Dana Incorporated
Q2 2015 Earnings Call Transcript

Published: 23 Jul 2015

[Operator:]

Good morning and welcome to Dana Holding Corporation's Second Quarter 2015 Financial Webcast and Conference Call. My name is Dennis, 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. There will be a question-and-answer period after the speakers' remarks, and we will take questions from the telephone only. To ensure that everyone has an opportunity to participate in today's Q&A, we ask that callers limit themselves to one question at a time. If you would like to ask an additional question, please return to the queue. At this time, I would like to begin the presentation by turning the call over to Dana's Director of Investor Relations, Craig Barber. Please go ahead, Mr. Barber.

[Craig Barber:]

Thanks, Dennis, and thank you all for joining us today for Dana's second quarter 2015 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 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 future results are summarized in our Safe Harbor statement. These risk factors are also detailed in our public filings, including our 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 would now like to turn the call over to Roger Wood.

[Roger J. Wood:]

Thank you, Craig, and good morning, everyone. Before I dive into the quarter, I'd like to mention that we recently announced that Jim Kamsickas will be the next President and CEO of Dana effective August 11. Jim comes to us from International Automotive Components or IAC, where he served as CEO since 2007. He's a proven leader who's demonstrated a track record of operational excellence and profitable growth over the course of his career and we're excited to have Jim join Dana. As you know, Dana has a very strong leadership team in place and, together with Jim, they will continue to build on our profitable growth strategy, which includes geographic expansion, new product innovation, M&A activities and operational excellence. I speak for the entire team when I say that we're really excited to welcome Jim to Dana and we look forward to working closely with him. Turning to the second quarter results on slide four. The second quarter, as with last quarter, had its challenges with softer markets in South America and continuing currency headwinds. But as we've demonstrated in the past whenever we face these issues, our team continues to execute well. During the second quarter, we recorded sales of $1.61 billion, which represents 4% organic growth compared to the first quarter last year. Net income for the year was $59 million and diluted adjusted earnings per share were $0.48. We finished the quarter with a 30 basis point improvement over the first quarter and ended the quarter at $176 million or 11.2% of sales. We also continued the execution on our $1.4 billion share repurchase program by returning another $63 million to our shareholders. This brings the total we've returned to the shareholders to $1.215 billion since we started the program and we had $185 million remaining at the end of June. Throughout the quarter, we also received several customer and industry awards and we continue to introduce new technologies into the marketplace and I'll cover some of those in a little more detail in a moment. And I will share with you some of the new business wins that we've had in the quarter that are continued to add to our backlog, as we move forward. Last month, Ford awarded our Columbia, Missouri facility with its Gold World Excellence Award, which recognizes suppliers that distinguish themselves by achieving the highest levels of excellence in quality, cost, performance and delivery. In addition, Daimler Trucks North America selected Dana as one of its elite suppliers and a recipient of the Master of Quality Award for 2014. The annual program recognizes suppliers that exceed Daimler's stringent quality standards. And our Power Technologies facility in Robinson, Illinois, was also honored with a quality award from Caterpillar, whom you know is a very important off-highway customer of Dana's. I'd like to call attention to two additional awards that highlight our commitment to being a good corporate citizen around the world. Dana China earned the Shanghai Corporate Social Responsibility Award, which recognizes corporate social responsibility successes, and it provides a model for other organizations that are looking to expand their community outreach efforts. Also, Dana's PTG facility in Gravataí, Brazil, was honored with a National Sustainability Award for its rubber recycling initiatives. This internationally recognized award aims to promote sustainability and to strengthen initiatives that adopt best practices in social and environmental responsibility – features that our good customers look for in their good suppliers. These awards demonstrate our commitment to working with our customers to not only develop unique solutions that address key market drivers, but they also provide world-class quality and delivery while at the same time being a good corporate citizen. I'd like to share in greater detail a couple of new innovations that we introduced to the market this quarter. We're now supplying metallic bipolar plates for Symbio FCell's fuel-cell range extender used by Renault for its Kangoo ZE-H2 light commercial vehicle. This range extender is the only one of its kind on the market for passenger cars, and it can increase the vehicles' driving range by 50%. Another important technology that we introduced is our Victor Reinz thermoplastic cylinder-head covers manufactured with a special injection molding process. Now available on several 2015 Ford vehicle platforms, including the Super Duty pickup trucks as well as the F53 Motorhome chassis and the F59 step vans, also the E-Series Cutaway, this product offers approximately 25% in weight savings over the traditional counterpart, which as we know results in improved fuel savings and lower emissions for the vehicle owners. The next slide highlights how the advanced innovations and solutions we're bringing to the market are helping to drive our new business backlog through 2017 and beyond. In the quarter, our Commercial Vehicle Group won significant new business all over the world. To highlight a few – and I can't name them yet because of customer confidentiality – we secured additional driveline business with a key medium-duty OEM in North America and also a new drive axle business with a major OEM in Asia. One of our key growth initiatives is business expansion in emerging markets, and we continue to further penetrate key countries such as China with both traditional as well as non-traditional customers alike. We recently secured some new business with FAW. We'll be supplying front and rear drive units for an all-wheel-drive SUV as well as rear-drive and power take-off units for an all-wheel-drive crossover vehicle. Guangzhou Automobile Group is launching an all-wheel-drive crossover next year featuring Dana's rear-drive unit. And we've secured the axle and the driveshaft business with Great Wall Motors, China's largest auto manufacturer for their compact pickup truck that'll be produced next year in Ecuador. Due to our strong global footprint and longstanding customer relationship, we continue to expand our presence in emerging markets as Nissan has awarded us the additional driveline business for their future compact SUV to be manufactured in Thailand. This is another exciting opportunity to promote our products and capabilities in the marketplace that will lead to many more global opportunities in the future. We've also earned a new program with Volkswagen in Europe that's launching in 2017. This program is a great example of our ability to quickly win new business that not only impacts our current business backlog but helps to build our future backlog as well. We look forward to sharing more about this exciting new program in a future call. As you know, the light truck market in North America continues to be strong, and this is evident by the high demand we see for GM's Colorado Canyon pickup trucks, which feature our front and rear axles. Customer reaction to the new compact truck has been extremely positive as the production outlook has increased by 30% since last June. In addition, Dana has benefited from increased content due to the positive mix of more 4x4 trucks being sold. Our Off-Highway business continues to gain traction in key markets including the construction market. This business is performing very well, and it's also positioned for strong growth when the markets finally turn around. Last month, we announced that through our joint venture with Bosch Rexroth, the new R2 hydromechanical variable transmission will be featured on Kalmar's new Gloria generation of reachstackers as part of their highly efficient Kalmar K-Motion drivetrain. Developed in association with engine manufacturer Volvo Penta in a systems integration exercise, the Kalmar K-Motion drivetrain system can reduce fuel consumption by up to 40%, while lowering noise levels by up to 6 decibels. The HVT R2 features a modular design that can be adapted for a variety of off-highway applications. We also secured new off-highway axle business that'll be manufactured in Europe for a major construction customer. Additionally, we'll be supplying axles for a large agricultural OEM in North America. We can share more details about these as they unfold at a later date in conjunction with our customers' announcements. As you can see, our technology strategy is helping us continue to earn new business all over the world. Despite operating in a very competitive environment, we're successfully competing by providing value-added products and solutions that meet key market drivers, which will continue to drive our overall organic sales growth and margins without relying solely on price. Our past experience, as illustrated by the improvements in our light vehicle margins, demonstrates that our business model is working and we're confident in our ability to grow the business and to do so profitably. So before I turn it over to Bill, I'd like to share a few thoughts with you. With Jim Kamsickas coming on board next month, I'd like to let everyone on the line know that this will be my last earnings call here at Dana. I want to thank my team and the people of Dana and you, our shareholders, for all of your support over the last five years. It's been an incredible privilege to work for this company, with has so much growth potential as we look out into the future. Saying goodbye is always difficult but I know that under Jim's leadership, Dana is poised to continue moving forward and achieving great things. So, with that, let me hand it over to Bill to walk you through the financial performance and our outlook. Thank you.

[William G. Quigley:]

Thanks, Roger, and good morning to everyone. Before we move into the detailed review of our financial performance for the second quarter, I'd like to highlight the key considerations that impacted the business, which we've highlighted here on slide nine. As Roger mentioned in his remarks, currency movements significantly impacted our financial comparisons, certainly masking the underlying growth in the business. The stronger U.S. dollar compared with last year lowered sales by about 9%. While most all currencies were weaker compared with last year, the largest contributors of the change were the euro and the Brazil real. And while the euro has maintained some strength against the U.S. dollar of late, a number of Asian currencies as well as the Mexican peso further weakened offsetting any benefit from the euro compared to our previous expectations. Organic growth across the business was again strong this quarter providing a 4% increase compared to last year, the same as in the first quarter of this year. End market demand in most regions was in line with our expectations, and we continue to benefit from new business coming online. This growth rate has even more significance in light of the further weakening of demand in South America during the current quarter with medium and heavy-duty truck production down 46% and in Brazil, down over 44% compared with last year and about 17% compared with the first quarter of this year. And finally, while we show mostly year-over-year comparisons on a sequential basis, each of our business units increased segment EBITDA margins in the second quarter. And while margins in our Commercial Vehicle Driveline business were held back some by premium costs related to our now completed supply chain initiatives, those costs are behind us and we expect a rebound in the margin performance of the business in the second half of the year. Now, let's move to the numbers and comparisons highlighted on slide 10. Sales totaled $1.609 billion in the quarter, $101 million lower than last year, reflecting the impact of unfavorable currency as well as the divestiture of our Venezuela operations, which we completed in January of this year. These two factors alone lowered sales in the quarter by $176 million. Adjusting for these items, sales increased in the quarter by $75 million, or an increase of 4% compared with last year, driven by improved market demand in a number of our segments, new business, and pricing and recoveries. Adjusted EBITDA for the quarter totaled $180 million, $25 million lower than last year, providing a margin of 11.2%, 80 basis points lower compared with last year. Key drivers here were the divestiture of our Venezuelan operations represented about half of the margin difference and the impact of currency translation while increased volume provided some offset. Net income totaled $59 million compared with $86 million a year ago, largely the result of lower adjusted EBITDA and diluted adjusted EPS was $0.48 per share compared with $0.58 a year ago, reflecting lower adjusted net income in the quarter, partially offset by lower share count related to the continued execution of our share repurchase program. And free cash flow was $88 million in the quarter, with earnings and the timing of working capital interest payments being the primary drivers of the comparison. Now, let's go into some further details starting with sales and adjusted EBITDA comparisons, which we highlight on slide 11. Let's first review the regional distribution of sales in the second quarter compared with last year which is highlighted in the upper left of the slide. As you'll note here, the most notable year-to-year changes in South America, where sales were down 39% compared to last year driven by unfavorable currency, certainly the divesture of our Venezuela operations, but most nobly, lower market demand driven largely by continued economic weakness in Brazil. For the rest of the world, we saw strengthening in many of our markets and while currency continued to be a headwind, we posted organic growth in excess of market in the quarter reflecting new business coming online. The chart at the bottom left provides the key drivers of the sales change as compared with last year. And as highlighted, currency was again the main driver lowering sales by $156 million, or 9%, with the weaker euro and Brazil reais accounting for $115 million plus of the change. The Venezuela divestiture reduced sales by $20 million and on a full-year basis as we discussed previously, will represent about $110 million sales reduction in our Light Vehicle Driveline business segment. Volume and pricing drove sales $75 million higher than last year as we continue to see strong demand in the light and commercial vehicle markets in North America, as well as the benefit from new business. Moving to adjusted EBITDA, Dana posted $180 million in the second quarter, again, 11.2% of sales and the chart to the bottom right provides the key drivers of that comparison. Currency lowered adjusted EBITDA by about $24 million with conversion running a bit higher than our overall margin but certainly in line with our guidance given the regional distribution and margin profile of our businesses. On a comparative basis, Venezuela was a headwind of $8 million, as last year we received currency recoveries in the quarter partially offsetting the evaluation charge we recognized in the first quarter of 2014. And as we highlighted during our first quarter call, comparisons for the remainder of this year will include a headwind for 2014 recoveries we were able to achieve in Venezuela to drive full-year break-even results for this operation. Rounding out the comparison, we have positive conversion on volume and mix of $10 million, which did include a $5 million headwind for significantly lower demand in Brazil, which impacted our Commercial Vehicle business in the quarter. Overall, performance is slightly negative for the quarter reflecting premium costs related to our Commercial Vehicle supply chain initiatives and the timing of Light Vehicle Driveline cost recoveries this year. The next two slides outline the sales and segment EBITDA performance of each of our business segments starting with Light Vehicle Driveline and Commercial Vehicle Driveline on slide 12. Light Vehicle Driveline posted sales of $641 million in the quarter, an increase of $5 million compared with last year. As highlighted here, the Venezuela divestiture accounted for $20 million of the change as we discussed, and currency lowered sales $24 million with the pound sterling and South America currencies representing the majority of that impact. Adjusting for these two items, sales rose by nearly 8% compared with last year with volume and mix providing an increase of $52 million reflecting new business, continued strength in North America, and some improvement in Asia, most notably, Thailand and India. Segment EBITDA was $66 million this quarter lowered by $10 million compared to last year. In my previous comments, you'll note the divestiture of Venezuela operations accounted for $8 million of the change and currency was a $5 million headwind. Volume and mix contributed $8 million, or 15%, contribution margin. On the performance front, the largest driver of the change is the timing of recoveries, which benefited 2014 by about $7 million. The current quarter also had some incremental costs in support of a strong 2016 new business long cycle in Light Vehicle Driveline. Strong material savings in the quarter, about $7 million, provided a partial offset to these items. And if you were to normalize for the 2014 impacts related to Venezuela and recoveries, margin performance improved by about 40 basis points compared with the year ago. So, let's move to Commercial Vehicle Driveline. Sales totaled $431 million in the quarter; $32 million lower than last year, with currency representing $45 million of the comparison due principally to a weaker Brazil reais and the euro. On the volume mix front, significantly weaker demand largely in Brazil provided a $26 million headwind, which is offset by stronger demand in North America. Finally, pricing and recoveries increased sales by $7 million in the quarter, largely for inflation offsets. Segment EBITDA was $36 million for the quarter, or 8.4% of sales. Currency lowered EBITDA by about $5 million and the decline in South America market demand further impacted earnings by about $5 million. Rest-of-world demand increase is principally a strong environment in North America, provided an offset a $5 million. Net performance in the quarter was lower by $6 million, compared with the year ago as we incurred about $7 million of premium costs related to our supply chain initiative to meet the increased demand in North America, as well as experience some under-absorption of costs in our Brazil operations. Now, let's review the performance of Off-Highway Driveline and power technologies for the quarter highlighted on slide 13. Off-Highway Driveline sales totals $279 million for the second quarter, $56 million lower than last year with the weaker euro accounting for almost all of the change. Volume and mix was down only slightly compared to last year as new business and positive market mix, most notably in Asia, offset the impact of weakness in global ag equipment as well as Asia construction demand overall. Off-Highway posted segment EBITDA of $41 million, $5 million less than last year, yet margin improved by 100 basis point to 14.7%. And as highlighted here, currency was the main driver lowering earnings by about $8 million compared with last year. Positive mix and new business tempered the decline in overall market volume, while strong performance from material savings and cost efficiencies added $3 million to the comparison. Let's move to power technologies. Sales for the quarter were $258 million; $18 million lower than a year ago and, again, currency being the major driver, lowering sales by $32 million, principally reflecting a weaker euro and Canadian dollar. Increased light vehicle demand in both North America and Europe increased sales by about $16 million, or about 6%, compared with last year. Segment EBITDA of $39 million equaled last year, as the impact of currency was offset with favorable volume mix and improved performance. As you recall, our 2014's results include a specific warranty settlement which did not recur this year. Margin improved 100 basis points compared with last year, rising to 15.1% in the current quarter. Now, let's turn to our cash metrics for second quarter, which are highlighted on slide 14. In the second quarter, we generated $88 million of free cash flow compared with $133 million last year. As you'll note here, working capital was a slight use in the quarter of $9 million mainly due to the timing of receivables collections in the current quarter. Interest was $11 million higher in the quarter compared with last year due to the timing of semiannual interest payments on our current outstanding unsecured notes. And going forward this year, our net cash interest will be about $33 million in the third quarter and $11 million in the fourth quarter reflecting the refinancing we completed last year. Cash taxes were $12 million, $10 million lower than a year ago and, again, largely reflecting the timing of estimated tax payments as well as jurisdictional profitability. And you'll note here, capital spending was $60 million, in line with last year. At the end of the quarter, cash and marketable securities totaled $1.06 billion. As Roger mentioned as well, we executed $63 million in share repurchases this past quarter, and we have $185 million remaining on our authorization. Finally, total liquidity stood at $1.437 billion at the end of June, which includes $392 million of availability under our U.S. credit facility. Now, let's move to our expectations for the rest of year. As we look to the second half of 2015, we expect that the currency environment will certainly remain volatile. We expect the euro, South American, and Asian currencies likely to remain under pressure against the U.S. dollar. We now also expect the demand environment in South America to remain weak as a decline in commercial truck production experienced in the first six months of the year is not expected to recover. We now expect second half commercial truck production to be lower than last year by about 40%, and compared to our prior guidance, lower by 30%. As noted in our second quarter results, we implemented further staffing reduction plans in Brazil during the quarter, which will largely be completed by the end of the third quarter and continue to take other actions to better align our cost structure to the expected demand environment. Yet even with this backdrop, we do expect that all of our business segments will see improved margins in the second half. Some examples

[Operator:]

Your first question is from the line of Brian Johnson with Barclays.

[Brian Arthur Johnson:]

Yes. Good morning.

[Roger J. Wood:]

Hey, good morning.

[Brian Arthur Johnson:]

Just wanted to ask few things. First of all, I want to say good-bye to Roger, hopefully not good-bye permanently, but I certainly have enjoyed working with you over the last several years. And it's exciting to see some of the stuff coming through in the backlog that were initiatives that you put into place a while ago. Just a very quick housekeeping question. Taxes for next year, I mean we mainly look EBIT and EBITDA, but with your (26

[William G. Quigley:]

Yes. I mean, the GAAP tax rate certainly, Brian, is likely to change obviously, and we stated even previously from a U.S. GAAP perspective probably to be more in line with the statutory rate. As you know, we're closely monitoring the U.S. results with respect to profitability, given that we carry a valuation allowance still on many of our tax attributes. And certainly as we progress during 2015 and in 2016, given the profitability in those businesses, and we've highlighted this obviously in our SEC filings, within the next 12 months, we could be in a position to release up to $500 million of that val allowance which would impact the U.S. GAAP tax rate. Certainly wouldn't have much impact obviously on cash taxes.

[Brian Arthur Johnson:]

Okay. And do you have any tax rate guide yet, or is it too early?

[William G. Quigley:]

Any tax rate targets that you said, Brian?

[Brian Arthur Johnson:]

Yeah. For like 2016 and beyond?

[William G. Quigley:]

It's going to be higher than our current run rate, but again probably more at the statutory level, if you will. So, that will be 35% plus whatever you are withholding, it's 37% or so.

[Brian Arthur Johnson:]

Okay. Second question, can you just recap your China exposure?

[Mark Wallace:]

Hey, Brian, it's Mark Wallace. Obviously, we have the Dongfeng joint venture, which is for Commercial Vehicle, which is unconsolidated. But actually, our exposure is fairly small; around 3% of our total sales is coming out of China. We know there's headwinds in the country, but overall, we still see that a market that we're pursuing because pretty much it would be all new organic growth for Dana.

[Brian Arthur Johnson:]

Okay. Third question real quick, and I've got a longer fourth one. One of your competitors in the North American light vehicle axle has flagged that they believe their primary customer may be looking at diversifying their axle suppliers on a program that's currently single-sourced. Are you kind of participating in that? Is it all in the pipeline in terms of the week's bidding activity?

[Mark Wallace:]

Yeah. Brian, it's Mark again. We're participating with many customers in a lot of programs going forward. Nothing we can talk about specifically around customer diversifying a portfolio, but safe to say that we've been winning a lot of new organic business for Dana to include a customer like GM, which picked up the Colorado/Canyon business. So, we do fully expect to participate in upcoming program potential for Dana.

[Brian Arthur Johnson:]

Okay and final question. This secure (29

[William G. Quigley:]

I think – Brian, it's Bill. I think you're exactly right. Pretty tempered year-over-year comparison. Certainly the business that Off-Highway has been bringing online, I think is tempering some of the continued demand volatility we see in those markets in particular. I think about global ag as well as construction demand. Is it early to call a bottom? I would say that they've evened out and leveled out other performance in the business with respect to the new business coming online. I think we're continuing to see probably some headwinds from a demand environment there. But again, I don't think we're looking at potentially, as we sit today, any market further declines in mining for example. It's at a fairly low level in the business. Certainly ag continues to move around a bit, and construction demand remains pretty stable in North America. So, I wouldn't say too early to make a call on a bottom, but certainly I think it's leveling out a bit.

[Roger J. Wood:]

Yeah. And, Brian, this is Roger. Just to build on Bill's answer, the Off-Highway group, as you know, has done a wonderful job in terms of executing during the difficult market conditions out there. So, on the question of is it too early to call for a bottom, what they have been able to do with their new business wins and the launches that they've experienced over the last year or so has been able to mitigate that decline in those markets. So, while I think Bill is exactly right – I'm not sure we can call – is it too early to call, we're not sure about that. What we do feel very confident about is that the new business coming on line with that group is now in a position to mitigate any further declines. And if we're correct in thinking that maybe there is not going to be any significant further declines, then that new business coming online is going to start to show some growth in that business. We feel really good about that.

[Brian Arthur Johnson:]

Okay. Thank you. And thanks again, Roger.

[Operator:]

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

[Patrick E. Nolan:]

Good morning, everyone.

[Roger J. Wood:]

Hi, Patrick.

[William G. Quigley:]

Pat.

[Patrick E. Nolan:]

Just wanted to give my best wishes to Roger as well.

[Roger J. Wood:]

Thank you, Patrick.

[Patrick E. Nolan:]

Just I wanted to follow up on the Commercial Vehicle business. Bill, what were the total premium costs you incurred in the first half or the supplier costs?

[William G. Quigley:]

Yeah. When we refer to our premium costs, we're largely looking at the premium freight, if you will, to obviously expedite product to meet the demand of our customers. You'll recall, Pat, we had identified about $7 million in the first quarter. And then, obviously, in the second quarter, it's about the same. We saw kind of a peak, if you will, heading into April-May, and then we've seen the downtrend into June. So, just on that previous cost front, it will be about $14 million move versus second half. But certainly, there are other productivity impacts that that position put us in that we now will recover from in the second half as well.

[Patrick E. Nolan:]

So, from a high level, as we think about the impact of that year-over-year looking out to next year, is the way to think about that the elimination of that $14 million headwind to EBITDA basically offsets roughly a $90 million decline in revenue next year? I'm just dividing it by like a 15% decremental.

[William G. Quigley:]

In the revenue profile for next year of $90 million.

[Patrick E. Nolan:]

Yeah. I'm just saying, if you take this kind of $14 million headwind that you had from the premium costs, divide that by your typical incremental margin, and that's 15%. Just that going away would offset like a $90 million decline in revenue.

[William G. Quigley:]

I'm sorry. Yes. Yeah. I thought you were highlighting maybe an expectation we had for 2016. I think you're exactly right. And in fact, if you think about that premium position, certainly, one of the reasons we embarked upon this initiative was to provide future flexibility and competitiveness from a material perspective in the Commercial Vehicle Driveline business. So, not only obviously we're avoiding that headwind, if you will, we would also expect in a volume environment to see cost savings on a year-over-year basis coming out of the completion of that supply chain initiative.

[Patrick E. Nolan:]

Okay. And that's how you tie into Mark's comment from last quarter basically saying, even if revenue declined in that business next year, you expect margins to be higher.

[William G. Quigley:]

Yeah. Certainly provides that upside with respect to the margin profile even in a – using your hypothesis of declining environment.

[Patrick E. Nolan:]

Yeah. And just one quick one for Mark. I know it's difficult to call it at this point. But is your expectation that we've kind of found at least on absolute volume basis, a bottom in South America that we would at least expect volumes not to be worse next year or – I mean, is that still too tough to call?

[Mark Wallace:]

Patrick, I mean, it's definitely tough to call. I mean, we were continually surprised throughout the year with the continued downward pressure in the market. But in general, my discussion with some of our key customers, I don't know they're expecting it to get much worse in Brazil, but we are back at levels probably predating 2003 from a volume perspective truck production. So, we're hopeful that it doesn't get any worse at this stage because we still, long-term, think Brazil is a good location to be with this future infrastructure growth and commodities, et cetera. So, that's why we just continue to reduce costs, unfortunately with a lot of head count reductions to-date, to be positioned to be able to take the recovery once it occurs. But I don't think we're expecting more significant declines or any significant upturn at this stage.

[Patrick E. Nolan:]

Great. Thanks. I'll get back in the queue.

[Operator:]

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

[Roger J. Wood:]

Hi, Brett.

[William G. Quigley:]

Hi, Brett.

[Brett D. Hoselton:]

Good morning, gentlemen. Roger, sorry to see you leave but I'm sure we'll see you again here at some point in time.

[Roger J. Wood:]

Thank you for your kind words, Brett.

[Brett D. Hoselton:]

Yeah. I guess my first question just broadly speaking, is there any reason at least at this point that we should believe that there is going to be any material change in Dana's strategy given that you're leaving, Roger, and Jim is going to be coming in? I can't think of one but is there any reason to believe that that might take place?

[Roger J. Wood:]

Yes. Very good question, Brett. And, no, there's no reason to believe that any significant change will be made. As you know, whenever any company is executing their strategy, market conditions may have a re-look at any small piece of it that would cause any of us to say, instead of doing this, maybe we should do that. But that's just adjusting to market conditions and I would suspect that as Jim comes on board and works with the leadership team, they will continue to do that just as we have done that with myself and our leadership team over the past few years, but nothing wholesale change. I mean if you look at Jim's experience, he's got fantastic experience in building a company, both organically and inorganically and he brings with him a lot of experience in being able to do that. And when an inorganic opportunity comes into the company, he's also got tremendous experience in making it aligned with the company to actually grow both top and bottom line. So, we're really excited not about a change in strategy but we're really excited about Jim bringing with him the talents that we need to really execute the strategy that's already in place in a great way. So, I don't see any significant change at all in the forward-looking strategy that we've put in place over the past two or three years in conjunction with the board.

[Brett D. Hoselton:]

Thank you. And I wanted to follow-on to Brian's question because this is a significant issue in the investment community at this point in time

[Mark Wallace:]

Yeah. Brett, it's Mark. Again, we won't comment specifically on any program you may be quoting on. But when you look at our technology and our footprint, we've shown over the last two or three years of winning a lot of new organic business. And that's really driven by the fact that we're able to bring the technology to bear at the right locations and at the right cost targets our customers have asked for. So, we do believe that we are – we'll be very competitive in any bidding process that may come along for any particular program. And we see that based upon our ability to bring the technology to bear to give our customers what they're looking for.

[Brett D. Hoselton:]

Do you think that you have any particular technological advantage versus some of your competitors and most namely, in this case, American Axle?

[Mark Wallace:]

(39

[Brett D. Hoselton:]

And what might those be?

[Mark Wallace:]

Yeah. One is efficiency and weight reduction for our axles. So, one of the – no matter – the fuel prices may be low today, but ultimately, all of our customers need to make their fuel economy targets in the future. So, we're driving toward, again, more fuel-efficient drive systems, which – it includes improved efficiency in our gear sets as well as weight reduction.

[Brett D. Hoselton:]

Okay. Excellent. Mark, thank you very much. And Roger, again, congratulations, nice job; and we'll see you shortly.

[Roger J. Wood:]

Okay. Thank you, Brett.

[Operator:]

Your next question will come from the line of Joseph Spak with RBC Capital.

[Joseph R. Spak:]

Thanks. Good morning.

[Roger J. Wood:]

How are you doing, Joe?

[Joseph R. Spak:]

Just going back to Commercial Vehicle for a second, I thought you said the minus $6 million performance – is that where some of that (40

[William G. Quigley:]

Yeah. Joe, we've got – this is Bill. You're exactly right. On the performance line, from a cost perspective, that would include our premium costs associated with our supply chain initiatives. And with respect to what we've tried to do with contribution margins, if you will, and volume flow-throughs, we do have a couple million dollars, if you will, with respect to Brazil inefficiencies logged in that performance line.

[Joseph R. Spak:]

Okay. So the Brazil line is a pure, sort of, volume (41

[William G. Quigley:]

Exactly.

[Joseph R. Spak:]

Okay. So then, if we sort of back out Brazil from Commercial Vehicle and back out some of the premiums you guys have paid, it would sort of suggest that Commercial Vehicle runs at that – runs closer to that 10% margin, which I believe was your longer-term target. But given that North America is 70% of that segment and we're probably closer to the top than not, I mean, are there more things you can do to expand those margins going forward or is that sort of as good as it gets, do you think, from a margin perspective?

[Mark Wallace:]

Joe, it's Mark. Just looking at North America, as you surmised from your math, we do fully expect that back-half margins will approximate the 10%. We saw already the flow-through starting to occur as we wound down Q2 with the premium rolling off. So, we do expect that the margins will continue to make improvement here in North America, but as you know, they're being tempered somewhat at this stage by our declines in South America. But your approximation of our margin is definitely a good place to be.

[Joseph R. Spak:]

Okay. And if we think out into the future as potentially volumes maybe – don't always remain that strong, are there more cost initiatives in Commercial Vehicle that we could expect?

[Mark Wallace:]

Yeah. Actually, as Bill mentioned earlier in the call, part of their supply chain initiative is – one was around flexibility but also getting additional cost reduction. So, as we go through this year and into next year, we'll see additional flow-through on our material cost reductions as a benefit from the margin profile.

[Joseph R. Spak:]

Okay. And then the second question is, I know this is only a once-a-year update but I was just wondering, if you could add a high level comment on the backlog, which you issued in January because you had Off-Highway probably seems broadly maybe a little bit softer, I think 5% of that backlog was in South America and then almost a quarter or a little bit more was in Asia Pacific, which also seems like you brought down some industry metrics there. So, I guess, do you still feel pretty solid about the backlog you're expecting in 2016 and beyond, or there need to be some adjustments made there as well?

[William G. Quigley:]

No. I think, Joe – hey, it's Bill. I think it's certainly on the track record that we've got I think going six months into this year with the new business wins that we're seeing really across the businesses. And we feel pretty good about the backlog to your point and we'll update that in the detail obviously and provide that to the community, if you will, in early 2016. But even kind of nearer term, I mean, we feel pretty comfortable in the backlog. Certainly, to your point, what may happen on a FX perspective or certain regions around the world with respect to demand environment, certainly has an impact on that, but I think the fill-ins are occurring. And to your question or comment really on Asia-Pac, I think it's important to note it was – certainly was a piece of our backlog, an important piece of the backlog. But again, to Mark's comments and Roger's comments, any business we gain there certainly is a pick-up for Dana and we look at that market still as a very strong opportunity for the company as we move forward. So – and it's highlighted quite frankly in our new business wins slide, even this quarter, you can see a number of those Chinese OEMs being represented. So, I think we're making good progress there as we stand today. I think we feel pretty good; the backlog is solid.

[Joseph R. Spak:]

Okay. Thanks and congrats, Roger. It was a pleasure.

[Roger J. Wood:]

Yeah, thanks. Thanks again.

[Operator:]

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

[David Karnovsky:]

Hi. Good morning, guys. This is David Karnovsky...

[Roger J. Wood:]

Hi, Ryan.

[David Karnovsky:]

...on for Ryan.

[William G. Quigley:]

Hey, David.

[David Karnovsky:]

Hi. Just a question on Off-Highway, you guys had really good margin performance despite a tough environment. How can we think about potential margins for the segment in the event you started to see gradual recovery in 2016 or even a sharp recovery?

[William G. Quigley:]

Yeah. This is Bill, David. I think – and we appreciate the recognition that the Off-Highway business, their performance over the last many quarters actually quite frankly. We believe, from a contribution margin perspective, they are well positioned to capitalize on the growth that will come. I think you're already seeing it with respect to, even while on a year-over-year basis, it's a small number, a move of $2 million down. Think about holding those margins in that environment. They're converting on the new business that they have and as the certain end markets recover, if you will, from a production perspective, they're well-positioned to certainly capitalize on that and we would expect contribution margins certainly in excess of 20% as we move forward in those types of markets.

[David Karnovsky:]

Okay. Great. And then just on the overall guidance, you know you're still assuming a dollar/euro exchange rate of $1.05. We're currently tracking a little bit above that. Assuming we hold at these levels, could we expect guidance to track towards the high end or are there other kind of currencies not on the slide that might be offsetting that?

[William G. Quigley:]

No, I think you're right, Joe. We held the currency rates, quite frankly, trying to run down every currency rate on a quarterly basis can be a little mind or brain damaging, if you will. But, in general, what we saw in the second quarter was – you're exactly right. We had basically a benefit from our euro expectations versus actuals. But, certainly, it was mitigated almost in total by what we saw in Asia, for example, on a number of currencies, Thailand, for example, India, what we saw in the Mexican peso. So I think, overall, we think we're even set, if you will, that our euro expectation should mitigate, if you will, movements in other currencies. But it depends on where the euro ends up actually at the end of the year.

[David Karnovsky:]

Okay. And then just last question on your capital spending guidance, can you talk about what the drivers to the lower guide there? Are projects being pushed out into the next year or is this just a response to changing demand environment somewhere?

[William G. Quigley:]

No, it's certainly not the latter. I think it's actually the former as our businesses go through, obviously, their program management. And as you know, a significant piece of that spend is around our light vehicle driveline business, right. So one is I think, obviously, from a judicious perspective, a disciplined perspective, a piece of that's that, but the larger piece is more just around program timing. You'll note they had significant launches in 2016 as they kind of move around. If it's a month move or 45 days, that certainly can impact the capital spending. We look at it, kind of a nominal move from our overall full year range, that $10 million down, but certainly trying to provide the best indication of the free cash flow of the business for the year. So I would say it's the former, Joe or Dave, just obviously nominal movements in program timing.

[David Karnovsky:]

Okay. Thanks a lot, guys.

[Operator:]

Your next question is from the line of Colin Langan with UBS.

[Colin Michael Langan:]

Great. Thanks for taking my question. I know earlier in the year you mentioned that there were changes in the PACCAR sourcing on the rear axle, but I actually have been getting some questions that there's been additional changes to the PACCAR business possibly on the front axles. Has there been any changes since the last quarter? I just wanted to clarify that.

[Mark Wallace:]

Yeah. Colin, this is Mark. We've renewed our LTA with PACCAR and, as we've talked about, the data book positioning changes quite frequently. We remain as their standard position on the linehaul drive axle and the driveshafts. And as we mentioned back early in Q1, we also contemplated any kind of share change it may be outlined for the rest of the year in our guidance, partly because we're expecting to continue to diversify our customer portfolio in commercial vehicle because we've been typically very heavy weighted to one of those customers, and we are diversifying both here domestically and abroad.

[Colin Michael Langan:]

So was there – has anything changed? I guess, it sounds like nothing has changed since last quarter in the structure, or am I understanding?

[Mark Wallace:]

Yeah. So you're asking about the data book positioning. There has been I know a change in the data book positioning relative to steer axles going forward, which we contemplated in our outlook, and at this stage we remain standard position on the linehaul axle and the linehaul driveshaft.

[Colin Michael Langan:]

Okay. Just looking at the segments in light vehicle driveline, you made some comments about cost recoveries. It sounds like you didn't get them this quarter, but is that – it sounds like it's a timing issue, so that you're going to get those similar recoveries later in the year, or was the last year just an abnormal Q2 recovery amount, and we're not going to get that this year?

[Mark Wallace:]

No, you're exactly right, Colin. This is more of a timing and pace, if you will, with respect to cost recoveries in our light vehicle driveline business. So last year, obviously, the second quarter benefited from about $7 million in those types of cost recoveries. Our expectation, again from a timing perspective, this is the second half timeline for current year for our light vehicle driveline business, and it's really just in cadence with programs, right, the recoveries are. So that's just straight up a timing, but it also I think bodes well with respect to first and second half comparisons as we move through the year.

[Colin Michael Langan:]

Okay. And just one last question, there's been a lot of deal activity in the space. I mean what are you looking at in terms of a pipeline for M&A? Is it a robust pipeline, or how is that market looking?

[Roger J. Wood:]

Yeah. Colin, this is Roger. So nothing has really changed in terms of the robustness of the pipeline, as we mentioned the last time we talked on the earnings call, that we have seen a bit of an uptick in the interest for some of the relationships that we've been working on over the past two to three years, and that's given us some encouragement that the M&A pipeline that we have been working will yield some benefit for us in the near term here as we move forward. So nothing's changed in terms of the robustness, but we again feel confident that fitting our strategy of the $200 million to $500 million range, we have some prospects that are much closer than they once were.

[Colin Michael Langan:]

Okay. Thank you very much and, Roger, it was great working with you as well, so best of luck.

[Roger J. Wood:]

Thanks very much, Colin.

[Operator:]

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

[Brian Colley:]

Good morning, guys. This is actually Brian Colley on the line for Justin today.

[Roger J. Wood:]

Hi, Brian.

[Brian Colley:]

Hi. So I was wondering if you could provide more color on your European exposure and how that breaks out between Eastern Europe versus Western Europe. It seems like we've been seeing more of a divergence between those two regions recently and just wanted to get your feel for your relative exposure.

[Mark Wallace:]

Yeah, Brian. It's Mark. Most of our footprint we have in Europe is Western European footprint. We do have locations in Hungary but very close to being on the western side and, for the most part, we have little to no exposure in Eastern Europe.

[Brian Colley:]

Okay. Great and just following up on the M&A question, just wondering what you're seeing in terms of valuations in the market today and if you think you can find something below your EBITDA multiple today. Or would you guys be willing to pay more for a more strategic acquisition that could drive more synergies?

[Roger J. Wood:]

Yeah. So, Brian, this is Roger again. Our strategy all along has been to make the M&A projects or the acquisitions into the organization that are going to fit strategically and be great additions for us to move forward and grow this business along with the strategies that we have in place. We fully recognize because of the multiple that we have been trading at that the acquisitions that fit that strategy likely aren't going to fit that multiple, so we are willing to look beyond the multiple that we trade at for that, but do it in a very disciplined and a financially responsible way to make sure that we understand the multiple difference and how quickly it's going to come into the organization, be accretive right away and move us forward. So we're not opposed to spending more than what our current multiple is trading at for the right opportunity, but that right opportunity has to fit both strategically and be fiscally responsible for our shareholders.

[Brian Colley:]

Great. That makes sense. I appreciate the time today.

[Roger J. Wood:]

Okay. Thank you.

[Operator:]

And we do have a next question from the line of Patrick Archambault with Goldman Sachs.

[Patrick K. Archambault:]

Yeah. Thanks. Hey. Good morning. Thanks a lot for squeezing me in. And I'd like to reiterate that, Roger, it was very nice to work with you as well and we appreciate a very distinct point of view that was taken of the company and which it sounds like is being very much kept even as you move on to other things. So definitely appreciate that. Just a lot of mine have been answered, just one clarification I think it was sort of touched on maybe in Colin's question but, Bill, you have the kind of difficult comp with some Venezuela recoveries that occurred this quarter last year and I thought you had said at the beginning of the call that these were going to remain negative in the back half but I might have misheard because that seem to conflict with some subsequent comments, so just wanted some clarity on that.

[William G. Quigley:]

No, Pat. This is Bill. You're exactly right. With respect to Venezuela, recall, if you kind of do your year-over-year comparisons, a year ago we suffered a, if you will, a devaluation charge and some operating losses in the business of about $18 million. In the second quarter of last year, we recovered about $8 million and then you'll recall, we said that we were going to be about – we ended up break-even for 2014. So there will be some headwinds with respect to the comps on a year-over-year basis. So if you think about just the math, it's about another $10 million to go. I think the distribution of that would be probably 50% to 60% in the third quarter and the remainder in the fourth quarter from a comp perspective. Again, we drove that business to a break-even business at the end of last year.

[Patrick K. Archambault:]

Okay. Cool. Yeah. That's very helpful. And then the only other one I had was just on the Super Duty. I mean this is obviously something that's more of a 2016 consideration but can we just talk a little bit about the importance of that within your portfolio, kind of any kind of content changes as it changes over next year and, yeah, just the materiality actually of the changeover? I guess it could be something that's helpful as they try and build up inventory at the end of this year but, clearly, if they do change it over in March, there'd be kind of a little bit of a dead spot, so how are you thinking about that program?

[Mark Wallace:]

Yeah. Patrick, it's Mark. I mean Super Duty is a very important part of our portfolio with Ford Motor Company, and that program as it switches over will bring us additional content. As we mentioned before, we're actually able to win some business that had typically or traditionally been an inside-produced part. We actually added that to our portfolio going forward for the Super Duty as well.

[Patrick K. Archambault:]

And have you guys ever quantified more or less what that increase is?

[Mark Wallace:]

No. We haven't given any guidance on that particular program, other than that would be represented though, recall, on our backlog.

[Patrick K. Archambault:]

Sure.

[Mark Wallace:]

As you kind of look at that, obviously, a light vehicle driveline, a pretty significant piece of that puzzle and certainly just more content on the Super Duty would've been recognized as part of that process moving forward.

[Patrick K. Archambault:]

And then just in the second part of my question. I mean, are you anticipating kind of an acceleration of build towards the end of the year as these guys anticipate changing that over because it sounds like there's going to be nine weeks of downtime for that Kentucky plant?

[Mark Wallace:]

Patrick, I'm sure they'll make their inventory adjustments as needed but, again, the Super Duty is running quite strong today. So I think they'll at least keep the same pace. They may add a few days here and there to build a little of the inventory but nothing I would see as significant.

[Patrick K. Archambault:]

Got it. Okay. Capacity constrained a bit too, yeah. Okay, cool. Thank you for the color, guys.

[Roger J. Wood:]

Thanks.

[William G. Quigley:]

Thank you.

[Operator:]

Your next question is from the line of Brian Sponheimer with Gabelli.

[William G. Quigley:]

Hey, Brian.

[Brian C. Sponheimer:]

Hi. How is everyone? Congratulations and best of luck.

[Roger J. Wood:]

Thank you, Brian.

[Brian C. Sponheimer:]

I certainly enjoyed working with you. My question is I guess around M&A and it's I guess said a different way, you mentioned your own multiple and potentially the opportunity to buy other companies. Knowing that you know exactly what's in-house, why not look to make that $500 million acquisition of yourself?

[Roger J. Wood:]

Well, Brian, thanks. Surprisingly, you're not the first guy that asked that question to us. But let me respond by saying that we made essentially a $1.4 billion acquisition of ourself by the authorization of share repurchase that is out there and we're nearly completed on that. So we've done that. We've executed that as we've been saying over the past two or three years. The uses of capital that we have for the organization are to support the organic growth, to look for key strategic M&A opportunities that'll support us inorganically, and then after that, the excess cash will be looked at in terms of how to get it back into the shareholders' hands. So that strategy and capital allocation process hasn't changed really at all and so your thought is a really good one. We continue to focus on those priorities, as I've just laid them out, and I'm confident that some M&A opportunities will come to fruition. But as you know, this is a great business that generates a significant amount of cash and so it's probably not out of the picture that at some future date we'd be looking at some other alternatives as well beyond M&A so.

[Brian C. Sponheimer:]

I mean just if you liked the stock when you bought it at $22, $24, I just figured you must love it at below $19 here.

[Roger J. Wood:]

Yeah, you're not wrong about that.

[Brian C. Sponheimer:]

All right. Well, good luck, Roger. Thank you.

[Roger J. Wood:]

Thanks very much.

[Operator:]

Today's final question will come from the line of Emmanuel Rosner with CLSA.

[Emmanuel Rosner:]

Hi, good morning and thanks for squeezing me in.

[William G. Quigley:]

You bet.

[Roger J. Wood:]

Yes.

[Emmanuel Rosner:]

My question is regarding the margin progression. I know you've gone through a lot of factors that would improve in the second half throughout this call. Would you be able to just summarize it simply for me? Simply mathematically, to get to this 11.7% for the full year, you'd probably need like north of 12% in the second half, so what are the main factors and can you quantify them in terms of sequential improvement first half to second half that would help the margins?

[William G. Quigley:]

Yeah, Emmanuel. This is Bill. You're spot on I think with respect to first to second half. You'll note given the ranges that we've provided from a sales perspective either flat or maybe slightly up a bit or slightly down a bit, if you will, first to second half. The key drivers though, if you think about the margin progression of the company, the north of 12% in that second half is probably spot on. Think about the cost that we've incurred with respect to our supply chain initiative in the first and second quarter, that largely being around premium freight but, certainly, there's been productivity impacts, if you will, with respect to that supply chain initiative, which we're somewhat through. As long as the size is round (01

[Emmanuel Rosner:]

Excellent. That's very clear. So thanks again for squeezing me in. And then, Roger, best of luck.

[Roger J. Wood:]

Okay. Thanks very much and I'd like to just take a second and, once again, thank all of you for your very kind words and especially your support over the last several years. I really enjoyed working with all of you during my time at Dana. I am just unbelievably excited about the future potential of this company based on the foundation that the leadership team here, all of our employees and I have been able to work together to build and I just, I think the future is very bright for Dana. Again, appreciate your support and I am absolutely sure, in my opinion, that as Jim comes in to take the leadership of the organization, you will continue that support and you will not be disappointed at the future of Dana. It's a great company. Thank you all.

[Operator:]

Ladies and gentlemen, this does conclude Dana Holding Corporation's second quarter 2015 financial webcast and conference call. You may now disconnect.