Dana Inc (DAN) 2014 Q4 法說會逐字稿

Good morning and welcome to Dana Holding Corporation's fourth-quarter and full-year 2014 financial webcast and conference call. My name is Brent and I will be your conference facilitator.

(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 fourth-quarter and full-year 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 its 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 a Q&A session. In order to allow for 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 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 On Highway Driveline Technologies. I will now hand the call over to Roger Wood.

Thank you, Craig. Good morning, everyone. As we told you back in January, 2014 was another good year for Dana.

Starting on slide 4, in 2014 we recorded sales of $6.6 billion, net income for the year was $319 million, and diluted adjusted earnings per share were up 12% to $1.99, $0.03 better than our guidance. Our adjusted EBITDA margin continues to get better.

We ended 2014 at $746 million, $1 million better than we thought when we talked to you in January. 2014 was another record year with a margin of 11.3%, the sixth consecutive year of margin growth.

Our free cash flow was very strong at $276 million, and we continued the execution on our $1.4 billion share repurchase program by returning another $260 million to our shareholders in 2014. All told we've returned over $1 billion to our shareholder since we started the program.

And since we talked in January, we divested our operations in Venezuela, eliminating our direct exposure to this volatile economy. What I'm really excited about were the successful new product launches that we had, notably on the Chevy Colorado, the Motor Trend Truck of the Year.

And I'm excited that in 2014 our three-year sales backlog has grown to $730 million, a 30% increase over the previous backlog. The Chevy Colorado and GMC Canyon were not the only successful launches for us in the light vehicle market during the past year.

As you can see on slide 5, Dana's technologies are featured on many important platforms all over the world. This slide highlights a sampling of some of our current and near-term launches and illustrates the breadth of our customers both by market and by region.

In addition to the Colorado and Canyon, we're proud to have our axles and drive shafts featured on the newly redesigned and highly anticipated Ford Super Duty pickup trucks. Our innovative technologies are lighter weight, offering improved fuel economy and efficiency while also providing greater performance and durability.

Other significant launches include the Nissan Navara pickup truck, Jaguar's XF and XE sports sedans, and the Suzuki SX4 compact vehicle in Europe, as well as Toyota's Hilux pickup in South America. Ford also recently launched the Everest SUV in Australia, and Dana axles are featured on the Mahindra Bolero, one of India's most successful SUVs, as well as the Xylo Mini.

So turning to slide 6 you'll see that existing Dana technologies are helping to drive some of the most popular and award winning vehicles in each of our markets. In addition to the Chevy Colorado that I already mentioned, Dana provides technologies for the Volkswagen Golf, which was named the Motor Trend Car of the Year and the North American Car of the Year, and once again our technologies are included on seven of the 2015 Ward's 10 Best Engines.

Among the products found on these engines are Victor Reinz cylinder head and secondary gaskets. They deliver improved reliability and durability while reducing oil consumption and bore distortion. And Dana's long brand of heat exchangers which help to effectively manage heat to ensure optimum operating conditions and long-term durability.

In the commercial vehicle market Dana's Spicer 46K drive axles, the steer axles, and the drive shafts are featured on the Kenworth T880 vocational truck, which was named the American Truck Dealer's 2015 Commercial Truck of the Year. Other finalists for the award included the International WorkStar 7600 and the Peterbilt Model 567, and we're proud to have drive line and power technologies on those vehicles as well.

In the commercial sector Dana's brand has a tremendously loyal following among fleet customers for the proven reliability and durability that they've come to expect. And we serve that loyalty with our highest appreciation and dedication as we look forward to continuing to build on those relationships with our new products well into the future.

On slide 8 you'll find some honors that our technologies recently earned in the off-highway market. Recently OEM Off-Highway Magazine recognized Dana's Spicer modular agricultural axle as one of its innovators Top 10 New Products for 2014.

The components used in Dana's new line of modular agricultural axles provide engineers with a flexible global platform that features a common center section and wheel ends while accommodating multiple traction devises on just a single carrier. In addition Dana's Spicer PowerBoost hydraulic hybrid transmission technology was honored as one of the seven nominees for the prestigious Intermat Engineering and Systems Innovation Awards.

And that recognizes technologies that contribute to progress in the construction and the materials industry. This technology offers fuel savings of up to 25%.

And finally our off-highway facility in Rovereto, Italy was recently honored with the prestigious Caterpillar Excellence Process award. So what that all means is it's our technology, our products, and our footprint that are driving our growth.

On slide 9 is the detail of our three-year sales backlog. Over the next three years we have incremental sales of $730 million coming online, a $130 million increase over the prior period, or 30% greater.

This represents real new business wins net of any losses that are added to the base of sales. This chart shows the cadence of $730 million of new business by year, with 2015 being a launch year and 2016 and 2017 seeing the higher run rates.

We have a great cross section of customers that make up this backlog, and we're winning business all across the globe. So moving to slide 10.

I'm really excited to share with you that Dana recently unveiled the results of ongoing field tests of our VariGlide technology, a revolutionary new transmission design that incorporates continuously variable planetary technology. We believe this technology shows considerable promise for delivering substantial gains in fuel economy while also supporting superior performance, two major areas of focus for our industry going forward.

VariGlide technology can be incorporated into the existing package space of a standard automatic transmission, replacing the torque converter. This technology provides today's light vehicles with up to 20% fuel savings, an improved MVH, smoother shifting, and high performance.

On this slide here you see a driveable prototype car equipped with this technology that was developed at our tech center near Austin, Texas. I'm thrilled because I had the opportunity personally yesterday to drive that car down in Austin, and it's just awesome.

In the off-highway market this technology is ideal for the rapid acceleration, deceleration, and precise positioning required by material handling applications. It also eliminates the need for forward and reverse clutches while reducing overall engine speeds, allowing the engine to operate at its optimum efficiency level and reduced noise level.

We're on track with this investment that we made a few years ago, and we couldn't be more excited about where it's going right now. On slide 11 we highlight some key points when we look ahead to 2015 and our end markets.

We expect North America to remain strong, with light vehicle and commercial vehicle markets to continue the very good year that they had in 2014. Additionally our light vehicle driveline and off-highway businesses should benefit from new businesses being launched.

We are expecting Class 8 production in North America to be between 300,000 and 320,000 units in 2015, appreciating that most likely we think it may be on the higher side of that. South America will continue to see economic uncertainty and currency headwinds, as well as weaker end market demand for commercial vehicles in Brazil which we think could be down another 7% this year.

In Europe currency will be the real story, impacting our euro exposed businesses, mainly the off-highway and the power technology business units. Our off-highway group will also feel a bit of a top line pressure from lower agricultural equipment demand.

In Asia Pacific we look for some modest volume growth in India and also in Thailand. And as we launch new business this year and get some quick uptick in key markets, we expect to offset the currency headwinds in South America and Europe. And I'm sorry, the euro.

So before I turn it over to Bill let me leave you with slide 12 and what we see as the Dana advantage. First, we continue on our trajectory of profitable growth, and our backlog continues to grow and our 2016 margin target is solid.

We continue our investment in the future of the business as we prepare for new business launches over the next few years. Our strong cash flow generation allows us to fund our growth and return capital.

And our continuing pursuit of new technology and innovation, in fact last week I brought on board a new head of our M&A function as we ramp up our pursuit of the best technology that aligns with our strategy. So now let me turn it over to Bill and he will walk you through the results and also our outlook. Thank you.

Thank, Roger, and good morning to everyone. Before I get into the details of our 2014 financial results, I'd like to cover several important initiatives and items that are included in our fourth-quarter results and the impact on our reported net income.

First of all as Roger mentioned in his remarks, we completed the divestiture of our Venezuelan operations in January of this year which resulted in a net charge of $77 million in the quarter as we accounted for the business as held for sale at the end of 2014. Next, we completed a previously announced voluntary pension settlement program which further reduced the liabilities of our US plans.

Upon completion of this program, as well as the final wind up of a small plant in Canada, we recognized non-cash settlement charges of $42 million in the quarter. We also completed successful refinancing of certain long-term senior unsecured notes to reduce our annual borrowing costs and extend our maturity profile.

The fourth quarter reflects a charge of $19 million for this action. And finally in the quarter the income tax line includes a benefit of $179 million for the partial release of valuation allowances we maintained against our US deferred tax assets. The table at the bottom of the slide highlights the impact of these items, moving from our prior year reported net income to this year for both the quarter and full year.

And as you can see, adjusting for these items, Dana's 2014 reported net income continued to improve. We also excluded the net benefit of these items from our adjusted EBITDA and diluted adjusted EPS performance.

Now let's move to a summary of our fourth-quarter financial results. For the quarter sales totaled $1.582 billion, slightly lower than last year.

As you all know the strengthening of the US dollar against many currencies has certainly been headline news, and in the quarter alone lowered our sales by $106 million. Adjusting for the effects of currency, sales for the quarter were up about 4% compared to 2013 which I'll detail more in a coming slide.

Adjusted EBITDA for the fourth quarter totaled $178 million, $4 million higher than last year, providing a margin of 11.3% which was a 60 basis point improvement compared with last year. Net income totaled $109 million, including the net benefit from non-recurring items outlined in the previous slide compared with $42 million a year ago.

Adjusting for those items, net income rose by $26 million in the quarter compared with last year. Diluted adjusted EPS increased 8% to $0.53 compared with $0.49 a year ago, reflecting a higher adjusted net income in the quarter as well as a lower share count related to the continued execution of our share repurchase program.

We certainly posted strong free cash flow in quarter of $118 million. Lower working capital inflows were the principal driver of the comparison last year as we continued to maintain our networking capital efficiency during the course of 2014.

Now let's go into some further detail. Slide 16 provides the key drivers of our 2014 sales and adjusted EBITDA performance compared with last year for the quarter.

As noted on the left, unfavorable currency was a significant headwind in the quarter lowering sales by about $106 million. Other than off-highway, which has continued to experience softer end markets, all of our business segments benefited from increased demand driving volume and mix higher by $38 million.

We also realized $26 million in pricing and recovery actions in the quarter, mostly in our light vehicle drive line segment, as an offset to currency inflationary pressures principally in South America. With respect to adjusted EBITDA, unfavorable currency of $24 million was partially offset by higher volume and mix of $15 million in the quarter.

You'll note here the incremental volume benefit was a bit higher than normal largely due to favorable mix in our off highway sales in the quarter. Performance, which included pricing recovery initiatives as well as our net cost efficiencies, provided an additional benefit of $14 million.

In commercial vehicle the performance line was impacted by premium costs of about $8 million in the quarter as we continued to move through a supply chain initiative we commenced earlier in the year. Overall we are very pleased with our results in the quarter driving improved adjusted EBITDA and margin performance despite overall lower sales.

Now let's move to our full-year 2014 results on slide 17. Sales totaled about $6.6 billion, $152 million lower than last year.

Similar to the quarter, currency impacts lowered sales by about $213 million largely driven by weaker South American currencies. Adjusted EBITDA for the year totaled $746 million, slightly favorable to last year.

And as Roger highlighted, our adjusted EBITDA margin improved by 30 basis points to 11.3%. This continuing improvement reflects ongoing efficiency gains throughout the business as well as initiatives to offset the impacts of inflation and other factors in emerging markets, most notably actions taken in South America during the course of 2014.

Net income totaled $319 million compared to $244 million a year ago. When adjusting for the impact of the net benefit of non-recurring items in the fourth quarter, net income again improved by $34 million compared with last year.

In addition to slightly higher adjusted EBITDA, net income benefited from lower depreciation, amortization restructuring expenses combined with higher equity income, which more than offset higher interest expense associated with our 2013 capital structure actions. Diluted adjusted EPS of $1.99 was higher than last year by $0.22, or 12%, reflecting the benefits of the lower share count from the execution of our share repurchase program.

Capital spending was $234 million, $25 million higher compared to a year ago, as we increased an investment for new business launches. And we continue to generate strong free cash flow, boasting $276 million for 2014.

Let's look at our sales and adjusted EBITDA performance in more detail on the coming slide. So slide 18 provides a sales comparison for 2014, our business segment performance, and the key drivers of the year-over-year change. North America sales represented about 47% of sales compared to 44% a year ago, as demand was higher for both light and commercial vehicles in the region.

Europe represented about 30% of sales in line with last year as lower sales on off-highway and to a lesser degree commercial vehicle were mostly offset by higher sales in light vehicle, driveline, and power technologies. South America represented about 12% of sales compared to 15% last year.

Weaker currencies in the region lowered sales by $170 million, and lower end market demand primarily in light and commercial vehicle accounted for another $42 million of the decrease. Asia-Pac sales were 11% of total sales, down slightly from a year ago largely a result of lower light vehicle demand in India and Thailand and unfavorable currency.

The chart to the bottom left shows the change in sales by business segment with the key drivers of change shown on the right. As I commented earlier, currency lowered sales by $213 million largely driven by South American currencies, which you can see here significantly impacted our light vehicle driveline business.

Overall volume and mix was slightly lower than last year, with persistent low demand in mine and ag as well as some softening in construction demand in the second half of this year impacting our off-highway business by almost $100 million. Higher demand in our other three businesses largely offset this impact.

And then finally, pricing and recoveries principally benefiting our light vehicle drive line business, increased sales by $65 million. Similar to a sales comparison slide 19 provides a comparison of our adjusted EBITDA performance for 2014.

Adjusted EBITDA for the year was $746 million and margin increased by 30 basis points to 11.3%, again as Roger mentioned a record performance for Dana. Currency impacts, including the devaluation of the Venezuelan bolivar during 2014, reduced adjusted EBITDA by about $40 million in 2014 with light vehicle driveline bearing the majority of this headwind.

Volume and mix increase adjusted EBITDA by about $12 million reflecting higher demand in all of our businesses other than off-highway. And then finally favorable pricing recoveries and cost performance of $29 million further offset the impact of currency.

Let's move to slide 20 to review the performance of each of our business segments in 2014, and we'll start with light vehicle driveline and commercial vehicle driveline. As noted here light vehicle driveline posted sales of $2.5 billion.

Compared to 2013 unfavorable currency lowered sales by $148 million, with South America currencies representing almost $120 million of the impact. And adjusting for currency, sales rose by nearly 4% compared with last year with volume and mix providing an increase of $35 million reflecting continued strength in North America, offsetting principally lower South America and slightly Asia demand with performance increasing sales by $60 million largely reflecting the impact of inflation recoveries.

Segment EBITDA was $242 million in 2014, improving by $8 million compared to last year. Currency and the devaluation of the Venezuela bolivar lowered segment EBITDA by about $38 million. Offsetting currency was higher volume and mix of $8 million and performance of $38 million.

Segment EBITDA margin of 10% improved by 50 basis points compared with last year, rising to a record level. Commercial vehicle driveline sales of $1.8 billion were about in line with last year, which includes a currency headwind of about $49 million, the weaker Brazil real accounting for about 70% of that impact.

Adjusting for currency, sales were up about 1.5% with higher production demand in North America tempered by weakness in Brazil. Pricing recoveries added $7 million to the year-over-year comparison.

Segment EBITDA was $172 million, or about 9.4% of sales, 100 basis points lower than last year. Higher volume and mix of $3 million offset the impact of currency during the year.

Unfavorable performance largely occurring through the course of the second half of 2014 was driven by two specific issues we outlined in our third quarter update. First we continue to further optimize our supply chain so we can achieve greater flexibility and efficiency for this business over the long term.

As we progress this important initiative we incur premium cost to meet increased production demand in North America which totaled about $11 million for the year. We expect to conclude this initiative by the end of the first quarter of this year.

The second item was true up of a number of warranty reserves mostly in the second half totaling about $8 million. Off-highway driveline and power technologies performance are outlined in the next slide. Off-highway driveline sales totaled $1.231 billion for 2014, $99 million lower than last year.

And as I previously highlighted continued weakness in global mining and ag equipment demand accounted for over 85% of the decline, with remainder due to lower construction equipment demand in Asia and Europe that developed during the course of the second half of 2014. Even with this decline in end market demand off-highway posted a segment EBITDA of $169 million, $6 million better than 2013, and improved margin by 140 basis points to 13.7%.

Lower sales impacted earnings by only about $10 million for the year, as favorable mix in the third and fourth quarter tempered the impact. Strong performance during the course of 2014 of $17 million principally from material savings and pricing actions offset the demand environment, driving both increased earnings and margin.

Power technologies posted sales of $1.05 billion, $22 million higher than a year ago, driven by increased volume of $42 million in North America, Europe, and a lesser degree Asia which was partially offset by currency of about $16 million, principally a weaker Canadian dollar and net pricing of $4 million. Segment EBITDA of $154 million was $4 million higher than a year ago, reflecting a flow through on higher volume partially offset by currency and specific warranty settlements in the second half of the year.

In summary despite volatility in several of our served end markets as well as certainly unfavorable currency movements, we continued to execute resulting in another year of record margin performance for Dana. Now let's move to the cash and capital side of the equation, starting with slide 22.

2014, another strong year of free cash flow performance, posting a positive $276 million. As highlighted on this slide, working capital was a slight use of about $19 million compared to a benefit of $116 million in 2013.

As you know, we've been focused on improving the efficiency of our networking capital investment as measured in days of sales over the last several years, and including 2013 we have made significant strides in that area driving down our total investment. We continue to maintain these efficiencies in 2014 even as we entered into a higher volume environment at the end of the year.

You'll note here pension net was $49 million lower than last year as we have not been required to make contributions to our US pension plans given the significant actions we undertook over the last several years and the current funded status of these plans. Cash taxes were about $116 million, $20 million lower than a year ago, largely again reflecting the timing of estimated tax payments and jurisdictional profitability.

Capital spending was $234 million, $25 million higher than last year, as we began to ramp up investment in the second half of 2014 to support new business launches in this coming year. At the end of the year cash and marketable securities totaled $1.29 billion while outstanding debt was about $1.678 billion resulting in a net debt position of $388 million.

Total liquidity stood at about $1.571 billion at the end of 2014, which included $303 million of availability under our US credit facility. We certainly continue to focus on our capital structure, and slide 23 summarizes actions we completed during the course of 2014.

Under our share repurchase program we returned $260 million during the course of 2014, including $79 million in the fourth quarter, bringing our total return to $1.09 billion since initiating our $1.4 billion program in late 2012. To date we reduced our total diluted share count by 51 million shares.

At the end of 2014 we had $311 million remaining under this authorization and we continue to be in the market in a consistent and disciplined manner. In the fourth quarter of 2014 we refinanced $400 million of senior unsecured notes, taking advantage of lower interest rates and extending our maturities.

This refinancing will lower our annual interest expense by about $2.5 million and our earliest debt maturity is now in the year 2021. Finally we completed the voluntary pension settlement program with deferred vested salary participants in our US pension plans.

This action reduced our pension obligations by $171 million utilizing plan assets, and the funded status of our US plans remains strong at 89% at the end of 2014, slightly lower than last year. The voluntary settlement program and strong returns from our investment approach significantly muted the impact of new mortality tables and lower discount rates.

Now let's move to our expectations for 2015 with our sales and adjusted EBITDA targets outlined on slide 24. This slide bridges our 2014 actual results to our 2015 targets for both sales and adjusted EBITDA.

There have been two developments since we gave our preliminary financial targets in January of this year that we have now reflected in our 2015 targets. First certainly is the impact of the divestiture of our Venezuelan operations in mid-January of this year.

This operation had sales of about $110 million in 2014, and as we noted in January our preliminary financial targets had included expected sales of about $200 million for 2015. In both years we expected breakeven results from this operation, and as highlighted here adjusting for this divestiture did not impact our 2015 adjusted EBITDA target, yet does result in an increase in our full-year margin target.

A second development has been the continued strengthening of the US dollar post year earned against many currencies, most notably the euro, pound sterling and Canadian dollar. We have lowered our expectations for these currencies, with our euro forecast at $1.15 compared to $1.20 in early January as an example, and expect currency to represent about a $350 million sales headwind in 2015.

And while the divestiture of Venezuela removed about $50 million of currency pressures, our updated expectations for these three currencies will lower sales overall by about $100 million, the net impact being a sales reduction of about $50 million from the preliminary targets we shared with all of you last month. We continue to expect organic growth of a range 4% to 6%, adjusting for Venezuela and currency comprised of pricing recovery actions of $25 million to $50 million and market demand in our sales backlog providing additional growth of $250 million to $300 million.

When we look at our adjusted EBITDA progression outlined at the bottom of this slide, currency is a headwind of about $60 million when compared to 2014, while volume and mix provides growth of $40 million to $50 million and expected performance drives another $15 million to $25 million to our target EBITDA range of $740 million to $760 million. Our target adjusted EBITDA margin for 2015 now stands at about 11.6%, a 20 basis point improvement from our January preliminary targets.

Slide 25 summarizes our 2015 financial targets, reflecting the Venezuela divestiture and currency expectations. As just outlined, 2015 full-year sales now expected to be in the range of $6.4 billion to $6.5 billion, with adjusted EBITDA in the range of $740 million to $760 million, providing a margin target of about 11.6%, an improvement over 2014.

We are adjusting our expected diluted adjusted EPS guidance in line with adjusted EBITDA to a range of about $2.05 to $2.15 per share, and we should note that this range does not include the impact of any share repurchases post the end of 2014. We still expect capital spending to be between $300 million to $320 million for the year, certainly in support of new programs, and our free cash flow target range of $190 million to $220 million certainly remains strong.

We remain excited about 2015 as it is an important year for Dana for new business launches, as Roger highlighted. Our sales backlog remains very strong, which will continue to bolster our organic growth above market demand.

We also remain on track for our 2016 targets. While sales will come down as a result of the Venezuela divestiture, we remain confident in our exit margin rate of about plus 13%. So this concludes our formal remarks, and we'll now turn the call over to the operator for any questions. Thank you.

(Operator Instructions)

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

Just looking for a little clarification on slide 24. A couple of things. So on the volume mix portion of it, it seems like the incremental margin, if I'm using the $40 million to $50 million compared to the marketing backlog of $250 million to $300 million, it looks like an incremental margin in the mid-teens.

It's a little weaker than what you've historically done, and considering the light vehicle driveline should be the biggest portion of your growth I would have expected that to be higher. Is there just a significant launch cost that's in that number or could you just help us understand?

Yes, Pat, this is Bill Quigley. As we look at -- and we talked a bit about this in January with respect to the contribution margins, you're right, about mid-teens. And certainly light vehicle driveline is going to be the biggest driver in 2015 compared to 2014.

Not all the programs obviously are launching in the first of the year, so we've got a number of programs launching throughout the year. So from your perspective once you get to run rate, we would expect that margin to improve as we move forward into 2016, which certainly is part of our margin targets at that time.

So you're right. We got to get through the launches, which we're very confident in doing, and to your point light vehicle driveline being the largest piece of the puzzle. And as we move through 2015 we'll see those margins move up in the latter part of the year.

That's helpful, thank you. On the FX portion it seems like the decremental margin on the FX headwind, particularly if you look at the reduction in your guidance versus guidance in January, seems to be pretty high.

The change in guidance implies like a decremental on FX of around 20%, which is well in excess of your EBITDA margin. Is there some kind of transactional headwind that's within that number that's causing it to be higher?

Yes, Pat, it's Bill again. If you take a look at obviously the currencies that we moved, most notably the euro but certainly the sterling as well as the Canadian dollar, you think about the distribution of the business from a European perspective I use as an example that being largely power technologies as well as our off-highway business, we are getting a richer mix with respect to the impact on those currency movements.

So again it's a function of the distribution of our business around the world and obviously the margin profiles around the world as well. So again, you're right. little slightly higher margin impact there, but as we progress the year we'll see where we ultimately end up with respect to where rates settle.

To your other question, Pat, this does not include transactional impacts. It's largely just a flow through on translation.

Thanks very much. I'll get back in the queue.

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

Yes, good morning. Two questions both around margins.

First, as we think through the exit margin at 2016, 13%, clearly Venezuela helps a little bit, but we knew that a few weeks ago. Can you maybe go through just what markets in terms of end markets have to get better to get to that 13%?

Yes, I'll take a shot again at, Brian, at this. I think it's not only market but it's also the backlog. So if you take a look at the backlog through that period of time, through 2017 we've got a growing backlog of $730 million over that three-year period.

That certainly is a contributor to that margin profile as we move forward through 2016. Even in my comments in the previous caller's question with respect to light vehicle driveline for example, launching programs in 2015 get the full run rate and efficiencies in 2016 that will further obviously move the margin up.

To your point Venezuela certainly has an impact on that, and if you look out that will certainly lower our sales expectation for 2016. But we still remain very confident in that plus 13% exit rate. And I think as we look at our guidance currently, I'll move up to 11.6% or thereabouts with respect to 2015. We're certainly on the right trajectory.

With respect to demand, all the businesses obviously contribute to the improvement in our margin profile. But as we look to 2016 we do expect some recovery in the off-highway markets. And that business certainly is positioned well to have a significant contribution margin impact through 2016. So those are the factors that we look at with respect to the business profile as we move through this year and into next year.

Brian, this is Roger. Just to build on a little bit of what Bill had mentioned.

Predominantly the improvements that we continue to make in expansion of our margin is now starting to take hold in the product launches that we're doing. As we've mentioned several times before the new products bringing online are coming online with margins at a better margin rate than the traditional products that we've had in the business. And because we're now launching more programs our margin expansion is due to that.

So as Bill correctly said from a market perspective we feel like at some point the off-highway market does have to come back because we've said for several years that it keeps going down. We're confident that it will and we think that it will some time in that plan to be able to affect the margins a little bit.

But for the rest of the business units and the rest of the regions of the world we're not really expecting anything spectacular from a demand standpoint. It's really all about the product launches.

Similarly if I look across the four businesses this year, the two driveline businesses 10% and 9.4% margin respectively, the two other businesses 13.7% and 14.6%, is 10% as good as it gets in driveline? And again as we think that 13%, is there room to go up there or is it more did it get to that 13%? Or is it more there's our 10%, but incremental revenues in off-highway and backlog and power tech at higher margins help move the dial?

Brian, it's Mark Wallace. We definitely expect that off-highway and PTG will continue to expand their margins. But in the driveline business which is a large portion of the backlog, we will get margin appreciation in the driveline business that will help our exit rates in 2016.

Brian, it's Bill. We certainly don't look to 10% as a ceiling for that business. And again I think if you look at all of the challenges that that business encountered during the course of 2014 let alone in 2013, this 10% is a record performance.

And again as we look too it's certainly not a ceiling with respect to the margin profile of the business as it moves forward. So bringing on additional capability with respect to technology to our customers, we're certainly confident that we're going to see a rising margin profile here.

Is it a 16%, 15% margin? Probably not, but certainly we got room to grow from our 2014 levels.

Just finally within that commercial vehicle margin and also sales, any revenue impact from a competitor moving up in the data book at PACCAR? And then how was that reflected in the backlog numbers you put out earlier? And could that have a second order effect either on pricing or on other vendors?

Hi Brian, it's Mark Wallace. We fully contemplated competitive movements in our outlook moving forward. And regarding the 46K axle as you mentioned that's a vocational axle, it's not the standard class 8 over the road axle.

And historically when you look backwards between our competitor and our position in the data book, we've been fairly close from a pricing perspective and we've enjoyed a majority of that share in that 46K market. So even though they may get some preferential treatment here in the data book, we definitely will continue working with our end customers because they look forward to our product robustness and our service network.

Okay, thank you.

Your next question comes from the line of Patrick Archambault with Goldman Sachs.

Thank you, good morning. Yes, I guess on some follow-up questions on slide 24. Just so I can better understand the chart.

If I try and convert some of these sales impacts to EBITDA impacts, I get the market/backlog translates into the volume and mix piece on the EBITDA line. But I guess the pricing recovery, why doesn't that flow down to EBITDA, or is that folded into performance?

Pat, it's Bill. Recall as we've gone through, progressed this year as well as last year that pricing recovery range if you will, the $25 million to $50 million, largely is around recoveries of inflationary pressures. For example in South America where we operate be it Brazil, Argentina, and certainly in the past it was in Venezuela which we certainly won't have to deal with moving forward. So it's a neutralizing factor that increases our sales but it basically neutralizes the flow through from an EBITDA perspective as well as the margin.

So you'll get some flow through, but the bulk of that really is around what we see in inflation movements, be it in just highly inflationary environments and/or commodity movements. So as you know from a commodity perspective we've got a number of arrangements in place and/or channels with customers.

If we see commodities rise we've historically been in a position to recover a substantial portion of those, but at the same time if commodities go downward that would be the inverse effect. So you're right, it doesn't flow naturally to that performance line because it's effectively offsetting expected inflation in the business.

Okay. And to the extent some of that is compensating for FX like in Brazil, that's netted out in the $60 million that you've got there?

Correct.

Okay. And then I guess one other question really that I had. You referred to some -- in commercial vehicles you referred to some pretty big performance headwinds, I mean big I think it was $22 million if I'm remembering the number from warranty and premium freight in CV. And I was just wondering is there some kind of a non-recurrence of that that could potentially be a tailwind here or are those two things expected to continue?

Patrick, it's Mark Wallace. Regarding warranty, we don't expect that to be a recurring issue. We trued up an accrual for past issues and that's settled.

Regarding the premium freight, we've gotten through Q4 and are much better positioned in 2015 with our strategic actions around our supply network. We expect to wrap that up in Q1 and we feel comfortable that a lot of the premium we saw in Q3 and Q4 will begin to shrink in the full year.

So those are both positives. Are those folded into the $15 million to $25 million of performance, or are those potential opportunities?

Those are folded into our outlook and our performance.

Okay. And last question for me just from an accounting perspective. The D&A increase that you saw this year versus last year, or actually 2014 versus 2013, is that just kind of fresh start accounting rolling off, or is there anything more to that?

No it's largely -- actually it was a decrease from 2013 to 2014 largely around the amortization line, a little bit on depreciation expense. And you're right, Patrick, it's all around the fresh start roll off if you will, that's what it is.

So it's in line with your new CapEx spend. Obviously we should -- we found a base here and we're growing D&A from here?

Correct.

And then last one, forgive me if this is probably clearly in your press release somewhere, but the cash implications of Venezuela, can you just remind me of that?

Yes, at year end you'll see it on our external financial statements of our 10-K once we file that. We had cash balances in Venezuela at year end of about $29 million, of which $2 million were written off, and we had $27 million left.

Once we concluded that transaction in January that will fully come off the balance sheet. It's not reflected in our cash and marketable securities balances that I highlighted in our slides.

It's sitting in a separate line item really around the accounting requirements of businesses held for sale. So about $29 million in total.

Okay that's helpful. All right, terrific, thanks a lot.

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

Hi, good morning, everybody. Just wanted to start with a follow up on the choice by PACCAR of a different supplier as their preferred axle.

Obviously PACCAR is your largest customer in the commercial vehicles, about 30% of your revenue last year. What is the risk in going forward beyond just to reflect this mechanical direct impact here, is there any risk generally more to the relationship?

I mean I was surprised to see that the investment of your competitor, they literally had the CFO of PACCAR present there and say why this relationship is so important and how it could progress going forward. Could you maybe give us a little bit of context on sort of like what happened and what sort of is potential mid-term impact beyond just the mechanical right away?

Yes, Emmanuel I'll take that. This is Roger and Mark can follow up with some of the details.

But first of all we have a great relationship with PACCAR, and for many, many years we've enjoyed the predominant part of their business if you will, by far the majority nearly all of it. And it's not realistic going forward to think that in a competitive environment that we all live in that there's not going to be some shifts once in awhile and some decisions to move in a direction that gives maybe somebody preferential positioning.

We in fact, we haven't announced it over the last year, but we in fact have won a number of preferential positions with other OEMs in the industry. And our commercial vehicle team has done an outstanding job at getting our technology in front of all the customers in the industry. And that has yielded us preferential positioning in a number of those instances.

We also have a long-term agreement with PACCAR, which was announced I think by our competitor as something new. For us it's not something new, it's something relatively normal.

So we don't see a long-term impact other than what we've already reflected in our numbers, in our growth numbers where we're growing the $730 million over the next three years and what we think the impact there is. But maybe just before I turn it over to Mark I'll just mention that with our relationships with the fleet owners out there if you will, that input from the fleet owners is what prompted us to invest and actually develop a new product that you've all seen at the shows, the global axle if you will, to be a solution that gives them what they're looking for from a technology perspective.

So we enjoy great relationships with our fleets, a great relationship with PACCAR as well as the rest of the OEMs in the industry and we don't see any further impact than what you already see. Mark, is there anything to add to that?

No, that's it.

And then just -- that's incredibly helpful. Just a point of clarification on this. So I'm looking at your 2015 to 2017 sales backlog.

The commercial vehicle piece of the backlog is pretty much nothing. Is that essentially netting out some good wins elsewhere to serve losses there? And also on this what are your plans for the unused capacity that you had dedicated to some of this PACCAR business?

Emmanuel, hi, it's Mark Wallace. First regarding the backlog we've contemplated we call our pluses and minuses, but also a big portion of the backlog that shrunk was due to programs that were being pushed out.

If you look at countries like Russia, although we aren't in Russia, we actually sell into Russia out of Western Europe, some programs were delayed there. There was programs delayed in India as well as in Brazil.

So a big part of the backlog was mainly programs that were delayed. It's not that we don't expect to get those wins when they come about, but for now until we get confirmation we put them out of our backlog.

Regarding capacities, really there's no change in capacity. Given run rates we're seeing right now in industry, we don't see any need to shrink capacity.

And in reality part of our supply initiative we undertook in 2014 we actually created more global flexibility for our commercial vehicle worldwide. So we actually are able to increase forging capacities that will have zero impact on Dana, but give us a lot more flexibility when it comes to supplying customers at higher volumes than the traditional markets have shown in class 8 here in North America.

Great, thanks for all of the color.

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

Hi, thanks for taking my questions. I apologize if this has been talked about, my line dropped.

But the first question would be on the effect of FX on the backlog. Looks like you went down to $1.15 on the euro.

You have about 28% of the backlog dedicated, or attributable to Europe I should say, but the backlog doesn't seem to have changed. Is that correct?

John, it's Bill. From a backlog perspective you're right. We don't go through every month and try to currency effect that.

So there would be some impact on that backlog. But again 28% of $730 million I would say it's not as significant as what we're seeing on the full boat with respect to almost $2 billion in sales, $2.5 billion in sales for the business. So you're right, there would be some impact but we update that on an annual basis.

We do it from a production perspective as well as from a currency perspective. So as we sit here today some impact, but we'll give an update here at the end of the year.

Okay, that's helpful. Then following the divestiture of the Venezuela business, is this going to -- how does this affect how you service the South American market? Is this going to have a negative impact on that?

No, we don't think so because our products -- this is Roger sorry, John. Our products are still into those vehicles and if the vehicle production starts back up, we would be a supplier of this product just like we did under the old scenario. We would just do it with the new Management team that's in place in terms of the company that they are running down there to supply the ultimate product to the customer.

Okay, that's helpful. And then finally, maybe just an update on the acquisition pipeline. Anything -- how does the pipeline in general look and what is your focus in that regard?

Yes, so great question. We're really encouraged, especially in terms of the last several months with the work that we have been doing over the past several years.

As we had mentioned it takes many times several years to establish the relationships and to really get something moving. We've been working on it for a number of years now, and we're really encouraged with where some of these discussions stand.

And as I had mentioned in my dialogue we actually just brought on a new head of M&A reporting to me and the organization because we feel that the opportunities are in a better spot than maybe they have been in the past couple years. And we're very much encouraged by that.

Great, thanks very much.

Your next question comes from the line of Justin Long with Stephens.

Thanks and good morning. First question, I wanted to ask if you could provide some more color on how your European off-highway revenue in 2014 split between construction, ag, and mining. And then maybe if you could talk a little bit more about the visibility you have in each one of those end markets as we head into 2015?

Yes, Justin, this is Bill. If you take a look at our European business, in total for our off-highway business it's about $570 million in 2014.

Some of that distribution is going to be weighted more a bit to the construction side of the house and then followed by ag. So if you look at those two big players there, that would be the distribution of the business.

What we saw in Europe obviously from an ag perspective certainly a down trend from a demand perspective during the course of 2014 compared to 2013, high-single digits I'd say. And quite frankly construction was I would say a bright side, stable to slightly up in Europe.

So those two markets kind of moving in different directions. And I think the color as we move forward in 2015, I think we're looking at construction kind of stable.

I mean ag, as Roger mentioned in his comments, probably a further down tick but largely in the larger units or the combines if you will, the larger applications which we don't have as much participation in given how much of that is captive business. So again, I think there's pressure on the ag side in Europe. Construction I think we're looking at kind of even keel.

Okay, great, that's helpful color. And I wanted to also ask about the impact you feel like you could see to your business from the decline in oil prices over the last couple of quarters.

I know that's -- part of the value proposition for many of your products is fuel savings. Does that create a tougher sell for some of your products in this market? I guess the flip side is you have more money in the hands of the consumer. But if you could just walk through the puts and takes that you feel like you have to the business in a lower oil price environment, that would be helpful.

Justin, this is Roger. That's a great question because we haven't seen any impacts in the shorter term, obviously with what's happened in the recent several months and the drop in the prices, but overall our strategy stays intact.

We're working on product technology that helps our customers, if you will, and the customers of our customers to use less fuel for what they're trying to accomplish, whether it's in the light vehicle market or the heavy truck market or the off-highway market. And less fuel is going to equate to less money overall in their business being spent as an expense.

Longer term I don't know that anybody really understands or knows whether fuel costs will remain low for the short term, medium term, or somewhat into the long term. But long term we believe that a fuel economy play and an emissions reduction play is going to be continued a great place to play because even if the fuel costs remain relatively low, the regulatory framework is going to take over and still be there regardless. So we're not seeing any less of an emphasis on fuel economy type products from our customers and so we are not changing our strategy going forward to invest in those kinds of technologies.

Okay, great. Thanks, Roger, appreciate the time this morning.

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

Good morning, gentlemen. Just a few quick questions here.

First, EBITDA margin expansion or improvement or increase in your guidance in 2015, it seems to be primarily attributable to the Venezuelan divestiture. Is that a fair statement?

Yes, Brett, it's Bill. Certainly it is. That was a breakeven expectation for that business, and from a perspective of maybe a potentially higher margin certainly our FX assumptions muted the impact there.

But you're exactly right. Venezuela certainly we've been operating that just trying to get back to a breakeven position, which our team has done a great job on, and our expectation in 2015 was no different given what we saw from an economic perspective.

And then the free cash flow expectations are unchanged despite about a $20 million decline in the EBITDA expectation. So were there some particular offsets there, or did you just simply move your expectations to the lower end of the free cash flow range?

No I think with respect to -- you'll see a slight move in CapEx for example, from a range perspective. We took down cash taxes a bit based on the jurisdictional profitability that we were looking at as well as then we looked at Venezuela.

What are those movements with respect to working capital there? So it's kind of a confluence of a number of factors, and we feel very good about that range.

Okay. And then finally if I understood you correctly earlier on you comment that North American class 8 you were kind of thinking like 300,000, 320,000 units of production this year. That seems somewhat conservative relative to the order rate and relative to some other forecasts out there.

And my question here is if we were to see a production rate in the 330,000 or 340,000 range or something along those lines, how do we think about the potential impact on your sales, but more importantly your EBITDA? A lot of times you find that there are certain inefficiencies, premium freight over time costs and that sort of thing, which significantly dampened let's say the contribution margins as you move up into that upper range. So how do we think about higher production translating to higher sales and higher EBITDA at Dana?

Brett, it's Mark Wallace. Just relatively speaking on a North American basis, if you look at our mix of business about 60% of our commercial vehicle business is here domestically. And we also have a large portion in Brazil.

So even though we've seen improvements and we are seeing higher rates today, the Brazilian market continues to mute our growth here in North America. Regarding our outlook, I mean as Roger mentioned already we're probably at the top end of that 300,000 to 320,000 range, around 320,000 units.

And I've been polling different people out in the industry as well. I think we're definitely expecting that Q1 and Q2 remains at the rates that we're seeing today, which is elevated to around 340,000 units.

But again, there's a lot of stress in the system today. As I mentioned we've put -- we're adding some global flexible capacity that can help mitigate some of those short-term issues from our perspective, but I think ultimately there's still going to be pressure in the system to run at these elevated levels for long term.

I mean if it stays at these higher levels we would expect to see some revenue flow through here in North America and the associated margin would be kind of the normal margins that we expect to see here in North America. Because again as we mentioned the capacity we're bringing on will be pretty much fully on board in Q1, and so we wouldn't expect Dana to be any type of issue for these higher run rates at this stage.

If we were to think about normal margins would we think about 9.4% commercial vehicle driveline margins, or would we be thinking 20% contribution margins?

Actually, when you look at the contribution margin it's about 15% in the commercial vehicle business.

Fair enough. Thank you very much, gentlemen.

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

Good morning. Mark, if you could -- just so the rest of us can potentially understand, just the amount of these vocational axles that you sold in 2014 and a dollar basis?

Actually, in looking at the 46K there's probably in total revenue 46K is around $100 million in total revenue for commercial vehicle for Dana. And we've contemplated like I said some competitive movements on the 46K and we don't see that being any change to our expected outlook. And again, as you know in commercial vehicle most of the decision making, especially around vocational axles, happens at the fleets. And we do expect that we'll be able to continue with our robust products and our service network, to continue to play a major role in that particular market.

Understood. So it's not all that large. Okay, thank you.

And Bill you spent so much of the last two years looking to restructure the balance sheet, change how you're restructuring from a financial perspective. You're in great shape from a net-debt perspective and you mentioned M&A. How do you picture yourself framing return of capital on a going forward basis relative to maybe where you saw things a year ago?

Yes, I appreciate that, Brian. I think certainly the Company has spent a lot of time with respect to opportunities and alternatives with respect to the capital structure, and certainly what we've accomplished to date we're pretty proud of.

As we move forward certainly part of the capital allocation process will be opportunities to invest in the business. You're seeing that with respect to our capital spending for example, to operationalize our backlog.

But as also Roger mentioned looking for opportunities where we can get a higher and better return as well with respect to our inorganic initiatives that we may see over the next year or so. So that really is a big focus, but absent that given the cash flow generation of the business, we will continue to evaluate whether from a shareholder value perspective further share repurchases may be in order and/or how we look at dividend yields.

So I think it's kind of a factor of all of those, Brian, as we move forward. But certainly we've made a lot of progress the last couple years with respect to the capital structure.

Okay, thank you.

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

Hi, thanks for squeezing me in. I remember during the presentation in Detroit that you'd called for commercial vehicle driveline market to be roughly flat year-over-year in 2015.

But I see on slide 28 today you're calling for a bit of growth across most of the commercial vehicle categories. So I'm just curious if you feel anymore positively about North America today than you did even a month ago?

Yes, this is Bill. I'll let Mark catch up here real quick. If you think about what the ran rates we've been seeing, I think there is more -- we feel more optimistic from a pure production perspective.

In our comments we had a range of 300,000 to 320,000, in our comments today we're probably at the upper end of that. Certainly there could be upside to that as we move through this.

From the polling that's been going on from a marketplace perspective this 340,000 run rate could extend through the second quarter. So yes, I think there is probably some upside with respect to pure demand if you will in North America.

Okay. Last question at the end here just on CapEx. The forecast ramped like 28% to 35% I think on the low end to the high end of the range there despite flatter sales and more modest increase in EBITDA.

How should investors think about that generally? Is the ramp really to support revenue that comes on in 2016?

And then how should CapEx trend in the years after 2015? Does it actually potentially decline after a couple years after you launch all of the business currently in your backlog? How do you think about that? Thanks.

I think if you look at from the uplift if you will in our expectations for capital spending is largely around our light vehicle driveline business, and it's largely around operationalizing launches that they have this year and into 2016 as well. So once those launches are through 2016, depending on the success of that business, which has been very successful to date on opportunities, you could see some additional capital spending.

But are we going to be in a zip code of 4.5% to 5% per year? Probably not. So we're seeing kind of an uptick now, and certainly as we're turning the corner with respect to organic growth we're going to make that investment.

But I think over the longer term you wouldn't see an uplift if you will or a higher base level of capital spending on an ongoing basis. But certainly if the programs are available to us not only in light vehicle driveline but around our other businesses, if the investment returns are there we'll make the investment.

Yes, Ryan, and maybe I could just complement what Bill was just saying about that, that our backlog this year is 30% greater than our backlog was last year. Which is great news because organically we are penetrating the market with the new products and the technology that we've invested in in the last three or four years. We expect that to continue.

The rates are going to vary, right? So some years are going to be more than the other years and the capital investment will follow that.

As well as it being varying when we are coming out with a new axle if you will, or a new product that we have now versus a brand new product that we may come out with in a new business unit. So for instance one of the product lines that is gaining a lot of interest to the customer and the off-highway group is a power boost system.

It's a fantastic product. It's gaining a lot of interest.

We're not into production with that yet, so when that becomes part of the backlog where we go into production we'll probably see a slight uptick. But that boundary between all that variability should be in the narrow band that Bill had mentioned. We don't see anything wildly out of those bands.

Okay, very helpful, thank you.

Your final question comes from the line of Joe Spak with RBC Capital Markets.

Hi, thanks for squeezing me in. Almost all my questions have been answered, so maybe just one quick housekeeping one to wrap it up.

If I just do the quick math on the $20 million lower EBITDA it's about $0.09. So is there anything below the line that's offsetting that at all?

I think if you look at our EBITDA, there's not anything unusual with respect to that year-over-year move, Joe. So what you're getting is the impact, probably as you'll really think about it is the weighted averaging that's going on year-over-year.

So as you know we purchase shares in the market but you only get X benefit with respect to -- from an accounting perspective on the EPS side. So I think what you're seeing there quite frankly is just the timing and trending of our share repurchase activity or expectations if you will over 2015.

Okay, thanks. I'll follow up later with some others.

Okay, so for anyone that may be left on the call I'd just like to say thank you for joining us this morning and we'll see you next time. Thank you.

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