Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Dana Holding Corporation (NYSE:DAN)

Q4 2008 Earnings Call

March 16, 2009 10:30 am ET

Executives

Stephen N. Superits – Vice President of Investment Management & Investor Relations

John M. Devine – Chairman of the Board, Chief Executive Officer & President

James A. Yost – Chief Financial Officer & Executive Vice President

Jacqueline A. Dedo – Vice President of Business Development

Analysts

Brian Johnson – Barclays Capital

[Unidentified Analyst]

Operator

Welcome to Dana Holding Corporation’s fourth quarter 2008 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 the Q&A session will be recorded for replay purposes. All lines have been placed on mute to prevent any background noise.

There will be a question and answer period after the speakers’ remarks. We will take question from the telephone and the web. (Operator Instructions) At this time I would like to begin the presentation by turning the call over to Dana’s Vice President of Investment Management and Investor Relations, Steve Superits.

Stephen N. Superits

You should now be on Slide 3 in the presentation deck. As referenced on this Slide, I would like to remind everyone the topics discussed on this call will include forward-looking statements. Please take a moment to review our Safe Harbor statement. This call is being recorded and the conference call and supporting visuals are the property of Dana Holding Corporation. The may not be recorded, copied or rebroadcast without our written consent.

Our webcast system allows you to direct questions to us via the Internet. We will answer as many questions as time permits. Moving to Slide 4, today’s call will feature remarks by Dana’s Chairman and CEO John Devine and Chief Financial Officer Jim Yost. John will begin today’s presentation with an update on some key issues and initiatives and Jim will follow with a review of our December 31st financial results, liquidity and other financial issues.

Our call will conclude this morning with a question and answer session. Now, please move to Slide 5 and I’ll turn the call over to John Devine.

John M. Devine

I’ll just cover a couple of Slides here quickly before I turn it over to Jim to go through the numbers. You’ve been seeing this page 5 all year throughout ’08 on our priorities for ’08. I’d say it’s a mix score card. Obviously our financial performance and plans were below what we would like to see given the lower volumes that we saw and higher steel costs. That said and despite a very difficult year we made very important progress in 2008 around rebuilding our team, jump starting our operations including manufacturing business development, a number of operations throughout the organization.

Right sizing the operation began and so at the end of the day I felt very good about what we achieved in ’08 and obviously for ’09 we have to improve that performance based on a lot of the things we got done last year. If you turn to page 6 and really the key for us in 2009 is a plan that I’ve briefly described here and Jim will describe in more detail later. Our focus is very much on achieving this aggressive plan.

We’ve had to right size our operations to what we believe are now conservative volumes and we’re doing that right now. That will be largely done by the end of this month. We’re focused on improving profits on operations despite lower volume this year. That really requires more cost reduction at our plants, more cost reduction activities around the company, reducing fixed costs in all activities.

Margin improvements both through cost and pricing with a real focus and a continued focus from ’08 on our loss and low return business. We made good progress last year, we expect to make even better progress this year. Throughout the year we’re focused on maintaining adequate liquidity and profitability obviously, both very critical in this environment, Jim will talk more about that in a moment and on our strategic initiatives, as you might recall, last year we said we were exploring our options for three of our businesses: ceiling; thermal; and our structures business.

We’re announcing today that we determined that it’s not an attractive environment, no surprise, to divest our ceiling and thermal operations. We remain committed to maintaining their competitiveness, they’re strong brand reputation and the performance of these businesses and to the customers they serve. While we did have strong interest from buyers in these businesses but the current environment created a number of impediments to executing attractive transactions so we’re keeping them. We’re going to run them hard and work with our customers going forward.

On the structures business we’re still exploring strategic options and we’ll update you there as quickly as we can. With that, let me turn it over to Jim.

James A. Yost

If you’d all turn to Slide 8 for a review of our 2008 results. On Slide 8 we’ve summarized both our fourth quarter and full year results. On the sales front we ended up the year at about $8.1 billion that’s down $600 million from ’07 and the fourth quarter came in at $1.5 billion, also down $600 million so you can see through nine months our sales were pretty comparable to ’07 but the short fall for the full year was equal to our short fall in the fourth quarter.

EBITDA we finished at about $300 million, that was equal to the guidance we provided to you in the third quarter call. Given that the fourth quarter volume and revenue was down substantially, we finished with essentially a flat EBITDA for that quarter and we’ll have a Slide on that in a second. Capital expenditures totaled $250 million for the year with about a quarter of that falling in to the fourth quarter.

On free cash flow we finished just a little bit worse than we had hoped, we had hoped to breakeven in the fourth quarter ending up with about a $350 million negative, we came out just a little bit worse than that. Then again, I’ll have a Slide for that in a second.

Please turn to Slide 9 which shows our fourth quarter sales results. As I mentioned, sales were $1.5 billion down $636 million and that was more than explained by the volume and mix shortfall and about half of that was in our light axel group. If you wish you can look at Slide 32 for all the detail and the backup. Currency was unfavorable by about $106 million and that was essentially the result of a stronger dollar. We did improve our margins by pricing actions to the tune of about $66 million which included material recovery as well as some improvement on some unfavorable contracts.

If you turn to Slide 10, you can see the results for the full year, down from the $8.7 billion we had in ’07 to the $8.1 again, about $600 million year-over-year. Volume and mix was more than $1 billion in that short fall and actually the only business unit that increased its sales year-over-year was our off highway group. Overall, our margins improved through pricing actions by about $140 million and for the full year currency actual was favorable due to the weakness of the dollar in the first nine months of the year.

If you take a look at Slide 11, we’ve shown you the impact on EBITDA of those lower sales in the fourth quarter where we were essentially flat, down about $115 million. Again, that was more than explained by the decrease in volume and mix. Steel costs negatively impacted us by about $60 million in the quarter and we had pricing improvements of $66 million. Of that $66 million, $54 was to offset those material cost increases so we had a net steel impact of -$6 million. Cost savings totaled about $15 million.

Take a look at Slide 12, you can see the full year EBITDA results of about $300 million, down from the $450 in ’07. Volume and mix was off $245 million and our steel costs were unfavorably about $157 million. Total pricing was $140 million for the year of which $114 million of that was to offset the steel costs. So, for the full year results we had a -$53 million impact due to steel. Our cost savings totaled $123 million, now we had hoped for a bit stronger result there as you can see in the fourth quarter we only had $15 million and essentially with the rapidly declining volumes we were not able to achieve the level of cost savings that we had achieved in the first nine months.

Turning to Slide 13, we’ve outlined our free cash flow for both the fourth quarter and the full year. As I mentioned earlier, our fourth quarter free cash flow was -$50 million. Our seasonality on our working capital actually generated cash for us of $177 million, capital spend $86, interest and taxes totaled $46 million and then we had some realignment which is our restructuring costs as well as some reorganization costs totaling about $90 million for the quarter.

On the full year we were negative by about $381 million. Working capital was pretty flat. We had actually hoped to do a little bit better no working capital but we ended up the year with about $900 million of inventory which was substantially higher than what we planned but given the rapidly declining volumes we were unable to use up our inventory, our raw materials as fast as we had hoped. We’ve made a very strong effort in the early part of 2009 to reverse that trend. It is a significant focus for us in the New Year.

If you turn to Slide 14, you can see our net debt position. We finished the year with $777 million of cash and total debt was $1.25 billion for net debt of $474 million. That equates to about 1.6 times EBITDA, still a reasonably good level of debt for us. The lower loan balance in the fourth quarter compared with our third quarter reflects the $150 million pay down associated with the amendment we received to that term facility in November.

Slide 15 shows our liquidity at the yearend. We finished with $866 million of liquidity which is more than sufficient for us to manage our global operations. The major changes in Q3 are the debt pay down and then the reductions in our lines of credit in both the US and Europe due to lower borrowing base as well as a partial restriction of the use of those lines due to our leverage covenants. We expect to have some continual restriction of our availability of those lines of credit as we get in to this year due to our leverage tests. Our borrowing base will continue to increase as the receivables climb in to March and April.

Slide 16, you can see our debt maturity profile and as we mentioned before we have no significant debt maturities until 2014 so no cash impact for that. On Slide 17, we summarized our US pension and [OPED] status. As you may recall our US pension liabilities were frozen during our Chapter 11 proceedings so we have no ongoing service costs accruing there. At the end of last year our plans in the United States were funded at 92%, a very good result for us.

You can see below the asset allocation at the end of the year and the -4.6% return on our portfolio last year was a very good result largely driven by our liability driven investment strategy which put most of our assets in to fixed investments. We have no cash or profit expense in 2009, nor do we have any retiree health liabilities due to funding of the [FEBA] at the emergence of our Chapter 11.

Turning to Slide 18, you can see our diversified revenue base as we finished up 2008. Overall about 42% of our revenue last year was in non-automotive and even within the automotive area we are very well diversified. Ford was our largest customer at 17% with much of this revenue overseas. We have significant contributions from Toyota, PACCAR, Navistar, Daimler including its commercial brands, Volvo, also commercial vehicles, Nissan and Fiat and Fiat of course includes SNH. On the right you can see some of our key platforms, the largest platform is no higher than 3% of our revenues. So again, a very diversified revenue base with no significant exposure to any one platform.

Let’s take a look at 2009, we’ve outlined on 2009 production assumptions on Slide 17. You can see on the right hand side our planning range for 2009. We started out at higher levels in this, I think all of us did but we’re not planning really at the low end of this planning range in terms of how we are gearing our operations and resizing our operations. That low end of the planning range really reflects the most pessimistic of outside third party forecasters and as I mentioned we’re restructuring our operations to meet those lower production levels.

In North America we’ve also completed a detailed platform-by-platform analysis of the 20 key platforms we have to which we are exposed and we’re comfortable that we’re planning the correct assumptions for these platforms in our operating plans. John laid out some of the key elements of our 2009 plan and on Slide 20 we’ve provided a financial perspective on these.

To right size our operations we will reduce our global workforce by an additional 5,800 employees in 2009 from the already reduce levels in 2008. You may recall on the third quarter call we talked about a 5,000 person reduction, these levels are in addition to that 5,000 reduction we announced at that time. Most of this reduction will be achieved by the end of this month and these will represent a 35% reduction versus our yearend 2007 headcount and I’ll show you that on the following Slide.

Although volume is uncertain, within our planning assumptions we expect EBITDA to be slightly higher in 2009 than we had in 2008 and to do that we are driving our conversion cost savings in the range of $150 to $200 million largely on the back of those work force reductions. In addition, we’ve got significant margin improvements already planned of the $160 to $200 million range you see here, we’ve already booked and achieved $160 million improvement which includes material cost recovery, some recovery of past claims from our customers as well as margin improvements and about $110 million of that $160 is carryover from last year.

Cap ex is expected to be about $150 million this year and we expect to be breakeven or better in free cash flow. Now, we will manage our operations to drive that free cash flow to the extent we can and we will manage our cap ex within that capability. You can see on Slide 21 the trend of our hourly and salaried employments since the end of 2006 and you can see the substantial reductions we have planned in 2009.

As I mentioned, the bulk of our reductions will be achieved by the end of this month so this isn’t just planning, this is actual taking out the structure that we have. We will be down about 35% at the end of 2009 compared with the end of 2007. That’s about 12,000 people globally and that’s largely in line with the reduction in revenue from 2007 through 2009 of about 33%.

No company can survive on cost reductions alone so we’re continuing to push for new business and on Slide 22 you can see our summary of net new business by region, by year. In total last year we booked about $1.3 billion of net new business. That’s new business on existing and new platforms in excess of those platforms that run off. As you can see we’re continuing to have significant growth in Asia and in Europe and are doing well in South America.

Turning to Slide 23 you can see in summary we’ve made good progress in 2008 despite a very difficult climate, particular a difficult climate in the fourth quarter. We have aggressive plans in place to manage 2009 and have contingency plans in place if the environment continues to deteriorate further. A key priority is to manage our profitability and cash flow this year while continuing our strategic and growth initiatives.

This concludes our formal portion of today’s call. I’ll now turn the call back over to Dennis our facilitator who will begin our Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brian Johnson – Barclays Capital.

Brian Johnson – Barclays Capital

On the 8K press release could you talk about the $25 million that’s between other income/expense that was a positive item between segment EBITDA and overall EBITDA? What’s in that?

James A. Yost

Let me just try and take a quick look at that and let me get back to you in a second Brian. I don’t have that handy.

Brian Johnson – Barclays Capital

The follow on to that was going to be related to that the LIFO/FIFO accounting on commodities, how did that play out in fourth quarter versus third quarter?

James A. Yost

Overall, we ended up the year with about a $14 million LIFO reserve. So, essentially that reserve came down during the fourth quarter.

Brian Johnson – Barclays Capital

Will that be hitting in 1Q as that inventory goes out?

James A. Yost

Yes.

Brian Johnson – Barclays Capital

Then the cost savings, if you go back to the plan of reorganization, how much of the cost saves in particular with regard to labor or other items were really variable in nature as you were reducing the variable costs per unit? So, the aggregate dollars are going to be lower if production is lower. Secondly, given that how can we get comfortable with the cost saves in 2009?

James A. Yost

Well fundamentally Brian the amount that we’re showing for conversion costs savings is all in excess of the variable cost reductions associated with lower volumes. We’re going to have overall in excess of $400 million of year-over-year cost savings but a lot of that is traded out through decreases in volume on a year-over-year basis. So, what we’ve shown you for conversion costs are those savings in excess of linear volume reductions that we need to take just to hold our margins.

Brian Johnson – Barclays Capital

Well my question was the other way which is how much of the big cost savings target assumed a certain production level? Say you have 1,000 workers and you’re going to save $600 per worker but if you don’t have those 1,000 workers anymore because you’re not producing that amount do the cost saves go down or are we double counting? Have you gotten that person out but still expecting that cost savings on a run rate basis?

James A. Yost

Well the number we’re showing assume the level of production that we’ve put in to our planning assumptions. So, I’m not sure I’m answering your question. Basically we are planning as I mentioned to the lower end of that planning range. We have then calculated our results assuming that volume level and therefore we’ve had negative volume and basically we have to take out people associated with that volume. On top of that, we’re taking out $150 to $200 million of costs on top of that. So, there’s no double count.

Brian Johnson – Barclays Capital

In terms of the pace of cost reduction, some of the other parts companies have talked about where they are with their European plants and either far ahead or not so far ahead in getting flexible work weeks and other cost saving measures there. How would you characterize the state of restructuring in Europe as we speak?

James A. Yost

Europe is a more difficult environment in terms of taking cost out than in North America and even in South America so we have been working with each of our operations to identify cost savings that the need to take to maintain their profitability at the lower levels. It’s a combination of short work weeks where we can take downtime and a combination of that as well as government support. So, we I think are in pretty good shape overall in identifying the plans and we’re in the process of implementing that throughout Europe.

Brian Johnson – Barclays Capital

When do you expect to get flexible work weeks implemented?

James A. Yost

We’re implementing it as we speak.

Operator

Your next question comes from [Unidentified Analyst].

[Unidentified Analyst]

I just have a small presentation related question, as of 3Q ’08 the segment EBITDA in the off highway business was $119 and I just couldn’t get that number to reconcile with the numbers in the 4Q ’08 presentation both in terms of year-to-date as well as quarter [inaudible]. I was hoping you could explain that or whether there was sort of a movement of some numbers between different segments? For instance, I look at the 4Q ’08 off highway segment EBTIDA, I believe that the first nine months was close to $120 million so I was just wondering why that number was as low as it was?

Stephen N. Superits

We noticed that too this morning and we’re following up on it. We can get back to you if we have to smooth the numbers out a little bit we’ll republish those.

Operator

At this time there are no further phone questions.

Stephen N. Superits

We do have a couple from the Internet. One is, how are you going to manage R&D investment to respond to the US government’s goals with the US auto industry?

John M. Devine

We’re very conscious of the need to change our investment and change our products over time so we’re looking at it very carefully. Obviously, in this environment as you saw before we’re cutting cap ex. We’re working on a number of products despite those restrictions that we think will pay dividends for us in the future. I don’t want to go too far in to it. One thing that is not totally clear are the US government’s goals.

Directionally, I think we understand what that is but I think that will evolve over the next year or two. But, certainly in our mind, we have to get through this year but we also have to recognize that we have to change our product portfolio. I think every supplier and every OEM has to say the same thing recognizing the focus on hybrids, electric, more fuel efficiency not only here in the states and not only globally but in every business we have. Certainly, in the automotive business, our heavy truck business and our off highway business.

This is something that’s going to evolve over the next several years. But, right now we are changing our R&D investment until we know a lot more about where that’s going to go. We are looking at a number of different options but right now I wouldn’t say there’s clarity as to what the government’s goals are.

Stephen N. Superits

Next question, can you please detail the global backlog dollar amount by year?

Jacqueline A. Dedo

I don’t have the detailed numbers with me but I can tell you about $300 million in 2010 growing to about $350 in 2013 with the important shift taking place that you can see on these graphs with short term larger growth in North America and as we move through the next several years our larger growth is coming from Asia and Europe as a percentage of our current revenue.

James A. Yost

Let me if I can just get back to the question Brian asked first up, the other income in quarter four essentially two major pieces. As you may know, coming out of reorganization we segregated our asbestos liability in to a separate entity. There were reductions in liabilities there of about $12 million which came through in income because we do consolidate the results there in to our corporate results. We also had some legal settlements that totaled about $10 million on some pending cases so the combination of that explains most of that $25.

Operator

At this time there are no further questions.

John M. Devine

If there are no more questions at this time we thank you very much for participating in the call.

Operator

Ladies and gentlemen this does conclude today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Dana Holding Corporation Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts