Dana Inc (DAN) 2013 Q2 法說會逐字稿

Good morning, and welcome to Dana Holding Corporation's second-quarter 2013 webcast and conference call. My name is Brent, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session, will be recorded for replay purposes. There will be a question-and-answer period after the speakers' remarks, and we will take questions from the telephone only.

(Operator Instructions)

To ensure that everyone has an opportunity to participate in today's Q&A, we ask that callers limit themselves to one question at a time. If you would like to ask an additional question, please return to the queue. At this time, I would like to begin the presentation by turning the call over to Dana's Director of Investor Relations, Craig Barber. Please go ahead, Mr. Barber.

Thank you, Brent, and welcome to all of you joining us today. Presenting this morning will be Roger Wood, President and Chief Executive Officer, and Bill Quigley, Executive Vice President and Chief Financial Officer. Also with us is Mark Wallace, Executive Vice President and President of Light Vehicle Driveline Technologies. As always, copies this morning's release and our presentation have been posted on Dana's investor website. Today's call is being recorded, and the supporting materials are the property of Dana Holding Corporation. They may not be recorded, copied, or rebroadcast with our written consent. Today's call will also include a Q&A session. In order to allow as many questions as possible, please keep your questions brief.

Today's presentation includes some forward-looking statements about our expectation for Dana's future performance. Actual results could differ 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 identified in our filings, including our annual, quarterly, and current reports with the SEC. I will now turn the call over to Roger Wood.

Thank you, Craig, and good morning, everyone. This morning's press release highlighted our second-quarter sales, which were about $1.8 billion, continuing our sequential improvement from the fourth quarter of 2012. Net income for the quarter was $92 million, and diluted adjusted earnings per share were $0.54. We improved our adjusted EBITDA margin by 250 basis points over the first quarter of this year, with second-quarter margin coming in at a record 11.9%. This was a 40-basis point improvement over last year. We were also pleased to announce our expanded share repurchase plan of $1 billion, including the more than $100 million that we've already returned to the shareholders.

In all, a very good quarter for Dana. Not only did we execute well, but we also continued to position the business for profitable long-term growth by securing several business wins and expanding growth in emerging markets. So let's take a look at a few examples on slide 5. Dana is doing a great job of winning new and replacement business. We don't usually assign a dollar value to these wins in the middle of the year, and I'm not going to do that now, but if you look at all the new and replacement opportunities that we've bid on, Dana has earned more than 75% of that business in terms of the dollar value in the first half of the year. Most of this is business that will launch over the next several years, generally anywhere from two to four years, and involves major customers in all regions of the world.

Of significance is our Light Vehicle Driveline business unit, which alone was responsible for more than 50% of these new and replacement wins. You see some of these customers on the slide. We're earning new business in emerging markets as well. In our Off-Highway business, this quarter alone we secured driveline business in Brazil, China, and India, with construction, vocational, as well as agricultural equipment manufacturers. And our Power Technologies business is expanding its joint venture in India to manufacture heat exchangers. The agreement leverages Dana's existing technical knowledge and manufacturing capabilities with the customer relationships and physical infrastructure of the joint venture, which is currently manufacturing sealing technologies.

Turning to our Commercial Vehicle business unit on slide 6, last quarter we introduced to you our new line of lightweight Spicer Pro-40 tandem axles, which are optimized for weight-sensitive fleets with regular duty cycles. As you may have seen earlier this week, the largest privately-held flat bed carrier in the United States, TMC Transportation has specified the Spicer Pro-40 for its recent order of 1,500 Peterbilt 579 on-highway trucks. The Spicer Pro-40 family of heavy duty axles offers a dramatic weight reduction and improved power density, enabling customers to increase payload, improve fuel economy, and ultimately improve their bottom line. We're also pleased to be the standard and exclusive supplier of Spicer steer axles, drive axles and driveshafts on Navistar's new International TerraStar 4x4 medium-duty truck. We began shipping these products to Navistar earlier this month. Not only do these axle and driveshaft technologies offer best-in-class performance and efficiency, but they also offer the rugged durability that is required in this line of hard-working trucks.

Looking at new technologies, slide 7 highlights the latest addition to Dana's line of driveshaft products, our proprietary Spicer Rzeppa-style Constant-Velocity Joint for high torque applications. We're talking about two and four-wheel drive light and medium-duty pickup trucks, SUVs, as well as vans, in both established and emerging markets. It's specifically developed for use in rugged applications where extreme temperatures are often the norm, and this durable compact CV joint offers high-powered density and can handle up to 6,000 newton meters of torque. This makes it a perfect solution for today's vehicles where greater engine power and towing capacity is a must. At the same time, manufacturers of these vehicles are demanding a quieter ride, and this technology provides best-in-class NVH. It can also operate at very high joint angles, allowing greater design and packaging flexibility. Because of these high angles, this innovation can replace a heavier double cardan joint design, contributing to improved fuel efficiency and reduced emissions. Spicer Constant-Velocity joints can also be combined with Spicer Diamond Series driveshafts to deliver even more weight savings and performance.

Turning to slide 8, let's review the trends in our major end markets that we saw in the second quarter and anticipate for the remainder of the year. We continue to see strong production in North America for full-frame trucks for the full year benefiting our Light Vehicle Driveline segment. While we're not seeing a dramatic rebound in Europe, indications are that light vehicle markets are stabilizing, though production will still be significantly below last year. Light vehicle markets are softening in South America, particularly Argentina and Venezuela, as inflation and economic concerns are weighing on demand. Likewise in India, we're seeing lower demand based on the macro issues. We expect this to be a headwind to our Light Vehicle Driveline business for the rest of the year.

In the North American Commercial market, we've seen sequential improvement in production and are still expecting the second half to be stronger than the first. We don't expect to make up for the weaker-than-anticipated first quarter, so we're adjusting class 8 unit production guidance down slightly, and are now expecting 255,000 to 265,000 units. In the off-highway vehicle market, we no longer see a recovery for the construction equipment in Europe or Asia this year. As well, underground mining equipment is showing continued demand weakness. We saw sequential improvement in most of our end markets so far this year, and we still expect some improvement throughout the rest of the year, though will be somewhat muted compared to our earlier expectations. We have a proven track record of being able to navigate through market volatility and still generate results, and we're confident that our plan for the rest of the year will do just that. So let me turn it over to Bill so he can review the financials before our Q&A. Thank you. Bill?

Thanks, Roger, and good day, everyone. Slide 10 provides a summary of Dana's second-quarter 2013 financial results. Second-quarter sales totaled $1.8 billion, lower than a year ago by $136 million. Similar to the first quarter of this year, Light Vehicle Driveline planned program roll-offs and leisure products divestiture completed last year lowered sales by $84 million. Improving sales in South America were offset by lower commercial vehicle demand in North America and Europe as well as continued softness in off-highway construction and mining end markets, and an (inaudible) sourcing action by an off-highway customer a year ago further contributed to the comparison. Currency was unfavorable by about $38 million, including the ongoing impact of the Venezuela bolivar devaluation that occurred in February of this year.

Adjusted EBITDA for the quarter was $215 million, compared to $225 million in the first quarter of last year. The impact of lower sales was mostly offset by favorable cost performance and recovery actions related to the Venezuela currency devaluation. Adjusted EBITDA margin for the quarter was 11.9%, a 40-basis point improvement compared to a year ago. Net income totaled $92 million, compared to $86 million a year ago, an increase of $6 million. On a comparative basis, lower restructuring and depreciation and amortization expense in the quarter of about $22 million more than offset the impact of lower adjusted EBITDA and increased tax expense. As you know, for fully-diluted adjusted EPS purposes, we exclude amortization and restructuring expenses. Fully-diluted adjusted EPS of $0.54 in the quarter compares to $0.56 a year ago, reflecting lower adjusted net income partially offset by a lower share count reflecting execution under our share repurchase program. Capital spending for the quarter was $42 million, $5 million higher compared to a year ago. Free cash flow for the quarter was $160 million, $53 million higher compared to last year, and included $26 million of prior-period accrued interest from the payment of a long-standing note receivable from a previous divestiture received in the current quarter.

Slide 11 highlights Dana's year-to-date financial results. Through the first six months of 2013, sales totaled about $3.5 billion, lower by $424 million compared to a year ago. Light Vehicle Driveline planned program roll-offs and the leisure products divestiture accounted for $185 million of this comparison, while currency provided a further reduction of $68 million. Volume and mix, reflecting lower production demand in commercial vehicle and off-highway end markets accounted for the remainder of the comparison. Year-to-date adjusted EBITDA was $373 million, compared to $437 million a year ago, reflecting lower production volumes and currency impacts, partially offset by favorable cost performance and our recovery initiatives. Adjusted EBITDA margin was 10.7%, 40 basis points lower than last year, 20 basis points of the decline due to the Venezuela devaluation in the first quarter alone. Year-to-date free cash flow was $116 million, compared to a use of $80 million last year, which included $150 million voluntary pension contribution in the first quarter of 2012. Adjusting for this pension contribution, free cash flow was higher than 2012 by $46 million.

Slide 12 provides a comparison of our consolidated sales, the change by business segment, as well as the key drivers year-over-year for the second quarter. On a regional basis, North America sales totaled $800 million in the quarter and represented about 44% of total sales compared to 49% a year ago. Sales were lower than a year ago by about $145 million, reflecting the impact of program roll-offs, the leisure products divestiture, and lower commercial vehicle and off-highway end market demand. Europe sales totaled $517 million in the quarter, or about 28% (sic - see slide 12 "29%") of total sales, lower than last year by $33 million, mostly driven by lower construction and mining equipment demand impacting our off-highway business. South America sales totaled $271 million in the quarter, or about 15% of sales, an increase of $46 million compared to a year ago, largely reflecting recovery in commercial vehicle demand in Brazil. Asia-Pacific sales totaled $212 million, about $3 million lower than a year ago, and represented 12% of total sales, reflecting both light and commercial vehicle softness principally in India as well as lower construction and mining equipment demand as well.

The chart to the bottom left highlights the change in sales by business segment, while the chart to the right highlights the key drivers of the year-over-year sales performance. Currency lowered sales by $38 million, primarily impacting our Light Vehicle Driveline business, $21 million of which was due to the Venezuela bolivar devaluation earlier in the year. In the current quarter, recoveries related to this devaluation increased sales by $12 million. As highlighted, program roll-offs in Light Vehicle Driveline of $72 million and a divestiture of off-highway of $12 million accounted for $84 million in the year-over-year change in sales. Volume and mix accounted for $43 million, mostly driven by lower construction and mining equipment demand and a customer in-sourcing action impacting our off-highway business, while declines in North American commercial vehicle demand were more than offset by increased volume in Brazil. Europe continued to be a slight headwind compared to a year ago.

Slide 13 provides a similar comparison of adjusted EBITDA for the quarter, with the year-over-year change by business segment presented at the bottom left and the key drivers of the change presented to the right. Adjusted EBITDA for the first quarter was $215 million, compared to $225 million a year ago. Adjusted EBITDA margin in the quarter was 11.9%, a 40-basis point improvement from our 2012 results. In the second quarter, we recovered about $6 million of the Venezuela devaluation that reduced Dana's first-quarter adjusted EBITDA by $11 million. We continue to be on track to recover the majority of this impact over the remainder of the year. Volume and mix represented $16 million of the year-over-year change, principally driven by lower construction and mining equipment sales. Performance, which includes a year-to-year impact of our pricing and recovery initiatives as well as net cost performance, improved adjusted EBITDA by $9 million compared to a year ago.

In the next two slides, we'll review the sales and EBITDA performance of each of our business segments. This slide highlights sales and segment EBITDA performance for Light Vehicle Driveline and Commercial Vehicle driveline. Light Vehicle Driveline sales were lower by $62 million, or about 8% compared to a year ago, of which $72 million was attributable to program roll-offs and a net $9 million to the ongoing effects of the Venezuela devaluation. Segment EBITDA of $71 million was lower than a year ago by about $5 million. As mentioned earlier, we recovered about $6 million of the first quarter of Venezuela devaluation in the current quarter. Similar to the first quarter of this year, taking into account lower margin program roll-offs and the effects of currency, the business was mostly in line with last year. Volume and performance was impacted by both lower production volume and inflationary pressures in South America, principally around continued economic volatility in Venezuela and Argentina. Segment EBITDA for the quarter was 10.5% compared to 10.3% a year ago. Light Vehicle driveline margins improved 390 basis points in the current quarter when compared to the first quarter of this year.

Commercial Vehicle Driveline sales of $498 million were lower by $15 million, or about 3%, compared to a year ago. Currency lowered sales by $7 million in the current quarter, while lower demand in North America and Europe of about $47 million was largely offset by a recovery in Brazil. Segment EBITDA was $61 million in the quarter, $4 million higher than last year, driven by ongoing cost improvement actions within the business. Segment EBITDA margin was 12.2% for the quarter, 110 basis points better than last year and 320 basis points better than the first quarter of this year.

Turning to slide 15. Off-Highway Driveline second-quarter sales of $364 million were lower than last year by $62 million. Lower end market demand in construction and mining equipment was a principal driver again in this quarter, with the remaining amount related to leisure products divestiture and the planned impact of an in-sourcing action by one customer that we highlighted earlier this year. Off-highway posted segment EBITDA of $46 million in the quarter, or 12.6% of sales, 50 basis points lower than a year ago, reflecting the impact of lower volumes, partially offset by continued execution of cost reduction actions. Compared to the first quarter of this year, Off-Highway sales increased by about $20 million, and segment EBITDA margin increased by 60 basis points, reflecting favorable earnings contribution and increased volumes.

Power Technologies second-quarter sales of $265 million were higher than a year ago by $3 million, driven by increased volume of $7 million, partially offset by currency. Segment EBITDA of $39 million was $2 million higher than a year ago, reflecting the impact of higher volumes and performance. Segment EBITDA was 14.7% in the current quarter, a 60-basis point improvement compared to a year ago. And compared to the first quarter of 2013, Power Technologies improved segment EBITDA margins by 60 basis points, reflecting favorable earnings contribution on those increased volumes.

Similar to the year-over-year comparisons just discussed, slide 16 presents the key drivers of Dana's sales and adjusted EBITDA performance from the first quarter to the second quarter of this year. Sequentially, sales increased $124 million, primarily driven by increased volume and mix of $129 million and pricing and recoveries of $11 million. Recovery actions related to the first quarter of Venezuela devaluation increased sales by $5 million, net of the ongoing impact of the currency devaluation. Adjusted EBITDA improved by $57 million, with the key drivers being favorable contribution from higher sales volume. Improving recovery and cost performance actions contributed as well. Adjusted EBITDA margins improved 250 basis points on a sequential basis. And as highlighted here, segment EBITDA margins sequentially improved across each of our business segments in the second quarter.

Slide 17 highlights free cash flow for the quarter. Free cash flow was $160 million in the current quarter, compared to $107 million in the second quarter of last year, an improvement of $53 million. Working capital generated $22 million in the quarter, compared to a use of $55 million a year ago. Capital spending was $42 million, $5 million higher than a year ago, as we continue to invest in the business to drive efficiencies and support new programs. Net cash interest provided a net in-flow of $24 million in the quarter, due to the partial payment received on an outstanding note receivable from a prior divestiture of in total $61 million, of which $26 million represented prior-period accrued interest. Cash taxes were $32 million, $25 million higher than a year ago, reflecting the timing of our estimated tax payments and the non-recurrence of refunds in the prior year of about $14 million. Restructuring cash outflows totaled $12 million, $4 million higher than last year, and in line with our full year guidance. Pension contributions for the quarter were $4 million, compared with $16 million in the second quarter of last year. Year-to-date, free cash flow was positive $116 million. As highlighted here, for comparative purposes, we have adjusted last year's free cash flow results for the $150 million voluntary pension contribution made in the first quarter of 2012. Adjusting for this contribution, Dana's free cash flow performance was still $46 million higher compared to last year.

Slide 18 highlights our cash, debt, and liquidity positions at the end of June. Cash and marketable securities totaled $1.127 billion, while outstanding debt was $898 million, providing a net cash position of $229 million. Debt balances did decrease from the first quarter of this year reflecting lower local borrowings in South America. Total liquidity stood at nearly $1.5 billion, including $394 million of availability under our US and European financing facilities. Year-to-date, we have returned capital to shareholders via dividends and execution of our share repurchase program of $116 million. In the current quarter, we repurchased about 3.5 million of outstanding common shares at a cost of about $62 million, compared to the repurchase of about 1.4 million shares and $24 million utilized in the first quarter of 2013. In total, we repurchased over 6 million shares and returned over $100 million to our shareholders since we started the program late last year.

We continue to evaluate our capital structure and allocation strategy, and slide 19 provides a current update on that front. During the second quarter, we refinanced our existing $500 million US credit facility, extending the maturity through June, 2018, as well as lowering commitment fees and drawn borrowing costs. In addition to the $100 million returned to shareholders through our existing share repurchase program, as Roger mentioned, on June 28, the Company announced the expansion of the program by $900 million, to a total of $1 billion to be executed over the next two years. In addition to our financial performance, these actions reflect our focus on increasing shareholder value by a continued drive to improve the efficiencies of our business as well as the productivity of our cash flows and financial position.

Slide 20 summarizes our full-year financial guidance. We have refined our full year targets for 2013 to the low end of our previous adjusted EBITDA guidance while maintaining our adjusted EBITDA margin target, reflecting the sales impact of our current end market production outlook for the rest of the year. We now expect sales for 2013 to be about $7 billion, about $100 million lower than our previous estimate, as we expect continued softness in certain end markets for the rest of the year, most notably pressures in India and South America impacting our Light Vehicle Driveline business and continued softness in construction and mining equipment demand impacting off-highway. We expect adjusted EBITDA to be about $800 million, at the lower end of our previous guidance, and adjusted EBITDA margin to be about 11.4%. We expect diluted adjusted EPS to be about $1.90 for the year, about the mid point of our previous guidance. This, of course, excludes the impact of any future exercise of our share repurchase program. Capital spending is unchanged and expected to be in the range of $180 million to $200 million. And we have increased our free cash flow target by $25 million to a range of $265 million to $285 million, reflecting the receipt of interest in the current quarter that we discussed earlier in the presentation.

Slide 19 highlights the progression and key drivers of our full-year sales guidance and our full-year adjusted EBITDA margin target of 11.4% based on our first-half actual performance and second-half expectations. As we discussed in our first-quarter call, we did expect an improvement in our sales over the remainder of 2013, and the volume environment did sequentially improve by about $129 million in the second quarter. We do expect further volume to increase sales by about $60 million in the second half of this year, with the majority benefiting our Commercial Vehicle and Light Vehicle businesses. We have lowered our expectation overall for Light Vehicle production over continued market pressures in South America and India. While there is still a degree of uncertainty in the North American class 8 market, we believe the global production forecast is sufficient to maintain our sales target for Commercial Vehicle Driveline. On the Off-Highway front, we have lowered our full year sales target by about $50 million, reflecting our expectation of continued weak construction and mining equipment demand for the remainder of the year. On the adjusted EBITDA margin front, currency will be a slight headwind, but we expect to convert on improved incremental volume adding about 40 basis points to our first-half margins. We also expect ongoing cost recoveries, including those related to the Venezuelan devaluation, to contribute a 30-basis point improvement in margin.

Finally, we continue to focus on all areas of cost performance, including supply chain initiatives and conversion and overhead cost reductions throughout all of our businesses and expect these actions to generate a further 75-basis point improvement over the first half results. While adjustments to our full-year sales target reflects continued volatility in a number of regions and certain end markets, each of our businesses have a solid foundation and plan in place to maintain our margin objectives for 2013. This concludes our presentation, and we will now turn the call back to the operator for questions. Thank you.

At this time, we would like to begin the Q&A session.

(Operator Instructions)

Your first question comes from the line of Joseph Spak with RBC Capital Markets.

Hi, good morning. Thanks for taking the question. Just wanted to get a little more color on the strong performance on the Commercial Vehicles and the strong EBITDA up year-over-year with down revenues, and I was wondering -- I also noticed there was strong DDAC revenues for this quarter. Did that help out with the margins at all, because isn't that factored into the EBITDA but not the revenue?

No, Joe, it's Bill Quigley. With respect to the performance in DDAC, you're exactly right, we did see a nice uptick in volume and a corresponding increase in equity income. But DDAC's results are not reflected in our Commercial Vehicle Driveline business, as presented on page 14. So to your first question, with respect to the improving margin there, to your point, our second-quarter 2013 segment EBITDA margin was 12.2% compared to a year ago at 11.1%, a significant driver being cost performance there. Commercial Vehicle continues to move the business forward with respect to material efficiencies, conversion cost efficiencies. They had a very productive quarter on that front, so we believe they've done a very good job in light of, quite frankly, a somewhat weak commercial vehicle market in North America and certainly in Europe, but they were buoyed by a Brazil uptick. But overall, that group continues, like all the businesses do, to continue on cost reduction initiatives as well as investment initiatives throughout each of the businesses. So they're really on a good track there.

Okay.

Maybe Joe if I could just -- this is Roger -- give you a little bit of complement to what Bill is saying. Across all of our businesses, our operations folks have done a fantastic job of making sure that they're tenaciously focusing on performance in light of the volatile markets. In particular, in the Commercial market, the one that you had referenced in your question, the folks there have really been making sure that as we're watching this market unfold through the rest of the year, because as you know, it started low and we expect it to finish higher throughout the year, and still expect that, they're always making sure that as a just in case, that they're ready for any eventuality that may come down, and they're doing a fantastic job at managing that, and they had great second quarter result of it.

Absolutely. And maybe just two quick ones on Light Vehicle Driveline. One, on the recovery on the Venezuelan devaluation, it looks like some progress was made. Do you expect that to continue to get better throughout the year? And also, just help me understand how performance was a positive to sales but a negative to earnings in that Light Vehicle Driveline segment.

Sure, Joe, I'll make a couple comments, and Mark Wallace, who joined us here today as well, might have some follow-on. On the devaluation front, you'll note, and I think it's on page 14, where we highlight the various drivers for Light Vehicle Driveline, you'll note from a sales perspective, actually down in sales by $9 million but an EBITDA improvement of $6 million. And how I highlight it on the consolidated slides was, in effect, we had currency impacts negative of about $21 million, although the Light Vehicle group quickly implemented recovery actions of about $12 million in the quarter, which netted to that minus $9 million. So there's ongoing FX impacts from the devaluation, yet from a recovery perspective, they did implement about $12 million in recoveries. That $12 million in recoveries flow into the segment EBITDA at about $6 million. So you've got two things going on here. One is obviously to recover the devaluation of the first quarter. A second piece of that was the ongoing impacts of the devaluation into the second quarter that they've been able to offset. So from that front, our expectations are this was an $11-million expense in the first quarter, of which $6 million has been recovered through the second quarter. We continue to work on the Commercial front for the remaining recovery over the rest of the year. Some of that may spill into 2014 based on production. But again, the Light Vehicle business has been very focused on that recovery.

With respect to performance, it's a little bit of the same impact, given where light vehicle operates around the world. And if you think about Venezuela and Argentina, what you see here on that performance front are a actions taken by the Light Vehicle group from a pricing perspective and a recovery perspective of about $16 million. Of that amount, on a year-over-year basis, that basically is just keeping neutral the EBITDA given the inflationary pressures in Venezuela and Argentina. So of that $16 million, effectively, the majority of that was just to stay neutral on a year-over-year basis. The remaining $5 million, certainly continued volatility in South America with respect to importations into Argentina, premium freight, so on and so forth. So there were some operational issues, if you will, in the second quarter in Light Vehicle, but to Mark's point, I don't believe that will he recur into the future.

It's Mark Wallace. On the performance side on the $5 million, definitely with the disruptions in Argentina at the borders and also some disruptions in Venezuela, we're mitigating those costs and don't expect any significant impact full year.

Thanks a lot, guys.

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

Yes. Good afternoon. Just want to look, so your second half forecast, if we back out the recoveries, it's about 11.7%. That's pretty close to that 12% target you've talked about. I know you don't want to get into 2014 guides yet, but where can we expect that 11.7% to 12% to go, and how much -- let's say there were no volume improvements next year, how much is in terms of the backlog in terms of higher margin products could we see improvement, and how does that kind of pace out over time?

Let me just take a crack at that in the beginning. As I mentioned before, Brian, our operating groups have done a fantastic job, not just in the second quarter but all through the last year and-a-half or two years in terms of really running the business to what the sales volume is and at the same time improving the base of the business to make our foundation more robust. Where we're at in the second quarter and throughout the remainder of the year, to Bill's charts, is we feel confident that given where we believe the sales are going to fall, we'll be able to perform at that level. But we've always maintained that there is a little piece of our improvement that does represent sales. We need the sales to cooperate with us, and as we go into 2014, we're not projecting or providing any guidance, as you say, for 2014, but we feel of confident that the improvements that we've made in the base of the business, combined with a little bit of help from the sales, will allow us to maintain the levels that we're at. So it's a factor for sure, but our guys continue to make the improvements and put the new products in the marketplace as well as make gains on the material side of the business. So we're happy with the performance, and we're confident that we'll be able to continue it.

And when you put these new products out there, like the ones you flag at the beginning of every deck, do they hit there above 12% -- above average, above 12% margin right away, or does it take a few quarters for them to hit that kind of run rate?

Yes, great question. And it depends on, really, the business segment because the different products behave in a different way. But the take rate is critically important to when those margins hit. That said, all our products that we're putting into the marketplace are meeting or exceeding the financial targets that put out there. And a quarter or two, or even three in some of the business segments, is not an unrealistic point where it would make a material impact on the bottom line. The programs that we mentioned in the beginning of today's presentation and the wins that we've talked about are really over the next two to three years in terms of getting into the marketplace from a production launch standpoint. But as we ramp the business up in terms of the new products that we are putting out there, we would expect the cadence to increase so that -- right now we're in the mode of watching the these products come in, but the cadence will increase as we put more and more products out there and we get a take rate on each one of the products that get higher and higher. So I think you're right with your assumption there, Brian.

Okay. Thanks.

Operator. Your next question comes from the line of Emmanuel Rosner with CLSA.

Good morning, everybody. First question is on your preferred convertible. If I recall off memory, when the stock reaches a level of something a bit north of $23 for 20 days, I think you get to force a conversion of it. Now, the stock is getting impressively close to that right now, and so I was curious what your intentions are there. Would you -- if that happened, would you force conversion, and then does that save you cash on an ongoing basis, and what would you do with it?

Yes, Emmanuel, it's Bill. To your point, there is a mandatory conversion price. It's $22.24 for 20 consecutive days. That's both for the preferred A and preferred B outstanding tranches of those -- of the preferred shares. With respect to conversion and/or obviously moving up through that, that certainly would be an opportunity from a conversion perspective. That stock would perform well. The Company is performing well. But if you think about it, that would -- those shares would then become common stock equivalents of about 65 million shares. So as we contemplated the discussions and deliberations was the Board with respect to our share repurchase program, we certainly included and looked at it on a fully-diluted basis. What were the common stock equivalents in our capital structure from a perspective of sizing, if you will, of our share repurchase, and then the corresponding use of cash. So not to put any fine point of where or not where we may be, we looked at the capital structure holistically from shares outstanding, and assumed on the A's and B's, that those would be on a fully-diluted basis, so they would be comprehended within our share repurchase program.

Oh, okay. In the sense of a part of the same budget. But just thinking, what advantage does it bring you? Is it mostly the -- would it be mostly the absence of a preferred dividend, basically, which is 4% as opposed to the 1% yield that you pay on the common? Would that be the main impact on your day-to-day operation?

Yes, that certainly is an impact, obviously. That 4% guaranteed yield, if you will, or dividend is about a annual $30 million use of cash. Obviously, our current common dividend yields 1% or so, about $30 million in cash as well. So that certainly is part of the calculus with respect to looking at the preferred shares specifically, but there certainly are other rights attendant to those tranches that we certainly pay attention to as well.

Okay. And then just one question on the business performance. So this quarter, you had a great contribution to the EBITDA from cost performance, so there was a nice positive on year-over-year basis. The first quarter, not that much. What do you view as the opportunity or the goal for you in the second half to -- in terms of the opportunity for additional improvement in performance?

We had talked, actually, a bit about this in the first quarter as well. And I think you're starting to see some of that benefit in the second quarter. Certainly, the recovery of the Venezuela devaluation was a benefit in the second quarter compared to the first quarter. And we expect -- we highlighted on, I think it was slide 21, our adjusted EBITDA margin progression first half to second half. The recovery of the remainder piece of that will certainly impact the second half of the year. I think the other piece, though, you'll note here, is we had cost performance of about 65 basis point improvement. Where we've seen some benefit in the second quarter, and our expectations is that benefit will continue to progress forward, is on the material front as well as our continued efficiencies around the businesses as highlighted even in their second quarter performance, and obviously, with respect to Light Vehicle Driveline, as they continue to mitigate some of the issues they've had certainly around South America and the production therein. So I think if we look forward, I would take that 65-basis point improvement, and that's about $30 million or so of cost saves, and I think you could probably highlight that 50% or so between material spend savings, material reduction saves, and the other 50% around continued conversion cost improvements in the businesses, and quite frankly including SG&A structure reductions. So again, the second quarter, we appreciate your comments. I think it certainly was a good quarter, and certainly formalizes more of the ability to move forward on the cost performance front in the second half of the year.

Great. Thank you.

Your next question comes from the line of John Lovallo with Bank of America.

Thanks for taking the call. First question would be on the Light Vehicle Driveline business. How much more business, if any, rolls off in the second half of this year and into 2014? And then if we think about some of the new wins that you highlighted at the beginning of the call, would you anticipate that that would be a pretty significant offset to those roll-offs?

Yes, John, it's Bill. I think with respect to the planned program roll-offs impacting Light Vehicle Driveline, recall in the first quarter we had $90 million on a year-over-year basis was the comparator. In the second quarter, we've highlighted here, obviously, $72 million. And we said in total it would be about $190 million. So we've got a bit to go into the third quarter, and I think on a year-over-year basis into the fourth quarter, that should be a pretty clean comparison. So we don't expect an impact moving into 2014 with respect to these particular planned program roll-offs.

I think the second part of your question, there, John, was -- the beginning of our presentation had talked about the new business wins offset that, and the answer to that is, not in the current calendar year. Those business wins that were referenced are great business wins, but they are business wins in a normal production cycle that would start over the next two to three years.

That's helpful. Final question would be on the Commercial Vehicle side in North America, if volumes do begin to recover, would you anticipate needing to hire additional workers or possibly put any brick and mortar in the ground. How are you from a capacity standpoint?

Good question. Maybe direct labor workers that would be required in spots within our organization, but certainly no brick and mortar for it.

Great. Thanks very much, guys.

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

Good morning, everyone. Good quarter.

Thank you.

Two questions. First just on the guidance, and then second a more longer-term question. Just on the guidance, I notice you took down your North American industry assumptions for Commercial Vehicle, but the full-year revenue guidance for the CV business is unchanged. Is that mainly because you're expecting Brazil to offset the weakness in North America?

We do expect -- Pat, it's Bill. We do expect some improved demand in Brazil, and again, we're doing approximates. The Commercial Vehicle business, approximately, obviously, we're still very focused on the class 8 market. We took our production outlook down from 260,000 to 270,000, to 255,000 to 265,000 in the current guidance, and obviously, within that range, we'd feel pretty comfortable with respect to that full-year sales outlook for Commercial Vehicle.

And a little bit longer term, a big part of the margin improvement story has been the pricing improvements you've been able to achieve pretty much across the business. When do we get to the point that you'll start having to deal with the typical normal price negatives that most of your competitors are dealing with on an annual basis? Is there still more pricing positives in '14, or do we start to see pricing be a drag on your top line?

Yes, good question, Pat. From our perspective, we haven't stopped dealing with the pricing negatives, even in the past when we were improving the pricing. And what I mean by that is that the pressures are always there for reduction in cost throughout the value chain. The difference is how we handle that as an organization to be able to provide that to our customers. So we work with our customers in terms of cost reduction to actually take cost out of the value chain so it doesn't negatively impact our margins and be able to provide our customers with increased value. Increased value can be decreased price or increased performance of the products that we put into the marketplace that enable them to achieve some value for their customers. So it's a whole -- it's a mixed bag of things, but I would not portray out there in the future that just because we've attained a level of achievement in the organization, that future price reductions are going to negatively impact the Company because that's not what our plans say, and I would not expect our execution to be different than what our plans have.

If I could just follow up on that. You have done a good job on the recovering the cost to offset pricing, but on a go-forward basis, do you think the top-line impact from pricing, not margin, but the top line, do you think that would be basically offset?

No, the top line -- we're still -- there's programs that we have a percent here, a percent there, or something of that nature, and that's very normal across all the platforms in our business in all of the segments. But the growth that we have in our plans and the improvements that we have in our plans, I wouldn't expect the top line to be materially affected by that one component of pricing actions negatively. Won't be impacted by pricing actions positively like it was in the past either because pretty much that initiative is behind us and we've done that. We expect our performance to continue to improve as an organization, but there's always going to be minor fluctuations on the top line due to the pricing up and down.

That's very helpful. Thank you.

Your next question comes from the line of Brian Sponheimer with Gabelli.

Hi. Good morning. Nice execution. Question on the balance sheet. We're looking at a rising rate environment over the next couple of years. How are you thinking about your pension in regard to this going forward?

Yes, Brian, this is Bill Quigley. Right now, obviously, to your point historic lows from an interest rate perspective, certainly impacting our pension benefit obligation and certainly impacts in a current environment the funded position. Right now, we've -- even through last year, we put an incremental contribution in the US plans of $150 million. We continued some funding last year into the US plans, and this year we've put about $10 million in the US plans through the second quarter. Our funded rate is about -- or funded position right now is about 86%. So we're closely monitoring those. The US plans, quite frankly, they're frozen plans, and to your point, in a very historically low-interest-rate environment, somewhat being penalized with respect to the funded position. So over time, we're looking at trying to bolster that funding or funded position, but it's going to be over time, Brian and we're certainly cognizant of the impacts of interest rate on that funded position. I think a 25-basis point move in interest rates impacts the funded position by like $50 million. So we're monitoring that. I wouldn't expect to see significant, voluntary, one-time contributions in those plans in the near term. But certainly, we keep an eye to it with respect to both interest rate as well as what's happening on the investment front with our immunization portfolio that we have in place.

Right. Okay. Thank you. Just along those lines as far as deployment of cash, with the $1 billion of repo translating to roughly $125 million a quarter over the next eight quarters, should we expect some acceleration as far as repurchase activity?

Yes, I think you should expect that over the coming quarters.

Okay. Last question. Just with your construction and mining customers, we listened to CAT yesterday talk about still there being some slack within the mining market. What's your sense as far as your customer base is concerned about you potentially still getting double hit with just some inventory that needs to work through the system, or do you think that you're at the point now where your own demand is that of the sales demand of the ultimate end customer?

Yes, I think if I understand your question correctly, Brian, I think from our perception, it's the end customer demand at this point that is soft, and we don't see -- it's very soft, and so we don't see a material uptick in that for at least the foreseeable future, the rest of this year, at least. So I don't think it's an inventory issue, per se. It's really a -- we believe it's an ultimate demand issue.

All right. Thank you very much.

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

Thanks. Good afternoon, everyone. If I can just ask on the buyback, was there anything particularly you guys saw with either future business conditions or Dana's own position that gave you the confidence to raise the buyback that much, or did you just think it was the right time to do that?

Well, from my perspective -- let me start that Ravi, and then maybe Bill can fill it in. But from our perspective, we've been talking for the last two years about our tenacious focus, if you will, on shareholder value creation and returning that value to the shareholders, but protecting our ability to do the M&A that we need to do and to run the Company sufficiently and be comfortable with that. We feel very comfortable with the improvements that we've made in the base of the business, and we feel excited about the opportunities that we have in the future to the point where we felt very comfortable with the number that we put out there in doing this at this point in time. So it wasn't really a change from what we've said in the past as much as it was a solidification of the confidence that we have in this business going forward and being comfortable with the number that we put out there. Bill?

Perfectly summarized.

Okay. Thank you.

Great. And just a quick follow-up. Are you seeing any changes in the competitive activity out there, both in terms of other suppliers or your own customers potentially in-sourcing in both -- in basically all your segments, Light Weight Driveline, Commercial Driveline, and Off-Highway?

No, as we go around the segments, as a blanket statement to that question, we don't really. There's always evaluations, right, all of our customers, as they should do to run their business on what is their optimal solution. But we feel very comfortable with what is happening there in the marketplace, especially with the regulatory framework that's coming into being and our focus on fuel economy and emissions technologies that are going to help our customers and their end customers run their businesses better, especially in the Commercial market, to where we feel very good about the landscape as we look forward. We believe our competitors are trying to also supply products that fit into that bill from a technology standpoint, but we feel great about what we've been doing in terms of offering our customers, and the interest level that they're displaying to us in taking those products. So I think that's the best way I can answer it across all the segments.

Understood. Thank you.

Your next question comes from the line of Colin Langan with UBS.

Great. Thanks for taking my questions. Can you just clarify the comments you were making around the share repurchase and the preferreds? You said the -- is it possible to settle the preferreds with cash instead of stock? Because that was one of the considerations of your -- the size of the buyback? I want sure what you were -- linking those two together.

Colin, I think the sizing was -- as we looked at market caps, enterprise value, so on, so forth, the sizing was always looked at and the accretion opportunity, quite frankly, from an earnings-per-share perspective given where we think the stock is and our high aspirations for the Company overall. That's why we looked at it from a fully- diluted basis or an as-converted basis. Your question is -- there are other alternatives with respect to, in particular, the preferred tranche. It does not have to be a mandatory conversion. You can obviously -- there could be a cash type of position. There could be a cash-equity combination. There are different scenarios or different structures, certainly. We could probably all theorize what those could be. My comments were around really the question of the capital structure from a holistic perspective, and when I say sizing of the share repurchase, we just certainly took into account our shares outstanding both, preferred and common, as we had deliberations and discussions with both the Senior Management and the Board.

Okay. And any thoughts on M&A? Obviously, now you've committed a lot of cash toward repurchases. Do you still have any active targets on that front, or any update there?

Yes, absolutely, Collin. Nothing has changed in terms of our M&A pursuit, our M&A aspirations, our discussions. We framed the share repurchase in light of making sure that we were able to continue on the M&A front, no different than we had done in the past, and continue with our organic investments as well. So nothing on the organic investments, nothing on the inorganic investments are changing at all because of the share repurchase.

Okay. And then looking at the -- you had very, very strong Commercial Vehicle margins. Was there any benefit from geographic mix in the quarter? Brazil was obviously very strong, India weak. Did that actually help the overall margins? As that switches out, is that going to be a headwind?

Collin, it's Bill. On a Commercial Vehicle front, obviously, North America very soft, vis-a-vis Brazil being up. And given the content, if you will, in Brazil with our steer axle business in our arrangement SIFCO, it may have been actually a little bit of a headwind from a margin perspective given North America versus South America. So nothing really unusual with respect to, I would say, the volume mix there, but on the cost performance perspective, this is just, I would say, just day in and day out cost execution that's going on across all the plants around the world within the Commercial Vehicle business. Nothing of really note with respect to nonrecurring items or anything like that. It's just day in and day out focus on that business that they've been executing against, quite frankly, in somewhat of a volatile market, one region up, one region down. They've been flowing through material savings, conversion cost savings, operating expense efficiencies, so on and so forth.

Okay. That's very helpful. And just one last question. What is the impact from commodities? Obviously, they seem to be trending favorably overall. Has that been a help to results?

The commodity environment's been very tame, to your point, and in fact, overall, probably on a southward trend. We do see some elevated costs still, though, on SBQ for example, but again, it's not I would say a call-out here in our performance.

Okay. Great. Thank you very much.

Your next question comes from the line of Ryan Brinkman with JPMorgan.

Thanks for taking my call. Could you just elaborate maybe a little bit on the 65 basis point of expected increase in 2H margins relative to 1H owing to cost performance that you call out? What are the major drivers there, and do they represent more actions, I'm curious, that have already taken place in the first half, so it's more just about the run rate difference with the passage of time, or are there additional actions that you need to execute upon to get those extra basis points? And if so, what are those actions?

Ryan, this is Bill. On that -- what was it, slide 21? Yes, slide 21, it's 65-basis point improvement from a cost performance. I think you can look at that, about 50% of that is going to come from largely around material initiatives that we have. When I say material, raw material initiatives that we have within all of the business units. And the remaining 50% is around just continued manufacturing efficiencies, conversion cost efficiencies, as well as other cost structure initiatives. Part of that is obviously represented in the second quarter. So not necessarily in the first quarter. That was one of the questions of one of the previous people on the phone. So there will be some flow-through, but we still have some ahead of us, so we certainly still have some actions to take with respect to those two tranches of cost performance, material and then all other cost, and that will obviously benefit as well as we move into 2014. So some started in behind us, reflected in our second quarter, with the flow-through on that into third and fourth, and certainly some ahead of us in 3 and 4 as well.

Okay. That's really helpful. Just last question, if I just divide the impact, the $16-million impact to EBITDA on slide 13 from the year-over-year swing in volume/mix by the $43 million impact to revenue from the same on slide 12, it would suggest a detrimental margin of north of 40%, which seems high. Can you just remind us of what your typical operating leverage is on volumes? Which I think it's more like 20% to 30%, so that would imply there's a mix headwind. And if so, what are those changes to mix.

Yes, I think if you think about -- I'll do it broadly. We can follow up with you. Is on the detrimental, and what you're seeing is, I think it's reflected, actually, in our Off-Highway business. So if you take a look at the detrimentals in the Off-Highway business on those lower sales, they certainly carry a high contribution margin. I think the detrimental is like 34% in the current quarter based on a sales decline. We certainly enjoy very fine operating margins on our construction and underground mining business, and that businesses has certainly been under pretty significant pressure year-over-year, and even sequentially now. So I think you are seeing, Ryan, a bit of a volume mix move here, and because of that, real significant volume on a year-over-year basis impacting Off-Highway. And you can compare it to Light Vehicle, right? If you go over to Light Vehicle and the program roll-offs, they're running at like 5.5% margin.

Okay. That's very helpful. Thanks for all the color.

Your final question comes from the line of Brett Hoselton with KeyBanc.

Good afternoon, gentlemen. Wanted to ask you about the longer-term targets that you set forth. And to begin with, in your Analyst Day, you talked about revenue growth, a 10% CAGR from 11 to 16, and obviously, part of that's volume dependent. But my question is, Roger, as you talked about some of your new business wins and so forth, how do you feel about the pace of your new business wins as it relates to achieving your revenue growth targets longer term? Is it coming in a little bit better than expected, little bit worse than expected, in line?

No, I think from -- Brett, great question. It's coming in about in line, but from this perspective, from the perspective of the normal market growth rate. When we talked about that a few years ago, of the 10%, we were looking at a market growth rate of 4% to 5%, and I think that's been tempered a little bit. So from that perspective, it's down as we look out through the plan. But in order to grow above the market, or us growing above the market with the new products that we're putting out there, is consistent with our expectations, and the new business that we're winning is somewhat consistent with that. So that will come in, as I mentioned earlier in the call, over the next two to three to four years, so the wins that we're piling in now are cadencing in then. But I think overall, the only thing it may have changed is that base market rate, but not our thesis that we can grow at twice that base.

And then secondly, as you think about your margin objectives as you think about two, three, four years out, whatever time frame you'd like to put on it, what kind of a margin business do you anticipate this might be? Is it a 12% margin business, or do you that think you can start to push it beyond that? I know you've got a number of -- obviously, volume potentially help you out, but you've got a number of other longer-term initiatives that I think you're working on as well.

Yes. So we haven't put anything out there other than that 12% that's been out there since 2010 for this year, 2013. But as we've said, we haven't looked at that as an ultimate goal. We've looked at that as a stepping stone into the product technology strategy that we have in place for all of our business units. So we certainly expect the margin, as we get out there with the new business coming online, out in that two or three or four-year timeframe as being higher than the 12% that we have out there right now and in a fairly substantial way.

Thank you very much, gentlemen.

Okay. Very good. Well, I'd like to just take a second and thank everyone for joining the call today, and we appreciate your time. We had a great quarter, and I'd like to congratulate the Team here at Dana for the work that they've done, and we're confident that we've got a great future ahead of us. Thanks very much.

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