Dana Inc (DAN) 2011 Q3 法說會逐字稿

Good morning, and welcome to Dana Holding Corporation's third quarter 2011 webcast and conference call. My name is Bonita, and I will be your conference facilitator. Please be advised that our meeting today, both 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, Ms. Etzkorn.

Thank you, Bonita. Good morning, ladies and gentlemen. Welcome to all of you who are joining us either by phone or web cast. 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 Drive Line Technologies, and Dwayne Matthews, President of Power Technologies. 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 the supporting materials are the property of the 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.

Thanks, Lillian, and thanks, Bonita. Good morning, everyone, and thank you for joining us today. To review our third quarter results, we're pleased that we performed better than expected this quarter, the result of good execution of our cost controls, and increased sales, which were up 29% year-over-year. Our positive momentum continues, with strong net income of $110 million, bringing our year-to-date income to $148 million. The third quarter includes a $60 million gain on the sale of our Getrag joint venture, which more than offsets the $53 million cost of refinancing our debt in the first quarter. We posted a 35% increase in adjusted EBITDA this quarter, $200 million on sales of about $2 billion, which represents a margin of 10.2%. We continue to see strong customer orders coming in, so we expect to stay on track to meet our projected annual sales volume. We're seeing some commodity and material prices stabilizing, which is good news.

Our cash and liquidity position remain strong. With $50 million of free cash flow in the quarter, we further enhanced our liquidity with cash from the Getrag JV transaction resulting in total liquidity of more than $1.3 billion at the end of the quarter. We're still projecting to have free cash flow of $200 million by year's end. You may have seen the news from Moody's investor service last week, when they raised our credit ratings, another acknowledgment of our strengthened financial position. Our outlook for 2011 remains largely the same, but we have narrowed the targets. We expect EBITDA to come in at about $780 million, and earnings per share to come in between $1.65 and $1.70 for the year. Now, let's turn to the slide 5. I spent some time talking to many of you recently about the Dana story. An important part of our unique story is the diversity of the markets in which we participate, as well as our geographic diversity. A key point here is that more than half of our revenue base is outside the traditional light vehicle market.

In the top chart, you can see the breakdown by market segment. When we include the impact of our DDAC joint venture in China, our commercial vehicle and off-highway segments account for about 58% of our sales. Geographic diversity is also an important competitive advantage for us, and we're seeing the results of our efforts as we expand globally. The SIFCO transaction in Brazil increased our South American sales footprint to 16%. Again, with the DDAC sales in China, our Asia-Pacific share rises to 20%. I believe diversity in our markets and customer base around the world is an important enabler for Dana to continue our growth. We continue to be recognized for our technology by customers, through new business, and also by other credible industry experts. Let me highlight just a few of those. We were awarded a new contract to supply our Advent Tech rear drive units for the new Ford Interceptor police car program, adding to our existing Advent Tech business that we currently have with Ford. In addition, Land Rover awarded us a new contract to supply front and rear axles for the Defender, which will go into production in mid 2012. We're excited to add the Land Rover Defender to our growing list of conquest business.

We received great recognition this quarter for our industry-leading lightweight aluminum drive shaft for heavy vehicles, our Spicer Diamond series drive shaft. This was awarded the prestigious best practices award for innovation in drive line manufacturing by Frost and Sullivan. I would also like to acknowledge that our active warmup technology, developed by our Power Technologies Team, was named a finalist in the Automotive News Pace Awards, which we know is a benchmark program for innovation in our industry. Let's turn to our business unit performance and take a look first at the light vehicle drive line technologies. They had a strong year-over-year improvement this quarter, with sales of $689 million, and an EBITDA of $74 million, on modest volume increases. Light vehicle achieved an improvement in EBITDA margin for the quarter at 10.7%, and also made a significant sequential improvement over the second quarter. This puts our year to date margin at nearly 10% for this business segment. I mentioned earlier two important business wins for light vehicle; the Ford Interceptor Police Car Program, and the Land Rover Defender, both key wins that recognize Dana's ability to meet our customer needs.

If we turn to the commercial vehicle drive line technology segment, we can see that they posted a strong 55% increase in sales, reflecting the acquisitions in South America and India, as well as continued volume strength in the market, especially in the class 8 segment in North America, where production is up over 60% so far this year, compared to 2010. We also saw a marked increase in material cost recovery in the quarter. EBITDA is up about 49% this quarter, versus last year. The EBITDA margin of 10% is improved sequentially versus the prior quarters, as we begin to see the results from our performance improvement efforts. As you know, we have been working to improve our commercial vehicle performance in North America, focusing on three key areas, and I will talk more about that in just a minute. The performance at DDAC was roughly in line with the first half. Net income was $6 million on the quarter, and $24 million year to date. Our increased equity in DDAC makes this our largest axle manufacturing operation.

As we had planned, our team there is now fully engaged with our joint venture partner, and together we're working to improve the performance of the business. With the addition of DDAC in China, we're now showing our customer diversity and regional sales break out to include the pro forma sales to Dongfeng. On a pro forma basis, Dongfeng is our largest customer in this segment, so its impact on our customer and geographic diversity is significant. I should add that the segment financial performance data shown on this slide does not include DDAC, because of the 50-50 equity ownership relationship. I've already mentioned the great third party recognition we received for our Diamond Series Drive Shaft with the Frost and Sullivan innovation award. We're seeing significant interest from our customers for this product, so we're really excited about the future potential of the Diamond Series product line. Commercial vehicles also had a successful launch of our 90S drive axle in India, which we've optimized for yet another customer there. This is an example of how we're regionalizing our products for specific geographic markets.

Now, I would like to give you a few more details on our improvement plan for our commercial vehicle business in North America. As you can see, we've made significant progress in the areas of focus that we've previously identified and discussed. We have successfully negotiated new contracts on more than half of our North American OE and after-market business, and we launched new products, such as steer axles that comply with a new stopping distance regulation. Importantly, we've been able to support our commercial vehicles customers consistently through a volatile market upturn, while continuing to bring on new business, such as the Bluebird Bus Program we announced last quarter. These initiatives resulted in a significant improvement in the margin for the commercial vehicle segment in North America in the last two quarters, and we're continuing our work on reducing product complexity and making continuous improvements in our cost basis. If we move on to the Power Technologies Group, you can see they continue to make a strong contribution to our results, with great product innovations fueling a growing customer base. And sales were up nearly 9%. The 12.1% margin is slightly below our ongoing expectation for this business, but it's attributable to some non-repeatable factors, so the underlying performance of this business is intact, and we expect to see the margin return to normal levels in the subsequent quarters.

We continue to see new regulations driving demand for technology solutions that improve fuel economy, and reduce emissions. Our Power Technologies Group is a leader in these critical areas. Our Active Warmup technology, a pace award finalist, is currently featured on the Ford edge. We're seeing a lot of interest in this technology. We already have contracts with two other OEMs for additional platforms, and we expect more growth in the future. With more than 20 active electric and hybrid vehicle programs now, we're seeing robust interest around the world in our battery cooling capability. The demand for energy alternatives is also driving increased interest in our fuel cell applications for both the vehicle and the stationary markets. As we turn to our Off-highway Technologies business, it also has improved, sales and margins, versus the prior year quarter. Sales are 42% higher for the quarter, as the market continues its recovery, since the severe downturn in 2009. The agriculture market remains strong, and the global construction segment is on track for a 20% to 25% increase over last year, even with an expected reduction in Europe in the fourth quarter.

Our EBITDA margin is 10.9% for the quarter, up 240 basis points, and is 11.4% year to date. This quarter, we finalized our Dana - Rexroth joint venture with Bosch Rexroth. This is the JV that marries the hydraulics expertise of Bosch Rexroth with our expertise in drive train and transmission systems for the off-highway markets. Its premiere product is the hydro mechanical variable transmission, which goes into production in 2012 for our first customer. With an expected fuel savings of up to 20%, we're very excited about the potential of this new product. So to summarize, our third quarter results are strong. This represents continuing positive momentum for Dana in recognition for our products and technology, from both customers and third parties. We also made continued progress refining our portfolio of business, which further enhances our strong liquidity position. The recent credit rating upgrade by Moody's is an additional recognition of our ongoing progress in strengthening our balance sheet. Now, Jim yost can take you through the financial details of the quarter. Thank you. Jim?

Thank you, Roger. And if you turn to slide 13, you can see a summary of our third quarter and our year to date results, and as Roger said we had a very good quarter, achieving $110 million of net income. Year to date net income is $148 million, and as Roger mentioned, this includes the $53 million charge we took in the first quarter, for the extinguishment of our debt, as well as the $60 million gain in the third quarter, from the sale of our Getrag equity affiliate interests. Sales were just about $2 billion for the quarter, an increase of over $400 million versus last year, and adjusted EBITDA of $200 million is also a significant improvement over last year. I will cover both sales and adjusted EBITDA on subsequent slides. Our diluted adjusted EPS of $0.45 is also up significantly versus last year, and we have included a reconciliation in the appendix to our GAAP presentation. Capital expenditures of $56 million are up versus last year, and are on track to be in our expected range of $185 million to $225 million for the full year, and this quarter represents about a quarter of our ongoing continued expected spending in cap ex, and is basically in line with our depreciation.

Free cash flow was $50 million for the quarter, down slightly, from last quarter, last third quarter and last year. Year to date, we're at $59 million of free cash flow. On slide 14 is a change in our sales versus 2010. We've continued to see significant increases in sales revenue on a year-over-year basis. We're up $436 million, or about 29% versus last year, and sequentially, sales were about flat versus the second quarter of this year. Volume and mix contributed $346 million, or about a 23% increase over 2010, and is largely in line with our expected full-year increase, year over year, of about 25%. Included in that is about $120 million of sales attributable to our Sifco acquisition in South America, which continues to perform very well, and we're very pleased with that acquisition. All other changes were $90 million favorable, and that's primarily related to favorable exchange, but does include material price recovery also.

Slide 15 explains the change in our adjusted EBITDA, up to $200 million for the quarter, a $52 million increase from last year. The margins for both the quarter and year to date were about 10.2%. This is up from the prior year and in line with our second quarter results of this year. Volume and mix were favorable by $38 million on the sales increase of $346 million, so about a 11% drop-through. Mix continues to be impacted because of the disproportionately higher growth in the North American commercial vehicle OE sales, which presently have lower margins, as well as the impact of the Sifco acquisition, which is at lower-than-average margins. Beyond volume and mix, our overall performance for this quarter was a favorable $14 million, and we achieved a $4 million positive net material impact in the quarter. This is in line with our full-year expectations, and includes not only commodity increases, spending reductions, but also pricing.

Turning to slide 16, you can see our free cash flow for the quarter, was 50 million, and that's 9 million lower than last year. The year to date number of $59 million. Just a few comments on that. As I said, capital spending was at $56 million. Putting us at $127 million year to date. And we expect a little bit of an increase in the back quarter of the year. Year to date cash taxes and interest were $77 million, and restructuring was $59 million on a cash basis. We now expect total cash taxes for the year to be about $85 million, and cash restructuring to total about $80 million this year. As a result, we're on track to generate about $200 million of free cash flow for the year.

Turning to slide number 17, you can see our strong liquidity position that Roger highlighted earlier, and how we've used that liquidity to fund the business this year. We generated $59 million of free cash flow through the first three quarters, and have reinvested $151 million net into the business. This includes $150 million for the SIFCO transaction, $124 million for the DDAC investment, as well as $13 million for the axles India investment in the drivehead business there. We also had divested of non-strategic assets with the sale of our Getrag entities, and received about $136 million in proceeds. Additionally, we refinanced our debt earlier this year, and have further increased our liquidity through improvements in our credit line availability. And most importantly, we finished the third quarter with essentially no net debt. Overall, we continue to maintain very strong liquidity, and have sufficient capital to fund our growth plans, both organically and inorganically. Slide number 18 provides an update on our US pension plans, and this has been a topic that has received some attention in our industry recently, so we thought we would give you a little bit of an update. Our defined benefit plans in the United States are frozen, so we have no new entrants or future service accruals. So unlike many companies, the liabilities in our plans are not building, but are varying only with the discount rate.

In 2011, we expect about $8 million in expense for the full year, with a total of $30 million in required contributions. Next year, we estimate that the required contributions on a cash basis will be about $62 million. You can see in the chart the allocation of our pension fund assets. The bulk of our assets are not in equity, so we have largely been shielded from the volatilities of the equity markets year to date. Year to date, our performance is around our long-term annual return rate of 75%, so our assets have done -- continued to perform well. We project a year-end benefit obligation of about $1.9 billion, with a projected funding level of 77% on an accounting basis. This is about the same as at the end of last year, where we were 78% funded on the same basis, with an unfunded liability of about $410 million. The immunization portfolio was set up such that it largely counteracts the movements in the underlying discount rates for the obligations. What we've seen this year is huge instability in the capital markets, but for us, because the pension plan is frozen, and because we've structured the assets to provide immunity from some of this volatility, we don't see any significant issues going forward for the Company, and we will continue to fund the short fall on an ongoing basis.

So turning to slide 20, you can see our global production estimates, in the global markets, we serve, we continue to see strength in most markets, and some mixed outlooks for some of the others. In North America, we see modest improvements in 2011 for medium truck market, and have taken that production range up a little bit. In the heavy truck market, while we continue to see robust demand, the industry has been constrained due to supply issues, not from us, but from other suppliers. As a result, we are reducing our expected production range for the heavy truck market to 250,000 to 255,000 units this year, and that is down a little bit from our previous estimate, and this is in line with our customers' projections. I should also comment that when you looked at the GDP result this morning for the United States, we're seeing continued growth in GDP, so we actually have a positive outlook going forward for the overall economy, although clearly not robust. Europe continues to show strength, and we've modestly increased the medium and heavy truck projections there. I think the tentative result of the negotiations on the Greek debt issue has further added some bolstering to our expectations in Europe. So we don't expect to see any major downturns there next year.

We've reduced our production expectations in Asia-Pacific for medium and heavy trucks, and we are projecting a year-over-year decline of about 10% from the 2010 levels. I should note that the impact of the Thai flooding has not been reflected yet in our forecast. We're continuing to monitor that, and although we've been able to maintain production, and have continued to export outside of Thailand, we are seeing some reductions in demand from our customers due to their shutdowns. The overall off-highway market continues to recover, as Roger mentioned, and the ag market continues to be strong, with an increase of 15% to 20% this year. The European construction market growth has continued, but is expected to grow at a little bit less fast pace. In fact, we expect to see a little bit of a sequential decline in that market in the fourth quarter versus our third quarter results. So we are revising our full-year global construction equipment market growth projections down slightly, to 20% to 25%. Overall, we expect growth in our markets to be up about 20% year-over-year, supporting our projection of sales up about 25% year-over-year.

You can see that on slide number 19, where we've given updated guidance on our financial targets. Sales up about 25%, a little bit more than that, and we've continued to tighten some of our financial elements we show here. We're closely watching the situation in Thailand, and the production shutdowns due to flooding. We haven't reflected, as I mentioned, any of that into these projections. Full-year adjusted EBITDA is now estimated to be about $780 million, and that's in line with our 10% EBITDA target we set in January, with diluted EPS of about $1.65 to $1.70 per share. Margins, we, again, expect to be at 10%, and capital spending is expected to be $185 million to $225 million, based on the run rate we have today. And as I mentioned earlier, we expect our free cash flow to be greater than $200 million for the year. So in summary, we delivered another strong quarter, building on our growth and our operational performance. As we execute our plan, we will look to continue growth opportunities that will drive shareholder value. With that, I would like to turn it back to Bonita to begin our Q&A session.

Thank you. At this time, I would like to begin the Q&A session.

(Operator Instructions)

Your first question come from the line of Brett Hoselton with Keybanc.

Good morning, gentleman and ladies.

Good morning.

Good morning, Brett.

I was hoping you could talk a little bit about slides 7 and 8, the commercial vehicle segment. First question would be simply the contract negotiations in North America, you've completed 50%; does that mean that there is still another 50% to go, or are you completed with your contract negotiations at this point?

Well, thanks, Brett, for the question. This is Roger. What that means is that we've completed all of the discussions that we're going to have, because there are some of our business that is in longer-term contracts. As we've mentioned in a couple of -- a couple of times I think, the contracts that were up and that could be negotiated have been negotiated, and the discussions are completed. However, the implementation of some of those discussions are ongoing. So some of the agreements that we have already put in place would put some effective dates at subsequent quarters. Some of them have already hit. Some will hit in a little bit later. That said, however, we do have the opportunity to replace some of the products that are not able to be negotiated, but are less desirable products of ours with new technology products that provide our customers with significant value, through their eyes, where they're wanting to implement those products right away. And when we're doing that, we're doing that at the price levels that we need for the product line to be good for us and also our customers.

Do you have a trajectory -- you're currently tracking in that mid 9% range from an EBITDA standpoint for the segment, and you're looking at 12% for 2013. Do you see it as kind of a steady state trajectory? Or do you see some step function improvement in, let's say, 2012?

Well, this is Jim, Brett. Overall, we expect to be more of a steady state improvement. There will be some swings and roundabouts by quarter. But we do expect continued improvement. As Roger mentioned, some of those new agreements are phased in, so you will see that improving. Some of our other changes in terms of the product lineup, in terms of some of the complexity reductions is all happening over time. So you will see more of a steady state. There won't be any significant one-time huge impact to get to the 12%.

Thank you very much, gentlemen.

Thanks, Brett.

Your next question is from the line of Tim Denoyer with Wolfe Trahan.

Good morning.

Good morning, Tim.

Specifically, I'm just thinking about the truck margin for just one second. I think you had said last quarter that you were expecting a fourth quarter CV segment margin sub 10%. Can you update on your expectations on that?

What we indicated, as I recall, was we expected by the end of the year to be at a run rate of 10%. As you can see, this quarter, we're able to get there this quarter, and we expect to be there next quarter.

Okay, great. And then just quickly on Thailand, can you give us a percentage of the Asian light vehicle drive line business? Is that mainly where your exposure to Thailand is?

Our biggest impact there, locally, is in the domestic pickup market, but we also do ship out of Thailand components to support both our South African, as well as our Australian operations. So we've actually been working, continuing to work, exporting. The vast majority of our domestic production has been down a little bit. We will probably see somewhere in the range of $1 million to maybe $1.5 million per week of shutdown that might hit us as a result of probably $5 million to $10 million per month of sales impact.

Okay. Thanks. And if I can just throw one quick small one in there. In terms of European trucks, a lot of production forecasts have been cut the last few weeks, for the next few months. Can you talk about your European truck customers, specifically, and just what you're expecting there?

Hi, it's Mark Wallace. Just an update on Europe. In Europe, we see probably what everyone else has been seeing. Some customers continue to run at the existing paces, and some of the customers have cut some of their volumes in Q4. But I think going into next year, everyone is expecting, pretty much, a constant run rate in 2012.

And which OEMs do you serve in Europe?

Pretty much across the board, we serve all of the OEMs in Europe.

Okay. Thanks very much.

Your next question is from the line of Brian Johnson with Barclays Capital.

Good morning. I would like to talk a bit about power solutions, and get some more color and detail on what drove -- what were the special non-repeatable things that drove the nearly 200 basis points margin contraction? What is the timing for, either A, working through those, or B, to the extent they are launch costs, realizing the return on that?

Brian, this is Jim. They weren't launch costs. They were one-off items. Just some accrual adjustments, so nothing significant. We expect them to return to their normal margins in the range of 13% to 14%, both in the back half of the year, and then ongoing.

Okay. So it is just a variety of one-offs there?

Yes. Nothing specific.

And then -- we will get back to -- I have a housekeeping question just on the equity income.

Brian, this is Roger. I just wanted to follow up on Jim's comment just a little bit. We track the operating performance of these business segments, and as Jim said, these were just some minor changes that -- not changes, but adjustments to accruals and things, but the operating performance and fundamentals of the business segment are solid. So that is why we're confident that we will return to where we need to be on these.

Okay. And then just quick housekeeping question. Just wanted to clarify. Segment, you have $6 million of equity income reported, probably the first quarter we've had to worry about it. I just wanted to clarify, obviously the revenues are not consolidated into the CV business. Am I right that that $6 million equity income, 6 then comes from DDAC is not in segment EBITDA on page 7?

That's correct.

Okay. Thanks.

Your next question is from the line of Patrick Nolan with Deutsche Bank.

Good morning, everyone.

Good morning, Pat.

I just had a question on the off-highway business. As the construction business seems to be slowing, relative to ag, is there any mix considerations we should think about going into next year, as far as margins? In other words, is that construction business typically higher or lower margin than ag?

It varies dramatically. It is a little bit higher than the ag business. So yes, there is a bit of an impact. But we still, again, the impact that I mentioned in the fourth quarter, where we're seeing some downturn sequentially in Europe, although overall, up year to year, every indication we have is that will return back to normal in next year, so we don't expect to see a depressed market there ongoing.

Got it. Is there -- and how is the inventory within the channel of a lot of this equipment?

Yes, we think overall, it is not bad, but essentially, that is an area, because we serve more of the middle market than all of the Cats and so forth, we have less visibility into that market than we do in some of the others. So I would say right now, we don't see it as an issue. But our visibility is much more limited there than it is in our on-highway business.

And on raw materials, it looks like steel is kind of -- we will see after today, but it looks like steel has still kind of come down versus where it was running earlier in the year. What is raw materials looking like as you go into next year as far as a tailwind for you?

We expect there to be a little bit of a tailwind when you think about it on a net net basis, and the way I've portrayed it here was commodity increases less our cost reductions, less any pricing recovery. And as we said, we expected the back half of this year to be positive, and a contributor, and that's what you saw in the third quarter. We expect that to continue in the fourth quarter. We expect that also to continue into the first half of next year, assuming commodities stay under control. Now, one thing I will point out that we're not only exposed to scrap, steel prices, as it passes through our purchased components, both forgings and castings, but also impacted very much by special bar quality steel. And we have seen continued buoyancy in the pricing in that market, so we've been negatively impacted by that. And there have been some obvious pass-throughs of costs from our suppliers to us, just as we've been able to pass some of those costs on to our customers. So everything now, the prices stay fairly stable. We expect to see a little bit of a tailwind, but obviously as we get into next year, we will give you an update.

And just one last housekeeping question, what is your pro forma share of DDAC's year to date revenue?

Our share is 50%. You mean what is the number?

Yes, what is the number?

I'm not sure I have that number separately. We will have to give that to you separately. I'm sorry, I don't have that on hand.

Okay. Thanks very much.

Your next question is from the line of Aditya Oberoi with Goldman Sachs.

Hi, this is actually Pat Archambault here. A couple of questions. Just first on Thailand, if you, forgive me if you've commented on this, I hopped on the call a bit late, but did you say your facilities, are they impacted at all, or is it really just a supply chain issue at this stage?

Right now, our facilities are not impacted from the flooding. We have been very fortunate that that -- obviously some of our employees have been very impacted, and our hearts go out to them, but as it relates to our facilitates, we're still operating, capable of operating. We are shipping to our export locations in both Australia and South Africa. But to domestic suppliers, it is largely shut down now, due to their inability to produce.

Okay. And you know, just one high level, on the impact of the backlog of some of the -- you know, the business improvement plan, part and parcel obviously is the repricing, and the exit of certain contracts, I mean, can you just give us orders of magnitude? How much -- you know, what kind of an impact can we think about, sort of going forward in terms of increasing the amount of expired business that would be a bit of an offset to new business and volume going forward, as you renegotiate some of those contracts, and presumably some people will choose to exit, and perhaps go with somebody else, if the economics are not right for them.

I'm assuming you're talking about the commercial vehicle business.

Correct, yes.

I would say, so far we've been very successful in managing to enable us to renegotiate contracts that had been favorable to us, and still provide value to our customers. We haven't seen any impact of that to our current share, or our current expectations going forward.

Yes, and this is Roger here. Also to add on to what Jim is saying, I think that we haven't seen anything, unusual activity from what is normal from our customers assessing the vertical integration versus their outsourced supplied components, and we have growth in the market basket, that we don't see any significant change in the share, if you will, on a negative basis from the actions.

Okay. So the only stuff that you will likely get rid of is stuff that was targeted to be not repeated to begin with, I guess? At this point, it looks like that.

Yes, there will be a combination of us introducing new products, like the Diamond Series, which Roger mentioned, the Pro 40 lightweight tandem axle, those are all of the things we will be introducing, and we will take that as an opportunity to get rid of some of the products that we don't need to have anymore in our portfolio. Some which are replaced by those new products, and some which are low margin, low volume which can reduce our complexity in our manufacturing and engineering systems.

Okay. And last one for me, I don't know if you commented on this earlier in the call, but given your significant liquidity position, and I think fourth quarter is -- well, clearly by your guidance, a big seasonal inflow, can you give us any update on your thinking in terms of capital allocation?

We have nothing to report, other than the preferred dividend that we announced last night at this time. Normally fourth quarter is a very good quarter for us in working capital. I'd just remind you that first quarter tends to be a bit of a drain, so there is a bit of a seasonality there, so you've kind of got to look at both of those together. But we hope -- we will continue to talk about that going forward.

Okay, great. Thanks a lot, guys.

Your next question is from the line of Peter Nesvold with Jefferies.

If you take the contract reprices that you just went through in this last quarter, do those repricings alone get you to the 12% margin, as you look out a couple of years, just as they phase in?

No, Peter, this is Roger. The actions that we've taken are really three-pronged to fix the commercial vehicle business in North America. Obviously, getting the appropriate prices in place are one of the actions. But it is not the only action. Reducing our own internal costs is a significant effort that has been ongoing, and continues to be ongoing, in terms of our internal manufacturing costs, as well as our supplied component market basket, if you will. And then the reduction of the product complexity is the third prong of that. As we can reduce the complexity of the proliferation of product numbers that we have, or part numbers that we have, we should be able to gain some efficiencies for both us and provide a better value to our customers in doing it. So the pricing alone is not going to get us to where we need to be. It is going to be a compilation of all three efforts ongoing.

So if you were to take the pricing actions that you've completed in the last quarter, and if you were to assume, just for pro forma purposes, that they were all implemented today, what would the pro forma margin be like today? And the reason I ask that is I'm just kind of trying to triangulate -- the contract repricing should more or less be set, so if we're talking 110 basis points or so of margin expansion from at least this quarter's run rate, I'm just trying to get for how much is variable and dependent on execution and volumes for the industry.

This is Jim. We haven't provided any further detail on that. As Roger indicated, we actually have a phase-in of the impact of the contracts we've renegotiated. Some small pieces hit the third quarter. A bigger piece will hit the fourth quarter. And then we've got some adjustments in some of our contracts in the first half of next year. So you will see, as I mentioned earlier, a continuing increase over time. No big jumps, as we achieve that number through the combination of the three actions that Roger indicated.

I get that it kind of phases in over time, I was just hoping that if there was a way of looking at it, that as if all of the price increases had been in effect during 3Q, what would the margin have looked like? And again, what I'm just trying to get a sense for, how much of the margin expansion between now and 2013 is actually kind of set by contract, and how much of it is sort of dependent upon execution and volume?

I will just say a very significant piece of it is set in terms of those contracts. Obviously, depending upon industry and mix. But we still have a significant amount of work to do on the other pieces.

Okay. Thanks, guys.

Your next question is from the line of Himanshu Patel with JP Morgan.

Hi, I just had two questions. Jim, appreciate the attention disclosure. What gives rise to the doubling in the cash contribution '11 to '12?

That is just the minimum PBGC contribution requirements. That's all.

Does that sort of stay at that 60 level prospectively into 2013?

It's a good question. It is going to vary. But, yes, that is more of an ongoing level. You may recall, we put $50 million in the fund last year, on a voluntary basis. We had no required contributions. We're required $30 million this year. It goes up to about $60 million or so next year, and then it bounces around a little bit, but that is more of a normal ongoing level for us until we get back, reduced significantly, the under funded amount. We obviously will take a look on an ongoing basis whether we want to increase the voluntary contributions, and we may from time to time do that.

Okay. And then just last question, can you guys touch a little bit on just the M&A market, and in particular, how active or inactive is Dana's own pipeline of what you guys are looking at?

Himanshu, this is Roger Wood. We continue to actively pursue product portfolio gap fillers, if you will, or bolt-on type acquisitions that would enable us to fulfill one of our business units' needs. And we are -- we're in the marketplace, we're having discussions, but there's nothing at this point that is ultimately imminent. And it is important, also, to note that we don't foresee any very large acquisitions. We see our pursuit here as being more of a bolt-on, or technology acquisitions, to outline our portfolio.

Most of what you guys have done so far have been very, you know, complimentary and sort of in line with your existing product offering. I'm just curious from a product perspective, would you guys consider expanding into any different areas?

Our considerations would be limited only by the competencies that we have in the organization. We think it is prudent for us to stick to what we know. That said, there could be opportunities for us to expand the business, utilizing the core competencies, but in areas that we may not typically be in. So we would be open to it, but not outside of the competencies that we have in the company.

Is that a reference mainly to kind of the power train area?

It is not really a reference to any specific thing. But we would make sure that it was market value driven, and we are going through significant efforts right now to make sure that we're completely aligned on the inside, and we are, I'm very comfortable that we are, and it is also opening possible opportunities on the outside. Again, nothing imminent right now. Nothing that would take us outside of our core competencies, because I feel that we can be very successful by leveraging the knowledge and the expertise that we have. But it could take us outside of what we currently do in some aspects, keeping in line with what we know. So nothing imminent, but we're open to ideas.

Okay. Great. Thanks for the color.

Your next question is from the line of Ravi Shanker with Morgan Stanley.

Thanks for taking my question. Can you guys talk about the Latin American market, and what happened in 3Q there, and how you see that evolving going forward? Thanks.

Sure, I will give a shot at that. I think we see a continued robust market down there. It is a relatively more closed market than many of the other markets in which we deal. That allows us to take advantage of local content requirements, to be a premier supplier, in our drive line business in particular. So we've seen fairly robust, continued growth. We've indicated before that we're largely running at capacity down there, and there are some areas where we've got to push and shove to get to the levels that our customers are demanding. Except for the commercial vehicle market, where there are some emissions changes in the early part of next year, where there may be a little bit of pre-buying, pre-building, and therefore, a little bit of a dip in the first quarter, we're still expecting continued robust growth down there, although probably at a little bit less rate than we've seen over the last couple of years.

Great. Just a quick follow-up on the power tech margins. Are any of the unusual items in 3Q timing related, and do they reverse in 4-Q, or are this all in 3Q?

It is all in 3Q.

Great. Thank you.

Your next question is from the line of Brian Sponheimer with Gabelli and Company.

Good morning.

Good morning.

So, 3 months ago we were talking about supply chain issues, and we still are. I guess from a sequential basis, what has changed within the supply chain on the commercial vehicle side, and what gives you confidence that the tier 2 supply chain can withstand another 15% to 20% growth trajectory for next year?

What we said last quarter is we -- we saw some tightness in the market from our tier 2 suppliers, and we had to do some things to make sure we could satisfy customer requirements, which we did fully in both the second quarter and the third quarter. But we did hear from our customers, in some cases, that there were restrictions from other suppliers, and particularly other commodities, for their builds in both the second quarter and the third quarter. I think our overall perspective is we're seeing the environment loosen a little bit, as more and more capacity comes on. And everybody is getting more comfortable with the higher levels of production. Therefore, we think there is some ability to go higher, and expand higher, as long as it isn't at a precipitous rate.

So, I mean if I'm thinking about capacity coming on, we're basically talking extra shifts and man power, as opposed to a footprint that needs to be added, on the commodity side, right? There wasn't too much taken out during the downturn?

Well, in our case, we did not take out any installed capacity, so we have the ability to ramp up, provided that we can get supply from our suppliers, so largely to us, that is the case. I don't think that is the case overall in the marketplace. I do believe because of the extended downturn in the CV market over the previous 2 or 3 years that there was a significant amount of capacity that was taken out or diverted to other industries. So I do believe that some of the capacity issues that have been seen have been diversion of capacity or reduction of capacity directed to the CV business, and as a result of that, some constraints. Now, in addition to that, global volume is up. As I mentioned, in south America, we're seeing continued strong demand. And overall, volumes are up. So we have seen some tightness, particularly for things like forgings, and front steer axles are a global constraint right now on the overall heavy truck market, because there hasn't been any significant capacity there. And as you can imagine, the forgings for that are fairly expensive, and it is unlikely there will be huge added capacity without some sustained recovery that people see in the marketplace.

That's helpful. Just talking about the light vehicle side, full-sized trucks, particularly for the domestic OEMs, your impression of the demand and the quality of demand that we're seeing in the marketplace now, strictly replacement demand? What metrics are you looking for, where you think you may have to ramp to support the light commercial side for, let's say, Ford and Chrysler, the super duty platforms?

Hi, Brian. It is Mark Wallace. Overall the volumes have continued to pick up nicely. So clearly there is some replacement is going on, due to the fact that we've had such a depressed market in the last couple of years. But we don't see any potential disruptions in the near term. And along with that, our capacity base that we have here in the US is still fully intact. So we don't see any potential disruptions from our viewpoint, going forward, supporting the OEMs.

Okay. Well, I was really talking about the actual demand side, from your customer perspective, whether you think that the potential for an early 2012 pickup is there.

Brian, I guess the comment there is, when you look at the inventories that our OEs that are holding, it is very well in line with what we would expect to see continued improvement in the car production going forward. So -- and our customers have done a really nice job of managing inventory, so we would expect that we would continue moving forward with volumes into 2012.

All right. Thank you very much.

Bonita, we have time for one more question.

Thank you. Your final question is from the line of Tim Denoyer with Wolfe Trahan.

Thanks. Just real quickly on Asia, in terms of light vehicle, that business went up a little bit more than expected. Can you comment on what was driving the strength from 2Q to 3Q there?

$150 million from $100 million, roughly, of revenue?

Tim, hi, it is Mark Wallace. The main thing was the launch of the Ford T6 program between Q2 and Q3.

Okay. Thanks very much.

With that, I would like to thank everybody for joining us today. Have a good afternoon. Thank you.

And thank you for your participation in today's call. You may now disconnect.