Dana Inc (DAN) 2016 Q2 法說會逐字稿

Good morning and welcome to Dana Holding Corporation's second-quarter 2016 financial webcast and conference call. My name is Brent and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session will be recorded for replay purposes.

(Operator Instructions)

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

Thanks, Brent. And thank you to everyone on the call for joining us today for Dana's second-quarter 2016 earnings call. 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 a Q&A session. In order to allow as many questions as possible please keep your questions brief.

Today's presentation includes forward-looking statements about our expectation for Dana's future performance. Actual results could differ from those suggested by our comments today. Additional information about the factors that could affect future results are summarized Safe Harbor statement. These risk factors are also detailed in our public filings including our reports with the FCC.

Presenting this morning is Jim Kamsickas, President and Chief Executive Officer, and Jonathan Collins Senior Vice President and Chief Financial Officer. With that, I would like to turn the call over to Jim.

Thank you, Craig, good morning, everyone. Thank you for joining us. The second quarter of 2016 was another solid quarter as a result of continued teamwork by Dana teams and our execution on our operational and strategic priorities.

In terms of financial results for the quarter, sales were $1.55 billion, a decline of 4% from the second quarter of last year, largely as a result of currency headwinds. While we continue to experience weakness in market demand in the commercial vehicle and off-highway segments our light vehicle-related businesses, specifically our key market of light trucks, are doing quite well with double-digit organic growth.

Our earnings for the quarter came in strong with diluted adjusted EPS up $0.05 per share over last year and adjusted EBIT margin of 11.5% driven by strong light vehicle markets and very effective cost management across the Company. We have continued our drive for profitable growth and exceptional customer satisfaction.

And I will highlight this morning, we have had some real successes including, securing significant replacement business in Light Vehicle Driveline leading to continued backlog growth. We also completed a strategic bond refinancing that allowed us to achieve three key improvements in our capital structure. The new issues extend our maturity into the next decade, lower our overall interest rate and increase our available liquidity. Jonathan will provide more details on this in just a few moments.

Finally, we continued the execution on our $1.7 billion share repurchase program returning $53 million to our shareholders in the second quarter.

Turning to slide 5. Let's take a moment to update you on what we are seeing in the end markets around the world. Starting in North America, our outlook for the year is positive as the overall economy remained stable. More importantly for us, fuel prices remain low, which is good for the light truck market. We continue to see brisk demand in our Driveline and Power Technologies business for light trucks and with our upcoming launches we see this trend continuing. I am also happy to report that we are on track with the Ford Super Duty launch this summer.

For the commercial vehicle market in North America we see two story lines. The first is a fairly strong medium duty market, which is helping to offset the weakness in the Class 8 truck market. We are slightly reducing our production expectations for Class 8 trucks to 230,000 to 240,000 units. The impact of the decline will be less than you may expect as our sales mix has shifted more to the medium duty market. More on that in just a moment.

Moving to Europe. All the talk has been about the UK and their exit from the EU. This is certainly causing some uncertainty in the region and putting pressure on the pound and the euro. However, Dana's direct UK exposure is limited to only about 3% of our total sales. Most of our business in the country is with Jaguar and Land Rover.

We have not seen any near-term issues in either demand or production changes from our customers. In fact, light vehicle demand in Europe was up over the past quarter and we expect it to be stable in the back half of the year.

We continue to see demand headwinds in our off-highway market, where the largest sales exposure is in Europe. Recently demand for the construction vehicles has slowed, but our Off-Highway Group has reacted quickly, continuing to adjust our operations to match demand.

Looking at South America, we remain cautious as we don't see the economy improving this year, especially in Brazil, where the recession and the fluctuating currency has been a headwind, especially to our Commercial Vehicle Group, since the second quarter of last year. In order for the market to see meaningful improvement, there will first need to be political stability, revised tax policies and improved access to capital. We expect commercial vehicle production in the country to be down 10% to 20% compared with an already depressed level of last year.

But there are some bright spots for Dana in the region. Our Brazilian team has done a great job managing costs through this downturn and continued to provide exceptional service to our customers which has led to new business. When the market does recover, and we do believe it will, we will be very well positioned for profitable growth.

Another bright spot has been our Light Vehicle operations in Argentina. We're faced with a tough market here as well but have successfully launched a new program with Toyota, and we have experience good sales growth in the country which has helped us to offset the currency headwinds.

Finally, in Asia Pacific we're seeing continued improvement in India and economic stability in Thailand where light vehicle demand is up over last year, though currency remains a headwind. We still believe the Chinese markets will mostly be flat this year compared to last. But we have had several new program launches on SUVs and light trucks coming in over the next few years, and we expect to continue our organic growth in the region.

Speaking of growth and customer satisfaction, let's turn to slide 6. Over the last several quarters we have shared with you many new business wins that are organically increasing our revenue backlog. This quarter I am excited to provide you an update related to, again, Dana's top line, but more specifically to successfully re-securing our replacement business.

As you know provide, we provide a three-year backlog incremental to our base replacement business. At the beginning of this year that was $750 million for all of Dana. This backlog number is a net number meaning we lower the backlog for any replacement business losses. I am very pleased to report that our Light Vehicle Driveline group has secured virtually all of our current book of business through at least the end of the decade.

We also have a strong foundation in our commercial vehicle business, which has rebounded extremely well, recovering from our supply chain driven issues last year. While the overall market demand is lower this year our share in the Class 8 market has been stable and we continue to see positive movements in our positioning in the marketplace.

At the same time our heavy-duty business has stabilized, our medium duty business has strengthened. This has tempered the Class 8 market decline. We continue to improve our commercial vehicle business in North America and abroad.

After safety, customer satisfaction is priority one. This has never been more relevant than our Off-Highway Group where our collaboration with construction equipment manufacturer Manitou Group has significantly contributed to the manufacturing of a vehicle with Dana's revolutionary new hybrid PowerBoost drive system. We highlighted this technology and relationship earlier this year and most -- and last month Manitou was recognized by the Council National des Achat, a French national association for procurement professionals, for demonstrating innovation through collaboration work between the supplier and manufacturer.

Working with Dana, Manitou set out to develop new technologies that decrease both fuel consumption and emissions for the increasing competitive agricultural telehandler market. The award truly demonstrates how two partnering companies with a shared business vision for developing advanced vehicle technologies can work together to achieve new levels of efficiency and innovation.

Finally I'd like to take just a minute to highlight a new business win in our Power Technologies group that was a result of our ability to collaborate with the customer to develop a customized solution that meets their needs. Earlier this year, we engaged with a major global light truck manufacturer to help them engineer a solution for a diesel engine fuel cooler. Working closely with the customer, we were able to utilize our core technology to custom design the product and have it ready for production all within six months. Bottom line, Dana's ability to act quickly and exceed customer expectations continues to generate opportunities for additional new business and truly exemplifies what is driving our continued success.

To take this focus one step further, on slide 7, today we announced that on August 1 we will change our Company name from Dana Holding Corporation to Dana Incorporated. This change is intended to better reflect how we conduct our business as one unified organization with a focus on customer satisfaction, operational excellence and advanced technology across all mobility sectors.

Perhaps important for the stakeholders on the call, please note that we will continue to operate and report our four business segments as we do today. Also of importance, we will retain the iconic Dana Diamond logo, which has been associated with the Company for nearly 100 years. Our New York Stock Exchange ticker symbol will also remain the same.

Now I would like to turn the call over to Jonathan to review the financials.

Thank you, Jim. Please turn with me to slide 9 for an overview of the second-quarter financial results. Second-quarter sales of $1.55 billion were down $63 million from the same period last year with $44 million of the decline attributable to foreign exchange as the US dollar continued to appreciate against foreign currencies. The remainder of the decline was due to lower volumes as strong growth in our Light Vehicle Driveline and Power Technologies segments was offset by lower end market demand in the Off-Highway Driveline and the impact of last year's share shift in Commercial Vehicle Driveline.

Adjusted EBITDA for the quarter was $178 million, essentially flat to last year, yielding an 11.5% adjusted EBITDA margin, which is 30 basis points higher than last year and 130 basis points higher than the prior quarter as our cost performance improved significantly. Net income was $53 million, $6 million lower than last second quarter. The second quarter of this year included a $17 million loss on extinguishment of debt due to the bond refinancing we completed in June. This was partially offset by lower tax and restructuring expenses.

Capital expenditures were $77 million, $17 million higher than last year, as we continue our investment to support our growth through new program launches and delivering our growing backlog. Free cash flow for the quarter was $108 million, $20 million higher than last year, primarily due to improved working capital efficiency, which more than offset higher capital spending and the timing of cash interest as a result of the aforementioned bond refinancing.

Slide 10 provides some additional color around the changes in sales and adjusted EBITDA versus last year. Sales of $1.55 billion, while down 4% from last year, represent a 7% sequential improvement over the first quarter. Adjusted EBITDA of $178 million was essentially flat versus last year as strong cost performance, pricing and commercial recoveries more than offset lower volumes and nearly offset the impact of foreign currencies. All segments improved or maintained margins as we posted an overall 30 basis point improvement from 11.2% to 11.5%.

The chart on the bottom half of the page highlights the four main drivers of the year-over-year adjusted EBITDA change and also notes the corresponding impact on sales. Foreign-currency lowered our adjusted EBITDA by $6 million compared to last year, driven by a $44 million headwind to sales primarily due to the devaluation of the Brazilian real, Argentine peso and South African rand against the US dollar.

Volume and mix lowered adjusted EBITDA by $8 million on $22 million in lower sales, driven mostly by higher North American market share and commercial vehicle last year compared to this year and lower demand in global off-highway end markets. Both of these headwinds were nearly offset by the 10% organic sales growth we achieved in Light Vehicle and Power Technologies, which combined, increased sales by $83 million compared to last year. Again this quarter's stronger Light Vehicle demand levels along with new customer programs drove the increase.

Pricing and commercial recoveries added $3 million to sales and adjusted EBITDA compared to last year. Cost performance was a $9 million improvement over last year as our manufacturing excellence initiatives begin to take hold.

Please turn with me to slide 11 for a closer look at the year-over-year changes to segment sales and EBITDA. The Light Vehicle Driveline group had a strong second quarter with sales of $669 million, up $28 million or 11% on a constant-currency basis, due to higher volumes in the light truck market in all regions as well as the benefit of incremental sales from new business.

Segment EBITDA was $71 million this quarter, $5 million higher than last year, providing a margin of 10.6%, higher than last year's second quarter by 30 basis points and higher than the first quarter this year by 50 basis points. We expect margins to continue to improve in the second half of the year as we launch new business and recognize the corresponding commercial recoveries.

As we look at the drivers of change for Light Vehicle Driveline, currency lowered earnings by $7 million and sales by $42 million mainly attributable to the Argentine peso, South African rand and Thai baht. As I mentioned previously, volume and mix performance was excellent this quarter benefiting segment EBITDA by $9 million on an additional $62 million in sales, which represents 14.5% incremental margin. Pricing and commercial recoveries were an $8 million, benefit offsetting $5 million of lower cost performance, driven by higher startup cost and inflation in Argentina.

Moving to Commercial Vehicle Driveline, we note that sales were down $82 million compared to last year due to lower market demand and the shift in market share that occurred last year. However, margin is up 80 basis points compared to last year due to meaningful improvements in our cost structures.

Looking at the details, currency was less of an impact this quarter as the Brazilian real was less volatile. Volume and mix lowered earnings by $13 million driven by $80 million in lower sales including the impact of the Brazilian market and lower share position in the North American Class 8 market. While it has been stable since the fourth quarter of last year, the lower share position accounted for the majority of the second quarter year-over-year change partially offset by our growing position and a better performing medium duty market.

Pricing, commercial recoveries and performance were all positive for a combined benefit of $10 million compared to last year. The positive cost performance of $8 million was driven mostly by the elimination of premium freight cost related to last year's supply chain initiative as well as realizing the benefits of that initiative in the form of lower material costs.

For Off-Highway Driveline, sales were lower by $27 million due to lower end market demand. However, through stringent cost management, margin was held flat compared to last year at 14.7%, which represents a sequential improvement of 140 basis points from the first quarter. Currency was a slight benefit compared to last year as the euro has stabilized.

Volume and mix lowered earnings by $9 million on $25 million in lower sales. This higher than normal decremental margin is the result of less favorable mix as demand was lower in the construction equipment market and aftermarket. Pricing was a slight negative compared to last year due to the timing of changes in commodity cost. Overall, performance was $5 million benefit due mainly to material cost improvements.

Finally, Power Technologies had an excellent quarter posting 6% organic growth and a 50 basis point margin improvement over the prior year. Sales were up $18 million and EBITDA $4 million for a 15.6% margin, which represents a 220 basis point sequential improvement as the inefficiencies we experienced in the first quarter associated with converting on rapid increases in volume are now behind us. The currency impact was $1 million negative to earnings, though you will note the sales impact was $1 million positive. This difference was driven by the relative strength of the euro, which was offset by some unfavorable transactional impacts.

Volume and mix benefited segment EBITDA by $5 million on $21 million higher sales due to continued strength in the light vehicle markets. Material savings drove $4 million in performance improvements offsetting an equal amount of lower pricing.

Slide 12 highlights our free cash flow for the quarter. We ended the quarter with free cash flow of $108 million, an increase of $20 million compared to last year on just slightly lower adjusted EBITDA. This change was primarily driven by improved working capital, which was offset by higher interest payments and capital spending.

Working capital was a source of $45 million this quarter, a $54 million improvement over last year. This change is largely attributable to the timing of customer payments and higher inventory requirements last year related to our supply chain initiative. Net interest was higher this quarter due to the accelerated payment of accrued interest related to the debt refinancing completed in June. Capital spending was $17 million higher than last year as we continue to invest capital to support our growing backlog.

On slide 13 I'd like to provide you with an overview of the actions we took in the second quarter to extend debt maturities, lower debt servicing cost and increase operating liquidity. First, we issued new 10 year senior unsecured notes at 6.5%. The proceeds were used to call our existing 6.34% notes that were set to mature in 2021 extending the maturity by five years. We issued these new US notes from a European subsidiary allowing us to efficiently utilize cash generated in the region to service the debt.

Second, simultaneous with the closing, we swapped the US dollar to euro denominated debt, which lowered the effective rate on the new notes to approximately 5.125% percent and the total overall average fixed interest rate on all of our unsecured notes to less than 5.5%.

Finally, we issued a new $500 million cash flow revolver with favorable terms to replace the prior asset-based revolver. This action provides greater ongoing and consistent full availability of funds and improved liquidity by $159 million compared to the prior ABL facility. The net result of these actions, along with strong free cash flow generated in the second quarter, is a $246 million increase in our operating liquidity to over $1.2 billion.

Slide 14 highlights our outlook for the full year, including some detail on our second-half targets. Our full-year guidance remains unchanged from what we provided in January, with the exception of the free cash flow guidance revision we made in April to accommodate higher capital spending to support our growing backlog. We still expect sales to be in the range of $5.8 billion to $6 billion, adjusted EBITDA of $640 million to $670 million, full-year margin of 11% to 11.2%, free cash flow of $120 million to $140 million and diluted adjusted EPS of $1.65 to $1 75.

As we look at the second-half targets, it's important to note what we have accomplished in the first half this year. For sales, we're expecting the back half to be slightly lower than the first, mostly due to lower market demand in commercial vehicle and off-highway. Since we had already assumed some weakening in these markets our sales guidance remains unchanged.

For adjusted EBITDA, our strong first-half performance will require the second half to be only slightly higher mainly due to margin improvements in Light Vehicle Driveline, as they will see the benefits from new business launches and the recovery of engineering costs.

Free cash flow is expected to be about $120 million in the second half of this year compared to $10 million in the first half. This seasonality is normal in our business as we see higher working capital requirements earlier in the year. For comparison, in the first half of 2015 we generated $6 million of free cash flow and $140 million in the second half. This year the second half will be lower than last year's second-half due to the timing of customer payments and higher capital spending to support our backlog.

Our second-half and full-year targets are called out by segment at the bottom of the page. As just mentioned, while sales will remain flat in Light Vehicle Driveline margin will improve as new programs launch and commercial recoveries are recognized. In Commercial Vehicle Driveline we are expecting to be approximately $100 million lower in sales due mainly to lower demand in the North American Class 8 market offset partially by strength in the medium duty market.

The transfer of our medium duty truck program from our Commercial Vehicle Group to our Light Vehicle Group in the third quarter will also affect this group. While this will have an adverse impact on the Commercial Vehicle Group sales and margin it will be accretive to Light Vehicle and to Dana overall. If you recall, we mentioned this program transfer on our first quarter call in April.

For both the Off-Highway and Power Technologies groups we expect second-half sales and margins to be in line with the first half. Hopefully this additional detail on our assumptions is helpful in understanding our glide path to achieving our full-year targets.

It is worth noting that from a seasonal perspective we anticipate that margins will remain relatively flat with the second quarter in both the third and fourth quarters. This is atypical from the past couple of years and is due primarily to the timing of program launches and commercial recoveries within the Light Vehicle Group.

Turning to page 15, I will summarize the key highlights from the second quarter that advance our priorities. Our customers have continued to demonstrate confidence in our capabilities through awarding us new business. The solutions we are offering them that they are selecting our differentiated through the technology advancements we're making in our products and processes. The financial results we delivered in the second quarter represents significant improvements over the prior year and the previous quarter as the Light Vehicle Driveline and Power Technologies businesses delivered excellent organic growth and margin expansion.

In the midst of a declining Class 8 market in North America and continued lower demand in Brazil, commercial vehicle improved margins versus prior year and the previous quarter and the Off-Highway business was able to maintain margins in the midst of historically low end market demand.

We have affirmed our full-year guidance. And while we have work to do in the second-half and we have some market headwinds, we have manageable expectations in terms of sales and anticipate sequential margin improvement in Light Vehicle Driveline based on well-defined actions. We will also continue to maintain an attractive free cash flow profile in the midst of supporting our new business growth.

That concludes our presentation this morning, and I will now turn the call back over to Brent for any questions. Thank you for listening in today.

(Operator Instructions)

Colin Langan, UBS.

Thanks for taking my question. Any color on -- it seems like from your presentation that there is some weakness in North American truck and other markets still remain very challenged. What gives you confidence in holding the full-year guidance as it seems like markets subsets deteriorated a bit from how you started of the year? Or were there offsets I'm missing?

This is Jonathan. Relative to second-half and first-half comparison, our original plan that we had in our guidance did contemplate lower volumes in the second half versus the first half. There has been some softening as we noted from the 240,000 to 260,000 range down to the 230,000 to 240,000 range.

However, our medium duty segment is performing better which is helping to offset some of that. Not all of that was contemplated in our original guidance. And candidly, Light Vehicle volumes which affect both our Light Vehicle Driveline business and Power Technologies are slightly better which are helping to ameliorate some of that impact. So on balance we're able to maintain but the commercial vehicle business will be a little softer than we originally anticipated.

Got it. And how is the Off-Highway market trending? Are there any signs that market is starting to bottom out or possibly even turn the corner there?

Yes. Good morning. Appreciate the question. Who knows, of course.

But we feel -- we kind of feel like it's at the bottom but we -- who knows. That doesn't mean it's going to come back up anytime soon but we do feel it's closer to the bottom than not. As you know although it's largely manufactured out of Europe for Dana, we have a significant amount of our product is supplied overseas. So we do have a geographical balance.

So we're continuing to work through it as you know. And 30% of our Off-Highway is export. So anyway, I think we are okay with where we are at but I think it's just going to continue to bump around the bottom here for a while, Colin.

This is Jonathan. Just one thing I would add to that, a lot of the work, even to Jim's point, we're uncertain when it's going to come back. A lot of the work that we have done in that business in the cost structure and engineering of our products, has really positioned us well for when that market does come back. So we expect very attractive market conversion when we start to see an improvement in the global Off-Highway markets.

And just lastly, any color on how we should think about the cadence of Light Vehicle Driveline in Q3 and Q4. I know the super duty flat is a pretty big platform within that business, is that going to create a little volatility in Q3 and then a stronger Q4? It sounds like you're pretty confident about the margins there.

Yes, we feel pretty good about Light Vehicle margins from first half to second half. The timing of the launch ramping up certainly helps us. The other factor, some of the business when you look at it on a year-over-year basis that was within Commercial Vehicle last year, we have moved that platform to the Light Vehicle business.

It's an overall margin improvement for Dana in the aggregate as we're able to utilize some existing assets for both platforms. And then the final piece is just due to the timing of our commercial recovery. So remember in our business customers pay for the engineering work based on program milestones.

This year those milestones are weighted towards the second half of the year. So with those three factors, we are feeling quite confident about the Light Vehicle's performance in H2.

Thank you very much and congrats on a good quarter.

Brian Johnson, Barclays.

Thank you. A couple of questions. First around Commercial Vehicle Driveline. You called out last quarter that you expected the margins to decline due to volume shifting from CV to LV.

One, could you maybe re-explain that? And two, is that what's behind your posting a 8.5% this first-half but guiding to 7% in second-half and for next year? Or is that 7% something that, given these cost saves, given some of the mix, you may be looking to raise?

Brian, this is Jonathan. Just on the first half, second half for Commercial Vehicle, there a couple of factors. The one you noted, that I can give you a little additional color on, is the program shift. We had mentioned this in our April call at the end of the first-quarter and what is happening is we have a platform -- when you get into the Class 5, 6 range, you know those vehicles can be either a commercial vehicle or a light vehicle. And in this case we were able to leverage some existing technology and manufacturing processes for both platforms for one of our customers.

And what we did is, those sales and margins are moving from the Commercial Vehicle business to the Light Vehicle business in the second half of this year. So that is a headwind for the Commercial Vehicle business, puts pressure on the top and bottom line and obviously on margins as that business moves over. What we did highlight is, the reason we did it is it's better for Dana in the aggregate and it's part of Light Vehicle's improvement from the first half to second half.

The other factor I'd point to within Commercial Vehicle is, you will note that the Class 8 volumes in North America are weakening throughout the balance of the year. Right now we see it finishing in the to 230,000 to 240,000 net range which is a lower run rate in that in the balance of the year.

So that's putting pressure on the top line and is also going to put some pressure on margins. So those two factors are really the key drivers as to why you see some margin decline in Commercial Vehicle in the second half of the year.

Okay, and within commercial vehicle, is there a significant margin difference between the Heavy-Duty business and the Medium Duty business?

Obviously we've highlighted -- (multiple speakers)

-- content per vehicle?

Well we -- it'[s very difficult for us to provide you specifics on content-per-vehicle because there is so many mix variations. We would indicate that we have said in the past that growth in Medium Duty is good for us.

That's very good business for us so generally speaking those margins are good. So when those products are going up that's a benefit to Dana.

Okay and then over on the Light Vehicle Driveline, we certainly get the underlying segment shift going on towards light trucks. But within that there was an $8 million tailwind of revenue in EBITDA from pricing and recovery.

Usually, we are conditioned to think about price downs and while steel's up from its bottom commodity cost, is still historically low which would seem recoveries would go the other way. Can you give us a little more color as to what the drivers of that are? And then how long would you expect positive pricing recoveries to continue?

Yes. I think in the case of Light Vehicle Driveline, one of the things that we're able to do is, we get some recovery in other parts of the world as a result of inflation. So some of that is what you are seeing coming through.

There's also some timing of engineering recovery that's reflected there as well, too. But when you think about this those are really the drivers more so than the productivities or the price-downs that you would traditionally think of in the category.

Okay and then finally there's a couple things going on at GM. They are freeing up room at Wentzville for more midsize pickup trucks and then they are doing some business with Navistar.

Can you give us a sense of, first, I guess at the Wentzville, how -- what your content-per-vehicle is? How you could participate in that? And then as, given you have relationships on both sides, does the Navistar deal mean anything for you and is that maybe part of what you are flagging in the LV to CV shift?

This is Jim. I can't really give you a content-per-vehicle specifically but I will, for you and the audience, reinforce that as many of you know, we are on the Colorado Canyon, it's a big platform for us. It's a big successful platform for General Motors. I can't comment on what their manufacturing strategy is.

Obviously, we are very well positioned, not to get a little bit off tangent on that, but our facility that supplies a good piece of that is out in that region and it was just last quarter was recognized as a, albeit [Ford], was recognized as one of their world excellence award-winning plans. We are in good shape to continue to support General Motors or whoever in that area.

Relative to your question on the Navistar news, so on and so forth, certainly Navistar is an important customer of ours. General Motors as an important customer of ours. We're in very good condition with both of those two successful companies and we will certainly be in play for anything that continues to come our way with the GM Navistar relationship.

Okay. Thank you.

Patrick Nolan, Deutsche Bank.

Good morning, everyone. 2 quick questions. Just a follow up on the pricing and recovery question for the Light Vehicle Driveline business. So it sounds like for the full year for 2016 that will be a positive to the EBITDA line.

That's right.

On a go-forward basis, does that swing back to kind of the traditional price-downs or negative impact EBITDA or is that kind of a net-neutral on a go-forward basis in your mind?

Yes, Patrick, on a go-forward basis that should be relatively neutral.

That's helpful. Can you maybe also elaborate on the Commercial Vehicle Driveline, the market share losses that were incurred? What's the path to potentially get some of that share back over time?

Great question. Good morning, Patrick. The path was -- we know the path that went -- why it went the other way, you are aware of that.

We kind of hit a bump in a road there, stepped on our toe, call it what you want. First and foremost it's performing. We are absolutely performing extremely well with that customer and all of our customers, for that matter, as it relates to quality, delivery, warranty, all the important ingredients that seem cliche-ish but they're in fact what drives the business. The other one is the technology road maps and the things we're doing.

Again we are driving those to all the customers. Although I can't commit to tell you, we are here today and we will be here tomorrow. I don't have a crystal ball in terms of what the customers are going to do. I would tell you that I am bullish on our commercial -- I'm bullish on all of our segments, but commercial vehicle and we are in very good standing with all of our commercial vehicle customers.

We have been growing. You know that. We have been talking about growth every quarter. We are not faking it and we expect to certainly grow in the Commercial Vehicle Group as well.

That's helpful. And, Jonathan, just quickly on the working capital line. What's your expectation for what the full-year working capital usage or source looks like?

As you can see when you look at the full-year free cash flow guidance, we anticipate that working capital on a full-year basis will be a modest source of cash flow. I think we are in the approximately $30 million range to get you to the midpoint of our guidance range. There are obviously a number of factors there but we're actively managing our inventories and our disbursements and receipts to make sure that we deliver that but that's the approximate range.

Thanks, guys. I'll get back in the queue.

Brian Sponheimer, Gabelli.

Hi. Congratulations on a good quarter. You know, Jim, if I am thinking even on the job certainly less than a year but you've got a good sense of the businesses now and the changes to the balance sheet to increase liquidity. Could we take that possibly as a more aggressive stance towards looking to expand the portfolio from and inorganic standpoint?

I'm going to answer that two-part. First of all thank you for the call and for joining. And the question. I wouldn't read into it that way necessarily. Jonathan, will give you some more color commentary outside of his scripted remarks on why we did it.

I think for one, before I overcook it a little bit, I think the timing by the Dana team, financial accounting team was fantastic in terms of everything else that happened in recent time with Brexit and everything else. But from our standpoint, we certainly want to always be in a position to pull any lever. If that lever is going to be inorganic, if that lever is share buyback or whatever.

But the thing that's most important for us, as you can see by our organic, which is our most preferred avenue for growth, we are growing sizably and we need to make sure that we are in a position to support that and as the industry is going more and more global, customers want to go with the same design, same engineering, same people to talk with, same products. We need to make sure that we are in a strong position to do that, not just here in 2016 but for years to come. So from an operating standpoint, from a customer satisfaction standpoint that is what is important to me.

Jonathan, I'll ask you to add some color.

Now, Brian, while to Jim's point, it does give us some flexibility strategically and we will continue to look at organic priorities first but then also add inorganic opportunities. We were pretty opportunistic about this. When you look at the refinancing of the bond which generated a comparable amount of liquidity, the economics were quite attractive given our ability to swap that to euros. So it was an NPV positive trade, allowed us to extend maturities by five years. That one was pretty opportunistic.

On the revolver, we had an asset-based facility and due to efficiently managing our working capital and some structural changes of our legal entities, we had less available under that facility so when we did the bond we felt it was the right time to get the cash flow revolver in place and have access to the full $500 million. That was somewhat opportunistic as well also. Hopefully, that gives you a little bit of additional insight on how we're thinking about it.

That's good. Thank you. Maybe just a step back from -- how you look at your standing with investors. You have got a Power Technologies business that's bumping up against 20% EBITDA margins which would put it up with really any in the industry. How do you strategize as to how to get investors aware or more aware of this business that Dana is really a technology leader and not necessarily just a -- thought of as an old axle company?

Great question, again. No surprise, Brian. Great question. What I tell you, actually I will toggle it back to your opening comments that I am coming up on a year, not quite a year yet. Jonathan has been in the saddle here for two or three months now, getting his feet on the ground, and the team is doing a great job.

So what does that mean? It means we also, as part of our responsibilities, and the thing we work on is really developing our go-forward strategy. I can tell you in the last couple months that has been a key point of what we have been working on and I would tell the audience today, not just yourself but the audience today, you should expect more on that in the near term. Maybe the October timeframe but certainly by the end of the year.

Thank you very much.

Irina Hodakovsky, KeyBanc.

Thanks, good morning, everyone. Thank you for taking the question. Wanted to ask you about your Brazilian exposure.

The market there continues to decline, cost reduction would eventually hit limits at some point. If we are looking for 20%, up to 20% additional, in the bottom of this year plus the ability for further weakening next year, just wondering where are you in terms of limits on cost reductions? And then you only really have 5% exposure there, if you do begin to be -- if operations hit unprofitable levels, is it material your bottom line?

Thanks for the question, Irina. This is Jonathan. Just relative to where we are with Brazil right now from an outlook standpoint, we are generally of a view that we are pretty close to the bottom in Brazil from a demand standpoint.

Certainly there is a lot happening that Jim mentioned in his comments earlier in the call relative to the political environment and we're hopeful that some of the changes there will catalyze some economic growth. Broadly speaking, we are bullish on Brazil. We have a very strong presence. We have taken a little bit of a different approach in the past few months.

We have been able to, as suppliers in the region undergo financial stress due to the low volumes, we have had the opportunity to pick up business. We have also addressed the cost structure very aggressively. We work to put programs in place to get arrangements with the union to be able to address lower labor costs as demand is lower which has positioned us really well.

From a financial perspective we are hovering right around breakeven in that market. We will continue to watch demand carefully.

There are some additional opportunities for us to improve the operations and trim cost to stay at or near that level. But certainly Jim will probably want to add something to this but we have a very good outlook on Brazil and remain committed to that market.

Yes. I can only just paint a picture for you. None of us could be there. We are very vertical in Brazil.

We have a very talented team in Brazil. A long-standing foundation there. Anybody that's ever done business in Brazil recognizes, probably, the most, from a vertical standpoint, probably the most important country in the world with all of the taxation and other challenges that come along with it.

So the team has done a very good job of kind of holding the line and not being a big drag on the Company. So we are going to stay the course there and I think it's going to turn out very good for us. Especially back to my other comments as it relates to global platforms and I think everybody on the call gets it.

You're not going to -- in the long haul, if you are not in a position to be able to support the same platforms around the world, you are going to be at a significant disadvantage. We are in a very bullish and a very strong position in that regard, from a manufacturing footprint.

Thank you very much. Congratulations on a great quarter.

Justin Long, Stephens.

This is actually Brian Colley on the line for Justin this morning. Congrats on the quarter first off. Just wondering if you could give an update on what you are seeing in terms of acquisition opportunities and any color on the size and which end markets or geographies you are seeing opportunities in?

Thanks for the question, Brian, and thanks for the comments. Appreciate that very much. As I often say, not to overcook it, but as I often say, there is always the M&A opportunities that are circulating through.

We always keep a keen eye on those. I won't to try to hint towards anything too much but typically I have had a tendency, like anybody as an investor in anything, and that's an investment of course is to look for the buy low sell high type of thing. And there certainly some targets out there.

There are some weaknesses in various geographical markets, there is some weakness in particular product and end markets. So we are very keen on keeping a close eye to that.

We have done some structuring internally here recently to make sure we are efficient and effective. Definitely fishing and looking and making sure we do a quick assessment, get in and get out and know where we're at as it relates to if we should do something on the M&A front.

All right. Thanks for that. I also wanted to ask about, separately from you guys looking at acquisitions, looking at alternative strategic options for the business, you have a diverse business model serving multiple end markets in multiple geographies. Yet you guys don't really seem to be getting much credit for that diversity seemingly just because of some of the end-market headwinds you have been facing. But at the right price would you guys ever consider divesting one or more of your divisions and also have you seen any interest from potential buyers?

This is Jim again. From my point of view, just less than a year on the job, I've said this a couple times but the Dana team over multiple years has done a very good job of synthesizing and aligning the product. We are largely a Driveline Company with our Power Technologies group not only supporting the engineering but supporting our driveline products.

So they are very connected. We are not a Company that's got some legacy history it's trying to do bumpers and tires and seats and all sorts of other stuffs, so we are very core to our product so I feel pretty good about it from a product standpoint, from a synergy standpoint, from a value proposition standpoint for our customers, our ability to grow, our leverage off of the footprint, et cetera.

Would we ever say never to some type of play where we would move something out? Sure. You're always open-minded to it. But I would tell you that we are much more on the, what I would call, we are more slanted toward being a buyer side than we would be of looking to move something out. There's a very powerful engine here, pardon the pun, as it relates to Dana, how we are interrelated with our Power Technologies group along with our three driveline businesses.

Understood. That's helpful. And lastly, I just want to ask about the new Light Vehicle Driveline facility you guys announced in Toledo.

Could you guys just talk about that, the returns you are expecting on that investment? Do you expect them to meet something in the range of at least mid-teens on a return basis? And then secondly, when would you expect a top line impact from that investment to become meaningful?

Sure. This is Jonathan. I'll just touch on the numbers and then let Jim talk you through the rationale and the strategy associated with the facility. As far as returns are concerned, the project most certainly our internal hurdles or requirements. We look at ROIC.

We target in the mid- to high-teens in that category and this project absolutely met that criteria. In terms of the sales coming on supporting new program launches, that will be coming to market towards the end of next year. So we are actively engaged in getting that facility up and running and ready to launch well for our customer.

I would only add to it that, I don't expect anybody on the call to know our complete manufacturing footprint, but it -- you see what happens with suppliers or companies in general, this for one thing happened after another and it ended up the way it did. But if you looked at the Dana footprint for our Light Vehicle business we didn't have a facility to the Toledo/ Metropolitan Detroit/area where there's a lot you, obviously needless to say, there's a lot of light vehicle production.

So it was a necessity for us to take care of our customer and to be in a position and to win. And so it was announced that we're going to support two customers and then beyond that hopefully more. But we needed, from a bull's-eye manufacturing strategy standpoint, we needed that footprint here and so that's why we are moving forward. But we're very bullish on the facility for sure.

Great. That's helpful. Well, that's all I have. Thanks for the time and congrats again on the quarter.

Christopher Van Horn, FBR & Company

Good morning. Thanks for taking my call and congrats on the quarter. Just a question on the backlog as well as your pipeline coming up. Could you give us a sense of what the mix is between new customer opportunities as well as maybe some program extensions or program rebates?

And then secondly within that pie, I guess, could you break out regionally where you are seeing the opportunities or what kind of end market-wise where you are kind of slanted?

Sure. Christopher, this is Jonathan. Just a couple comments with our backlog. Just to remind you relative to some of your points about how -- what that is composed of.

Keep in mind, our backlog takes into account or nets any lost business, which is why Jim emphasized today the securing of our major replacement business in our Light Vehicle Driveline business through the end of the decade. That's really significant, provides a really strong basis for growth. This does not include any of those replacement business but if we weren't to give one it would count against it.

This is truly incremental business relative to the customer and segment and geographic dispersion. You know the backlog, all four groups are contributing to the backlog, so all of them have positive backlog. The majority of it is coming from the Light Vehicle Group.

So they're major contributor. We have had a lot of success with new business. Most of it is coming from existing customer relationships so we have a strong relationship with our major customers and the growth is spread across that customer base.

From a geographic standpoint, again, all regions are contributing to the backlog around the world but the majority of the concentration is within North America. So you'll see a heavy weighting to growth that's in the North American geographic segment.

Got it. And could you just comment on maybe some of the opportunities or what your mix is within Asia Pacific, specifically China? Are you levered more on the light vehicle side? Is it commercial side? And then where your opportunity - -what's your opportunity set there from a pipeline perspective?

Thanks for the question, Chris. Just a quick snapshot to that. What we seldom talk about but it's important to us, of course is, because it's unconsolidated, let's take commercial vehicle first.

We have a joint venture with Dong Fang over there. It's a very sizable business so we are a big player there. It just doesn't roll up into the consolidated numbers. So that where we're at there.

We will continue to be relatively strong from that standpoint in the commercial vehicle side going further in China and you asked more specifically for Asia. That's actually where our strongest growth on a percentage basis is certainly in the China market. Last year, I believe we reported that overall consolidated business, it's only about -- China only about 3% of our sales but that's headed north quite a bit.

And over the next couple years and been heading north because of some, actually the technology side of our business, is that -- where there's not as much truck vehicle production there, as you know. Our products, we have made some pretty significant moves in different -- our rear disconnecting unit-type of products, our Power Technology products as well as our PTU business. Our other products in the all-wheel drive market are hitting very nicely in the China and Asia market.

Okay, great. And then just last one if you don't mind. I noticed the buybacks were down year-to-date compared with last year. Could you just comment on your strategy for that going forward and maybe just why they were down year-over-year?

Yes. We are operating under a different authorization now so we have a $300 million authorization to purchase this year and next year. We actually accelerated the rate of purchase in the second quarter given where with the stock price is we bumped up our purchase levels. Just relative to our approach going forward, I think we have been pretty clear that our primary place where we want to invest capital is in growing the business organically and supporting this growing backlog.

We will continue to look at inorganic opportunities as well, too. And at the right price for assets that will add technology that will help us grow our business profitably, we will certainly be willing to deploy it there. And then finally we will repatriate it to shareholders in the event that those don't materialize. It does sit if you will at the bottom of the priorities relative to the other alternatives. But the answer compared to last year as we are operating under a program that's a little bit lower because of the growth phase that we are in but just seasonally we actually did step up the rate in the second quarter due to our conviction on the price of the stock.

Okay. That makes sense. Thank you very much.

Joseph Spak, RBC Capital Markets

Thanks for squeezing me in here and congrats. Jonathan maybe just a quick clarification. I thought in the prepared comments -- let me take a step back, talking about the recovery in LVD, again. I thought in the prepared comments I heard you mention you thought margins would continue to improve in the second half as you launch the new business and there's going to be some corresponding commercial recoveries.

And then later on I thought you implied that the recoveries implied in the back half were basically neutral. So did I miss hear something? Did I misinterpret something? Maybe could you clarify that.

Sure. No problem. The comment early on was relative to the Light Vehicle business. Light Vehicle is expected to improve from first half to second-half and on a half-over-half basis the recoveries in the second half for both Light Vehicle and all of Dana will help to improve margins.

I think the comment I made relative to flat margins is I just wanted to signal that our third and fourth quarter margins we expect to be in line with second quarter margins which is unique from what you have seen seasonally from us in the past couple of years. Typically the second and third quarter are peak margins and margins taper off in the fourth quarter.

But the issue here in the fourth-quarter is that because of the timing of recoveries we expect on an aggregate basis for Dana that margins will be in the 11.5% range in both quarters. Apologize if that was a little bit confusing but the intent was to just give you some feel on cadence for the third and fourth quarter there.

Got it. So just with staying within LVD, the recoveries plus $8 million this quarter, can you give us a sense as to how much it's going to help the back half? Within LVD.

The $8 million is an eight year-over-year variance. We do expect them to be positive relative to the second half of the year.

The $8 million is on an year-over-year. It's slightly more than that in the back half of the year compared to prior year. But that's both the third and fourth quarter.

Okay. Thanks. You talked a lot about how the mix on commercial vehicle in North America is moving more towards 5 through 7 versus 8. Maybe just, and sorry if I missed this, but of 66% or 2/3% roughly of CVD in North America, what is the breakout between Class 8s and Class 5 through 7

For competitive reasons we have chosen not to disclose that specifically. What I can indicate or what we have been talking about is that the medium-duty vehicle growth combined with the fact that we lost some share in Class 8 in North America last year has become a much more meaningful portion but we've opted not to give the specific percentages for competitive purposes.

Last one and this is a little bit of housekeeping, commercial vehicle margins in the back half, I know if you look on a year-over-year basis in the fourth-quarter 2015 there was a big impact from the warranty expense, so I think that was $60 million versus -- that would still sort of imply a good improvement in sort of efficiencies. So can you just remind us, on a year-over-year basis, what were they're -- was there something beyond the warranty that was more punitive from an efficiency perspective that sort of reverses in the fourth-quarter this year?

Yes. So a couple things you will remember, we did incur some premium costs associated with the supply chain in the back half of last year which will be a help on a year-over-year basis. The other factor is that volumes took a pretty steep decline in the fourth-quarter in Class 8 in North America.

We've talked about the fact before that while we are generally very good at responding to changes in market demand when they happen very rapidly. We sometimes get caught there for a period and that's what you saw happen in the fourth quarter. It's really a combination of those two factors that add to the fourth quarter improvement compared to last year in CV.

Okay. Thanks a lot.

Okay. This is Jim just to close it out. Thank you for joining the call. I hope it's obvious that we continue to execute under strategic priorities for this year.

Again that is the enhancing of our competitive position, growing our core business by winning new business, protecting our base business, driving customer satisfaction through operating performance and solution providing innovation.

We are continuing to drive profit margin improvement by focusing on manufacturing excellence and cost management and of course we're continuing to maintain a strong balance sheet by managing the capital structure. Thank you all for your questions, attention and have a great day.

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