well as some significant cost savings on the material side going forward. I also mentioned that, we saw price recovery in the first half at about 60%, 70% overall. The CV market tends to lag a little bit more on price recovery on material. So, one of the other factors improving our margins in the second half is the material that got impacted on in the first half. We will be getting full recovery for, in the second half. So, that is another thing that will drive the margin improvement. Obviously ongoing, the longest commodity prices stay pretty stable those higher margins will hold.

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

Peter Nesvold, Jefferies.

I'm probably misunderstanding something in the Commercial margins. So, I just want to make sure I do understand it correctly. You are currently below 10% today. I think you said to Brian the incrementals will be below 10% in the second half of the year, although maybe that is just North America but you still expect to exit the year at 10%. So, I'm sure I'm missing something in the math there. Maybe it is just the price recovery and materials. Can you help me bridge that?

Yes. I probably haven't been as clear as I could be. The question I answered for Brian was on a volume basis, what would be the drop-through. What I'm saying is, it probably won't be higher than 10%. So a good question, Peter, on how do you get to 10% at the end of the year, in addition to that, which will be less than 10%, which would tend to drag the margin down. As I said, we will see material cost recovery in the second half that we didn't experience in the first half. We will see some mix improvements with some of the new products and there will some margin improvement due to some pricing and some of the long-term agreements that we have been in the process of signing. So, it is a combination of the non-volume pieces that will actually drive in the margin up in the back half of the year.

Okay. Power Technologies, I think in the prepared comments you said there was a warranty charge that impacted profitability. Did you quantify that? I don't know that I caught it.

We did not quantify that. It is not a material amount overall to Dana, but it did adversely impact the margins there. If we were to exclude that there would have been a good increase year to year.

Okay. Quick last one, you had mentioned DDAC is $0.02 to $0.03 accretive in the second half including the impact of purchase accounting. I have had the unfortunate experience of dealing with purchase accounting before. How much, once the write-up of inventory, is the write-up of inventory done by the end of the year and how much of a drag is that to the earning accretion in the near term?

The inventory accounting, it should wash out by the end of the year. So, that is not a big issue. What normally hit you on purchase accounting is the write-up of not only the fixed assets, but also things like customer relationships, IP, and that sort of thing, which has to be amortized over [5 -- 12] kinds of years. That is normally what hit you, that decreases the earnings. But essentially, the inventory will not have much of an impact at all. Some, but not a huge impact in that number.

So, $0.04 to $0.06 for 2012 might be kind of the range to think about.

Yes. We obviously like it to be bigger but you know if double you are not too far off based on today's earnings.

Okay. Thank you.

Brett Hoselton, Keybanc.

Again, on your Commercial Vehicles, your 3-step process. First of all, as you are talking about rationalizing your products, it sounds as though you are going to offer fewer products to your customers. I'm not sure I'm hearing that correctly but it sounds that way, which suggests that there is a potential for some market share losses. Am I correct in my assessment there?

Yes. This is Mark Wallace. Good morning. To answer the question more clearly, there has been a lot of products have overlapped each other. So, in our portfolio clean up, there is no loss of our ability to cover the market space.

All right, and then on the improved pricing actions, it sounds like you have already been successful in implementing some of these pricing actions. My question is, are there more pricing actions that you have yet to take place? Or have all of the pricing actions taken place? And it is merely a matter of them flowing through your income statement and your results?

We expect to see condition improvement in the back half, both as a result of some new agreements, as well as the flow-through of those that have been signed. There was not a huge impact in the second quarter as a result of those pricing. The big impact will be in the second half, and obviously a full impact next year.

Thank you very much, gentlemen.

Tim Denoyer, Wolfe Trahan.

Good morning. Couple questions on Off-Highway. That continues to outpace your market assumptions. Is that essentially just Europe, specific? Or can you give me a little bit more color on the outlook for Off-Highway as the year progresses?

Hi Tim, it is Mark Wallace. I'll speak up for the Off-Highway group. Globally, we are seeing growth in all the main 4 markets we serve, with the ongoing commodity price increases in food supplies. The agriculture space continues to grow, in all the regions of the world, as well as the commodities for mining above ground and below ground mining. We continue to see strengthen in those markets as well, pretty much around the globe. Construction begins to make some come back now, as well as material handling for port revitalization, et cetera. So, we have been seeing a nice increase around the globe.

Okay. But in terms of the 45% revenue growth rate that you are running at versus your market assumptions of, I think, 25 to 30 -- is there, yes 25 to 30 in construction and 15 to 20 in ag, I was a little surprised those assumptions didn't go up. Are you, have you seen any, anything that would suggest that your run rate's lowest?

No, I think one thing to take into account is due to we are fairly large in Europe, you will have some seasonality in the back half of the year, as there is time taken out of the schedules in August and again around the rest of the holiday period. So, you will see some seasonality. But overall with the growth rates we have seen, we continue to see those moving forward.

Okay. Can you continue to give a little bit more color on the 50% of new business outside of Europe? Which regions were the top winners?

Just in general, we definitely picked up some business in North America, as well as in Asia Pacific. We continued to see China, specifically, as one of the key growth markets for the Off-Highway business space. That would include the agriculture, as well as the mining construction industry.

Great and then, one or two more, if you don't mind? Jim, did you mention the GETRAG JV income number? Did I miss that?

No I didn't. No I didn't. They will be available in the Q, just to give you a quick update. In 2011, first half, sales and these are of the JVs, not representing our share, about $400 million. PBT was $24 million and net income was about $15 million and we have booked about $5 million for the impact of the equity earnings to us. That is about the same. Sales were up a little bit from last year's first half. Net income was about the same. Those numbers, as I said, will be available in the Q when we publish it later today.

Okay. Great. Then one CV question. Is there any difference in the pricing with the Modified Steer Axles you talked about for the new brake regulations?

We don't comment specifically on any particular product. Obviously, we do our best to make sure that we give our customers good value, and we make sure that we like the profitability on the business too.

Okay. Great. One more if you don't mind, in terms of the going back to the PACCAR question, their production was looked very good in the second quarter. Just relatively, are you seeing anything in the third quarter that would suggest the supply chain stuff they are talking about -- we haven't seen it in the numbers yet?

I don't think I would be in a position to talk about what might impact PACCAR, but I think, overall, the supply chain is continuing grow and respond to the market needs. Next year, we are looking obviously at something much higher than what we have experienced this year. So, I think overall the market's growing. The only question is it growing as fast as the OEs would like?

Himanshu Patel, JPMorgan.

On the DDAC business any potential to get those EBITDA margins, obviously excluding purchase accounting, to Dana corporate levels?

Himanshu, that's clearly our goal. As I mentioned earlier, one of the reasons why we are very interested in this business is we think there is a big opportunity to improve the operations through efficiencies, through more technology and higher margin products. So, that is you know, clearly going to be our goal. Obviously with the increase in commodity prices and the lag, and the ability to re-price in the marketplace, it is always a problem in volatility. So, we are hoping that once that stabilizes we'll also be able to make sure we fully recover that margin. So yes, we think there is a very good opportunity to improve it.

And then, I think you mentioned the ability to get raw materials pricing on the Dongfeng business was a lot better versus the non Dongfeng business? What is the customer mix at DDAC?

About 70% to DFL. The rest is outside.

Separate question. You know, you guys have talked to a lot recently about simplifying the product portfolio and investing more on some of these you know more fuel efficient, value-added product areas. I'm curious, as you think about the Company's engineering and R&D budgets, is this all kind of a linear investment pace? Or does it, at any stage, get lumpy where we see step change increases down the road?

Himanshu, this is Roger. That is a great question. Because we've looked at that pretty hard in the context of wanting to go make sure our technology was in a position to take care of the customer needs that were out there, for the solutions that they need. We will be increasing our engineering investment, there is no question about that. But we are going to be doing it on a basis of how the business is growing, and when is the right time to lay that in there. I would say from a year-to-year basis, if you looked at it in that context, it would look like it was on a linear type of a basis. During any given year, it might get lumpy from quarter to quarter. So, where we might have had it in our plans to do something in the second quarter, that we may end up doing in the third quarter or the fourth quarter, it may be a situation like that. But it is not going to be overall, outside of the bounds of what we had originally planned.

Okay. That is very useful. Then just a very small specific question. On some of this battery cooling stuff, the air cooling and the liquid cooling stuff you guys are working on. I think you mentioned you have 16 or so contracts already. Can you just help us understand the competitive landscape there? Who are you competing with in these product areas? And I guess more broadly, is this sort of stuff all done by suppliers? Or is a lot of it still kept in-house by OEs?

The vast majority of this is outside. Most of the battery producers don't do this in-house. We have got a very, very significant share in that business. And so, we are very comfortable with our position [vis-a-vis] our competitors. We think we got a very good patented technology which is very low cost, very scalable; we continue to see growth in that.

Is it the battery makers themselves who do some of this?

No, it is other, it is other suppliers in the space.

Himanshu, this is Roger. I have learned a lot about this in the last quarter since I have been here, as I go around to our technical centers. And one of the advantages that Dana has in this technology space is, that we are leveraging the process technology we have in other areas of the business, in order to accomplish the production processes required in some of these battery cooling technologies. So, it is a little bit different and it is unique. But it is a great example of how we've leveraged processed technology in one area of the business to exploit a new market segment. To add to that in terms of the battery manufacturer, is the one that ties it all together. We are providing the sub components, the cooling plates. And it is the OE of the battery, if you will. That is responsible for the overall management. Now, we have been helping very much on that. We've got some technology and capability to take over that, if we want to. We have been continuing win share. And actually in a couple of cases, have taken over for some other suppliers who weren't able to provide the cooling products.

Yes. Is there anything more in this area that you guys would look to expand into? Additional products of components, either organically or through acquisition?

If you think about the whole cooling -- heating and cooling, I think you can see a pattern in the business, we are into active and passive warm up. We are trying to take our technologies and use them in a number of different ways. Things like overall HVAC systems. If you think about every way in which you can use thermal technology to provide value to customers, that's what we are taking a look at right now. So yes, we think there is opportunities to grow in this space. And as batteries become more and more widespread, obviously the requirements for heating and cooling the passenger compartment becomes much, much more important. So, we think we have some opportunities and specific technologies we can use to address those needs.

Great. Thank you, guys.

Brian Sponheimer, Gabelli & Company.

Hi. Good morning, Roger. Jim.

I thank you for taking my question. Most of my questions have been answered. I just want to talk about a outlook in South America after this year. There has been some talk about some volumes that may or may not be falling off. Given the order visibility that you have in talking to your customers, are you getting any sense of this?

We haven't taken a deep dive into 2012 yet. We are in the process of doing that as we pull together our long-range plan and our budget for next year, but at the present time we haven't seen any signs yet whatsoever there will be any slackening in 2012 against the fairly heavy pace of growth in South America, particularly in Brazil. So, we expect to continue to see growth in that marketplace at the present time, and we continue to see people making investments in that market to support that growth.

All right. Thank you. On the Light Vehicle side, in the US, there has obviously been a push by the administration for major miles per gallon regulations in the out years. What runway do you think you would need, in order to essentially change your product type to really help with the fuel efficiency and fix up?

Fuel efficiency has been a focus for us, even within our existing portfolio. In terms of providing lightweight products, for example, our aluminum driveshaft is a good example of providing fuel efficient products to our customers. We have taken a look at parasitic loss programs. We've reduced weight, increase power density, so all the things we have been focusing on has been focused very much on fuel economy. And then we are also taking a look, obviously, our battery technology, the cooling technology there, the active and passive warm up is also contributing substantially to fuel economy improvement. So, we have a wide range of products right now that address that space. We are also taking a look at some new technologies and some new capabilities that we are not, at the present time, ready to announce that will play a little bit more into the space, that will provide even greater fuel economy benefits.

Okay. Thank you very much. Nice quarter.

Thank you.

Carmen, we have time for one last question, please.

Thank you. Jeff Rosenbaum, York Capital.

Hi. Good morning. Your comments on some the inefficiencies you experienced on the Commercial Vehicle side because of some of the other supply chain issues that the OEM saw. Can you quantify that? Some of the other suppliers have actually quantified that to be pretty meaningful in this quarter and the first half? Is it really meaningful?

It is meaningful to the CV business, not to Dana overall. It is a single digit number.

In terms of margin impact, would it have taken the margin well above 10% in that business?

No.

Okay. Thank you.

Okay. With that I would like to thank everybody for joining us on the call today and wish you a good day. Thank you.

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