Dana Inc (DAN) 2013 Q3 法說會逐字稿

Good morning and welcome to Dana Holding Corporation's third quarter 2013 webcast and conference call. My name is Jennifer and I will be your conference facilitator. Please be advised that our meeting today, both the speaker's remarks and Q&A session will be recorded for replay purposes. There will be a question-and-answer period after the speaker's 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, Jennifer, and thanks to all of you for 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 this morning is Mark Wallace, Executive Vice President and President of our Light Vehicle Driveline Technologies.

As always, copies of this morning's earnings 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 without 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 expectations for Dana's future performance. Actual results could differ from those suggested by our comments here.

Additional information about the factors that could affect our future results are summarized in our Safe Harbor statement. These risk factors are also detailed 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.

We are pleased to report another quarter of strong operating performance for Dana and to spend some time with you this morning to help you understand how we see the rest of the year unfolding in our three end markets.

For the third quarter of 2013 we recorded sales of $1.7 billion, while net income for the quarter was $68 million. And diluted adjusted earnings per share were $0.47. We improved our adjusted EBITDA margin to 11.9%, an improvement of 90 basis points over the third quarter of last year. And this is the second time this year that we've posted margins near 12% in this low volume market.

We continue to execute on our share repurchase program in the third quarter redeeming our Series A preferred shares and launching an accelerated share repurchase program. In total we have repurchased more than 34 million shares and returned about $780 million to shareholders since we began this program about a year ago, executing on our tenacious commitment of shareholder value creation in the Company. In 2013, our end markets have not produced as expected, which means we will adjust our expectations for the year and we remain cautious on volume for next year.

A few of our end markets around the world continue to be challenged, requiring us to flex our operations as we navigate them and simultaneously secure new business that will drive our future growth. So turning to slide 5, we will highlight a few of these opportunities.

We've continued to focus on market-driven technologies to secure new business, much of it launching in 2015 and beyond. One example of this is our thermoplastic cylinder head cover assembly, which a Japanese automaker has sourced for its entire V-6 program globally. This lightweight solution improves fuel economy while allowing for better integration of a proprietary air oil separation unit reducing oil consumption and emissions.

You may have seen a recent announcement that we are expanding our business with Mahindra & Mahindra by supplying them efficient, lightweight, Spicer AdvanTEK axles for their new platform of sport-utility vehicles and small trucks launching in mid-2015. These axles are engineered to deliver enhanced efficiency and fuel economy, as well as improve power density and best in class NVH. That's noise, vibration and harshness characteristics.

Turning to slide 6, you may recall that three years ago Nissan also chose Spicer Life Series driveshafts for its CUV and SUV platform to be built in Japan. We are launching production of these driveshafts this month out of our operations in Thailand. But this quarter Nissan has also awarded Dana a contract to supply Spicer Life Series driveshafts to their vehicle manufacturing operations in Korea and Russia. Considered the industry standard for low emission, high-efficiency light vehicles, this driveshaft is precision balanced for reduced NVH.

Finally, we don't talk much about our specialty vehicle market, but this diverse group of customers manufacture buses, recreational vehicles, fire trucks, cement mixers, yard tractors, refuse haulers, military tactical wheeled vehicles and similar equipment. This quarter alone we were awarded business for six new platforms of axles for fire trucks, RVs, and refuse vehicles. In all cases we displaced the incumbent supplier.

Dana's primary advantage is it's very robust, yet lighter weight axle portfolio. Key features include a tighter turning radius for steer axles, as well as drive axles that allow for the mounting of auxiliary equipment that improves performance, reduces maintenance and extends the life of the vehicle. Our customers also tell us that our best in market lead times provide them the manufacturing flexibility that they require for their end use customers.

On slide 7, you will see that Dana continues to be recognized for the technologies that we're bringing to the market. Earlier this month Dana's Spicer AdvanTEK 40 tandem axle was selected as a finalist for the 2014 Automotive News PACE Awards. That marks the third consecutive year that Dana has had a finalist in the automotive industry's premiere award program. This new 40,000-pound tandem axle for a variety of class eight applications features a market-leading design that increases fuel economy, improves reliability, it reduces the vehicle weight and it decreases total ownership costs.

The theme that you are hearing through each of these new product introductions is that we are engineering our products to meet the market drivers that our customers value, validated by the new business awards that we are receiving and the industry recognition. Our engineering investments are getting results, and as new programs begin to launch, we will grow the business despite the end market volatility that we've been experiencing over the last few years.

So turning to slide 8, let's talk about the key trends in our major end markets that we saw in the most recent quarter and we expect to see for the rest of the year. As has been the case all year, we continued to see strong production in North America for full frame trucks in the third quarter, a continuation of the strength that we saw in 2012. This drives mainly our Light Vehicle Driveline segment.

We do expect a normal seasonal slowdown in the fourth quarter, though. Auto production in Europe continues to show signs of improvement, though we don't expect any significant ramp-up in the fourth quarter.

The month-long labor disruption that impacted several of our OE customers in South Africa in August has been resolved and we hope to make up at least some of that lost revenue yet this year. The markets remain challenging in Argentina and Venezuela, as economic concerns and inflation placed downward pressure on the demand there. We continue to monitor the situation in South America, in particular Argentina, and we are taking the necessary actions to mitigate the risks.

Likewise, India has been seeing its own macroeconomic issues that are dampening light vehicle demand and this lower volume environment is likely to continue into next year. In the North American commercial vehicle market, we've not seen the improvement in production that we expected and that we discussed last quarter.

Class 8 production in the third quarter was down 8% from previous forecasts and the fourth-quarter production is now expected to be flat with the third quarter. Consequently, we are adjusting Class 8 unit production guidance down, and we are now expecting 245,000 to 250,000 units for the year.

In the off-highway vehicle market, weakness continues in the construction equipment and the mining end markets, as we mentioned last quarter, and we expect lower demand to continue through at least the remainder of this year. Despite the challenging demand environment, our team has done an outstanding job of delivering on the performance of the business. And as we finish out this year we'll continue to focus on our execution and to continue to position this business for the future growth that we'll see. Now let me turn it over to Bill for a review of the financials.

Thanks, Roger, and good morning, everyone. Slide 10 provides a summary of Dana's third quarter 2013 financial results. Third quarter sales totaled almost $1.7 billion, $46 million lower when compared to last year. As we have highlighted over the course of this year, this quarter reflects the last of the year-over-year impacts of Light Vehicle Driveline program roll-offs and a divestiture of the off-highway leisure products business, which was completed in August of 2012.

In the current quarter, these items accounted for $33 million of the comparison while currency further lowered sales by $46 million. We will review in further detail and market impacts across our businesses, yet as Roger indicated, positive year-over-year demand principally in the North America Light Vehicle and South America Commercial Vehicle markets were largely offset by further weakening in India, Venezuela and Argentina, as well as continued weakness in underground mining equipment demand impacting all off-highway business.

Adjusted EBITDA for the quarter was $198 million, compared to $190 million in the third quarter of last year. Adjusted EBITDA margin for the quarter was 11.9%, a 90 basis point improvement compared to a year ago.

In light of a weak demand environment across a number of end markets, our operations continued to flex our manufacturing cost structure. In addition, pricing and other actions offset ongoing inflationary pressures in South America, including the recovery of the impact of the first-quarter Venezuela devaluation, and certain insurance recoveries completed in the quarter bolstered adjusted EBITDA performance compared to a year ago.

Net income totaled $68 million, compared to $56 million a year ago, an increase of $12 million. In addition to higher adjusted EBITDA in the quarter, lower depreciation expense and higher equity income of about $10 million in total was partially offset by higher interest expense attributable to the $750 million debt raise we completed in August.

Diluted adjusted EPS of $0.47 in the quarter compares with $0.37 a year ago, driven by both increased earnings and lower share count reflecting significant execution under Dana's $1 billion share repurchase program. Capital spending for the quarter was $52 million, $10 million higher compared to a year ago. Free cash flow for the quarter was $54 million, $34 million lower than last year due to slightly higher capital spend, cash taxes and pension contribution.

Slide 11 provides a comparison of our consolidated sales that change by business segment as well as the key drivers of the year-over-year change for the third quarter. North America sales totaled $728 million in the quarter and represented about 44% of total sales compared to 45% a year ago. Sales were lower than a year ago by about $48 million. Program roll-offs and the leisure products divestiture contributed $33 million of the comparison. While our North America light vehicle lines were higher in the quarter, benefiting Light Vehicle Driveline and power technologies, lower commercial vehicle and off-highway end market demand more than offset this favorability.

Europe represented about 29% of total sales, or $482 million in the quarter, higher than last year by $22 million, principally driven by favorable currency of $16 million and the benefit of flailing increased light vehicle demand. South America sales totaled $261 million in the quarter, or 15% of sales, about $10 million higher than last year. Currency movements in Venezuela, Argentina, and Brazil significantly impacted the comparison, lowering sales by $51 million. This headwind was more than offset by improved Commercial and Light Vehicle end market demand of about $61 million in the quarter.

Asia-Pacific sales totaled $198 million, about $30 million lower than a year ago, and represented about 12% of total sales, reflecting unfavorable currency of about $10 million, principally attributable to the weakening of the India rupee as well as continued light and commercial vehicle weakness in India. 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 change in sales.

Program roll-offs in light -- I'm sorry, currency lowered sales by $46 million, primarily impacting our Light and Commercial Vehicle Driveline businesses, $22 million of which was due to the Venezuela bolivar. In the current quarter commercial recovery's related to the first quarter of Venezuela devaluation increased sales by about $1 million. Program roll-offs and Light Vehicle Driveline of $24 million and the 2012 divestiture in Off-Highway of $9 million accounted for $33 million of the year-over-year change in sales.

Volume and mix was positive at $17 million in the quarter. Favorable volume comparisons for Light Vehicle Driveline, Commercial Vehicle Driveline and Power Technologies totaling $44 million were partially offset by weaker mining demand and the impact of a customer insourcing action, which lowered Off-Highway sales by about $27 million in the quarter.

Slide 12 provides a similar comparison with 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 quarter was $198 million, compared to $190 million a year ago. Adjusted EBITDA margin in the quarter was 11.9%.

In the third quarter, we recovered an additional $3 million of the first-quarter Venezuela currency devaluation impact of $11 million. Year-to-date we have a recovered about $9 million of the devaluation impact via both commercial actions as well as government authorized settlement of transactions at the exchange rate prior to the February devaluation.

While higher volume in mixed increased sales by $17 million year-over-year as highlighted in the previous slide, the adjusted EBITDA impact was lower by $2 million, reflecting a relative high contribution margin of our off-highway mining and related aftermarket business. Performance, which includes the impact of our pricing, cost performance and recovery actions, improved adjusted EBITDA by $12 million compared to a year ago.

The next two slides highlight the sales and segment EBITDA performance of each of our businesses. Slide 13 highlights sales and segment EBITDA performance for Light Vehicle Driveline and Commercial Vehicle Driveline. Light Vehicle Driveline sales were lower by $30 million, or about 5% compared to a year ago. Currency and program roll-offs lowered sales by $41 million and $24 million respectively.

Improved North America and Europe production volumes, as well as pricing actions principally related to recovery of inflation, provided a partial offset. Segment EBITDA was $67 million in the quarter, slightly lower than a year ago. Segment EBITDA margin for the quarter is 10.7% compared to 10.3% in 2012, providing a 40 basis point improvement.

The margin impact from volume and mix was impacted by production shutdowns arising from OEM labor strikes in South Africa in August and walking into September, lowering sales by about $9 million and segment EBITDA by about $3 million in the quarter. As Roger stated, we do expect to recover the majority of the sales shortfall in the coming quarter.

Lastly, on the performance line, pricing and other actions increased sales by about $24 million, of which almost $20 million related to the recovery of significant inflation in our South American operations. Commercial Vehicle Driveline's sales of $465 million were lower by $6 million, or about 1%, compared to a year ago.

Currency lowered sales by $16 million in the quarter, principally attributable to a weakening of the Brazil real, and India rupee. Stronger volume increased sales by $17 million, largely reflecting improved demand in South America of about $30 million, partially offset by lower demand in North America, Europe and India.

Segment EBITDA was $52 million in the quarter, $7 million higher than last year, driven by both cost improvement actions as well as a favorable impact of a tax recovery in the current quarter. Segment EBITDA margin was 11.2% for the quarter, 160 basis points better than last year.

Turning to slide 14, Off-Highway Driveline third quarter sales of $318 million were lower than last year by $25 million. Volume and mix was low at $27 million, principally driven by lower mining equipment and related aftermarket demand and the impact of an insourcing action by a customer that we highlighted last quarter. Off-Highway posted segment EBITDA of $40 million in the quarter, or a margin of 12.6%, about 140 basis points lower than a year ago. While continued cost actions provided a benefit of $3 million on a performance line, these actions were more than offset by the margin impact of lower demand in the quarter.

Turning to Power Technologies, third quarter sales of $257 million were higher than a year ago by $15 million, driven by increased volume in North America and Europe. Segment EBITDA of $39 million was $10 million higher than a year ago, reflecting the impact of higher volumes and improved cost performance. Segment EBITDA was 15.2% in the quarter, a 320 basis point improvement compared to a year ago.

Similar to the year-over-year comparisons just discussed, slide 15 presents the key drivers of Dana's year-to-date sales and adjusted EBITDA performance compared to last year. On a year-to-date basis, 2013 sales of $5.145 billion were lower by $470 million compared to last year. As highlighted on the lower left of this slide, unfavorable currency, Light Vehicle Driveline program roll-offs and the 2012 Off-Highway divestiture accounted for $332 million, or 71% of the comparison.

Volume and mix accounted for $185 million, principally attributable to lower off-highway and commercial vehicle end market demand. Pricing and recovery actions continued to be accretive through the year to date.

Adjusted EBITDA of $571 million in 2013 was lower than a year ago by $56 million, reflecting lower production volumes and currency impacts. As highlighted in the lower right of this slide, despite a lower volume environment in several of our key end markets, our year-to-date adjusted EBITDA margin performance at 11.1% is equal to last year, reflecting the impact of our cost performance and recovery actions.

Slide 16 highlights free cash flow for the quarter. Free cash flow was $54 million in the quarter, compared to $88 million in the third quarter of last year, a decrease of $34 million principally due to slightly higher capital spending, estimated tax payments and our planned pension contributions. Working capital generated $28 million in the quarter compared and largely even to last year.

Capital spending was $52 million, $10 million higher than a year ago, as we continue investment to support new programs and add gear manufacturing capability and capacity in Asia. Net cash interest was $29 million in the quarter, equal to last year, reflecting interest payments on our unsecured debt. While we issued $750 million of new senior unsecured notes in the third quarter, semiannual interest payments on this issuance does not commence until March of 2014.

Cash taxes were $39 million, $10 million higher than a year ago, largely reflecting the timing of estimated tax payments and jurisdictional profitability. Restructuring cash flows totaled $9 million in the quarter, about even with last year.

Pension contributions for the quarter were $36 million compared with $24 million in the third quarter of last year. Of this quarter's contribution $30 million were voluntary contributions we directed to our US plans. And at the end of September, the funded status of our US pension plans stood at about 90%.

On a year-to-date basis, free cash flow was $170 million. And for comparative purposes, we have adjusted last year's free cash flow performance for the $150 million voluntary pension contribution we made in the first quarter of 2012. And adjusting for this contribution, Dana's free cash flow performance is ahead of last year's result by about $12 million.

Slide 17 highlights our cash, debt and liquidity positions at the end of September. Cash and marketable securities totaled $1.226 billion, while outstanding debt was $1.632 billion, resulting in a net deposition of about $406 million. The increase in debt compared to our second-quarter results reflects the issuance of $750 million of senior unsecured notes in August. At the end of September, total liquidity stood at about $1.6 billion, including $377 million of availability under our US and European credit facilities.

As highlighted here as well, through the end of September we have returned a significant amount of capital to our shareholders, a total of $810 million in combined dividends and share repurchases. We had a very productive quarter on the capital structure front, and slide 18 summarizes the actions we have completed to date. It has been about a year since we announced our initial $250 million share repurchase program, which was increased to $1 billion in June of this year.

In August we successfully completed a $750 million senior unsecured note issuance at attractive rates, and redeemed our outstanding Series A preferred shares, representing an equivalent of almost 21 million common shares. Post these actions we executed a $200 million accelerated share repurchase program and received an initial delivery of $7.3 million of common shares, equivalent to 80% of the total transaction value. We expect to receive additional shares upon the completion of this program no later than this coming December.

Commencing in the fourth quarter of 2012, to date we have returned $780 million to shareholders and repurchased the equivalent of 34 million common shares. There's about $220 million remaining in our share repurchase authorization, and we expect to continue to execute the program on an opportunistic basis during the course of the coming calendar year.

With respect to our outstanding Series B preferred shares, since the end of 2012 holders have voluntarily converted about 893,000 shares into common, resulting in a little more than 4.3 million shares outstanding at the end of September. As a result of these actions to date, we expect our diluted share count to be about 180 million shares at the end of 2013. All in all, these actions evidence our strong and continued commitment to deliver value to our shareholders as well as maintaining a strong balance sheet position to provide both future flexibility as well as growth capital.

Now as we look forward to the rest of the year, let's turn to the next slide. Our full-year targets are outlined on slide 19. We are lowering our full-year sales and adjusted EBITDA targets to reflect both the impact of currency and weaker demand in several of our end markets. We expect sales to be about $6.7 billion for 2013, about $300 million lower than our previous estimate, in light of weaker demand impacting our off-highway business, persistent economic pressures in India and South America, impacting principally our Light Vehicle Driveline business and certainly tempered expectations for the commercial vehicle market.

We expect adjusted EBITDA to be about $750 million for the full year 2013 providing a margin of about 11.1%. While our operations have performed well in adjusting cost structures in line with production around the world, we expect top line weakness driving lower sales of about $100 million sequentially from the third quarter to the fourth quarter of this year to further lay on our earnings performance. However, compared to our 2012 full year results, our 2013 estimated adjusted EBITDA margin performance provides a 30-basis point improvement on significantly lower volumes.

We expect diluted adjusted EPS to be about $1.76 for full-year 2013. We expect the number of weighted-average shares used to calculate full-year EPS will be about $200 million. And this, of course, excludes the impact of any future exercise of our share repurchase program. Capital spending is unchanged and expected to be about $190 million, the midpoint of our previous range. And our free cash flow target is now in a range of $240 million to $260 million for the year.

Finally, slide 20 highlights the progression and key drivers of our full-year sales and adjusted EBITDA margin targets from the prior guidance we provided in July compared to our current expectations. As highlighted, the $300 million decline in our full-year sales expeditions falls into two categories. A further currency impact of about $70 million split about evenly between our light and commercial vehicle businesses, and volume reductions of about $230 million impacting all but our power technologies business. Compared to our prior guidance of this change in sales, our third-quarter results represent about $140 million of the sales change with the remainder expected in the current quarter.

Compared to our prior guidance, Light Vehicle Driveline volumes being impacted principally by continued softness in South America as well as India. We expect commercial vehicle will be impacted the most significantly as we now expect lower orders from our North American customers, as well as continued weakness in India. And off-highway will be further impacted by lower mining related aftermarket demand.

In comparing adjusted EBITDA margin expectations, currency will still be a slight headwind, but a lower volume compared to our previous expectations, largest contributor to our revised full-year margin targets. Continuing cost actions will provide a partial offset as we close out the year. And while currency movements and end market demand are certainly outside of our control, our operations remain focused and diligent in continuing to action cost and investment levers throughout the business.

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)

Joe Spak, RBC Capital Markets.

Thanks. Good morning, everyone. Just wanted to dive a little bit deeper into some of the margin performance, particularly in commercially going off-highway. On a year-over-year basis in commercial vehicles, EBITDA $7 million higher but the top line was $6 million lower. I guess I'm wondering, is it fair to look at it year-over-year? Should we look at it more sequentially there or what's going on and is that sort of performance sustainable amid what looks like it might be some continued weak volume?

Joe, this is Bill Quigley. On the commercial vehicle front, if you looked at slide 13 I think you're referring to, we do provide the year-over-year comparisons. We think that, obviously, is a good basis for comparison.

On the performance line, you'll note that segment EBITDA was up about $2 million. And in my comments I did refer to that we've been chasing a pretty significant tax recovery in Brazil and we were fortuitous enough to complete that tax recovery in the quarter. That provided about $2 million or so if you will of that segment EBITDA performance.

But I think overall on a year-over-year basis we're certainly seeing some pressure. As we move into the fourth quarter we've lowered our expectations with respect to the North America Class 8 production environment so certainly sequentially as we move from the third to the fourth quarter, we are going to see some continued pressure there from a margin perspective.

And then on the off-highway business, the $11 million lower EBITDA on $27 million vol of sales, it looks like the decremental margin picked up there. So are you taking out or delayed costs as much as possible or was something unusual there?

No. What you see there certainly is a very high decremental margin of about 40% on that volume and mix, largely driven, quite frankly, by the impact of underground mining and the related aftermarket sales associated with that segment of the market. Very high contribution margins. From a cost perspective they're continuing to take cost out of the business. You can see on the performance line up for positive improvement $3 million year-over-year. But again, that contribution margin associated with that particular segment is pretty high and impactful to the off-highway business.

Okay. And preliminary comments about some of the -- some of these end markets for 2014 particularly mining? You mentioned it looks like it could be tough still in the fourth quarter. Should that begin to bottom out in 2014 in your view? And then similarly on Ag, which has obviously held up, is there the potential for that to roll over next year, particularly in North America in your view?

Yes, Joe. This is Roger. For any of our markets, we're not seeing anything fundamentally in the basis of the markets themselves to indicate to us that there's going to be any kind of a real upswing in 2014, particularly the mining segment and maybe the off-highway segment in general. I think you may have seen some of the previous announcements from some other companies that may have indicated the same thing. We are not seeing anything different than what those announcements have said.

Okay, great. Thanks.

John Lovallo, Merrill Lynch.

First question is on -- you guys discussed the ability to flex your operations in certain markets. Can you give us an idea where you think that the most potential is there and how quickly can you guys react to volume?

John, I'll take the first shot on that. I think with respect to off-highway for example, let's just use that, certainly what we're experiencing from a demand perspective is not positive for the business. We certainly have capacity and capability in place.

The flexing that's going on, for example, is we're employing all the usual tools with respect to agency employees, temporary layoffs, so on and so forth. But certainly from a capacity perspective, we're not taking capacity out currently in that business. We do expect over the longer term that that business will come back, but to Roger's point, the visibility on that from a timing perspective is still pretty muted.

So I think from a capacity and capability perspective, we're taking the cost actions across all the business across all the plants in light of the volume that we're seeing, but we're certainly not looking at capacity reductions. My only other remark on that front, though, would be we continue to look at our South American operations. Certainly there's a lot of economic turmoil in a number of the countries in South America and from a capacity utilization that is an area, and from a footprint perspective, that we are continuing to analyze alternatives available to us.

John, this is Roger. I maybe could just complement what Bill was saying about the off-highway sector. The off-highway sector is the business unit that we see the most sudden or short-term changes, if you will, in the schedule both up and down. So while we can react in every single one of our businesses, we want to be sure to be prepared for when we do see an uptick to be able to take care of our customers in that event. And the off-highway sector is probably the more difficult one to do that with. Commercial vehicle is not that far behind it, but the other two businesses, I think we can have ample warning to know what's going to unfold.

That's very helpful. If I could just follow-up with one question here. In terms of the off-highway market, can you just remind us how much of that is actually export business and what are the biggest markets there in terms of exports?

There's a very large European footprint, John, to you're point. I would say about 70% to 75% of sales, and of that probably 20% to 25% is export. So that's export not only to Asia for example, but also back to North America, as an example. So basically a manufacturing footprint that exports really around the world are really the primary export regions being North America and, to a lesser extent, Asia.

Great. Thank you, guys.

Brian Johnson, Barclays.

Good morning. I have questions on a couple categories. Just on your CV guide, and then I want to talk about light vehicle driveline. On CV, it sounds like you're looking for a severe sequential decline going into the fourth quarter in Brazil. How do you see that then playing -- is that right, and then how would you see that playing out over the beginning of 2014?

Brian, it's Bill. We are obviously, from a sequential perspective, looking at a client's CV. I would say it's both South America as well as North America. Obviously North America being really some of our prior expectations with respect to the Class 8 build. And we talked about this in the second quarter of this year, while the South American market has recovered very nicely in 2013 compared to 2012, we had called that we would see some softness in the fourth quarter and we are still holding that assumption in place as we move in. We're seeing a little higher inventory levels at least being communicated to us in Brazil. So that certainly is tempering the third to fourth quarter sequential and commercial vehicle for South America.

Okay. And in Light Vehicle, we've actually had some very positive commentary out of Ford, which at least one of your customers around the global boom in SUVs. Is that -- are you participating in that in places like South America and India? And that does that offer any offset just to the macro sales environment there?

Brian, it's Mark Wallace. With Ford, primary bulk of our business is with the Super Duty platform, but we also take care of Ford's requirements on the T6 platform, which is really in Thailand and South Africa and Argentina as well. But nothing really related to India. So that's the bulk of our business that we have with Ford from the SUV pickup truck market.

But with other customers are there any offsets from growth in SUVs elsewhere?

Actually, with Chrysler we're on the JK platform, which is up significantly on a year-over-year basis, which is very strong. And really with Toyota and Nissan, we're basically on the same style of vehicles, which is pickup trucks around the emerging markets.

And anything left to go on though? The bolivar, the Venezuelan currency, is that ridden down to a point where there's no further impact or it's going to continue to be a drag?

Brian, it's Bill. From the first quarter devaluation, which you'll recall is about $11 million, Mark's team has done a great job with respect to recovery actions. We've recovered year-to-date about $9 million of that $11 million. And we do expect into the fourth quarter to recover the remaining piece of the initial or first-quarter devaluation.

The second piece of the puzzle here with respect to Venezuela is moving forward given what's going on in that country and with respect to the ability to repatriate cash out of Venezuela, and certainly the economic turmoil continuing to swirl in Venezuela. We're very focused on other actions that may be required, given potentially another devaluation sometime in the near future. But, it would be unfortunately, I guess, the well-worn path that Light Vehicle Driveline has continued to execute upon much like the current devaluation in the event that that was to be experience.

And just a final housekeeping point, can you be active in the market hypothetically to buy back your shares even as your ASR program is out there? Or are you precluded from buying shares until the bank completes its delivery?

I mean, hypothetically we can, but we are completing -- we are awaiting completion of the finalization of the ASR, which in my comments should be early December.

Okay. Thanks.

Patrick Archambault, Goldman Sachs.

Good morning. I guess maybe I'll start with just a quick housekeeping. So you said it's sort of unusual -- not unusual, but you got a tax recovery from Brazil, about $2 million. I think you said you had insurance recoveries in the quarter as well?

Yes, Patrick. It's Bill. We had about, from one of our subsidiaries, we had about a $5 million insurance recovery principally related to the sale or the monetization of claims that we had with insolvent carriers.

Okay, got it. I guess my main question is if I have the math correctly, you guys managed to post a 80 basis point improvement in margins despite a 3% decline in revenue. This quarter, given all the actions you took, it seems like you've got implied like a similar 3% year-on-year for the fourth quarter, given the new guidance. But the increase in margin kind of jumps up to something like 190 basis points if I'm right. So I just wanted to kind of get a sense of what the items were that were helping you, if anything, post a larger margin comp in the fourth quarter despite what I think everybody would agree with is fairly challenging volume environment?

We certainly share your thoughts on the volume environment. If you take a look at our guide at about $6.7 billion in sales and EBITDA margin of about $750 million, and then obviously we provide also the end points, or estimates, for both sales and margin for our business segments, we would probably look to see some decremental actually in the fourth quarter on the margin front. At a business unit level probably 10.5% margins, obviously moving into the fourth quarter to derive that 11.1% off of the full-year. We posted 11.9% in the second quarter, in the third quarter, but with respect to some of the volume considerations that we're working through, we are expecting a lower margin performance in the fourth quarter.

That's sequentially. But year-on-year, right, I think you're up, right, if I'm not mistaken?

Yes, year-on-year we would be --

That's right. My question was year-on-year. I apologize.

Yes. Year-on-year, and I think again it's the move-through of the cost actions that we've taken throughout the course of the year. We have improved the business structurally from a cost perspective and I think if you look on a year-over-year basis, we're probably up about 140, 150 basis points for the quarter, for the fourth quarter.

Yes. That's what I have. So okay, so basically it's just a continued rollout, like the volume environment doesn't necessarily get any better, but the cost actions that you've put into place to mitigate some of this, I guess they just gather momentum and deliver better comps on that front. Is that kind of --

Exactly. And just briefly, we had talked about that in the first and second quarter that we are doing very significant work with respect to our material, buy, economics, usage, I think even the second and third quarter, we're seeing the benefits of that flow through to our results. So we don't lose that on a year-over-year basis into the fourth quarter, certainly what the buy is ultimately is going to be predicated on the sales volume. But the operators across the business have done a great job in focusing on that pretty critical element of our cost structure.

Patrick, this is Roger. To complement Bill there, the work that we've been doing over the last few years, as we've previously mentioned in past calls, is to really solidify the base of this business as we prepare for the growth that we'll see coming in the future.

We had anticipated a little bit better environment, if you will, in the market at this point in time and going into the fourth quarter and into the next year. It looks like that's going to be delayed a little bit from what we have seen and talked about here today, but the cost actions continue so that when that growth and the tailwind does come, we should see very favorable incremental margins on that.

Okay. Great. That's a lot, guys.

Colin Langan, UBS.

Hi. Thanks for taking my questions. Any color on -- when I look at it, South America, there's some numbers out there saying South America was up over 60% this quarter. And yet you kind of went to about 20%, over 20% of your sales in the region. I would've expected a bit stronger of a mix. Was there a customer mix issue in South America that resulted in some of underperformance or did you just not see that kind of year-over-year growth in the reason region?

Hey Colin, it's Bill. If we just point to commercial vehicle, we certainly saw a significant recovery in demand in South America out of Brazil, obviously, big market. What's muting that year-over-year is the corresponding FX impacts that we're saying as well. So certainly from a demand perspective, I think even in my comments overall we said South America, from a demand perspective, was up about $61 million.

Yet currently really masked that by about $51 million in the opposite direction. So currency movements in Brazil, Venezuela -- you know, we talked about Venezuela in the first quarter on a year-over-year basis, certainly a significant impact as well as Argentina. Those currencies have certainly moved against us.

And you're now expecting Brazil trucks to come down sequentially? And then any color on how that may trend into 2014? Because that's been a pretty volatile market.

We are expecting a sequential lowering of production volume in Brazil. And again, to Roger's point with respect to 2014, we're working through our planning assumptions. But I think that's more driven what our expectation was even a quarter and a half ago on how we solve the fourth quarter kind of lining up. As well as we're seeing some elevated inventories, if you will, with respect to that market in particular. So I think 2014, we don't see anything significantly different in Brazil structurally from an info structure perspective, but I think as we continue through the rest of the year, we'll finalize that and obviously report on it in January.

And just you know sometimes there are lot of restructuring items. Any color on your tax rate ex-restructuring in this quarter? And am I correct that your guidance for the year does include a higher tax rate for the full year now than what you were expecting before?

Yes it does, Colin. We're up at about 35% to 36% full year. What we're seeing, obviously, is in areas that certainly are under pressure. For example, South America, we're operating still under valuation allowances in a number of those countries. So we're not getting the benefit, if you will, from lower earnings or in some cases lost positions in certain countries. So that is elevating our effective rate to about 35% or so.

Is that a cash tax rate? Because slide 19 shows --

No, that's the US GAAP tax provision. So it's the income statement rate.

Okay. Thank you very much for your help.

Patrick Nolan, Deutsche Bank.

Wanted to just dig into a couple of the segments, a lot of my other questions have been answered. If I dig into the North American CV revenue, it actually looks like it was down year-over-year in the third quarter. And I think industry production was up about 6%.

Is there a customer mix issue or platform mix issue or has there been some programs that have maybe switched hands and that's part of what's going on? I just wanted to think about that in the context of your statement that North American CV would be down sequentially in Q4. Because it looks like overall industry production would be pretty flattish quarter-over-quarter.

Patrick, this is Roger. We've been seeing some pretty good volatility in the third quarter, not dissimilar to what we saw in the third quarter of 2012 with the changes, if you will, in the schedules that our customers are showing to us. We had some good confidence going into the quarter as we had talked to you about at the end of the second quarter, that the volumes were actually going to increase on the path that we had originally anticipated.

And then just recently here, realized that with the volatility that we are seeing, sales for us and production is slightly down from the year-over-year comparison. So it's not as much as any one particular factor, it's things are moving around pretty quickly and the visibility that we've seen kind of decreased on us here just recently.

That's why we're anticipating like we did in 2012 third quarter that the fourth quarter isn't is going to show us any uptick. Although I should just mention that sometimes our customers, or some of our customers, still anticipate maybe seeing some of that where we're not so sure of that anymore. So we thought it would be prudent to make sure that we go out to you guys and let you know that we are calling it flat with the third quarter.

That's helpful. And just quickly, on the off-highway insourcing, when do we start to lap that? And on the Light Vehicle business that had been rolling off, are we through that now once we get into the fourth quarter or is still a headwind in the fourth quarter?

Patrick, it's Bill. On the latter, on the Light Vehicle Driveline, we're through that program roll-off up activity or quarter-to-quarter comparisons. Third quarter was the last of that. With respect to off-highway, we'll see a bit more of that into the fourth quarter. The fourth quarter then we'll conclude the insourcing action.

Thanks very much.

Brian Sponheimer, Gabelli & Company.

Thank you for taking my call. Just one on your cost structure and given that volumes have gone against you, the execution remains pretty good across all of your businesses. If we were to see any sort of pick up in demand, what would be the type of incremental margin that you'd be hopeful for? Let's say in a 5% or 10% volume growth environment?

Well, in the incrementals, Brian, as we've mentioned before, we look for between a 15% and a 20% uptick from an incremental basis. And our operating units have done a very nice job at managing through this volatility both in the down as well as the ups that we've seen. For instance in the second quarter you saw that we were able to deliver on that upswing in sales.

So we anticipate keeping it in that 15% to 20% range. That's an average across the organization. There's a few business units that will be North of that. We expect them to be North of that. And there's a couple that may be slightly under that, maybe not to dramatically under that. So 15% to 20% for the overall enterprise.

All right. That's helpful. And just within the off-highway business, you'd called out on commercial vehicles and inventory slack in South America, what's your sense in the mining markets that inventories is where it needs to be before you really see a flattening at the bottom here?

That's an interesting question because one that we pursue an answer to often and very frequently across our entire customer base around the different regions of the world. It's pretty cloudy right now. We feel like the inventories are somewhat in line with where the production is right now. So we think that if there is an uptick in the production in the industry, we should be able to see that.

Because we believe that our customers in the mining sector are being very, very, very prudent with their inventory control. And that's one of the reasons that we've seen the impact, for instance over in the aftermarket piece of the mining business, is they're being very, very careful and cautious because we think that the outlook is unsure for them as well and a bit cloudy and so they don't want to be stuck holding a lot of inventory.

And we think they've done a good job from everything that we can tell. So the big question is when that market might uptick again. I think that's one that we're all trying to find an answer to, but we feel fairly good that when it does uptick we're going to see the orders flowing through because there's not a lot of inventory in the system.

Okay, that's helpful. And Bill, just one real small housekeeping item. With $220 million left on the share buyback and the ASR being completed by the first week of December or so, did you say that you had expected to finish the $220 million by year end?

Oh no, no, Brian, I said we would expect to post the completion of the ASR, look to our opportunistic approach as we've done moving into 2014.

Okay, that makes much more sense. Thank you so much.

Ryan Brinkman, JPMorgan.

Good morning. Thanks for all the color. A lot of my questions have been answered, but maybe just one quickly on Light Vehicle Driveline. I understand the program roll-offs affecting the business in the quarter and also the currency impact in the quarter, but I see that the volume mix line drove about an $11 million increase year-over-year to revenue. That's about 2% of last year's revenue. I thought maybe it would be just a little bit stronger.

Can you speak to why this might be? I'm sure you're benefiting from pickups in North America, so I guess this is the softness in the Brazil and India that you alluded to in the release. But can you talk about how material those markets are to Light Vehicle Driveline and what else might have driven the relatively tepid growth relative to global [latigs] holdings to production of plus four?

Brian, it's Mark Wallace. Just globally, we have a fairly strong business in India. So on a year-over-year basis, more than a 20% decline in that business. We are still obviously waiting to see when that recovery may occur. So that was definitely an erosion on a year-over-year basis, as well as Venezuela, as we've talked about all throughout this year.

In the US actually, as I mentioned before, both Super Duty and JK are up significantly on a year-over-year basis. And then obviously there's offset with the roll-offs. And the rest of the markets around the globe were pretty much flat.

We did see improvement in Europe for the Dana portion because of the Jaguar Land Rover business that was launching. But that was also then -- I had some headwinds relative to the strike in South Africa, which impacted several customers in that region as well.

Okay. That makes perfect sense. And then I guess my last question is just obviously you're doing a very good job containing the decremental margins in the face of the revenue declines. But in off-highway, I think that you reported about $11 million lower EBITDA and $27 million lower sales organically from a volume mix perspective.

That seems a little high, like roughly 47% decrementals. Is that a function of like the kind of products that you're producing less of year-over-year or the geography or what -- that's probably not what we should model going forward, right?

Yes, Ryan, your presumption is correct. Specifically, the mining sector, combine that with the aftermarket in the mining sector, both of those segments for that part of the business are very good and both of those are down.

Okay. Great. Thanks for all the color.

Brett Hoselton, KeyBanc.

Good morning. Just first, point of clarification. On the share repurchase, given the ASR program completing by December, does that mean that you are not in the market at this point in time? Or can you be independently in the market with your share repurchase?

We can be in the market independently, not with another ASR, obviously. But at the moment we are not in the market. We are letting the ASR, Brett, transact out, if you will. And that should be completed early December.

Okay. So the expectation should be that you're probably going to remain out of the market until December timeframe or something like that. Is that correct?

Correct.

And then directionally as we think about 2014 sales, I know you commented earlier that you are not seeing the markets improve and so forth, but I guess what I'm wondering is, is that an off-highway comment? I think generally speaking the expectations are that light vehicle production is going to be improving next year and the commercial vehicle production in Class 8, specifically North America, is going to potentially improve next year. So I was wondering if you could kind of talk directionally about those markets, commercial and light vehicle?

Thanks, Brett. This is Roger. My comment earlier in the call was kind of enterprise-wide across the four business segments. There are some differences between the segments.

We anticipate the light vehicle segment to be -- to remain strong, if you will, in North America. Absent anything that we don't yet see out there.

On the commercial side, though, that's -- we're not sure about that. We don't think it's going to get worse materially, but as you know we anticipated third and fourth quarter were going to show quite an uptick in the commercial market. That's not happening. At least from our view, our experience sitting here later in the third quarter and view of the fourth quarter.

And so going into next year, unless something fundamentally changes in terms of the comfort of the fleet operators being comfortable going ahead and placing those orders and replacing their fleets, and some of the things that are holding things back. Unless that breaks loose, which we had anticipated to happen here in the latter half of this year, we're not at this point seeing anything fundamentally that's going to improve that through 2014. Unless something changes between now and the end of the year or so.

As Bill mentioned, we're going through all the numbers in every one of the business segments right now as we speak. But the off-highway, we've talked about, don't see anything fundamentally changing there. CV, we're not sure, but we don't see anything dramatically changing there. LV remaining strong and of course PT across all the business units, that's a strong business anyway. But that's kind of how we see the individual business segments, Brett.

And do you have any expectations for any material incremental new business growth? I know in the past you've kind of talked about being twice the market. Obviously the market -- you're looking directionally it'll be flat, but that seemed at the time to imply maybe low-, mid- single-digit revenue growth based on new business revenue growth? What's your expectations into next year?

That's a great question. We're really excited about the business that we are winning out there because we're winning it based on the products and the value that we have focused on in the market, value drivers if you will. We're winning the business that we would expect to win out there.

But as you know, in the business that we're in, it takes a few years to get those pieces of business launched and we're in the midst of some of those launches right now. Some of them begin in 2014 and so I would anticipate 2015 and 2016 seeing the real opportunity that we talk about in terms of growing above the market.

As I mentioned in my part of the discussion in the beginning of the call, the reason we're really excited about that is because we anticipate in the results that we're getting with that will allow us to absorb some of these market fluctuations that we've been experiencing over the last couple of years. And for last year and for this year, and possibly in the near-term future as we experience these market fluctuations, we have to talk to you about them every quarter because these new launches haven't yet taken over to that. But that's what we anticipate in the future is we're going to be able to absorb these fluctuations with the above market growth that we'll see.

And then Bill, again thinking about 2014 margins, major headwinds or tailwinds? If revenues can be roughly give or take flat or something like that next year, just under that assumption, I know that you're not guiding to that but under that assumption let's say you're not going to initially get any leverage, but yet you've got some company-specific initiatives which have driven margin expansion over the past few years, so on and so forth. What do you see as the general trend for margins next year? Are there any major headwinds or tailwinds that you think that you're going to see next year?

Brett, I think absent volume, I think the Company and certainly in the current volume environment, and unfortunately one that's been around us for some time here now in the last 18 months or so, the Company has taken pretty marked steps with respect to cost improvement. I think to Roger's point, ultimately a continued margin ladder, if you will, is going to require good volume and is going to require our continued value that we provide to the customers with respect to innovation.

Is there just a bunch of more spit left in a flat environment? I think the groups have done, or the businesses have done, a great job working with what they have through this environment and I think there's always going to be some opportunity, Brett. But I wouldn't look at it as a large tailwind available to us.

I think the volume environment, certainly we're working through it very well. But at the same time where I think the growth in the margin profile will come from, and we saw this briefly in the second quarter as we walked from the first to the second, is the contribution margin that we can enjoy when we see that volume.

So major, major tailwinds? I don't think so, absent a change in volume. So apples to apples, if you will. Major headwinds? I think there's always some headwinds with respect to inflation, but right now nothing of significance that we're going to have to work through.

Thank you very much, gentlemen.

So this brings us to the end of the call. This is Roger. I just want to say thank you very much to you all for joining us in the last hour. Thank you.

Thank you. This does conclude today's conference call and you may now disconnect.