Dana Inc (DAN) 2014 Q1 法說會逐字稿

Good morning, and welcome to Dana Holding Corporation's first-quarter 2014 financial 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.

(Operator Instructions)

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.

Thanks, Brent. And thank you all for joining us today for Dana's first-quarter 2014 earnings review. Presenting this morning will be Roger Wood, President and Chief Executive Officer; Bill Quigley, Executive Vice President and Chief Financial Officer; and Mark Wallace, Executive Vice President and Group President of On-Highway Driveline Technologies.

Copies of our press release and presentation have been posted on Dana's investor website. Today's call is being recorded and supporting materials are property of Dana Holding Corporation. They may not be recorded, copied or rebroadcast without our written consent.

Today's call will 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 public 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. The first quarter of 2014 is off to a pretty good start, with most of our businesses right where we expected them to be.

For the first quarter we recorded sales of about $1.7 billion, while net income for the quarter was $34 million, and diluted adjusted earnings per share were $0.32. These results include the $17 million charge that we took at the end of the quarter to remeasure the financial statements of our Venezuelan operations at a higher currency rate. Bill will talk more about this in a little bit.

We improved our adjusted EBITDA margin by 40 basis points over the first quarter last year to 9.8%. Again, this improved performance includes the Venezuela devaluation. So, operationally, the businesses performed very well. And without that charge, we'd be talking about a 10.8% margin this morning.

We continued to execute on our $1 billion share repurchase program. Since we began the repurchase program in late 2012, we've returned $893 million to our shareholders. And we'll continue to execute on our remaining authorization.

This quarter we participated in several industry events. Key among these were CONEXPO, focused on North American off-highway vehicles, and the Mid-American Trucking Show, focused on North American commercial vehicles. Both of these events were great opportunities for me and our executive team to speak directly to industry leaders and key customers.

Turning to slide 5, I'll highlight some of the key takeaways from these events and meetings. The CONEXPO show for the global construction industry set records for exhibit space and the number of exhibitors. And the 130,000 visitors represented the second highest attendance ever. This activity reflected recent reports showing an upswing in the confidence of the construction market, especially in North America.

Equipment that leverages advanced technologies will support the growth in construction activity, as buyers look for more powerful machines that deliver increased productivity, reduce downtime and improved fuel efficiency. Dana is stepping to these market demands through innovations like the Spicer PowerBoost hydraulic hybrid concepts and the Hydromechanical Variable Transmissions developed through our joint venture with Bosch Rexroth.

Customers were especially interested in the Spicer PowerBoost technology because it captures kinetic energy otherwise wasted throughout the drivetrain, and then uses it to help power the vehicle, which can reduce fuel consumption by 20% to 40% compared with the conventional drivetrain concepts. Meanwhile, ongoing tests on front end loaders with Dana Rexroth HVT powersplit systems demonstrate fuel savings in the drivetrain of up to 25% when compared with the same vehicle outfitted with conventional torque converter transmissions.

This continued globalization of the construction market was also evident at CONEXPO, where about a quarter of all attendees came from outside the United States. Global demand requires a variety of drivetrain solutions, ranging from value-driven systems for emerging markets, to premium configurations with advanced technologies for the more mature markets.

On slide 6, the Mid-America Trucking Show in Louisville is the largest annual heavy-duty trucking event in the world. Our visits with customers there confirm that the technology strategy that we embarked on a few years ago is spot-on to what the market needs. Our customers validated for us that fuel economy is paramount. Couple that with ongoing concerns of driver recruitment, suppressed freight revenues, the ever-widening regulations, and also the total cost of ownership.

To meet these needs, Dana has been focused on developing drivetrain solutions that help standardize the performance of trucks to make them more fuel efficient, more reliable, more productive, and also cost effective over the long term. Our Spicer AdvanTEK 40 tandem axle is available now in select ratios, including the industry's fastest axle ratio, to support engine downspeeding initiatives that reduce fuel consumption. This axle uses a powerful combination of technologies that can enable an engine at highway cruise speed up to 200 RPM lower than alternative powertrain systems, while still reducing weight and increasing axle efficiency.

The recently launched Spicer EconoTrek 6x2 tandem axle allows the fleets to save 400 pounds over traditional 40,000-pound 6 by 4 tandem axles, increasing the fuel economy of heavy duty line haul tractors from 2% to 3%. And we also introduced new heavy-duty steer axles in single-reduction, single-drive axles that reduce weight and enable our fleets to optimize productivity, reduce maintenance, and improve their profitability.

With these new products, we've been very successful at winning new business over the last few years, including this past quarter. The new business that's bolstering our backlog is being driven by our market-leading technologies and our focus on the market value drivers.

As we turn to slide 7, I'll cover what we see in the markets up front and close this year. As we said at the beginning of this year, we expect some incremental growth in our key end markets, but we also expect that currency will remain a significant headwind, particularly in South America. We've seen strength in the full frame trucks in North America and expect it to continue for the remainder of the year.

And we're starting to see the expected improvement in commercial vehicle demand. We had expected higher demand for Class A trucks this year and we've built that into our guidance. There are positive signs that Class A truck production may further accelerate through the remainder of the year. So, we've taken up our production estimate to 265,000 to 275,000 units this year.

In Europe, a market that mostly impacts our off-highway and power technologies groups, we expect flat production for off-highway equipment compared to last year. And while construction markets in Europe and North America are showing some resilience, there are some signs of weakening in the ag equipment markets. While we're hopeful that the mining markets will return a bit inside of this year, we don't expect improvement until later in the year, at the very earliest. Our power technologies group is benefiting from improved light vehicle OE and after-market in Europe, and you'll see that when Bill walks through our results.

In Asia, where light vehicle driveline has our largest consolidated sales impact, mostly in India and Thailand, we're seeing a flat demand. The auto market in India and Thailand have been stagnant for several quarters. And though we expect some improvement in India in the second half, the region will remain a headwind for the year, just as we had originally expected.

Moving to South America, you know that the majority of our sales comes from light vehicle driveline and commercial vehicle driveline. We saw fairly stable demand for heavy trucks and buses, principally in Brazil, but were cautious on the outlook for the rest of the year. We're seeing inventories increasing as their exports are falling, and we've taken down our production estimates for that region. But we expect any decreased volume in Brazil to be offset by the strengthening of the North American market.

As I mentioned, we've seen, and we expect to continue to see, currency and inflationary pressures play a major role again this year. We've experienced currency movements in Asia and most recently in South America. At the end of this past quarter, we, along with several other companies, started using a higher exchange rate in Venezuela.

Now, Bill will discuss this in detail in a moment, but the ongoing currency issues have taken their toll, as automotive production has ground to a halt in the country. We've taken action. And I think our management teams are doing an outstanding job of mitigating this decline by focusing on the after-market and non-automotive applications. And we continue to work closely with our customers to evaluate alternatives to the current business environment.

While Venezuela is not a large part of our business, events there certainly will have an impact this year. But they will not slow down the long-term growth trajectory that we outlined for you in January earlier this year.

Now, let me turn it over to Bill and he'll walk us through the financials.

Thanks, Roger. And good morning, everyone. Turning to slide 9, let's review our first-quarter financial results.

Our first-quarter sales totaled $1.688 billion, $12 million higher than last year, reflecting higher demand in several end markets, which was tempered by currency headwinds. Adjusted EBITDA for the quarter totaled $165 million compared to $158 million last year, providing a margin of 9.8%, or a 40 basis point improvement.

As Roger highlighted in his comments, Dana's adjusted EBITDA performance in the current quarter included a $17 million devaluation charge for the remeasurement of our Venezuela financial statements, driven by the government introduction of multiple currency exchange mechanisms. On a comparative basis, our first-quarter results last year included a $6 million devaluation charge for Venezuela. If you were to exclude these charges, our margin performance would have been 10.8% in the current quarter. And the improvement over 2013 would have been about 100 basis points.

Net income totaled $34 million compared to $42 million a year ago. On a comparative basis, the benefits of higher adjusted EBITDA and lower amortization expense were offset by increased interest expense associated with our 2013 capital market activities, higher restructuring expense as we continue to address our Argentina operations, and increased tax expense principally related to several discrete items in both quarters, withholding tax of about $4 million in the current quarter in connection with our foreign repatriation activities, and in 2013, a $2 million benefit from their lease valuation allowance for our UK operations.

Diluted adjusted EPS of $0.32 compares with $0.28 a year ago, as the lower diluted share count from execution of our repurchase program more than offset lower adjusted net income. And lastly, free cash flow was a use of $36 million, $8 million lower than last year.

Slide 10 provides a comparison of our consolidated sales and the change by business segment, as well as the key drivers of the year-over-year change for the first quarter. North America sales totaled $760 million and represented 45% of sales compared to about 43% a year ago, as demand in the region was higher for both light and commercial vehicles.

Europe represented about 32% of sales, at $533 million for the quarter, which was $30 million higher than last year. About half of this increase was due to a stronger euro and the remainder reflecting stronger light vehicle markets.

South America sales totaled $209 million, or about 12% of sales, lower than last year by $11 million. Currency movements in Argentina and Brazil were the primary driver, lowering sales by about $41 million, offsetting volume increases of about $30 million due to slightly higher commercial vehicle production, as well as new business wins.

Asia-Pacific sales totaled $186 million, or 11% of total sales, about $45 million lower than a year ago, reflecting unfavorable currency of about $13 million, principally attributable to the weakness of both Indian and Thai currencies, and continued lower demand for both light and commercial vehicles in India and Thailand. The chart to the bottom left shows a change in sales by business segment, while the chart to the right shows the key drivers of the change.

Currency lowered sales by $44 million, mostly impacting our light and commercial vehicle driveline businesses, with off-highway benefiting from a stronger euro. Volume and mix increased sales by $57 million, benefiting all of our business units other than off-highway, which was impacted by a lower mining and after-market related demand, and the effects of a customer insourcing about mid last year.

Slide 11 provides a comparison of adjusted EBITDA, 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 was $165 million for the quarter, providing 9.8% margin, $7 million higher than a year ago, and 40 basis points better, even with the bolivar devaluation that lowered margin by 100 basis points in the quarter.

Volume and mix provided a benefit of $13 million. While transactional currency gains contributed to currency being a net positive of $5 million. As highlighted, as of March 31, we remeasured our net assets in Venezuela using the published SICAD rate, which resulted in a devaluation charge of $17 million compared to a charge of $6 million in the first quarter of last year, and an $11 million year-over-year headwind.

Slide 12 provides some additional color on Venezuela. As I'm sure you all know, the current business environment in Venezuela remains challenging. Continued social and economic instability has disrupted many consumer markets. And the lack of accessible hard currency has made it difficult to import raw material into the country, driving automotive production to a virtual standstill.

Even our non-automotive tube mill business is relying on the availability of steel, and is often in short supply. These factors have led to a decline in our expected sales to automotive OE customers. While there has been no official change in the bolivar exchange rate, the Venezuelan government agency responsible for foreign exchange has indicated that the official exchange rate of 6.3 bolivars per US dollar would not be available to all industries through the CADIVI process.

We believe the new SICAD rate, which was 10.7 bolivars to the US dollar at the end of March, is now the more appropriate rate to use for remeasurement of our Venezuelan operations. Our guidance issued at the beginning of this year assumed a devaluation in the official rate to 9.5 during the course of the first quarter, and would have had an estimated adjusted EBITDA impact of about $12 million. The $17 million charge we took in the first quarter of this year was due to the higher rate, as well as higher net assets. The SICAD rate relies on an auction process, so further fluctuation of rate and our earnings is possible, as we progress through the year.

Our full-year financial targets include the assumption that OE production will resume early in the second half of the year. Assuming production does resume, we expect our sales in Venezuela to be about $150 million this year. Higher after-market and non-automotive sales in the first quarter did provide an offset to the OE environment; yet, those sales, as well, are dependent upon the availability of raw materials. We are working with our customers on long-term solutions to this very difficult business situation; yet, continuing uncertainty surrounding the current environment in Venezuela certainly present a potential challenge to our 2014 financial targets.

Our current guidance assumes a restart to production. And we expect to end the year with a $10 million EBITDA loss, as we do not expect to recoup the full amount of the devaluation impact this year. In the event that production does not resume as expected, or we are unable to obtain raw materials to cost effectively operate the business, the required statutory people costs and other carrying costs we have in the business would reduce our earnings. We do currently estimate that a scenario of nominal or no automotive after-market and non-automotive production during the last nine months of 2014 could further reduce our full-year earnings by as much as $40 million.

The next two slides highlight our first-quarter results by business unit. Light vehicle driveline sales of $618 million were about even with last year. Currency lowered sales by $27 million and was equally offset by higher volume, principally in North America and the United Kingdom.

Segment EBITDA was $30 million in the quarter, $11 million lower than a year ago. And while the business converted well in additional volume in the quarter, this was offset by both the Venezuela devaluation impact, timing of certain inflation recoveries, and some engineering investment. Excluding the current quarter devaluation, segment EBITDA margin in this business would have been 7.6%.

Commercial vehicle driveline sales of $457 million were also about even with last year. Currency lowered sales by $24 million, mostly due to weakening of the Brazilian reais. Volume was higher by $23 million, reflecting increased demand in both North America and Brazil.

Segment EBITDA was $44 million, $3 million higher than last year. Transactional currency gains in Argentina and Mexico contributed $1 million positive currency benefit compared to last year, while higher volume lifted segment EBITDA by about $5 million. Performance was a slight headwind, reflecting some pricing and the timing of material and inflationary recoveries, as well. Segment EBITDA margin of 9.6% improved 60 basis points compared with last year.

Turning to slide 14, off-highway driveline first-quarter sales totaled $341 million in the quarter, slightly lower than last year. Favorable currency mostly offset the impact of lower volume and mix. And while off-highway experienced higher construction sales compared to last year, lower mining equipment and related after-market demand and the impact of an insourcing action by a customer were more than offsetting.

Off-highway posted segment EBITDA of $42 million, or a margin of 12.3%, 30 basis points improvement higher than a year ago. Net cost efficiencies totaled $3 million, offsetting the margin impact of lower volumes, as well. Power technology sales, $272 million, were higher than a year ago by $16 million, driven by increased volume in North America and Europe.

Segment EBITDA, $44 million, was $8 million higher, reflecting the impact of higher volumes and improved mix, along with improved cost performance. Segment EBITDA margin was again strong this quarter, at 16.2%. That's a 210 basis point improvement compared to a year ago.

Turning to slide 15, I'll review free cash flow for the quarter. Free cash flow for the first quarter of 2014 was a use of $36 million, or $8 million better than a year ago.

Highlighting several of the more significant elements, working capital is a use of $110 million compared to a use of $98 million a year ago, reflecting normal seasonality and higher sales in the current quarter. Net cash interest was $53 million for the quarter, $25 million higher than last year, reflecting increased interest payments to service the $750 million in senior unsecured notes that we issued during the third quarter of 2013. This was partially offset in the quarter by the receipt of $40 million of previously accrued interest income on a note receivable that was sold in the first quarter of 2014.

Cash taxes were $27 million, $8 million higher than a year ago, largely reflecting the timing of estimated tax payments, as well as jurisdictional profitability. Capital spending was $36 million, $7 million higher than last year, as we continued to ramp up investment to support new programs.

Slide 16 highlights our cash, debt, and liquidity positions at the end of the first quarter. Cash and marketable securities totaled $1.26 billion, while outstanding debt was $1.6 billion, resulting in a net debt position of $340 million at the end of the quarter. Our liquidity position is highlighted in the right-hand side of this slide, and stood at $1.54 billion at the end of the quarter, which included $302 million of availability under our US credit facility.

As highlighted here, as well, we returned $64 million to shareholders during the course of the quarter through our share repurchase program, which is highlighted in the next slide. In the quarter, we repurchased 3.1 million shares in the open market and, to date, have returned to shareholders $893 million in the form of repurchases and redemptions since inception of our $1 billion share repurchase authorization in late 2012. During this time, we have reduced our total diluted share count by 42 million shares, including a redemption of our Series A preferred shares.

At the end of the quarter, we had about $107 million remaining under our program. And we will continue execution in a consistent and disciplined manner through the remainder of 2014.

Slide 18 highlights our full-year financial targets for 2014. And as highlighted here, our full-year financial targets remain unchanged from what we presented in February in our year-end report, although we now expect to be at the lower end of the range for sales and earnings performance, largely attributable to currency movements and our current expectation for Venezuela, as previously highlighted.

In summary, while we have reviewed the impact of Venezuela at some length during this presentation, it is very important to note that we are very pleased with our first-quarter results, and the business is performing well and certainly in line with our expectations. The Dana team continues to execute our plan, with a keen focus on providing increasing value to all of our stakeholders.

This concludes our presentation. We will turn the call over to the operator for any questions. Thank you very much.

(Operator Instructions)

Colin Langan from UBS.

Thanks for taking my questions. Any color on your ability to recoup the bolivar through the year? Of the $17 million, how much will you be able to get back from customers?

Yes, I think, Colin, if you look at the slide that we've highlighted here, we're calling for a loss from an EBITDA perspective, at least in our current assumptions, of about $10 million. Obviously the charge was $17 million in the first quarter. So, we do anticipate being able to work with our customers from a recovery perspective once production starts. Again, our assumption is in the second half of the year, early in the second half of the year, that we would be able to work with our customers moving forward.

And I think it's important to note, because a year ago we had experienced the same situation in the change in the official rate, obviously, in the first quarter. And the light vehicle driveline team did a great job working with the customer, not only from a devaluation, but the ongoing impacts of the lower currency, given that we import a significant amount of materials into Venezuela for ultimate production and provision to the customer. So, given a volume restart, if you will, we feel pretty confident that we will be able to work through that with the customers. But it is predicated on a volume restart.

And you said that you were already baking in a $12 million headwind associated with it. So it's about $5 million worse than your guidance anticipated. Is that right?

Yes, we had baked in between $12 million to $15 million overall, which included not only Venezuela, but also inflationary impacts in certain countries. But, to your point, that's about correct, what we had included in our full-year guidance at the start of the year.

And any color on the off-highway margin? It was very, very strong this quarter. Is that sustainable? And was that helped at all by currency?

Yes, if you look at -- did you say off-highway?

Yes.

Yes, if you take a look at off-highway -- I think two-fold. You've got two impacts going on here. I think they are doing a great job with respect to responding to the volume environment on a year-over-year basis, Colin.

As you know, obviously mining has had a significant impact on the business. And I think, quite frankly, they are trying to offset even the contribution margins there. And then concurrently they continue on the cost performance front straight up, in material savings, conversion costs, so on and so forth. So, I think they are doing yeoman's work.

And when that market recovers, which it certainly will, from our perspective, it may not be early in the course of 2014, but certainly as we move into 2015, the business is well positioned to capitalize upon an increased level of volume.

Is there any help from the exchange rate? Because I saw on the walk that overall EBITDA was, ex the bolivar, was actually a positive on FX.

Oh, wait -- you're talking about light vehicle or off-highway?

On the overall walk there seems to be a positive FX impact. In fact, I assumed it might have been in the off-highway.

Oh, I'm sorry, on the overall walk. Yes, let's touch back on the overall walk. That's highlighted, I think, on slide 11.

If you look at it year over year, obviously the devaluation impacted EBITDA, or just EBITDA by $11 million. We've highlighted the charge in the first quarter of 2014 and the first quarter of 2013. You're exactly right. To the right, you'll see FX actually was a benefit. We obviously continue to have transactional gains. We operate multiple currencies.

And what that basically is, is an offset on the $44 million FX, down what we had in sales. So, we did actually have a benefit largely around transactions on inter-Company loans, for example, that are denominated in different currencies versus functional currencies. So, we actually did have a benefit in the quarter from a transactional perspective that offset the translational impacts of FX.

Okay. All right. Thank you very much.

Patrick Archambault with Goldman Sachs.

Good morning. Thanks a lot for the call. I just wanted to build a bit on those questions. It sounds like you were implying $12 million to 15 million of negative impact from -- I guess you said it's Venezuela, but some other things, as well. Your estimate on a net basis is a $10 million headwind, so consistent with that, maybe at the low end.

And currencies are a tailwind as of the first quarter. And then the guidance for North America has been raised and offset the volume guidance for South America. So, can you just help me understand on the margin the move down towards the bottom end of the range, because there's a lot of moving pieces here. I'm probably missing some of it.

Yes, Patrick, it's Bill. Let me try to provide you some clarity. With respect to Venezuela, certainly there's a currency impact. But concurrently, when we said $12 million to $15 million, that presumed that we would actually have production January 1 from an OE perspective.

So, if you think about that $10 million expected EBITDA loss now for the full year, we are not going to be in a position to recover the first- half sunk costs, that being the cost of our fixed costs charges, largely labor. So, you've got not only a currency impact, which was in our guidance, but the impact that we did not have in our guidance was the headwind of no OEM production during the first half. That certainly is a headwind to our guidance in February, why we are then bringing it down to the lower end of the range with respect to our earnings metrics.

On the top side, when you say tail wind on FX, we had called out, we thought year over year we would be down about $220 million. We're looking at, with the movements not only in South America but to certain currencies in Asia, that number is more like $240 million, $250 million move down. So, we're seeing still some currency headwinds compared to guidance, maybe a tailwind moving forward from where we're at currently, but from a guidance perspective, Patrick, the top line was certainly impacted by FX moves early in the first quarter.

Okay. So, it's just that the recoveries that you got on an EBIT perspective not necessarily are going to be at the same pace.

Correct.

Okay. So, it sounds like collectively, Venezuela currency and fundamental impact, is probably more like $22 million to $25 million.

Correct. Based on our current assumption. And, Patrick, one other point I would make here is, I think you're spot-on here, if you step back not only on our first-quarter performance but the full-year guidance, quite frankly, it really is around the position we have in Venezuela, what's going on in Venezuela with respect to production, and then obviously the fact that without production it is very difficult for us to recover not only devaluation impacts, let alone recover sunk cost. We need to maintain the employee levels that are in the country, under government law.

So, you're exactly right. This really is around our position and assumptions on Venezuela. The other businesses are performing quite well.

And then -- okay -- just the last question I have on Venezuela is, as you go into -- so we think about the cadence, you're assuming that the issues get sorted out and production resumes in the second half. If things don't get better, what are we -- actually, let me take a step back. If things remain as they are for the first half in the second quarter, what kind of hit would you be contemplating for Q2? And then I suppose we can figure out what that implies in terms of stuff coming back for the second half.

Yes, we tried to size that. We're not really providing it by quarter. We tried to size it in our comments, that if we had little or no production for the rest of the nine months or the rest of the year, if you will, we probably have further upside risk from an earnings perspective of about $40 million that is not included in our guidance.

So, if you think about from just, I'll call it, a fixed cost structure, that would be a range of about $4 million to $5 million per month of a fixed cost structure. So you can come back into quarters. If it's a cadence and second quarter is going to be light, other than if we continue to have some benefits on the after-market side -- but we have to have availability of raw material, mostly steel -- you can see that cadence. It's, I would say, largely second-half loaded, the recovery piece. So, there's going to be some pressure on the second quarter just how we have assumption with respect to OEM production commencing.

Okay. So, it looks like you'd probably be losing $12 million in the second quarter, just simple math. And then, so that gets you to $30 million for the year and then you would recoup $20 million of that in the second half, would be the base case. Or, no, I'm probably actually -- because you also have the currency impact that I'm not netting. Okay. But, generally speaking, the $12 million is directionally what you have for Q2, if the status quo is sustained for the balance of the quarter.

I would suggest it's probably a little lighter than that, without giving you quarterly guidance, Patrick, because we expect to have some production in the second quarter, non-OEM, which would be largely around -- we have a tube mill operation in Venezuela. That's industrial products and after-market products, and probably some after-market business out at the other location. So, I think you're a little heavy there, Pat.

Okay. Just shifting gears, just quickly, to Latin America in general, or Brazil specifically, can you just give us the quarterly color? It sounded like the beginning of the year hadn't gotten off to a bad start. I know March was weaker, but I think the timing -- Carnival -- shifted things around. But as you're looking forward, you said that you're seeing inventories build up. Can you just give us a little color on how the order book is playing out, and what's holding people back, if it's just macro, if it's [fanahmay], what other issues are having you change your outlook?

Yes, Patrick, this is Roger. As you said, it didn't start off too bad, actually, in the first quarter of the year. But we watch an awful lot of factors in every region of the world that we operate in. And we do see the inventories climbing a little bit, principally because the exports out of Brazil are falling, and because of all the other issues that we're talking about here.

So, it is for that reason that we've tempered slightly our thoughts on what the rest of the year might look like in Brazil because, while we don't think it's going to fall off a cliff at all, we tempered it just because the inventories are rising. We understand why they are rising. It's the falling of the exports, and the falling of the exports are due to the surrounding countries that we've just talked about.

So, we don't see it as a major issue, but we thought it responsible for us to just temper that down a little bit. And, again, we believe that the tempering up a little bit in North America could offset that. So we think that they are going to be marginal.

And if I could just follow up on that, it sounds like fundamentally the demand picture within Brazil is not necessarily what's changed as much.

No, I think principally it's, from what we can see, it's more about where the product goes outside of Brazil.

Okay. Terrific. Thanks a lot. I appreciate the color.

Brian Johnson with Barclays.

A few more questions on South America. Sorry. First question, a couple questions -- one, both for the Venezuelan impact and for the Brazilian currency, you've talked from time to time in the past of potential accommodations from customers for the currency pressures in Brazil and the inflation there, and for the situation in Venezuela. Anything there that might help offset any of these pressures?

Yes, Brian, it's Bill. I think with respect to our operations, not really Brazil, it's largely Argentina and Venezuela where we have good mechanisms and good discussions with customers with respect to the inflationary pressures in both those countries, certainly over time, as well as certainly a volatile currency environment. Not so much in Brazil. But we do have recovery mechanisms in place, working with customers.

I think Venezuela is a little different in our current structure, or current environment, than it was a year ago because in fact you could have dialogue discussion, because in fact there was production going on. Not only are we in the position, but many of our OE customers and colleagues are in the same position, in Venezuela with respect to no production. So obviously, it would be a difficult discussion to have that, given that environment.

So, in production environments where you've got highly inflationary countries, the ability to obviously work with customers downstream, if you will, upstream and then downstream, certainly presents an opportunity. Currently as we see it in Venezuela, at least for the first half of 2014, we're probably not going to be in that position, given there's not production.

Which gets to my second question. You've outlined the EBITDA impact of Venezuela. But if we think of those operations akin to an equity income stake, what's the kind of cash that's going back and forth and then locked up in Venezuela? So, what impact does the EBITDA drag actually therefore have on parent Dana cash?

In fact, Brian, there's no cash moving out of Venezuela. This has been a discussion we've had for almost 14, 15 months, as we've continued to work through this. The cash, obviously exchange mechanism is controlled by the government.

The cash burn, we estimate -- and we tried to highlight on the slide -- is, with no production is $4.5 million to $5 million a month. But that obviously from a cash perspective. Venezuela at a US dollar equivalent has about $32 million in cash at the end of March 2014. That's obviously at the 10.7 exchange rate. So, you can do the math on what the burn is and the cash available there.

But make no doubt about it, Brian, there's not cash moving out of Venezuela currently.

Okay. So, what little cash you could repatriate, if and when they ever let it leave the country, is being reduced by the burn rate in Venezuela. So, it's self-contained.

It's self-contained, you're exactly right. Yes.

Which is, at some point, not to remind you of where both Dana and your former employer have been in the past, but at some point can you just put that unit in your receivership? I assume your customers -- maybe customers are even thinking the same thing. And what happens when there's still a burn and there's no cash left in Venezuela?

Yes, Brian, this is Roger. As I had mentioned in my talk and also in previous calls, we're looking at the options to be able to make sure that we're able to support our customers with the product that they need, and do it in a way that doesn't negatively impact the Dana shareholders. So those are the two boundaries of what we're looking at from optionality.

There are opportunities. If -- not if, but when the production does start up, we plan on being in a position with our customers at that point in time to be able to solve that equation, make sure that they're supplied with product and make sure that that supply of product to them doesn't negatively impact the Dana shareholders.

As Bill has articulated quite a bit here, we're doing everything we possibly can do right now in this environment. And then parallel with that -- and, by the way, I think our teams are doing a marvelous job with what they have been able to do in the first quarter down there. Very, very fast reacting to the changing conditions of what's on the ground. So they have done a really nice job with that. But parallel to that, we are looking out into the future as to when this production restarts and what the business conditions have to be. And we're looking at a number of alternatives for that.

Okay. Thanks.

Ryan Brinkman with JPMorgan.

Hi. Thanks for taking my questions. Just one on Power Technologies, for example. Your margin there, it really inflected this quarter. And it looks like performance was a big part of that. So the question is, is this quarter's margin rate sustainable, or was there maybe something, maybe some commercial settlements or other factor in there, which might not repeat to the same degree?

Yes, Ryan, it's Bill. I would echo Power Technologies had a very nice quarter with respect to both absolutes, as well as the margin performance from a year-over-year basis and just an absolute basis. And if you take that walk here we've laid out, they converted about 26%, 27% of the volume they had. They had very good mix, largely coming out of the European operations, weighted a bit more to the after-market side of the house.

So, I think if that weighting would continue there's obviously a run rate here that may be sustained. We're not expecting that, because there's obviously some, I think, choppiness, if you will, with respect to after-market rewards. But, in general, they had a really sound volume mix. Converted well on it in the quarter. We're still highlighting that range of 15%-plus for the year. That would be embedded in our guidance, our full-year guidance.

And then, concurrently on the performance front, nothing really unusual here. Good material recovery -- when I say recovery, I should say efficiency -- as well as just base cost efficiencies. So, they are off to a good start. We're optimistic that, as we proceed in the year in a rising tide, hopefully, from a production environment perspective in their particular products, they're going to have a good year.

Ryan, this is Roger. To complement maybe what Bill said there, the group did a fantastic job in the first quarter at converting on the slightly increased sales that they had. And we've said for quite some time here over the past couple of years that, as we work in these volatile market end markets that we're serving, simultaneous with dealing with those markets, we have been methodically improving the base business from a cost structure standpoint and from a being-ready standpoint for the market's upturn.

And that's why we've articulated our optimism as we move forward with not only PTG in this situation, but businesses like the off-highway business that's operating, that are arguably well down from the median of the cycle and still performing very well. As a result of the focus that we've had on the business fundamentals, if you will, and now being excited for when these businesses start to turn up, being able to turn those incrementals. That's what little bit you've seen with PTG.

Whether it's maintainable at that level or not, we've held what we originally said because there was a good flavor of after-market in there, which they do a nice job on. But they also do a nice job on the OE side of the business. And so, overall, they are performing very strong and we expect them to continue strong in the rest of the year.

Okay, great. That's all very encouraging. Maybe just moving over to off-highway driveline, then, you brought it up. I know the end market remains challenging, but it does seem that the revenue declines have really moderated quite a bit. Do you see this as more of a year-over-year compare issue? Or are you starting to see some end market stabilization? If so, in what categories?

And then maybe while you're at it, just update us on -- harder for us to gauge from the outside -- the latest trends on the mining end markets, which you had earlier called out as a big downside driver. Is that starting to improve at all?

Yes, I think the first part of your question is accurate. We've seen some stabilization in the markets. And, again, I've got to give a plug to the team that's in place running that business on a worldwide basis. As that market has declined, they've done a remarkable job on the operations side of the business to prepare themselves for right now.

So, we've seen relative stabilization. Even in the mining it's fairly well stabilized, but on a very low level. And, so, if we move to talking about mining here for a second, we believe that it's a good market to be in, it's just not very good right at this moment. It's down pretty low. It will come back. And we're not expecting it actually to come back this year, but we're optimistic that it will be coming back in the not too distant future.

But we haven't put it in our plans that it's going to come back earlier. So, we're cautious on that and we're watching that. But we're very well positioned when that market does come back. This team is ready for it.

Okay, great. Thanks again. And then just definitely last question, relative to that yeoman's work that is being done regarding cost in off-highway driveline, should we think about these savings as permanent increases in efficiency and therefore margin? Or is there maybe some element in there related to maximizing efficiency in the current lower volume environment, which could necessitate putting some costs back in, say, in the event of a market recovery? Maybe another way of asking the question is, can I just model now a normalized incremental margin off of the stronger margins today? Or do I need to think about maybe modeling a little bit less incremental than maybe I otherwise would have?

No, I think you can certainly model the former. If you think about what we've highlighted on off-highway, for this quarter in particular as well, from just the straight-up performance line that we highlight here, much of that's coming from the work they are doing on materials. And by default, I would say those are nonrecurring once you get the materials save, the material efficiency, be it different materials, lighter materials, less content. It's embedded in your cost base. So definitely, Ryan, I would say it's the former, not the latter.

Okay, great. Thanks for all the color.

Joe Spak with RBC.

Hi. Good morning. Thanks for taking my call. Maybe just actually quickly building off that last question on Power Technologies, I can appreciate after-market being better mix. Can you remind us maybe the end market exposure within Power Technologies between light vehicle and commercial? And is there any mix benefit from end market in that segment, as well?

We can probably give you some end market. Included in our presentation way back in the deck, Joe, is we provide a segment profile. So, if you look at Power Tech, obviously from a customer perspective, for example, Caterpillar is a top five customer. Not only do they have light vehicle, they also have construction, they will have heavy, as well. So, they are broadly distributed, not only just in the light vehicle market, but in other markets.

So I think that's a piece of the puzzle with respect to, I would say, the buoyancy and the margins that they've seen moving forward. Also, you can see here from a European perspective, the business, still 40% or so in Europe, 50%, let's say, in North America. And as we see any type of pickup in Europe, we've got a good foothold there, great operations there.

They convert on that volume and, really, we see part of it -- to our comments earlier was, quite frankly, I saw some uptick in Europe, capitalizing from an OE perspective, as well as capitalizing on some uptick in the aftermarket. So, they had a lot of the right things moving in the right direction this quarter.

Okay. Maybe moving on to commercial vehicle in South America, I know you talked about some rising inventories in Brazil. And I think you've talked down the growth there a little bit, I think, versus your prior guidance. Correct me if I'm wrong, but did you actually change, all the way in the back, your volume outlook? And if not, why not? There's a couple other players out today talking nonproduction in South America.

Yes, Joe, it's Bill again. If you look at batch on our production volumes, that range in South America on medium and heavy truck, we had a range of 200 to 210. I think just on our comments with respect to the lower end of the guidance, you could attribute probably some of that.

If you're talking only about South America from a volume perspective, it would be attributable to commercial vehicle. But to Roger's comments, as well, with respect to the Class 8 side in North America, we're pretty well balanced right now, at least from our forecast perspective. Some may say we're cautious on Class 8. We've moved it up from 260-270, 265 to 275. But, at the same time, we remain very positive in that market, as well. All in all, it's a balanced approach with respect to closing off a first quarter here with the rest of the year ahead of us.

And is maybe the cautious outlook on the Class 8 side not fully knowing when -- the orders have been strong, but not knowing when the production will fall, whether it be end of this year or maybe early 2015?

Joe, it's Mark Wallace. We are definitely seeing net orders picking up. We're seeing the backlog that our OEs pick up, and we're seeing the actual build rates begin to pick up. So, we are definitely seeing the signals in the market space that we are going to see an upturn. We're just yet cautious on what's going to happen in full year at this stage, but we are definitely seeing the trend in the right direction.

Okay. And maybe this is a little naive, and please correct me if it is, but the fact that you've revalued Venezuela and obviously a bunch of the large automakers have, as well, should that be interpreted as a sign that production will start up at some point in the coming months? Is that what leaves you guardedly optimistic that there will be production in the back half of the year?

Yes, I think that's one indicator. I think the other indicator is just having some dialogue with customers with respect to production in general. Venezuela has gone through this volatility over the last 30 years, right? 20 years, let's say. And I think I would say it's a guarded assumption that we'll have OE production in the second half.

The rate certainly is one indicator. But I think just over time with the discussions going on with customers, discussions going on with government officials, not only in Venezuela, but in Brazil, at some point in time this has got to come to some head, if you will. If it's not the third quarter, maybe it's the fourth. But we are presuming right now it's a commencement in the second quarter.

Okay. Thanks a lot.

Third quarter, I'm sorry -- second half.

Brett Hoselton with KeyBanc.

Good morning, gentlemen. I wanted to start off just talking about the light vehicle driveline margins. If I look over the past three years, they've been in that mid, maybe a little bit upper, 9% range -- 9.7% for the full year. If I look at the first quarter of 2013, if I adjust for FX, I get around 8.4% adjusted. And if I adjust for the Venezuelan stuff here this quarter, I end up with 6.6% adjusted margins.

And, so, I'm wondering two things here. One, why are margins so unusually low here in the first quarter beyond Venezuela? There's obviously something else impacting. And then, secondly, how do I think about margins progressing going forward? It seems like the underlying production here, primarily in North America, is pretty positive for that segment. But it doesn't seem as though the margins are necessarily getting the positive benefit of that.

Brett, hi. Good morning. It's Mark Wallace. Just talking about the margins a little bit relative, on a year-over-year basis, looking at Venezuela, actually when you look at it, if you just look at the devaluation portion, Q1 of 2013 versus Q1 of 2014 are dead even actually. We do have a little bit of a headwind, when you look at taking out all of Venezuela to include the volume of about 30 to 40 basis points.

Again, we mentioned early that we are investing in engineering to support our backlog that we reported back in January, as well as we're increasing our investments in our new contingency variable planetary transmission technology, as well. However, we do not expect that to be a headwind. We expect, excluding Venezuela, we'll see our margin appreciation approximately around 10% this year.

So we do expect that the rest of our business will continue to see margin appreciation, both from the cost perspective, as well as new programs are coming on at a better margin.

Excellent. And then I was hoping to talk just a little bit about capital deployment. Where might you be at in terms of establishing maybe a more official leverage target? I don't know if you're expecting to. And if so, is there a particular timeframe that you have in mind there?

Yes, Brett, it's Bill. Thank God I couldn't get off the call without one of these questions (laughter). Actually, it's a great discussion and it's a great question, quite frankly. We've continued to refine the capital allocation approach here. And obviously you're starting to see the resulting capital structure as we move forward here.

We've been having a lot of dialogue internally, certainly with the Board, with respect to how to position the Company from a leverage perspective, what's the appropriate capital structure, given the current environment, as well as long-term environment. So, Brett, not trying to walk around it a bit, but certainly that may be a place that we go here into the future with respect to more refining and expectation for the market, with respect to a, one, level of leverage that's appropriate for the business in the current environment, as well as where we need to move to get to a leverage number.

So, I think it's an excellent question, to tell you the truth. We're continuing to refine that process. And I have to just say we'll progress it during the course of 2014. We can't really put a timeframe on that, but certainly it is a priority with the Company, as well as the Board.

Fair enough. Thank you very much, gentlemen.

John Lovallo with Merrill Lynch.

Hi, guys. Thanks for taking the call. Just going to touch on Venezuela quickly here. One quick question here. Bill, as you mentioned, the currency fluctuations have been something that's been around for quite a while. The question is, how critical is being in Venezuela to your business? Is it necessary in order to supply global platforms? Or is this something that eventually you guys might be able to move out of and perhaps source from other regions?

Yes, John, that's a great question, and it relates back to -- this is Roger, sorry -- and it relates back to what we had mentioned a little bit earlier. We're really evaluating all the options. And, again, the goal post for us is to make sure that our customers can build the vehicles they want to build wherever they want to build them. That's what we do.

But the other goal post is to make sure that we can accomplish that objective and make it be a good supply scenario for Dana. And we continue to work with our customers on that. Obviously, we're working with them a lot on that right now because of the current situation in Venezuela.

What that means long term for Venezuela, we're not quite sure yet. But, as we said, we've got a good team in place that's able to react very fast down there, like they did in the first quarter. And we have some other business there, as well.

So, we don't yet have the final answer because it hasn't unfolded down there in terms of knowing exactly what's ultimately going to happen. But we are taking a hard look at all the options that we have, again to make sure that we fit those two goal posts that really are driving our decisions.

That's very helpful. Next question would be on DDAC, if you can maybe give us a little update on how that business is progressing. And maybe even how should we be thinking about equity income perhaps throughout the remainder of the year?

It's Bill. We're going to file the 10-Q later on this afternoon, I believe. And what you'll see in it, we highlight DDAC a bit. We did see an uptick in sales first quarter on a year-over-year basis. Still around, obviously, potentially Euro 4 implementation mid year.

The build's been good. They posted about $200 million in sales in 2014 first quarter compared to $190 million in 2013.

On the equity income front, they actually had a good quarter with respect to the current volume. What we've got is, we've got some adjustments that we're booking because we convert their statements into US GAAP. So, you're not necessarily seeing the full picture on equity income for DDAC.

But, if you look at it, I think last year, you saw a nice progression up. I don't think -- we're not giving guidance on a particular line item. But I think if the market holds in China, I think the second half is probably more of a question on how that unfolds post-implementation of Euro 4. But we're seeing a nice move up with respect to the equity income on the business over the last several years.

Great. That's helpful. And a final question for Roger. There's been a lot of talk about lightweighting of vehicles, the introduction of aluminum, and so forth. I know you guys have introduced aluminum into some of your axles and products. Is there an opportunity for bringing more lightweight materials into your product and potentially even taking further weight out down the line?

Absolutely. That's a huge focus that we have in the business. We've been doing it over the last couple years. And a number of the Product Technologies that are being worked on right now are focused on doing that.

Not only, John, in lightweight materials, but also in the design of the overall product, if you will, in terms of accomplishing the function maybe with less componentry in it. So, the overall objective is taking weight out of the vehicle for fuel economy benefits.

And as I mentioned in my talk, the discussions that I had with the senior executives at our customers in those two shows, that is something that they talked about a lot with me, and appreciating that we focused on that in the last couple years, and that their engineering teams are really working hard with our engineering teams to get those incorporated. So it's a huge focus of ours.

Great. Thanks very much, guys.

Brian Sponheimer with Gabelli & Company.

Hi, guys. Good morning. Just a question on the cash flow in the quarter. You guys did a nice job on free cash. Outflow was reduced by, what? $8 million, about an $8 million increase in CapEx. What's going on there? Is that just better working capital?

Yes, if you take a look at slide 15, Brian, we highlight that here. Obviously we had an uptick in interest expense given the capital market activities we took on.

Working capital is about flat. I mean, it's slightly $12 million higher here, but obviously sales were up. I think a piece of the puzzle here buoying this a little bit was we did receive previously accrued interest income of about $40 million in the quarter. We had updated our guidance in February, recognizing that we sold a note on to a third party that we had existing on the balance sheet. So, that's buoying it a little bit because quarter over quarter, you would expect actually a little more of a headwind there, given the $750 million in senior unsecured notes that we took out in the third quarter of 2013.

But, in general, I think everything's in line. We are making some additional incremental investment from a capital perspective. We talked about that in our full-year guidance, a range of $210 million to $230 million, a lot of that around new program investment as we move forward to support the backlog. But all in all, lot of focus on the cash flow of the business as we move forward. So, we, as well, believe it was good performance.

All right. Thank you. And just looking a little bit deeper at the balance sheet, notice that common shares outstanding actually rose in the quarter. Did you guys see some conversion on the Series B during the quarter?

Yes, we actually, we actually did. And if you think about it -- we can disclose that, right? Like 1.7 million? 1.7 million conversion.

Okay. So, as that number now, carry it 206 on the balance sheet, it was 372 at year end. Anything from -- you talked about that capital allocation and capital structure perspective. Would you be more willing to try and get something done with the shareholders of the B just to get it off the balance sheet?

Yes, right now we're at about 2.1 million Series B preferreds outstanding at the end of the quarter. I think we're always -- we always talk to important shareholders. That certainly is part of the capital structure approach that we've taken over the last, let's say, 16 months. So we're certainly open to it.

But certainly as we've moved forward, there is a mandatory conversion process there. There's been a lot of voluntary conversions in that particular tranche. So we're willing to listen, but I don't think we'd do anything out of the ordinary, at this point at least.

Okay. Thank you very much.

Patrick Nolan with Deutsche Bank.

Hi. Thanks for taking my question. Just had two quick questions left. First, just trying to assess the risk of this $40 million of risk in Venezuela if it's zero production. Can you give us some help directionally of what you're assuming in the second half as far as where production rates come back to versus where they were last year? Is it half of what they were in the second half of 2013? Is it something more than that? Just so we can get a feel for what the risk is for that $40 million of EBITDA.

Patrick, it's Mark Wallace. We expect it to come back at the same rate as it was in the back half. Obviously, there's an adjustment on the revenue side for the devaluation portion, but we expect about the same production volume as the back half of 2013.

Okay. That's helpful. And just one housekeeping question, Bill. The $17 million impact from Venezuela in the quarter, how much of that was the one-time hit related to the asset devaluation and how much was the operating impact?

Actually, Patrick, all of that $17 million, because we remeasured at the end of March, the entire $17 million is just the remeasurement charge.

So, as we're walking to Q1 2015, it should be a $17 million benefit, assuming all else equal? It's one-time in nature, correct?

It depends as you're moving -- I mean, it's embedded right now, because you've got a 10.7 rate. It's a one-time devaluation charge, but your ongoing cost base effectively now is at that rate. But you're exactly -- I mean, it's a one-time devaluation charge, Pat, in entirety, the $17 million.

Okay. Thanks very much, guys. Appreciate you taking my questions.

Okay. Thanks very much. We've reached the end of our time. I want to thank all of you for joining the call this morning. Thank you.

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