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Dana Holding Corporation (NYSE:DAN)

Merrill Lynch & Co., Inc.'s 2013 New York Auto Summit

March 27, 2013 2:50 pm ET


Roger J. Wood - Chief Executive Officer, President, Director, Member of Strategy Board and Member of Series A Nominating Committee

William G. Quigley - Chief Financial Officer, Executive Vice President and Member of Strategy Board


John Lovallo - BofA Merrill Lynch, Research Division

John Lovallo - BofA Merrill Lynch, Research Division

We'll try to keep things on time here. So next up, we have Dana Holding Corporation, ticker DAN, $3.8 billion market cap. They're Automotive News Top 25 Global Supplier. Over the past few years, there's been a massive transformation in the company.

If you kind of look at what their key focus is now, it's really leveraging 3 proficiencies that's driveline, thermal and ceiling over 3 key markets being light vehicle, commercial vehicle and off-highway. And the operating performance has actually been very impressive given it's very challenging end markets over the past year. They're now also returning value to shareholders through a dividend, $0.05 per share on a quarterly basis, and they've started a share repurchase program.

So with us today, we have Roger Wood, President and CEO; we have Bill Quigley, Executive VP and CFO; and also Craig Barber, the Director of Investor Relations. So with that, I'll turn it over to Roger.

Roger J. Wood

Thanks, John. Okay, I don't think I need those. I think I got the mic on me here. So thanks very much for coming this afternoon to visit with us. We want to go through a short presentation for you to help refresh those of you that know the company as to what we're doing and where we're going. And for those of you that don't, give you a little introductory to who we are. So we'll get right into it. And this is just the safe harbor statement that we're obligated to show up there for just a second, you all know what that's about. So let's get right into it.

To give you a little bit of an overview of Dana, in the beginning, just to refresh here a little bit, we're a global technology leader in efficient power conveyance, energy management solutions that enable our customers to achieve their sustainability objectives. That's a mouthful of words, but essentially, we work on fuel economy improvements and emissions reduction, cost of ownership and some market value drivers that our customer needs in order to take care of their customers and meet the regulatory framework that they're living in. So a technology-based solutions provider.

We're founded in 1904 as a technology company, and so someone said not too long ago, "How are you going to take a metal bending company, make it a technology company?" And my answer to them was, "I can't take credit for making it into a technology company because Clarence Spicer did that in 1904 when he invented the first application to solve a customer problem." The basic structure and foundation of the company has been technology for over 100 years, and we're really refreshing that, brought it to the surface in addition to the operating improvement that we made in the company that John spoke about earlier.

2012 sales of $7.2 billion, operate facilities in 26 countries and we serve customers in 125 different countries, so we have a global footprint around the world to take care of our customers where they're located.

When we think simply about how Dana separates themselves, ourselves, from the rest of the field of companies, if you will, we talk about it in terms of the Dana Advantage. And it's really 3 core technology expertises: First, driveline technologies, which make up products like axles and driveshafts, and in the case of the off-highway business that we'll talk about in a second, full transmissions. A sealing systems, core competency. So as engines become more downsized and transmissions evolve into the newer style transmissions, the pressures and the temperatures get a lot more challenging in those applications and our sealing systems expertise takes care of that. So we have multiple -- multilevel steel gasket systems, we have transmission separator plates and cam cover modules and things like that in the sealing arena; and then the third core competence from a thermal management solutions standpoint, again as engines get downsized, heats get higher, temperatures get higher, have to get managed around the engine, and we have things like oil coolers, transmission coolers, active warm-up systems, and of course, we have the battery cooling systems and a number of the electric vehicle systems around the world. So we think about the technology and the company, it's really in these 3 main areas that we go very, very deep with expertise in driveline, sealing and thermal management.

From a business diversification standpoint, we have a very broad customer base, about 3,000 customers across all of our end markets to take these technology expertises into. We serve multiple market segments that we'll get into in just a second, and as we already talked, we're serving customers in 125 countries around the world, have an established global footprint in order to take care of our customers where they are.

We say we're uniquely able to leverage our expertise across the markets because while we have competition in each of the segments that we serve and each of the technologies that we have, we don't really have a competitor that puts it all together like we do, so we're uniquely able to leverage that expertise across these end markets and across these customers.

If we take a look at 2012, where our sales by market and sales by region ended up, we're 20% off-highway markets, 45% light vehicles and 35% heavy. And you all know what happened to the heavy vehicle market last year, at least toward the end of the year, where it took the decline from the first part of the year, and so it shifted a bit of our mix between heavy and light. But essentially, if you think about our company being a 40-40-20 kind of a market split, we have a great diversification across these 3 markets.

And the one thing you'll notice about the pictures in each one of those segments of the pie, each one of those vehicles are vehicles, if you will, in these different end markets that we can put technology into this company and take it around to those 3 very different end markets with very different customer bases.

We also have a great diversification around the world with 43% of our business in North America. But importantly in the growth area of the world, 20% in Asia-Pacific. Now that does include our 50-50 joint venture that we have with Dongfeng, that DDAC, or Dana-Dongfeng, joint venture that we have over there, 25% in Europe and 12% in South America.

So as a company, we're all about innovating technology and leveraging that innovation across these market segments that we have. And we have some great examples of doing that. But first, let me explain the buttons on the left-hand side of this chart. These buttons represent the market value drivers that we've identified that will provide value to our customers, that will allow us to expand our margins as we go forward in the future.

Simple things, we didn't invent them, they're just market dynamics that are happening in the world, like fuel economy is going to be really, really important; emission reduction is really important; total cost of ownership in the commercial segments that we serve is really, really important. So we've identified these market value drivers, that as we increase the investment into the company, we make sure that we run it up against the profile that hits one or more of these market value drivers, gives us confidence that it's going to provide enough value for our customer to solve their needs in the marketplace and at the same time, expand our margins.

Some of the examples that we have up here, so the first one is the new technology based on these market value drivers, an active warm-up technology that improves fuel economy 4% to 5%. So essentially taking an oil-cooling product that we had, putting some componentry on it to make it an active warm-up system to take the early part of an engine cycle, quickly warm it up, to improve the viscosity of the flow of the fluid in the engine and increase the fuel economy in the early part of the startup cycle, if you will. That's a 4% to 5% improvement in fuel economy. It sold very, very well since introduced it, and it's a good example of a technology investment focused on a market-value driver.

Diamond Series driveshaft, most of you that know the company heard about that product, takes a huge amount of weight out of a vehicle, a typical commercial vehicle. And now it's being applied over into the light vehicle segment. Multilevel cylinder head gasket expertise applied to sealing of advanced transmissions. So a good example of leveraging the synergies of the innovation that we're able to create, taking a multilevel steel gasket, if you will, using that process and product technology to develop a transmission separator plate. And I think it was last June's earnings call when we mentioned that we had a new customer on board for that, a global customer.

Complete off-highway driveline systems is another aspect from a systems solutions standpoint or systems market value driver, where especially in the off-highway group where we make the transmissions as well, we can offer a complete driveline solution in the highest growth area of the world that we have, where the customers really need a company like Dana to help them design the entire driveline, and then we have, of course, the ability to supply that whole thing as well.

We do all that underneath the new lean operating model that we've been working on for the last couple of years, and it also has been a major contributor to the margin expansion that we've experienced over the last couple of years. But we have an operating philosophy or an operating model in the company that we launch all these new products in to make sure that we generate that margin expansion as we go forward.

Again from a technology leadership standpoint, this slide depicts both technology introductions that were announced in 2012 and production launches that -- of products that were announced in 2011 and launched in 2012. So things like a Spicer PowerBoost concept, up in the upper left-hand corner of this slide, is a product, if you will, that captures historically wasted energy in the cycle, the work cycle of an off-highway piece of equipment and redeploys that energy into the work cycle of the equipment, effectively saving fuel during the duty cycle or the life of that application.

We have a Rui Ma Spicer transmission launched in China, announced in China and now launched in China, and then a Dana Rexroth HVT2 transmission, R2 transmission, also in the off-highway market that is very, very well positioned to take some market there.

The production launches that were actually announced in 2011 from a product standpoint, launched in 2012, Diamond Series driveshaft, again launched in the commercial vehicle segment and now being taken over into the light vehicle segment, light vehicle pickup segment, if you will.

Pro-40 tandem axle with the select track housing, which was on display last week down at the Mid-America Truck Show in Louisville and the Triton Axle for off-highway application, also a great product for us that was launched last year. So great year in 2012 from a technology standpoint, and we're continuing to ramp that up as we go forward.

The real -- one of the real sources of pride for us as a company though is to actually have our technology on the premier award-winning vehicles out there in the marketplace. We had technology and products on the 2013 North American Car of the Year, the North American Truck of the Year, the Green Car of the Year and the Heavy-duty Commercial Truck of the Year, all had Dana products representing the technology that we've put into the marketplace, as well as launching and being on 6 out of the 10 Ward's Best Engines in 2013. Very, very proud of that because it fits right in the wheelhouse of where our vision and our strategy is for the company to be a technology solutions provider. And at the end of the day, this is the real proof of having impacted that in the marketplace.

So when we think about the technology that we create, innovate and leverage across the markets, the power of that leveraging is in a couple of different perspectives, if you will. The first one across the 3 main markets that we serve, the cars, the trucks and the off-highway market, again taking a piece of technology and being able to put it in those 3 different market segments across 3 very different bases of customers, if you will, about 3,000 customers all in total when we add them all in there, but some very prominent names in the industry that we serve with these solutions. And then on the third one across all other regions of the world that we play in.

We launched a technical center in China a few weeks ago. We were over there doing that, so that we could engineer the products, as we said, for China, in China. And the reason for doing that is because it's much more effective to do that than it is just to merely take a product from one area of the world and start selling it in another area of the world. There are compromises to be made when we do that and sometimes we do that for speed, but it's most effective when we engineer our product for the specifications needed in that market. And that's what this #3 allows us to do is to take the capabilities that we have everywhere in the world and apply them specifically for a specific and unique market.

So if we think about the Dana strength, if you will, overall, new product-driven focused on profitable growth, margin expansion through the use of technology solutions for our customers. When we take care of our customers, because they have some real challenges out there in the marketplace with the fuel economy regulations, and especially in the commercial side, where the customers really buy those vehicles based on what it does for their business, how much fuel can they save? How durable is it? The robustness of the product? When we can provide our direct customers with the products that their customers appreciate and will make them money, then everybody wins through that chain and we can expand our margins.

Market leader in technology and serving the customer as I just mentioned. We serve the 3 related markets, they're related because they're all vehicles, but we serve them with core product technologies that we're experts in. And we can leverage that global engineering and manufacturing footprint around the world.

And as I'll show in just a second, the consistent cash flow for investment and shareholder returns. And I'm sure we'll talk a lot about that here in a second during the Q&A. We have a very stable capital structure, a very stable balance sheet with room, obviously, to grow. So great strength in the overall company, and we continue to fuel this machine now as we go forward and look to the growth in the future.

So let me just go through a couple of the slides of the financial highlights. You can see on this slide here from a historical perspective, we've been able to continuously and reliably grow the profitability of the business as we've made these improvements. And John referenced them earlier in his introduction that we've been able to effectively increase the profitability of the organization in spite of the end market volatility that we're seeing.

The operating model that we put into place is meant to be able to control our cost structure with the revenue stream that we get, acknowledging that the volatility is probably not going to go away. It's probably going to be here with us for a long time as far as we can see into the future, but we're going to manage this business even with that volatility to make sure that our profitability is respectable and premier profitability.

Free cash flow, continue to generate strong cash flow as an organization. And you can see in the lower right-hand side from a cash and liquidity standpoint, a very, very strong balance sheet.

In January, at the auto show, we put out the 2013 financial targets. And you can see the sales, we put out there the $7.1 billion level, just under what we did last year. That is a result of some program roll offs and some softness in the markets. But we did put out there an improved margin again even in light of the slightly lower sales volume, generating good cash and, again, put out there a year that's going to be a very respectable year in a market that, we all know, continues to be a little bit volatile.

So if you think about the finances from a summary standpoint and summarizing it all up before we get to the Q&A here, Dana is really a results-oriented with a proven track record now behind us. And every year we get behind us is another year that lends itself to proving our ability to be a robust-performing company even with the volatile end markets. Because we have aggressive cost management and operating leverage, we continue to expand that margin, improve the bottom line, continuing to deliver free cash flow. And most important or as importantly, well positioned in the markets and geographies in order to grow. A great footprint in place with a great ability to leverage these technologies across regional boundaries, if you will, into the markets where our biggest growth potential is in getting very, very positive response from the customers there.

We have our capital allocation priorities in place, and now it's a matter of executing on those allocation priorities. And the whole focus for what we're doing here is to continue to deliver shareholder value for our shareholders out there. That's always been our mantra and always will be our mantra, and everything that we do is pointed in the direction of being able to do that in terms of the long-term sustainable growth aspect of the company.

So with that, let me say thanks very much, and we'll open it up to Q&A. Thanks.

Question-and-Answer Session

John Lovallo - BofA Merrill Lynch, Research Division

Great, thank you. Maybe I'll kick it off here with a couple of quick questions. Roger, you've been with the company now for a couple of years. I mean, what would you say have been the biggest successes since you've been there, and perhaps what are some of the biggest challenges that lie ahead?

Roger J. Wood

Yes, good question. First of all, in the 2 years, it's been fantastic. I didn't really have any negative surprises, if you will. The biggest improvements that we've been able to make is in terms of simplifying the business structure and clarifying the business structure, John, so that we can have a delivery of performance on this consistent basis that I talked about in the presentation. That is ultimately important because in these markets, we can't rely on a stable market in almost any market that we play in, in almost any region of the world. So we have to be running a company that can very quickly adapt to the market conditions that we find ourself in. And one of the biggest satisfactions on my part is being able to have that structure in place now that's very simplified. We've got 4 great businesses that we run with 4 great management teams, each one of them having a president with a management team focused everyday in their unique business structure for 2 very simple things, performance of the business and growth of the business, in those 2 aspects. So that is probably the most promising or satisfying thing that I found. In terms of the biggest challenge, it really is the volatility of the markets. And I feel very good about our ability to grow this technology solution strategy, if you will, and use it to fuel the growth of the company. But it seems like we always are fighting the market dynamics that are going on, on any given week in the markets that we serve around the world. So whenever people get nervous about Europe, that's an issue that we all deal with. The commercial vehicle market in North America last year started out with a bang, and we're all really excited and it ended the year, not so much of a bang. We think that's going to reverse itself this year. But it's that very volatility that we're pushing against as we try to grow the top line of the business. And I'm confident again in the longer term that we will be able to do that. It's just that in the short and the medium term, it seems like there's a lot of fits and starts on that. But to counter to that, we have a great set of teams in place to make sure that we're managing effectively through that.

John Lovallo - BofA Merrill Lynch, Research Division

Great. And I'll just throw one more in here. So you've completed the structure's divestiture at this point. You just got rid of leisure products. Is there any more portfolio pruning that you see in the near future?

Roger J. Wood

Not major. But inside of each one of the businesses, there's always work going on to make sure that as they're enhancing the profitability -- remember, I said there's really 2 main thrusts, and that's performance of the business unit and growth of the business unit. From a performance aspect, if there happens to be platforms inside of it that aren't performing to the level that we'd like, their charge is either to fix it or, if it's really not contributing to the business unit and it doesn't look like it can be fixed, then it's to get rid of that piece. But that's a platform-by-platform issue and not a business type of a business issue. So that said, as I said, we've got 4 great businesses running and we're always looking for opportunities that might add to the ability to the businesses to grow. But wholesale changes isn't something that we're actively pursuing at this point.

Unknown Analyst

Just to back on John's question, I guess for you, Bill, regarding the financial structure of the company. Is it where you want it to be now from a debt-to-capital ratio? 12 months in and you've already done some things but what else do you think we should be thinking about as far as where you want to take this company?

William G. Quigley

It's an excellent question. I've been on the company now for one year, and just to echo some of the points that Roger made, first is I think what we've got in place at Dana is a very focused management team across the business units continuing to execute and hopefully you've seen the results of that over the last several years, including obviously a pretty volatile market into 2012. With respect to the capital allocation process within the company, it's certainly an area that we're focused on now, we're continuing to refine. To your point, we took some steps with respect to, I'd say, liability management in our U.S. pension plans. But at the same point in time, we took a look at, from a distribution perspective, I call this kind of distribution channels. We've got a common dividend in place now, a structure to accommodate that as well as late in 2012, we've moved through, given our capacity, if you will, from a cash flow perspective and cash balances, implemented a share repurchase program. And again, a $250 million program over 2 years, a step, I'll say, with respect to how we're looking at the capital structure. Over time, and I think as we continue to progress that, we now have those venues in place. And make no doubt about it, as we look at the cash flow capability of the company and even in 2013 market which is, to Roger's point, is erratic in various regions around the world. If we cannot deploy the capital that we generate, we can now deploy that via the various methods available to us: Sizing them as share repurchase; upsizing, if you will, from a dividend perspective. So we're taking those steps there. Are we satisfied with the capital structure as presented currently? I would say not. I think one is a position of strength with respect to availability and liquidity. The balance sheet is of strength to us, with respect to a customer viewpoint and/or the opportunity for us to continue to progress our objectives. But concurrently, we've got to look at, to some extent, that strength can also be a weakness with respect to shareholder value, leverage, so on and forth. So we're certainly not done with the capital structure, we're taking the right steps. Some would suggest maybe too slow for some people in the audience, but certainly a measured approach moving forward and we're going to continue to evolve that thought process even throughout the course of 2013.

John Lovallo - BofA Merrill Lynch, Research Division

In terms of some of the emission regulations coming in on the off-highway market, the Tier 4 regulations, I mean, how is Dana positioned for those? And what kind of benefit do you see going forward?

Roger J. Wood

Yes, great question. That fits right in -- that fits right in the wheelhouse, if you will, of the technology strategy that we have. The things like the Powerboost system that I had on the one slide up there is an excellent example of a product that fits right there. It takes the typically or historically wasted energy, captures that wasted energy and redeploys it during the work cycle of an off-highway vehicle. So we also take in and are able to leverage some of the technologies from our other segments, the light vehicle as well as the heavy vehicle, and bring them over into the off-highway segment from an axle perspective and driveshaft perspective. So that's a great example of how we're able to utilize the technology in one area of the company as regulatory frameworks start to evolve around the world in another region that we serve or another market segment that we serve and be able to deploy that technology there. So I think we're very well positioned to be able to do that, John.

John Lovallo - BofA Merrill Lynch, Research Division

There's been a lot of talk about, clearly, the OE side of the business, but can you like give us an update on the aftermarket. How that's been performing and where the opportunities are there?

William G. Quigley

Yes, I can take that. With respect to -- that's certainly an important element of our business. We conduct our aftermarket activities within each business unit. So we have kind of a fronting organization, if you will, with respect to sales and marketing. But the conduct of the aftermarket is within each of the business units. And if you kind of take a look at the distribution of our business units from a light vehicle, driveline perspective, not a big piece of that business. Really more focused from a commercial vehicle segment as well as our off-highway business. But again, very good margins and very good opportunities for us to move forward from an aftermarket perspective. I think we said that business is about $900 million in total of the aftermarket stream including the OES and independent aftermarket channel. What you see in that business though and having come from some background on that previous engagements is there is volatility in that business, and sometimes, it's difficult to forecast that. We've seen some weakness really impacting off-highway largely around construction, as well as in commercial vehicle, to some extent. Some softening as well for our PTG group which also participates pretty wholly in that market. So we believe it's a great market for us, the aftermarket. It obviously extends our capability. At the same time, as we move forward there, our focus is to serve that OE customer and then use that aftermarket business as well as another buffer and to move forward. So we are focused on extending the range of our aftermarket business but continue to focus on that within the construct of each business unit, not as a separate and independent business in Dana.

Roger J. Wood

To complement what Bill had just said about the aftermarket, John, we also have been supporting over the last 1.5 year some small investments in consolidating the distribution, if you will, in the different regions of the world. So instead of having it from a lot of different places in Dana, for each region of the world, we've been consolidating into a warehouse structure that's -- it's more effective at supplying the aftermarket and more effective for us from an inventory control standpoint and a cost management standpoint. So we have supported that over the last 1.5 year, we're really nicely positioned right now in that, and we may still make a few incremental investments in certain areas of the world on that basis. They're small investments but it really serves to help us inside manage the cost and it helps us be better positioned to serve the customers and grow to the outside.

John Lovallo - BofA Merrill Lynch, Research Division

How are you guys participating in the hybrid and the electric vehicle market? And where do you see that market going?

Roger J. Wood

Well, we're participating. We actually have a great position in the market. So I can answer the first question pretty easily. The second one is really a hard one, where do we see it going? But from being positioned in it, we're in -- the last count I had was about 26 electric vehicles around the world, which is a lot, because there's not all that many vehicles in the world that are pure electric-type vehicles or hybrid vehicles from a battery cooling standpoint. We really have both air and liquid-cooled technologies for our customers and we're positioned in a lot of the content around the world right now. That said, it's pretty small in terms of the size of the market. But if the market should take off in any area of the world, we're really well positioned to be able to do that, from a cooling standpoint as well as some other componentry. The second part of the question, in terms of where it's going, I'm not sure. Fuel cells is another technology that we're very, very well positioned in, and we have good contracts with a couple of key marquee names around the world that I can't mention, but good development contracts because they're starting to initiate fleets with fuel cell technology, and we're very well positioned in that, again using the process technology that we have in some of the other pieces of our business. But I can't really forecast where that technology is going, because on any given day, people are really excited about electric vehicles, and on another given day, people may say that's not going to go anywhere. It's always going to be a little tiny niche. We're going to stay in it because I think, ultimately, in the long run, there will be a good sized play out there. What percentage of the overall market? I'm not sure. But I think electric vehicles aren't going to be going away. I think as soon as some of the battery technologies and things get improved and get more cost-effective and have the infrastructure in place, there will be a good chunk of the market. If you think it only gets to 10% in $100 million vehicle market, that's still a good sizable market to go after from a penetration standpoint. So I don't know when that will be. But the other thing that's important for us in this market segment is we're not -- it's not costing us money to stay in this game at this point. We've got good product technology that is providing a fair return for us at the levels that we're at right now. So technology-wise, we're positioned well. It's not costing us to be -- to stay with our position the way it is. So we're going to continue to support it in anticipation to figure out what this ultimate end market is going to be. Bill, do you have anything else?

William G. Quigley

No. I think it's perfect.

John Lovallo - BofA Merrill Lynch, Research Division

What would you say -- I mean, some investors that I speak to haven't done work on the new Dana. What would you say are the biggest misconceptions or what are the biggest things that have changed since the Dana of 2006 to the Dana of today?

Roger J. Wood

Yes, I think I referenced in the presentation that the question that I got some time ago, actually it was in the very first slide, about the comment that I got several months ago, maybe a year ago now about, how are you going to take a metal bending company and make it a technology company? And the answer to that, I kind of said it a little bit, was, I can't really take credit for making Dana a technology company because Clarence Spicer did that in 1904. All we can take credit for is this management team is making sure that we're enabling the talent that already exists and the fabric of the culture that already exists in the company to once again thrive and shine as a real technology solutions provider. And we've done that by simplifying the structure of the company and clarifying the structure of the company and making sure that we understand what the real charge is, very simply, perform in whatever markets are thrown at us and grow. It's really pretty simple. And using the growth platform, being the technology that we have in the company and continuing to reinvest in that. We're spending or we were spending, a couple of years ago, about 2% in engineering. We've crawled that up a little bit, and we said we're going to continue to crawl that up and we will. As the company can afford it and as the company needs it, we're going to continue that investment in engineering up. And you've seen in a couple of the slides some of the technology that we've already been able to put out there. And last week at the Mid-America Truck Show, we were very encouraged by the feedback that we got from the customer base. We've got a comment from one of the key customers in the world that it's nice to see Dana back in the technology game. And so that was kind of validation and verification for us that we're on the right track to get the name back to what everybody once knew, probably prior to the mid-90s, if you will, Dana as being -- as a real technology company, we're getting back there.

John Lovallo - BofA Merrill Lynch, Research Division

In terms of taking weight out of the commercial vehicles, I mean, the opportunity there is clear. What is the opportunity on the light vehicle side for light weighting?

Roger J. Wood

Same thing. Except the light vehicle side, when you start taking weight out of a vehicle, a little easier to do it out of big commercial truck or commercial vehicle because it's just mass-wise bigger. So on a smaller one, it's a little more challenging. But the same principles apply. We have what we call the AdvanTEK axle that we've put into the marketplace in the last year or so. And essentially what that is, is lighter weight materials, a smaller more compact packaging but carrying the same amount of torque. And some of the new business wins that we've talked to you about, that we've announced and have been working on, our customers taking advantage of that smaller package that ends up to be lighter weight and, ultimately, takes weight out of the vehicle. As you probably know, for those of you that follow the industries of commercial and light vehicle, weight is becoming everything now. And so we have a really good opportunity with the products that we supply to take weight out of the vehicle. The Diamond Series driveshaft is a great example that was put into heavy, takes a ton of weight out of the heavy vehicle and now they're putting it into the light vehicle. And it's not just the weight of the shaft itself, it's the ability to take out center beams, support beams, structures, out of underneath the vehicle. So it removes weight in a couple of different areas. So we're pretty well positioned in the light vehicle side as well from a technology standpoint.

John Lovallo - BofA Merrill Lynch, Research Division

Just as a follow-up to that question, with the exception of costs, are there any disadvantages to shifting over to the lower weight, the higher efficiency, lower weight materials? And as a second question, what is the market opportunity if -- of your existing products? How many are eligible to go over to either aluminum or the more lighter weight components that you've been talking about?

Roger J. Wood

Yes. There's really no disadvantage to doing it, because that's what our testing and validation and things is meant to do, is to make sure that we can carry at least the same amount of torque or greater with the lighter, more efficient package. So there's not any disadvantage. Sometimes, there's a little bit of a reconfiguration in the assembly plans of our customers, if you will, because where a driveshaft might have gone in, in 2 pieces before, now it's one big long piece because it doesn't need the center section. That one big long piece has got to get to the area of the production line, and you can't take that thing around the corner in the factory. So there's some logistic things that have to happen, but that's a pretty minor issue that can be dealt with as we launch these new products. But disadvantage on the vehicle itself, not really and it's been very, very well received, especially last week with some of the key leadership, the top leadership in the OEMs, recognizing the real benefit of that and getting really excited about it for their vehicles. Anything else? Yes. So the benefit of the smaller package in terms of the AdvanTEK axle is ground clearance. The small pickup GM that we announced last year was a real benefit of that. So carrying the same amount of torque in a smaller package gives you a greater ground clearance, and ground clearances, in some case, is a buying decision for the consumer. So there's some real benefits to lightening up the package and it's all benefits. The only time it becomes a disadvantage is if you have a performance characteristic that is sacrificed, and we're making sure that, that's not the case through the testing and the development.

Unknown Analyst

How big the opportunity is to switch over to the aluminum or the other lighter weight components?

Roger J. Wood

Yes, in our developed areas of the world where we have a significant market share, the opportunity is really to replace a lot -- some of the product that we already have in. So from a revenue standpoint, it's not all that significant. From an income standpoint, it is significant because we've been able to affect a much more cost effective way to make them. In the less developed areas of the world -- sorry, where we have less market share, in China and Asia and so forth, it all represents a growth opportunity in terms of the top line. So I think it's pretty significant. And the issue is getting it converted on the various applications and multiple applications, if you will, that are out there. But as I said last week at the Mid-America Truck Show, there was an awful lot of enthusiasm, and so I think we're going to get support from the top of the organizations at our customers to begin that process of converting over.

William G. Quigley

And it really, I think, in the near term, I'd actually say 3 to 4 years with respect to moving forward, is not necessarily a broadening of the revenue basis. Again, as Roger's point, the Diamond Series driveshaft as an example is a replacement of an existing product. So your revenue may be neutral but at the same time what it does is offer the opportunity from a margin perspective to continue the progression higher. So it's really 2-fold, one is slowly, over time, penetrating our current order book and at the same time providing opportunity to go outside of the order book. And that's the beauty of it. It's actually both worlds that we're operating in with respect to that particular application. Using that as an example.

John Lovallo - BofA Merrill Lynch, Research Division

Can we go back to that balance sheet for a minute, maybe discuss what you think are the internal and external factors that are driving a rather slow pace at optimizing that balance sheet, and maybe give us some guidance as to what you think the optimal balance sheet looks like. I mean, if you want to stay with no net debt, then let's just agree to that. Or if you think that, that negative arbitrage isn't in the shareholders' best interest, maybe you could tell us what kind of gearing you think is optimal for today's world.

William G. Quigley

Yes, I think for -- let's put it in the context of today's world. I think from an external perspective, we don't see any horizontal events that would cause us concern with respect to our current balance sheet or liquidity. So from an external perspective, given this market that we're in, we know the market's going to be volatile, but we're very comfortable with respect to the ability to execute within this type of a market. That doesn't suggest anything in a significant downturn, but we've also done the analysis and sensitivities with respect to our ability to move through a difficult environment. We're very comfortable from that perspective. Internally, we've looked at a number of items. Some we've addressed already, with respect to our pension funding in the U.S. pension plan positions, for example. We feel much better now at a mid-80-type funded position than we were maybe at the mid-70s. So we kind of shored that up, we'll continue to do some pension funding. But they're largely frozen plans now, so we're not going to see that surplus accrual creep in. Other internal opportunities, I think, is continued investment business but certainly even with our 2013 financial guidance, that investment certainly contained within our cash flow capability. Inorganic opportunities we've talked about, we certainly look for opportunities to bolster the 3 core competencies that we take to the market, not necessarily to add a fourth nor probably in the near term to be anything of transformational. So we want to have some capability to execute those and the flexibility to execute an acquisition in a range of $200 million to $400 million, let's say, that's kind of -- we're looking at it from a sweet spot perspective. So really those factors aren't necessarily given the balance sheet, a limit to our capability to expand, for example, upon a share repurchase. With respect to leverage, I think being in a net debt positive or net cash position, probably is not the most efficient position from a shareholder perspective. Will we be willing to take on additional leverage? We've talked a bit about that in almost every conference that we've gone to. We certainly believe this company can handle additional leverage from a service perspective, as well as just from an optimal capital structure. There's an opportunity for us to do something there. And it has to be for the right reason, but certainly coming today, saying a net cash position of $200 million, for example, at the end of 2012 is our optimal capital structure. And we're certainly not going to express that today, because it certainly isn't. We can take another turn of leverage of this business, we'll take a turn of leverage on as appropriate and what we think is a favorable outcome for the shareholders presents itself and we move forward with.

Roger J. Wood

That's it. Okay.

William G. Quigley

Thank you, John.

Roger J. Wood

Thank you, everyone.

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