Dana Inc (DAN) 2014 Q3 法說會逐字稿

Good morning and welcome to Dana Holding Corp's third quarter financial webcast and conference call. Please be advised that our meeting today, both the speaker's remarks and Q&A session, will be recorded for replay purposes.

(Operator Instructions)

At this time, I would like to begin by turning call over to Dana's Director of Investor Relations, Craig Barber. Please go ahead Mr. Barber.

Thanks, Brent, and thank you for joining us today for Dana's third quarter 2014 earnings review.

Copies of our press release and 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 include Q&A session. In order to allow as many questions as possible, please keep your questions brief.

Today's presentation includes some forward-looking statements about our expectation for Dana's future performance. Actual results could differ from those suggested by our comments here. Additional information about the factors that could affect future results are summarized in our Safe Harbor Statement. These risk factors are also detailed in our public filings, including our annual quarterly and current reports with the SEC.

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 our On-Highway Driveline Technologies.

I will now turn the call over to Roger Wood.

Thank you, Craig, and good morning, everyone.

I'm pleased to report another good quarter for Dana. For the third quarter of 2014, we recorded sales of about $1.6 billion and net income for the quarter at $90 million, with diluted adjusted earnings per share at $0.57. We improved our adjusted EBITDA margin by 20 basis points over third quarter last year to 12.1%, which is a sequential improvement of 10 basis points over the last quarter.

We continue to generate free cash flow, with this quarter coming in at $61 million. Our ability to manage our business and generate cash has enabled our Board of Directors in July to authorize an additional $400 million for our share repurchase program, and in this quarter alone, we have repurchased three million shares, returning $68 million to our shareholders. Since we started the program two years ago, we have been consistent in our execution and have returned over $1 billion to the shareholders.

Also this quarter we have simplified our capital structure by converting all remaining preferred stock into common. We now have just one class of shares outstanding.

As we look forward into next year and beyond, I'd like to take a minute and give a brief update on a few of our important program launches that we are in the middle of. On slide 5, we have talked before about our new business backlog that will come online beginning in 2015 and beyond, and we continue to feel great about how that is shaping up for us.

One of the most notable and earliest of these programs is the Chevy Colorado and GMC Canyon mid-sized pick up trucks, which feature our front and rear axles. We have just completed the final launch stages, and expect to be in full production in 2015. These trucks are creating a buzz in the marketplace with dealer orders exceeding expectations, according to automotive news.

Not only will these be the most powerful mid sized pick up trucks on the market, but they're being touted as most fuel efficient as well. In fact Green Car Journal recently named the Colorado a finalist for its green truck of the year award. Dana's Spicer AdvanTEK front and rear axles contribute to the efficiency and performance of these trucks but improving the fuel economy, while at the same time reducing noise vibration and harshness.

On slide 6, we show a sampling of some of our other exciting new programs that have recently launched, or are currently being launched. In the off-highway market, Caterpillar recently introduced the Cat 910K and 914 compact wheel loaders, which are setting a new standard for productivity, fuel efficiency, and comfort. Both are equipped with complete Spicer Drivelines that include drive axles, drive shafts, and either our single motor hydrostatic drop box, or our dual motor hydrostatic CVT gear box, which provides more power, greater efficiency, and better overall performance.

Our Spicer AdvenTEK 40 tandem drive axles are also proving very popular, with both Paccar and Navistar taking orders for them. Paccar's Kenworth Unit calls it an excellent, fuel-efficient addition for new Kenworth Class-A trucks; and Navistar's new ProStar uses the system to obtain higher torques at lower RPMs in order to enable engine down-speeding, which we all know is significant enabler of improved fuel efficiency.

Combined with our Spicer LiveSeries main drive line and inter-axle shaft, this system offers the fastest axle ratio in the industry to achieve even greater fuel efficiency at the same time reduced emissions. It is designed to handle the additional torque demands with less weight and greater reliability verses the conventional 6x4 tandems.

Finally our power technologies group has exciting new programs with some very important strategic customers. Cummins's latest ISX inline straight-6 diesel engine now feature's Dana's next generation fit-to-core 500 cylinder hide gaskets with multi-layer steel inserts. These customized gaskets aid heavy duty engines in meeting the extreme durability, the high stress, and pressure requirements for today's over the road hauling.

In addition, Volkswagen and Audi are offering transmissions with Dana's multi-layer steel transmission valve-body separator plates, which improve sealing efficiency and durability for advanced multi-speed, dual clutch, and continuously variable transmissions. We are very proud of this technology, and as you can see on slide 7, this transmission technology was selected as a finalist for the 2015 Automotive News PACE awards.

By leveraging our industry leading expertise and multi-layer steel technology, we can offer a product that's capable of withstanding three times the sealing pressures of current products in the market. The technology replaces traditional single layer body valve plates that uses paper gaskets that have limited sealing capability. And I'm happy to say that this technology is rapidly gaining acceptance with manufacturers of the most advanced multi-speed, dual clutch, and continuously variable transmissions.

With those product introductions summarized, let me turn it over to Bill for the detailed financial review for the third quarter and the rest of the year. Thank you

Thanks Roger, and good morning, everyone.

Our third quarter financial results are highlighted on slide 9. As Roger noted in his comments, our third quarter sales totals $1.637 billion, slightly lower than last year, with the change mostly driven by currency movements, and lowered demand principally driven by further weakness in South America and global off-highway end-markets. While sales were a bit lower than last year, adjusted EBITDA for third quarter totaled $198 million, equal to 2013, providing a margin on 12.1%, a 20 basis point improvement compared with last year.

Net income totaled $90 million compared with $68 million a year ago, a $22 million increase, driven principally by lower amortization, restructuring of pension expenses, partially offset by higher net interest expense in the quarter. Diluted adjusted EPS of $0.57 compares with $0.47 a year ago, reflecting both higher net income in the quarter, as well as a lower share count, related to the continued execution of our share repurchase program. As Roger noted as well, we posted strong free cash flow in the quarter of $61 million, $7 million better than last year's performance.

Now, let's go into some further detail. Slide 10 provides a sales comparison for the third quarter, our business segment performance, and the key drivers of the year-over-year change. North America sales totaled $780 million for the quarter, and represented 48% of sales, compared to 44% a year ago, as demand was higher for both light and commercial vehicles. Europe represented about 28% of sales, totaling $462 million for the quarter, $20 million lower than last year, largely driven by lower off-highway equipment demand.

South America sales totaled $203 million, or 12% of sales, lower than last year by $58 million. Lower volumes accounted for $26 million of the comparison, while weaker currencies, principally in this region, provided a further headwind of $32 million. While we did experience a slight increase in South America demand compared to the second quarter, that movement was weaker than what we had previously anticipated, driven principally by lower light and commercial vehicle demand.

Asia-Pacific Sales totaled $192 million, or 12% of total sales in the quarter, about $6 million lower than a year ago, largely attributable to lower production demand in Thailand and off-highway equipment demand in China.

The chart on the bottom left shows the change in sales by business segment, while chart to the right shows the key drivers of the change. Currency lowered sales by $35 million, largely driven by weaker Argentine and Venezuelan currencies with our light vehicle Driveline business being most impacted. Volume and mix lowered sales by $23 million in the quarter. Our off-highway business accounting for $35 million, reflecting persistent low demand for mining and agricultural equipment, which began last year, as well as some softening in construction equipment demand in the current quarter out of Europe.

Strong demand in North America for light and commercial vehicles was a partial offset by weaker end market demand in South America. Finally, pricing and recoveries principally benefiting our light vehicle Driveline business increased sales by $26 million in the quarter.

Now, let's review our adjusted EBITDA performance in the quarter. Similar to the sales comparison, slide 11 provides a comparison of our adjusted EBITDA performance in quarter, with the year over year change by business segment presented on the bottom left, and the key drivers presented on the bottom right of the slide. Adjusted EBITDA for the quarter was $198 million, equal to last year's performance, while margin increased by 20 basis points to 12.1%.

Focussing on the key drivers of the comparison, currency impacts reduced adjusted EBITDA by $7 million in the quarter, primarily representing weaker currencies in Venezuela and Argentina, impacting our light vehicle drive line business, net of sum transaction gains. During the third quarter, the Venezuela Bolivar, as measured by the SECAD-1 rate devalued from VEF10.6 to VEF12 to the US dollar, which resulted in a $3 million devaluation charge in the quarter. Also during the quarter, the Venezuela government approved a portion of Dana's pending US dollar requests at the official exchange rate of VEF6.3, which did produce a gain of $1 million, although that was comparable to last year's results.

Volume and mix lowered adjusted EBITDA performance by about $1 million in the quarter, reflecting sales changes across our business units, lower sales in our light vehicle and off-highway businesses offsetting gains in our commercial vehicle and power technologies businesses. Finally net pricing, recoveries, and cost performance of $11 million offset the impact of currency and volume mix in the quarter.

Let's move to slide 12 to review the performance of our business segments. Light Vehicle Driveline posted Sales of $608 million, compared to $629 million last year. Currency lowered sales by $32 million, reflecting weaker Venezuelan and Argentine currencies. Volume and mix lowered sales on quarter by about $11 million.

Increased demand in North America offset by lower volumes principally in South America. Performance increased sales by $22 million, driven principally by pricing and inflation recoveries in South America. Segment EBITDA was $70 million in the quarter, improving by $3 million compared to last year. Currency and the further devaluation of the Venezuela Bolivar lowered segment EBITDA by about $8 million, and lower volume and mix contributed an additional $2 million.

Cost performance was a net improvement, though, of $13 million reflecting the net impact of pricing and inflation recoveries in the quarter. Segment EBITDA margin of 11.5%, improved 80 basis points compared with a year ago.

Commercial vehicle and Driveline sales of $487 million were $22 million higher than the third quarter last year, reflecting higher volume of mix in North America of about $40 million, tempered by further weakness in Brazil. Pricing recoveries of $5 million in South America rounded out the sales comparison to last year.

Segment EBITDA was $47 million or 9.7% of sales, $5 million or 150 basis points lower than a year ago. Higher volume and mix was a positive $3 million in the quarter.

A couple of specific items contributed to an unfavorable performance in the quarter. First, we have a number of initiatives in process that are targeted to further optimize our supply chain for long term flexibility and efficiency. And, while our commercial vehicle supply -- or team, is very focused on the execution of these initiatives, we did incur some higher costs in the quarter to meet increased production demand in North America. But, we do expect these initiatives to be largely completed by the end of this year.

The second item was a True-Up of our warranty reserves in the quarter as we are seeing some elevated claims experience for certain legacy products. Finally, a year ago we recognized some currency gains in Argentina in connection with funding actions we took to execute the restructuring of our operations in the country, which obviously did not recur this year.

Off-highway Driveline and power technology Sales and segment EBITDA performance are outlined on the next slide. Off-highway Driveline third quarter sales totaled $283 million in the quarter, $35 million lower than last year.

Continued weakness in global mining and AG equipment demand accounted for almost 70% of the decline, with the remainder due to lower construction equipment demand in Europe, as well as Asia, that developed during the course of the current quarter. Even with this decline in end market demand, Off-highway posted segment EBITDA of $40 million, equal to last year's result and improved margin performance by 150 basis points to 14.1%. While lower sales impacted earnings by $3 million in the quarter, net cost performance of $3 million in the quarter offset that entire variance.

Power Technology sales of $259 million were $2 million higher than a year ago, driven by increased volume of $6 million ratably across North America and Europe, partially offset by currency headwinds of about $3 million, principally a weakening of the Canadian dollar, and net pricing of about $1 million. Segment EBITDA of $37 million was slightly lower than a year ago reflecting currency and lower net performance.

Our year to date sales and adjusted EBITDA performance are highlighted on slide 14. On year to date basis, 2014 sales totaled $5.035 billion, $110 million lower than last year. As highlighted on the lower left of this slide, currency effects accounted for a majority of the change, reducing sales by $107 million. South America alone lowered sales by $110 million.

Volume and mix accounted for $42 million, principally attributable to lower global off-highway demand, lower demand in South America, partially offset by improved demand in North America. Pricing and recovery actions, principally reflected in actions taken in our South American operations increased sales by $39 million compared with last year.

We continue to improve our margin profile, posting an increase of 20 basis points to 11.3% compared to last year, with adjusted EBITDA totaling $568 million through the third quarter. Performance, including the favorable impact of recovery actions initiated during the course of the year, has continued to mitigate the impacts of currency and lower demand.

Now let's turn to free cash flow for the quarter. Free cash flow in the quarter totaled $61 million compared to $54 million last year. As highlighted here, working capital is a use of $9 million compared to a benefit of about $28 million a year ago, although this swing this quarter is largely due to timing of accounts receivable collections.

Pension contributions for the quarter were $3 million, $33 million lower than last year as we are now required to make contributions to our US pension plans, given the significant funding actions taken in 2012 and 2013 and the resulted funding status of the plans. Cash taxes were $22 million, $17 million lower than a year ago, largely reflecting timing of estimated tax payments, as well as jurisdictional profitability.

Capital spending was $48 million in the quarter, slightly lower than last year. On a year-to-date basis, free cash flow for -- the total of $158 million, $12 million lower than last year, largely reflecting higher capital spending to support our new program launches, as well as slightly higher net interest.

Slide 16 summarizes our cash, debt, and liquidity positions at the end of September. Cash and marketable securities totaled $1.272 billion, while outstanding debt was $1.6 billion, resulting in net debt position of $337 million at the end of the quarter. Our liquidity position is highlighted on the right hand side of the slide, and at the end of September, stood at $1.576 billion, including $326 million of availability under our US credit facility.

And as noted here as well, for the third quarter, we have returned $211 million to shareholders in the form of share repurchases and dividends. And we continue to actively focus on capital allocation, and slide 17 summarizes actions we undertook in the third quarter.

As Roger mentioned previously, at September 30 we did complete the conversion of our remaining series B preferred shares into common stock, greatly streamlining Dana's capital structure, as well on July 30th, our Board of Directors authorized an additional $400 million for our existing share repurchase program, bringing the total program to $1.4 billion since initiated in late 2012.

Just as important, we continue to execute on this authorization, returning $68 million to shareholders by repurchasing three million shares of common stock in the third quarter. Since we started our share repurchase program, we have returned over $1 billion to shareholders, and have redeemed or repurchased 47 million common share equivalents.

Finally we continue to actively manage our pension exposure with a focus on reducing obligations. During the quarter, we initiated a program that would involve former salaried employees in the US, who are vested but not yet retired, to be eligible to voluntarily elect to receive a lump sum cash settlement. Existing plan assets will be used to fund the ultimate settlement and we don't expect a change in the overall funded position of our US plans post completion. We also expect to conclude this program in the fourth quarter of this year.

These actions reflect our focus on executing capital initiatives that drive long term shareholder value, while retaining financial flexibility to continue to invest in the business.

Finally, slide 18 provides full year financial targets for 2014. We have revised our full year sales and adjusted EBITDA targets to reflect currency headwinds in South America, as well as a weaker Euro and lower demand in South America and off-highway end markets. We expect full year sales to be about $6.65 billion, providing an adjusted EBITDA of $745 million, although affirming our expected EBITDA margin performance of about 11.2%.

We are increasing our expected diluted adjusted EPS guidance to a range of $1.93 to $1.96 per share, primarily reflecting the lower share count. We do still expect capital spending to be about $230 million for the year, and we have raised the low end of our free cash flow target to a range of $285 million to $295 million. We continue to expect our free cash flow to be at the higher end of that range.

For the fourth quarter, we expect sales will be slightly lower than our third quarter results. On a sequential basis, we expect light vehicle Driveline sales to be slightly higher than the third quarter as we continue our ramp up of program launches. On the commercial vehicle Driveline front, we expect a further decline in South America demand, with North America commercial vehicle production basically flat, which will lower sales in fourth quarter compared to the third.

Off-highway Driveline sales are expected to be slightly lower due to now anticipated end-market weakness in construction equipment demand. Finally, we expect power technology sales in fourth quarter to be slightly seasonally lower than the third quarter. We expect adjusted EBITDA to be lower in the fourth quarter compared to last year obviously in line with our sales expectations.

The third quarter was another good quarter for Dana, and we are well positioned to close the year achieving our margin and cash flow targets despite the impact of demand and currency movements our businesses have encountered. As we view 2015, at this time we are expecting several markets to remain relatively weak.

In particular, South America demand as well as global off highway end markets. For the time being, we don't expect a significant rebound in Europe, nor India and Thailand. However, North America currently remains a bright spot for both commercial and light vehicle demand, and at this time we are optimistic that the trend will continue into 2015.

Yet, as all of you know, 2015 is an important year for Dana for new business launches and I am pleased to say those remain on track, and even in a varied volume environment, we will execute our launch plans to drive profitable growth into the future, and we'll provide update of sales backlog in 2015 outlook in early January 2015.

So, this concludes our presentation, and we will now turn the call over to the operator for any questions. Thank you very much.

(Operator Instructions)

Your first question comes from Brett Hoselton with KeyBanc. Please go ahead with your question.

Good morning gentlemen.

Hi, Brett.

You guys continue to prove to be very, very good executers, so congratulations. Tough end markets in many respects, but very good executers. Well done there.

Thank you.

My question here is the performance numbers on slide 12. I was hoping you could kind of talk a little bit about, both in the light vehicle Driveline and the commercial vehicle Driveline, and I know you gave us a little insight into the CV issues, but you did $13 million to the positive in the light vehicle side. Can you talk a little bit about what's driving that? That's a very nice number.

Sure Brett. This is Bill. I certainly appreciate your commentary and reflection on our results very much.

Really focusing on light vehicle Driveline, let me walk through a couple of the drivers. You will see currency, obviously. We will just start at the top, here. That's a $32 million head wind, driving about a $5 million move on EBITDA. That head wind of $32 million largely driven out of Venezuela and Argentina. Really, those two countries drive the bulk of that currency movement.

On the EBITDA impact, certainly we've had with those movements, we've had increases in cost in those operations that are being muted somewhat by some transaction gains that we've had, in particular in Venezuela. That movement may be a little bit higher given the countries we are operating in and the impact of that currency move.

If you tunnel down to Volume and mix of about $11 million and resulting not 2 million, that's about an 18% contribution margin, largely really out of South America and Asia Pacific, as we view those markets from a demand perspective. And to your point, last but not least, light vehicle has continued really during this quarter, as well as previous quarters, to initiate actions, discussions, with customers on recovery of not only inflation but potentially currency in a number of the markets that we operate in.

You can see here performance increasing sales by $22 million. That flow through about $13 million to segment EBITDA is really offsetting the inflation we have incurred from prior quarters as well, because there is a lag on recovery, but they're also performing within the business. Obviously, recovery action is very important given the countries we are operating in and maybe the condition of those current countries, light vehicle continues to execute on that front.

I can trundle very quickly over to commercial vehicle Driveline. I think the story here really from a volume mix perspective is, we've got an uptick demand environment in class A in North America. If you bifurcate North America from South America, it's increasing sales by $40 million.

The downtick, obviously South America, most notably in Brazil. That was a head wind, if you will, year over year about $20 million. That's effectively driving that increase in volume and mix. On the performance side, you will see that negative $7 million on a year-over-year basis.

A couple of issues or items that I identified in my commentary. One was, and we have maintained this all along, an opportunity we continue to see at Dana moving our margins forward, is to continue to execute on the material front of the company. We have a number of supply chain initiatives being executed by a commercial vehicle group, both external and internal, and while they are keenly focused on executing as efficiently as possible we did incur some higher premium cost given the demand that we saw in North America. That accounted for about $4 million of that $7 million.

Last but not least, we did talk about elevated warranty experience we are seeing. We adjusted warranty reserves by about $4 million in the quarter. That kind of rounds it out.

Thank you very much. Then share repurchase, $400 million additional authorization, here. You have been repurchasing at a rate of, give or take, around $50 million per quarter. What kind of a pace do you anticipate going forward? Is that probably a good representation of the pace that you might expect going forward, or do you think you might accelerate or decelerate the pace of share repurchases?

I think our run rate has probably been about $65 million or so a quarter. We have maintained all along -- other than the actions, obviously, we took with respect to series A, and then a large ASR last year, that we were going to be very disciplined; execute the remaining authorization under the $1.4 billion program throughout the course of, not only this year, but into 2015. The program does extend through the end of 2015. So, I think we'll keep apace.

You know, obviously acceleration or deceleration may be, if you will, influenced by the market with respect to the stock price, but again, we are trying to be very disciplined and consistent in the execution of cash return to the shareholders.

Excellent. Thank you very much Bill. Congratulations gentlemen.

Thank you.

Your next question comes from the line of Patrick Archambault with Goldman Sachs. Please go ahead with your question.

Thanks a lot guys, and congrats on the execution for the quarter.

Thanks Patrick.

Actually, I just had a couple questions on slide 21, some of the changes that you have made. You know, you took up your class 8, you know, guidance. I guess it's a 10,000 variance that seems kind of between your upside and your downside. That seems kind of big, just given there is two months left in the year.

My first question is, what are some of the factors that you think are affecting whether you come in at the bottom or top end of that range? And then related to that, how do you see your capability? I guess that's a market number, but how do you see specifically your capability to address an increase towards the top end?

Well, Patrick, this is Roger. I will take the first shot at that and then I'll let Mark provide clarity around it, as he is here with us as well. From a being able to meet the increase that we put in there, I don't see an issue with that really. You may be asking that question because of the performance in the third quarter of the CV group, but as Bill articulated, it's supplier initiatives that we are working on -- are setting the CV group up in a great way for going forward in the future to accomplish what we have already articulated our goals are out there. We feel very, very good about that. Despite some of the short term challenges that the group has been working through, we feel real good that they're getting through those challenges in an effective way, and we're going to be able to handle the uptick.

In terms of whether the uptick is solid or real or quite a sharp increase, we feel good about that only because of what we see out there in the marketplace as a backlog that's forming, out into the 2015 time frame; not only in the first quarter, but even out into what is beginning to be into the second quarter. So, we are feeling good about those and we are feeling good about our ability to meet those. Mark, I don't know if you have anything else to add into that.

Patrick, just looking in the near term, we are continuing to see back logs grow. Especially at our major customer, so that has given us a lot of confidence walking into Q1 that we'll continue to see strong class 8 production in North America.

Okay. That's helpful. Any kind of, just on that -- now that you are making some of these supplier initiatives to sort of free up your own capacity, if you will. What kind of, without even trying to predict where guidance is going to go on this market number, but what kind of an increase do you see yourselves able to handle next year? Obviously, the build rates for this year already have come in much higher than we thought at the beginning of the year, and even a couple months ago.

Yes, Patrick, on two fronts. One from a pure capacity perspective, we think we've got the market demands covered with our new initiatives. Second, part of those initiatives are around our cost base in the business, and we do expect that to be a tail wind into 2015 and beyond.

Okay. So, we'll get a feel for what increase you are contemplating in January. One follow up there, just on Europe. You know, I noticed that hadn't changed on the heavy truck side. It has on mining and construction, but on medium/heavy, you are still looking for kind of a 5%, 4%, I think, decrease. Now, I know that's not a real big business for you compared to the off-highway stuff. Still, I guess I was a little surprised by that, just given some of the negative headlines we've had about, from companies like, MAN and the like, taking out capacity and stuff like that. Maybe a little comment on that would be helpful.

Yes. I mean, at this stage, it is a small market for us in commercial vehicle, primarily our drive shaft business, and we do expect pressure into 2015, but nothing significant we are seeing at this stage that would make us have a radical change in where we position the market, at this stage.

Okay. So I guess the post-prebuy decline in production in kind of the second half is playing out as you expected to happen.

Exactly.

All right. Thanks a lot guys.

Your next question comes from the line of Patrick Nolan with Deutsche Bank. Please go ahead with your question.

Good morning, everyone.

Good morning, Patrick.

Excellent preliminary review on 2015 by region. I was wondering if we could talk a little bit about off-highway? I know you said, sequentially, expect a little bit of a decline as we go into Q4. Are we finding a bottom in that market? Do you worry that we're going to see kind of continued downward movement as we move into the first half of 2015, or do you think we have stabilized this low level? I know it's hard to say at this point, but I was just wondering your view.

That's a great question Patrick. This is Roger. From a mining perspective, we think it is about as low as it can probably go over the past several quarters. That said, our group is managing that piece of the business really, really well.

In terms of the other pieces of the business, we think that ag may taper down just slightly, maybe, into the beginning, but we don't see that as a major headwind for us. Obviously we'd rather see it go up, and we are very, very confident that in the long term, whenever that is, it will go up. But ag may be an area that it could taper down just a little bit.

But again, I want to reiterate on the off-highway business that we have. We are excited about that business, in spite of where we are in the market place in many segments they play in, because of the performance demonstration that they've had and the simultaneous increase in the engineering investment that we are making there and products they're putting in the market and the customer draw, if you will, on those products.

I know it doesn't mean much in the very, very short term when we talk about that, but I feel very good about the long term prospect for that business because of where they're at in delivering performance now and I know what's going on with the new product draw in the market place. So when those markets come up, I think we're really, really well positioned.

If I could ask one follow up to that, have you seen any change in the new business kind of bids that have come up, based on the fact that the volume has been weakening for the customers in that business? Are they still looking to put in some of the same type of innovation near term you have seen over the past couple of months, as far as bidding activity?

In the off-highway sector, Patrick?

Yes.

Absolutely. There is no question about that. They are looking at the regulatory framework that's facing them coming down the road, and there is no question about it. They are very, very interested in adopting the technologies that's going to help them with those regulatory frameworks,

And that's particularly true in some of the emerging areas of the world where their aspirations are to sell globally. They're really demonstrating a pull for it.

Thanks very much. I'll get back into queue.

Your next question comes from the line of Brian Sponheimer with Gabelli & Company. Please go on with your question.

Thanks for having me on. Tremendous execution here, really nice job.

Thank you.

Just a question on off-highway. Given you're in a flat -- in a down year from a sales perspective; you were flat in EBITDA. Should we start thinking about this as a structurally more profitable business than it's ever been, given that the costs that you've taken out and despite some of the headwinds in mining and ag?

I think, fundamentally, Brian -- this is Roger again. Fundamentally, that would be a true statement.

The work that that team has done in restructuring that business and positioning it as a technology player, and putting those solutions into the customer marketplace, I think fundamentally, what you said is true. You should think about it as a reset, if you will, of the margin performance of the business.

Brian, it's Bill. I think it would be different if it was a one quarter phenomenon. I think what you've seen in the off-highway side of the house, if you will, just really continued execution despite obviously a volatile end-market demand. Even on a year to date basis, I think they're posting up about 13.3% EBITDA margin.

Oh sure, it's been a straight march up from 11.8%, 12.3%, 13.7%, 14.1%--

It's just continued to move up. It's not, I would say -- when you say structural, certainly, I think of vast improvements made in the business focus on efficiencies, material, utilization, all the things. Those guys should be very proud of their performance.

Just to add Brian, we were asked in an earlier call one time about whether or not we had cut too much in the organization from a cost basis and my answer then was the same as it is now, that no, we've not done that. We've actually increased our spending on the engineering side both in terms of the percent and the absolute dollars.

So, we're the putting money investment where we think it's going to prove beneficial long term for the shareholders. At the same time they're doing a tremendous job on the cost side of the business for the current performance.

I appreciate that. If you are thinking about your exposure on ag and I think when analysts hear ag, they think big North American tractors and combines heading into a three year downturn here. Just talk about how you're exposed in the ag markets, and why you are only seeing just a little bit of softness.

Brian, it's Bill. I think ag represents let's say about 30% of off-highway sales, total sales. That's one piece of the puzzle. The other piece that you are getting to is, we don't really participate in high end, if you will, from the large combines, the mega farms, so on and so forth. We're kind of that middle market -- I'll call it mid-engine size, and that market actually has been fairly stable. It's coming down, but it's been probably more stable than the top, if you will. So, that's kind of the positioning of the business with respect to off-highway.

As we kind of move forward, while to Roger's point, we could see some continued softness maybe going into 2015. I think even with the technology pulls that are going on with those customers as well, in particular goes back your other question. I think the profitability of the product we provide into that market will be better actually, as we move forward.

So, from a profitability perspective on an equal basis of sales, we expect to see improved profits over the next several years with respect to the actions being taken by the off-highway group. Again, we are middle market, not real top end guys with respect to the ag side of the house.

Just one more if I can. Before changing over the Super Duty next year to aluminum, do you guys anticipate any kind of pull forward maybe of some earnings from 2016 into 2015 for light vehicle Driveline, as they build up a safety stock and then change over?

Brian, just a little bit of clarity. The F150 will be launching here at the end of the year--

No, no, the Super Duty. The one that you're on.

Yes, the Super Duty launches in 2016. I don't know that we're expecting any major pull-aheads. The volume continues to be very strong on the Super Duty platform. We have seen inventories remaining low on a year-over-year basis, so I expect next year to be a strong year in the Super Duty. I mean, we will see some change over that will begin to occur late next year and into 2016, but at this stage, we don't see anything that would say we'd see a significant increase or a significant decline in the volume of the current Super Duty.

All right, guys. Thank you very much. I will get back in line.

Thank you.

Thank you, Brian.

Your next question comes from line of Colin Langan with UBS. Please go ahead with your question.

Thanks for taking my questions. Looking at your commercial vehicle North America mix, it looks like your sales are up about 8%, but the market's up quite a bit more year to date. Up something like 18%, 19%. Any color on the year-to-date under performance in North America. Is that a customer mix issue or a product mix issue?

Colin, it's Mark Wallace. You are correct. Definitely, we have a large customer in Paccar, and we basically follow as they do in their market share gain. That's kind of the basis of how our revenue has been moving throughout 2014.

When I look at the income statement, other income was a positive $20 million. I believe it happened last quarter, but I thought it was mostly FX related, but when you look at segment walk, it looked like FX was a negative, so what is driving that other income to be so positive?

It's not only FX in there. What gets recorded in other income is interest income, we do have FX if it's transaction gains. Also what gets -- was recorded in the current quarter was a pension benefit of about $6 million or so. It's basically those types of items.

If you look at it, it's basically flat, maybe slightly down through the third quarter of a year ago. That number is just an ambient reflection of what's in the account. It's largely interest income, and again, any type of FX transaction gains that are outside the business has been reflected there.

So, it's FX transaction gains? Okay. And then, any color on Venezuela in the quarter, and how you are looking at it for the rest of the year, and where your cash balance that's there now after the activity?

I'll take a shot at that, and my colleagues I am sure will follow up. About your last question, and we will be disclosing this in the 10Q that we file later on. The cash balance, in obviously Bolivar denomination, is about $31 million in US dollars at the end of September. What we are seeing, as you will recall, when we talked at the end of the second quarter, we expected to see an uptick in volume from first to second half, largely around the restart of OE production. That restart has begun largely, and probably latter part of August for one customer, a couple other customers latter part of September. And we expect that production, obviously, to kind of increase as we move into the fourth quarter.

With respect to the performance of the business, I will tell you that I think our team in Venezuela, via meetings with government officials, on setting at the official rate with respect to currency transactions, working with the customers on a change in how we conduct business in Venezuela as well as, I would say, just all the cost things that you would be doing regardless of what country you are domiciled in; they're doing a great job. As we look at it right now, we expect still probably totaling sales, we've got $120 million, and probably an EBITDA loss, you will recall that we said last quarter, of about $10 million for the full year.

We seem to be on track on that. I think there is going to be some puts and takes with respect to currency movements, really over the next quarter or so, but I think we're in line where we expected to be harkening back to the discussion we had at the update at the end of the second quarter.

Okay. Just one last question. When we think of cash priorities, you've announced some actions on de-risking your pension plan. How would pension transfer type transactions weigh on your uses of cash going forward? Is that something you think is a right long term move? Obviously, a lot of companies have maybe offers to buy down pensions and then follow it up with full transfers to insurance companies.

Colin, it's Bill again. I think, just to clarify, the pension plan assets will be used to settle whatever that participation rate is with respect to our current initiative for those terminated invested salaried employees, if you will. So, those will be pension plan assets used. Not necessarily cash call, if you will, on the company.

But to your question, I think over the longer term, certainly those two plans in particular are frozen plans, and I would say any time you can make a net pension plan smaller, reduces volatility, reduces risk. I think to your point, could that be a potential use of cash in the future? I don't think you can ever say never, but certainly we are taking the first step with respect to, again, managing that pension obligations there and making the plan smaller as we proceed forward.

Okay. All right. Thank you very much and congratulations on a good quarter.

Thanks Colin.

Next question comes from Brian Johnson with Barclays. Please go ahead with your question.

A couple questions, Venezuela, and then longer term aluminum light duty trucks. On Venezuela, can you remind us roughly what your PP&E and cash is down there, and given the divergence between the official rate and the black market rates, what could be in store, in terms of write downs there. And then would you be flagging those as special items if they occur?

Hey Brian. It's Bill. Your first question on the net asset position, our net asset position is about $65 million at the end of September. Cash is about $30 million and then PP&E is about $35 million. That's a net asset position in Venezuela.

With respect to the divergence, if you will, from official rates, a SICAD-1 rate, a SICAD-2 rate, and then obviously a black market rate. There certainly is a large spread. I think one step that was positive for automotive in general was in the third quarter, the official authorization by Venezuelan government that automotive and related suppliers would be operating at the SICAD-1 rate. But, to your question, and moving forward, there's still a lot of volatility in the currency rates.

I think, long term, having multiple tranches or currency controls probably isn't going to be a long term thing, quite frankly. So, you could see some convergence. There has been a lot of discussion on convergence. We just even put and disclosed in our SEC filings that if you were to have a move from the Bolivar VEF12 to VEF20, it's a 66% devaluation. You can kind of do the math on what would happen to the net assets of the business. I think the black market is probably trading at VEF90 Bolivars to the dollar.

So, I think that's where we stand currently. I think what's more important though, with respect to what or how we are viewing the businesses, and it's no different than the discussion that we had in the first quarter, nor the second quarter is -- anywhere around the world where we operate, we operate to provide our customers the best product service available and that's the capability that we have.

But at the same time, we're there because potentially customers are there. So, I think we work very diligently the customers with respect to this particular situation. We've implemented different business models, if you will, to minimize growth on the balance sheet of Venezuela, and certainly the growth of US denominated balances.

We're continuing to take all those levers and actions, as well as our team working with the Venezuelan government on, quite frankly, settling long standing claims, I'll say, at effectively the official rate still. So, you know a lot of hard work's going on there, but ultimately we'll address Venezuela as we address it in every quarter, and quite frankly, we look at every alternative available to us. We're continuing to have those discussions internally here, obviously, and with our Venezuelan team.

Okay, and if you were to do something in terms of revaluating the assets or the cash there, would that be a special item or would that be in EBITDA?

We have taken to date, obviously the to's and frow's in Venezuela through our adjusted EBITDA. If it was to be a, I think what you're intimating, some type of higher level transaction, I'll call it, or approach; I think we make the call when we make that call.

Okay. And then, probably more a Roger question. You talked about the F-150 Super Duty, which is an all aluminum truck. Can you confirm whether you are going to have content on the new platform that replaces that, which is rumored to be aluminum?

And then two, there's another large customer who's talked about taking one of their iconic SUVs to an aluminum. What would that mean for axle position there? Is that a threat, or is that an opportunity for some of the light weight things like drive shafts that you have?

Yes, so with the first one, on the F-150. We don't have significant Driveline content.

I meant the F-250. Sorry.

Oh, 250. I'm sorry. So, with respect to that, sorry about that, I was -- to finish my thought on the F150 for the folks that were wondering what I was going to say, we have content on the engine side of the F-150, from a PTG standpoint, not on the Driveline side.

But from a 250 standpoint, as things move to aluminum, I think it -- in some ways, we're a bit agnostic with that, but in some ways it's actually a benefit for us to be able to offer our customers with those kinds of platforms, the same durability and performance by contributing to the weight reduction that they're trying to ultimately achieve with the vehicle. I don't see that as a negative in any way for us. I'll let Mark pick up and provide his input because he's much closer to the actual applications and what we're doing with those.

Brian, we do have content on the Super Duty, as we do today, but we are also growing that share as well, on a go-forward basis in 2016 and beyond. One, with the applications we do have, aluminum body or not doesn't really have a major impact on the axle option or drive shaft option. But the main thing it does, it definitely changes some of the dynamics of the vehicle, which we are able to co-develop with our customers to ensure the best when it comes to weight saved, efficiency, and in the noise reduction, or vibration and harshness reduction as well.

What if a remaining body on (inaudible) solid rear axle SUV that you are involved with were to go all aluminum. Would that necessitate moving to an independent rear axle, or could you still offer a solid rear axle? And would there be other opportunities to de-weight a platform like that?

Good question. We've actually had both options. Based upon the architecture of the vehicle, we can support a full axle or an independent axle. As you may know, we already supply, with Jaguar Land Rover, some very high-end independent axle combinations for their vehicles already. So we have the alternative to go either direction to support the customer vehicle architecture.

Brian, this is Roger. I want to throw in, you are asking some very good questions, and it really highlights the value that we're able to bring to our customers when we think about the investments that we've made in systems engineering and systems integration, and product solutions, if you will. Because not only do we take a look at our individual product and component solutions, we look at those in context to the overall vehicle platform.

So, what we are seeing as customers are working on this thing, is much earlier involvement, and much more extensive involvement during the design phases of the whole vehicle. So, it's actually something that we're able to bring to our customers in a different way than we were able to do before.

Okay. So, just because a large customer might be thinking of an aluminum alternative on one of the current iconic platforms doesn't necessarily mean it's a threat to your content, long term?

No, and we think, in some cases, it may be a benefit because of the ability to bring that full systems engineering to the party.

Okay. Thank you.

Your next question comes from line of John Lovallo with Merrill Lynch. Please go ahead with your question.

Hi guys. Thanks for taking the call.

Hi, John.

First question is, in power tech, you guys cited a positive mix impact on EBITDA. Is that mix between light vehicle and commercial vehicle, or is that products within the light vehicle business?

John, it's Bill. Let me go back to that. I don't think we really mentioned a favorable mix. I think what we mentioned was, if you look at the year over year, the move in the EBITDA margin was some unfavorable cost performance.

We certainly don't think that's a trend with the business but, just on the quarter, that's what we had called out. If you will look at the contribution margin, it's probably a little actually south of what we would expect out of our power tech group, but again, nothing really you can point to with respect to really any significant change in mix; so on and so forth.

That's helpful. Then, getting back to the question I believe Colin asked earlier on the underperformance in North America commercial vehicle, versus the market, and I think you guys talked about Paccar. I'm curious though, is it also due to some of the less profitable programs that you let roll off on a year-over-year basis?

The Paccar discussion that Mark had, obviously, they're a great customer of ours, and a very large customer of ours, so we follow those in terms of market share. But there are different things that go on underneath that, as well, with other customers; some gains that we have with some other customers. There were some actions, most recently in second quarter in Mexico, where there were some decisions with some competition to take some pricing actions and we decided not to follow that.

So, there was a little bit of a down on sales on our part. I think it was the right thing do because it supported our goal to make sure that we are doing right thing for shareholders. That wasn't a huge impact, but it was a little bit of an impact. Those changes up and down can effect it a little bit.

Great. Thanks very much, guys.

Question comes from the line of Matt Stover with SIG. Please go ahead with your question.

Thank you very much for taking the call. You may have gone into this earlier, but I just was wondering if we look at the light vehicle business, and we look at the 13 million in performance, how much of that was associated with recoveries related to pricing currency and engineering that were in period and out of period?

Matt, it's Bill. I think in period and out of period, we certainly have some recoveries in that line that are out of period. Think about what we do, for example, in Argentina. So, we have positions that we take where we experience inflation, and then we're into a recovery process with a related customer.

So there is, certainly in period, out of period, but I think what we've seen during the course of, really quite frankly, most of this year as well as part of last year is; it's almost becoming an ambient level of in period, out of period because it's constant inflation going on, using Argentina as an example. To bifurcate between what's in and out, kind of difficult maybe to do, but there certainly could be the opportunity to do a bit of that.

If I look at the currency and the devaluation at, let's just say, those are at [8] would those recoveries have been equal to or greater than 8?

Equal to or greater than eight?

Eight million.

Oh, yes. So, you're talking about the currency line of the $5 million and the VZ deval of $3 million?

Right.

Really, those recoveries would have been about $9 million, actually, for those items.

Okay, okay. Then, If I look at the off-highway business, the margins says, you know, Brian, we're working through, if it nicely improved this year. If we look at the impact of after market in that, what is the proportion of after market? Sort of this year, verses last year? Has that been a contributor to that margin increase? I would imagine it would, but I am just not sure.

If you think about the after-market, that business -- our total after market sale is about $900 million, full year. Certainly, off-highway has a fairly sizeable piece of that. I think after market, actually, we saw a very significant down tick last year, and it sort of stabilized right now. So, from a margin perspective, if you look at what's going on off-highway it's really not a story for the quarter.

It's almost relatively equal to last year on the after market side. Now it's in a, I would say, a low demand environment, but year to year there hasn't been much real change in the after market side of the house in off-highway.

I'm thinking about that, just from a margin standpoint, if those revenues are flattish year to year, and the margins on that are higher than if the OE businesses are declining, due to the weaknesses in the end markets then the mix of the after market would have a favorable impact.

It certainly would, Matt, but concurrently, I think what you would also see is, given where we've seen down ticks, if you will, from an OE perspective demand; the work that's been done by off-highway guys, quite frankly, is to offset, if you will, obviously variable costs but even go further into it from a fixed cost structure.

You're right, apples to apples. Lower OE volume and neutral after market volume year over year should provide a margin uplift, as long as every cost associated with that OE business is variable, and we all know that that's not the case. They have to work both sides of the house, which they're doing very well.

Thank you, very much guys. I appreciate it.

You're welcome.

Final question comes from the line of Justin Long with Stephens. Please go ahead with your questions.

Thanks. I appreciate you taking the questions. First thing I wanted to ask about. The margin performance in a tough market has been impressive, but I wanted to ask about the longer term guidance you've given to hit that 13% to 14% EBITDA margin exit rate by the end of 2016.

I guess first, from a high level, do you expect that improvement to be weighted more towards 2015, or 2016? And secondly, how much of that is within your control, due to productivity, higher margin products, things that you can control?

Justin, this is Roger. Thanks for the question. As we look at what we had indicated for the 2014, 2015, 2016 time frame, we also indicated at the same time that it was a gradual progression and 2016 was where we thought we would have the more full scale of the production, if you will, in the launches that we are having. So, 2016 is where the real benefit would come from a margin expansion as a result of the product introductions. That said, we also talked about half of the growth coming from the new business, or the net new business if you will, that we have booked and the other half of the growth coming from the market that we discussed.

We talked earlier in this call about how we feel very good about the first half, the half of the net new business is launching, and we continue to win new business, and we feel very good about that. We also know on the other half, that the market is volatile in some respects, and has declined a little bit from what we had anticipated in 2014, as we have already talked through this whole call.

By 2016, I am not sure where those markets will be. I wouldn't anticipate that they would be down for the full two years, but if they were that could have some kind of an impact on it. But we would expect some of these markets to come back by that time.

So, I think 2015, we're optimistic about 2016. From what we know now, we're optimistic about it. And we think that's realistic only because we don't think that the markets that have kind of declined during the year, this year and last year, are going to stay down for that long period of time. We think they're going to start coming up by the time we get out there.

Great. That's a helpful update. I appreciate it. Last question. I just wanted to see if you can give an update on your view on South America? When you look at that market, longer term? Obviously, there has been some weakening, recently. Is there anything that gives you confidence we're close to a bottom in terms of demand?

This is Mark Wallace. Looking mainly at Brazil just for this instance, we've got an election coming up Sunday. We hope that turns out to be a favorable pro business government.

If you look historically, you see the same type of cycle that has been occurring in the past and we still have confidence in Brazil. By all stretch -- by our view point, we continue to weather through the storm, continue to take cost out from a structural perspective, but we do plan on continuing to focus on that market as potential growth in the future. Albeit, it may not be in the near term but we do expect it to grow over the course of the next few years.

Okay. Great. I'll leave it at that. I appreciate the time today, guys.

Thank you, Justin, and also, this is Roger. I want to thank everyone for joining our call this morning, and we really appreciate the positive comments and the recognition of the performance. We are excited about moving forward, and we look forward to talking with you again. Thank you.

Thank you.

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