Dana Holding's (DAN) CEO Jim Kamsickas on Q2 2016 Results - Earnings Call Transcript

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Dana Holding Corporation (NYSE:DAN)

Q2 2016 Earnings Conference Call

July 21, 2016 09:00 AM ET

Executives

Craig Barber - Director of IR

Jim Kamsickas - President and CEO

Jonathan Collins - SVP and CFO

Analysts

Colin Langan - UBS

Brian Johnson - Barclays

Patrick Nolan - Deutsche Bank

Brian Sponheimer - Gabelli & Company

Irina Hodakovsky - KeyBanc

Brian Colley - Stephens

Christopher Van Horn - FBR & Company

Joseph Spak - RBC Capital Markets

Presentation

Operator

Good morning and welcome to Dana Holding Corporation's Second Quarter 2016 Financial Webcast and Conference Call. My name is Brent, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session will be recorded for replay purposes. There will be a question-and-answer period after the speakers' remarks, and we will take questions from the telephone only. [Operator Instructions]

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

Craig Barber

Thanks Brent. And thank you to everyone on the call for joining us today for Dana’s second quarter 2016 earnings call. Copies of our press release and presentation have been posted on Dana's Investor website. Today's call is being recorded, and the supporting materials are the property of Dana Holding Corporation. They may not be recorded, copied or rebroadcast without our written consent. Today's call will include a Q&A session. In order to allow as many questions as possible, please keep your questions brief.

Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from those suggested by our comments today. Additional information about the factors that could affect future results are summarized in our Safe Harbor statement. These risk factors are also detailed in our public filings, including our reports with the SEC. Presenting this morning is Jim Kamsickas, President and Chief Executive Officer and Jonathan Collins, Senior Vice President and Chief Financial Officer.

With that I'd like to turn the call over to Jim.

Jim Kamsickas

Thank you Craig, good morning everyone thank you for joining us. The second quarter of 2016 was another solid quarter as a result of continued team working by Dana teams and their execution on our operational and strategic priorities. In terms of financial results for the quarter, sales were $1.55 billion, a decline of 4% from the second quarter of last year largely as a result of currency headwinds. While we continue to experience weakness in market demand in the commercial vehicle and off-highway segments, our light vehicle-related businesses specifically our key market of light trucks are doing quite well with double-digit organic growth. Our earnings for the quarter came in strong with diluted adjusted EPS up $0.05 per share over last year and adjusted EBIT margin of 11.5%, driven by strong light vehicle markets and very effective cost management across the Company. We have continued our drive for profitable growth and exceptional customer satisfaction. And I will highlight this morning we have had some real successes including securing significant replacement business in light vehicle driveline leading to continued backlog growth.

We also completed a strategic bond refinancing that allowed us to achieve three key improvements in our capital structure. The new issues extend our maturity into the next decade, lower our overall interest rate and increase our available liquidity. Jonathan will provide more details on this in just a few moments. And finally, we continued the execution on our $1.7 billion share repurchase program returning $53 million to our shareholders in the second quarter. Turning to slide five, let's take a moment to update you on what we’re seeing in the end markets around the world. Starting in North America, our outlook for the year is positive as the overall economy remained stable. More importantly for us, fuel prices remain low, which is good for the light trucks market. We continue to see brisk demand in our driveline and power technologies business for light trucks and with our upcoming launches we see this trend continuing. I'm also happy to report that we are on track with the Ford Super Duty launch this summer.

For the commercial vehicle market in North America we see two storylines, the first is a fairly strong medium duty market which is helping to offset the weakness in the class A truck market. We are slightly reducing our production expectations for class A trucks to 230,000 to 240,000 units. The impact of the decline will be less then you may expect as our sales mix has shifted more to the medium duty market, more on that in just a moment. Moving to Europe, all the talk has been about the UK and their exit from the EU. This is certainly causing some uncertainty in the region and putting pressure on the pound and the euro. However, Dana’s direct UK exposure is limited to only about 3% of our total sales. Most of a business in the country is with Jaguar and Land Rover. We have not seen any near-term issues in either demand or production changes from our customers, in fact light vehicle demand in Europe was up over the past quarter and we expected to be stable in the back half of the year.

We continue to see demand headwinds in our off-highway market with the largest sales exposure is in Europe, recently demand for the construction vehicles have slowed but our off-highway group has reacting quickly continuing to adjust our operations to match demand. Looking at South America, we remain cautious as we don't see the economy improving this year especially in Brazil where the recession and the fluctuating currency has been a headwind especially to our commercial vehicle group since the second quarter of last year. In order for the market to see meaningful improvement, there would first need to be political stability, revised tax policies and improved access to capital. We expect commercial vehicle production in the country to be down 10% to 20% compared with an already depressed level of last year. But there are some bright spots for Dana in the region, our Brazilian team has done a great job managing cost through this downturn and continued to provide exceptional service to our customers which has lead to new business.

When the market does recover and we do believe it will, we will be very well positioned for profitable growth. Another bright spot has been our light vehicle operations in Argentina, we are faced with a tough market here as well, but have successfully launched a new program with Toyota and we have experienced good sales growth in the country, which has helped us to offset the currency headwinds. And finally, in Asia-Pacific, we are seeing continued improvement in India and economic stability in Thailand where light vehicle demand is up over last year, though currency remains a headwind. We still believe that Chinese markets will mostly be flat this year compared to last, but we’ve had several new program launches on SUVs and light trucks coming in over the next few years and we expect to continue our organic growth in the region.

And speaking of growth and customer satisfaction, let's turn to slide six. Over the last several quarters, we have shared with you many new business wins that are organically increasing our revenue backlog. This quarter, I'm excited to provide you an update related to again Dana’s topline, but more specifically to successfully re-securing our replacement business. As you know, we provided a three-year backlog incremental to our base replacement business. At the beginning of this year, that was 750 million for all of Dana. This backlog number is a net number, meaning we lowered the backlog for any replacement business losses.

I'm very pleased to report that our light vehicle driveline group has secured virtually all of our current book of business through at least the end of the decade. We also have a strong foundation in our commercial vehicle business, which has rebounded extremely well, recovering from our supply chain driven issues last year. While the overall market demand is lower this year, our share in the class 8 market has been stable and we continue to see positive movements in our positioning in the marketplace.

At the same time, our heavy duty business has stabilized, our medium duty business has strengthened. This has tempered the class 8 market decline. We continued to improve our commercial vehicle business in North America and abroad. After safety, customer satisfaction is priority one. This has never been more relevant than our off-highway group where our collaboration with construction equipment manufacturer, Manitou Group has significantly contributed to the manufacturing of a vehicle with Dana’s revolutionary new hybrid PowerBoost drive system.

We highlighted this technology in relationship earlier this year, and most -- and last month, Manitou was recognized by the Conseil National des Achat, a French national association for procurement professionals for demonstrating innovation through collaboration work between the supplier and the manufacturer. Working with Dana, Manitou set out to develop new technologies that decrease both fuel consumption and emissions for the increasing competitive agricultural telehandler market. The award truly demonstrates how two partnering companies with a shared business vision for developing advanced vehicle technologies can work together to achieve new levels of efficiency and innovation.

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

And to take this focus one step further, on slide seven, today, we announced that on August 1, we will change our company name from Dana Holding Corporation to Dana Incorporated. This change is intended to better reflect how we conduct our business as one unified organization with a focus on customer satisfaction, operational excellence and advanced technology across all mobility sectors. Perhaps important for the stakeholders on the call, please note that we will continue to operate and report our four business segments as we do today. Also of importance, we will retain the iconic Dana Diamond logo, which has been associated with the company for nearly hundred years. Our New York Stock Exchange ticker symbol will also remain the same.

Now, I’d like to turn the call over to Jonathan to review the financials.

Jonathan Collins

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

Adjusted EBITDA for the quarter was 178 million, essentially flat to last year, yielding 11.5% adjusted EBITDA margin which is 30 basis points higher than last year and 130 basis points higher than the prior quarter as our cost performance improved significantly. Net income was $53 million, $6 million lower than last second quarter. The second quarter of this year included a $17 million loss on extinguishment of debt due to the bond refinancing we completed in June. This was partially offset by lower tax and restructuring expenses. Capital expenditures were $77 million, $17 million higher than last year as we continue our investment to support our growth through program launches and delivering our growing backlog. Free cash flow for the quarter was $108 million, $20 million higher than last year, primarily due to improved working capital efficiency which more than offset higher capital spending and the timing of cash interest as a result of the aforementioned bond financing.

Slide ten provides some additional color around the changes in sales and adjusted EBITDA versus last year. Sales of $1.55 billion, while down 4% from last year represent a 7% sequential improvement over the first quarter. Adjusted EBITDA of $178 million was essentially flat versus last year as strong cost performance, pricing and commercial recoveries more than offset lower volumes and nearly offset the impact of foreign currencies. All segments improved or maintained margins as we posted an overall 30 basis point improvement from 11.2% to 11.5%. The chart on the bottom half of the page highlights the four main drivers of the year-over-year adjusted EBITDA change and also notes the corresponding impact on sales. Foreign currency lowered our adjusted EBITDA by $6 million compared to last year, driven by $44 million headwind to sales primarily due to the devaluation of the Brazilian real, Argentinean peso and South African rand against the US dollar. Volume and mix lowered adjusted EBITDA by $8 million on $22 million in lower sales driven mostly by higher North American market share and commercial vehicle last year compared to this year and lower demand in global off-highway end markets.

Both of these headwinds were nearly offset by the 10% organic sales growth we achieved in light vehicle and power technologies which combined increased sales by $83 million compared to last year. Again this quarter stronger light vehicle demand levels along with new customer programs drove the increase. Pricing and commercial recovery has added $3 million to sales and adjusted EBITDA compared to last year. Cost performance was $9 million improvement over last year as our manufacturing excellence initiatives begin to take hold. Please turn with me to slide 11 for a closer look at the year-over-year changes to segment sales and EBITDA. The light vehicle driveline group had a strong second quarter with sales of $669 million, up $28 million or 11% on a constant currency basis due to higher volumes in the light truck market in all regions as well as the benefit of incredible sales from new business. Segment EBITDA was $71 million this quater, $5 million higher than last year providing a margin of 10.6% higher than last year's second quarter by 30 basis points and higher than the first quarter this year to 50 basis points.

We expect margins to continue to improve in the second half of the year as we launch new business and recognize the corresponding commercial recoveries. As we look at the drivers of change for light vehicle driveline, currency lowered earnings by $7 million and sales per $42 million mainly attributable to the Argentinean peso, South African rand and Thai baht. As I mentioned previously volume and mix performance was excellent this quarter benefiting segment EBITDA by $9 million on an additional $62 million in sales which represents 14.5% incremental margin. Pricing and commercial recovery were an $8 million benefit offsetting $5 million of lower cost performance driven by higher start-up costs and inflation in Argentina. Moving to commercial vehicle driveline, we note that sales were down $82 million compared to last year, due to lower market demand and the shift in market share that occurred last year. However, margin is up 80 basis points compared to last year due to meaningful improvements in our cost structures.

Looking at the details, currency was less of an impact this quarter as the Brazilian real was less volatile. Volume and mix lowered earnings by $13 million driven by $80 million in lower sales including the impact of Brazilian market and lower share position in the North American class A market. While it has been stable since the fourth quarter of last year, the lower share position accounted for the majority of the second quarter year-over-year change partially offset by our growing position in a better performing medium duty market. Pricing, commercial recoveries and performance were all positive for a combined benefit of $10 million compared to last year, the positive cost performance of $8 million was driven mostly by the elimination of premium freight cost related to last year's supply chain initiatives as well as realizing the benefits of that initiative in the form of lower material costs. For off-highway driveline, sales were lower by $27 million due to lower end market demand. However, through stringed cost management, margin was held flat compared to last year of 14.7% which represents a sequential improvement of 140 basis points from the first quarter

Currency was a slight benefit compared to last year as the euro has stabilized. Volume and mix lowered earnings by $9 million on $25 million in lower sales. This higher than normal detrimental margin is the result of less favorable mix as demand was lower in the construction equipment market and aftermarket. Pricing was a slight negative compared to last year due to the timing of the changes in commodity costs. Overall performance was $5 million benefit due mainly to material cost improvements. Finally, power technologies had an excellent quarter posting 6% organic growth and a 50 basis point margin improvement over the prior year. Sales were up $18 million and EBITDA $4 million for a 15.6% margin which represents a 220 basis points sequential improvement as the inefficiencies we experienced in the first quarter associated with converting on rapid increases in volume are now behind us. The currency impact was $1 million negative to earnings that you will not the sales impact was $1 million positive, this difference was driven by the relative strength of the euro which was offset by some unfavorable transactional impacts. Volume and mix benefited segment EBITDA by $5 million on $21 million higher sales due to continued strength in the light vehicle markets. Material saving drove $4 million in performance improvements offsetting in equal amount of lower pricing.

Slide 12 highlights our free cash flow for the quarter. We ended the quarter with free cash flow of $108 million, an increase of $20 million compared to last year on just slightly lower adjusted EBITDA. This change was primarily driven by improved working capital which was offset by higher interest payments and capital spending. Working capital was a source of $45 million this quarter, a $54 million improvement over last year. This change is largely attributable to the timing of customer payments and higher inventory requirements last year related to our supply chain initiative. Net interest was higher this quarter due to the accelerated payment of accrued interest related to the debt refinancing completed in June. Capital spending was $17 million higher than last year as we continued to invest capital to support our growing backlog.

On slide 13, I'd like to provide you with an overview of the actions we took in the second quarter to extend that maturities, lower debt servicing cost and increased operating liquidity. First, we issued new ten-year senior unsecured notes at 6.5%. The proceeds were used to call our existing 6.75% notes that were set to mature in 2021 extending the maturity by five years. We issued these new US notes from a European subsidiary allowing us to efficiently utilize cash generated in the region to service the debt. Second, simultaneous with the closing we swapped the US dollar to euro denominated debt which lowered the effective rate on the new notes to approximately 5.8% [ph] and the total overall average fixed interest rate on all of our unsecured notes to less than 5.5%. Finally, we issued a new $500 million cash flow revolver with favorable terms to replace the prior asset-based revolver. This action provides greater ongoing and consistent full availability of funds and improved liquidity by $159 million compared to the prior ABL facility. The net result of these actions along with strong free cash flow generated in the second quarter is a $246 million increase in our operating liquidity to over $1.2 billion.

Slide 14 highlights our outlook for the full year including some detail on our second-half targets. Our full-year guidance remains unchanged from what we provided in January, with the exception of the free cash flow guidance revision we made in April to accommodate higher capital spending to support growing backlog. We still expect sales to be in the range of $5.8 to $6.0 billion, adjusted EBITDA of $640 and $670 million, full-year margin of 11% to 11.2%, free cash flow of $120 to $140 million and diluted adjusted EPS of $1.65 to $1.75. As we look at the second-half targets, it is important to note what we have accomplished in the first half this year. For sales, we’re expecting the back half to be slightly lower than the first, mostly due to lower market demand in commercial vehicle and off-highway. Since we had already assumed some weakening in these markets, our sales guidance remains unchanged. For adjusted EBITDA, our strong first-half performance will require the second half to be only slightly higher, mainly due to margin improvements in light vehicle driveline as they will see the benefits from new business launches and the recovery of engineering costs.

Free cash flow is expected to be about $120 million in the second half of this year compared to $10 million in the first half. This seasonality is normal in our business as we see higher working capital requirements earlier in the year. For comparison, in the first half of 2015, we generated $6 million of free cash flow and $140 million in the second half. This year the second half will be lower than last year’s second half due to the timing of customer payments and higher capital spending to support our backlog. Our second half and full-year targets are called out by segment at the bottom of the page. As just mentioned while sales will remain flat in light vehicle driveline, margin will improve as new programs launched and commercial recoveries are recognized. In commercial vehicle driveline, we are expecting to be approximately $100 million lower in sales due mainly to lower demand in the North American Class 8 market offset partially by strength in the medium duty market. The transfer of our medium duty truck program from our commercial vehicle group to our light vehicle group in the third quarter will also affect this group, while this will have an adverse impact on the commercial vehicle group sales and margin it will be accretive to light vehicle and Dana overall. If you recall, we mentioned this program transfer on our first quarter call in April.

For both the off highway and power technologies group, we expect second-half sales and margins to be in line with the first half. Hopefully this additional detail on our assumption is helpful in understanding our glide path to achieving our full-year targets. It is worth noting that from a seasonal perspective we anticipate that margins will remain relatively flat with the second quarter in both the third and fourth quarters. This is atypical from the past couple of years and is due primarily to the timing of program launches and commercial recoveries within the light vehicle group. Turning to page 15, I will summarize the key highlights from the second quarter that advance our priorities. Our customers have continued to demonstrate confidence in our capabilities through awarding us new business. The solutions we are offering them that they are selecting are differentiated through the technology advancements we are making in our products and processes. The financial results we delivered in the second quarter represent significant improvements over the prior year and the previous quarter as the light vehicle driveline and power technology businesses delivered excellent organic growth and margin expansion.

In the midst of a declining Class 8 market in North America and continued lower demand in Brazil, commercial vehicle improved margins versus prior year and the previous quarter. And the off highway business was able to maintain margins in the midst of historically low end market demand. We have affirmed our full-year guidance and while we have work to do in the second half and we have some market headwinds, we have manageable expectations in terms of sales and anticipate sequential margin improvement in light vehicle driveline based on well-defined actions. We will also continue to maintain an attractive free cash flow profile in the midst of supporting our new business growth.

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

Question-and-Answer Session

Operator

And at this time we would like to begin the Q&A session. [Operator Instructions] Your first question comes from the line of Colin Langan with UBS. Please go ahead.

Colin Langan

Any color on, you know, it seems like from your presentation that there are some weakness in North American truck and other markets will remain very challenged. What is your confidence in holding the full-year guidance as it seems like markets have been deteriorated a bit from how you started the year or [indiscernible]?

Jonathan Collins

Hey Colin, this is Jonathan, relative to second-half and first half comparison, our original plan that we had in our guidance did contemplate lower volumes in the second half versus the first half. There has been some softening as we noted from the 248 to 260 range, down to the 230 to 240 range. However, our medium duty segment is performing better which is helping to offset some of that, not all of that was contemplated in our original guidance. And candidly, light vehicle volumes which affect both our light vehicle driveline business and power technologies are slightly better which are helping to ameliorate some of that impact. So on balance, we are able to maintain but the commercial vehicle business will be a little bit softer than we originally anticipated.

Colin Langan

Got it. And how is the off-highway market trending, is there any signs that market is starting to bottom out or possibly even turn, any color there?

Jim Kamsickas

Good morning, I appreciate the question, who knows of course, but we feel - we kind of feel like it’s at the bottom, who knows but it doesn't mean it's going to come back up anytime soon but we do feel it's closer to the bottom then not. As you know although its largely manufactured out of Europe for Dana, we have a significant amount of our product is out is supplied overseas. So we do have that geographical balance, so we're continuing to work through it as you know. And 30% of our off-highway is export. So, anyway I think we're okay with where we are at, but I think it’s just going to continue to bump around the bottom for a while here Colin.

Jonathan Collins

Collin, this is Jonathan, just one thing I would add to that, a lot of the work even though to Jim’s point we’re uncertain when it’s going to come back. A lot of the work that we’ve done on that business in the cost structure and the engineering of our products has really positioned us well for when that market does come back. So we expect very attractive margin conversion when we start to see an improvement in the global off-highway markets.

Colin Langan

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

Jonathan Collins

Yes, we feel pretty good about light vehicle margins from first half to second half. The timing of the launch ramping up certainly helps us. The factors some of the business when we look at on a year over year basis that was within commercial vehicle last year, we've moved that platform to the light vehicle business, it’s an overall margin improvement for Dana in the aggregate as we are able to utilize some existing assets for both platforms. And then the final pieces just due to the timing of our commercial recoveries, so remember in our business customers pay for the engineering work based on program milestones. This year those milestones are weighted towards the second half of the year. So with those three factors, we’re feeling quite confident about the light vehicle's performance in H2.

Operator

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

Brian Johnson

A couple of questions, first around commercial vehicle driveline, you call that last quarter that you expected the margins to decline due to volume shifting from CV to LV, one could you may be re-explain that and two is, is that what's behind your posting 8.5% this first half but guiding to 7% in the second half and for the next year or is that 7% something that given these cost saves, given some of the mix you might be looking to race?

Jonathan Collins

Brian, this is Jonathan, just on the first-half second-half for commercial vehicle, there are a couple of factors. The one that you noted that I can give you a little additional color on is the program shift. We had mentioned this in our April call at the end of the first quarter and what's happening is we have a platform when you get into the Class 5, 6 range, those vehicles can be either a commercial vehicle or a light vehicle, in this case we were able to leverage some existing technology and manufacturing processes for both platforms for one of our customers. And what we did is those sales and margins are moving from the commercial vehicle business to the light vehicle business in the second half of this year. So that is a headwind for the commercial vehicle business puts pressure on the top and bottom line and obviously on margins as that business moves over.

What we did highlight is the reason we did it as its better for Dana in the aggregate and it's part of light vehicle’s improvement from the first half to the second half. The other factor I point to within commercial vehicle as you’ll note that the Class 8 volumes in North America are weakening throughout the balance of the year, right now we see them finishing in the 230 to 240 in that range, which is a lower run rate in that in the balance of the year. So that's putting pressure on the top line and it's also going to put some pressure on margins. So those two factors are really the key driver as to why you see some margin decline in commercial vehicle on the second half of the year.

Brian Johnson

Okay. And within commercial vehicle, is there a significant margin difference between the heavy duty business and the medium duty business?

Jonathan Collins

We’ve highlighted...

Brian Johnson

Content per vehicle.

Jonathan Collins

It's very difficult for us to provide just specifics on content per vehicle because there are so many mixed variations, we would indicate that we have said in the past that growth in medium duty is good for us that's very good business for us. So generally speaking those margins are good, so when those products are going up that's a benefit to Dana.

Brian Johnson

Okay. And then over on the light vehicle driveline, we certainly get the sort of the underlying segment shift going on towards light trucks but within that there is an 8 million tailwind to revenue and EBITDA from pricing and recovery. Usually we are conditioned to think about price downs and whilst still is up from its bottom, commodity costs are still historically low, which would seem recoveries would go the other way. Can you kind of give us a little more color as to what the drivers of that are and then how long would you expect positive pricing recoveries to continue?

Jonathan Collins

I think in the case of light vehicle driveline one of the things that we are able to do is we get some recovery in other parts of the world as a result of inflation. So some of that is what you’re seeing coming through. There is also some timing of engineering recovery that’s reflected there as well too. But when you think about this, those are really the drivers more so than the productivity or the price downs that you would traditionally think of in the category.

Brian Johnson

Okay. And then finally, there is couple of things going on at GM, they’re freeing up Wentzville for more mid-sized pickup trucks and then they are doing some business with Navistar. Can you give us a sense of, first I guess that the Wentzville, how - what you’re content per vehicle is, how you could participate in that. And then, given you have relationships on both side, does the Navistar deal mean anything for you and is that maybe part of what you’re flagging in LV to CV shift?

Jim Kamsickas

Hey Brian, this is Jim. I can’t really give you a content per vehicle specifically, but I will for you and the audience reinforce that as many of you know, you know we are on the Colorado Canyon, it’s a big platform for us, it’s a big successful platform for General Motors. I can’t comment on what their manufacturing strategy is, but obviously they are very well positioned not to get a little bit off tangent on that but our facility that supplies a good piece of that is out in that region and it was just last quarter was recognized as a - albeit Ford was recognized as one of their world excellence award winning plant. So we’re in good shape to continue to support General Motors or whoever in that area. Relative to your question on the Navistar news so on and so forth, certainly Navistar is an important customer of ours, General Motors is an important customer of ours, we’re in good condition with both of those two successful companies and we’ll certainly be in play for anything that continues to come our way with the GM Navistar relationship.

Operator

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

Patrick Nolan

Two quick questions, so just a follow-up on the pricing and recovery question for the light vehicle driveline business. So it sounds like for the full year, for 2016 that will be a positive to the EBITDA line. On a go forward basis, does that swing back to kind of the traditional price downs or negative impact EBITDA or is that kind of a net neutral on a go forward basis in your mind?

Jonathan Collins

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

Patrick Nolan

That's helpful. And can you maybe also elaborate on the commercial vehicle driveline, the market share losses that were incurred. What's the path to potentially get some of that share back over time?

Jim Kamsickas

Great question, good morning Patrick. The path was - we know the path that went - I went the other way, you’re aware of that, we kind of hit a bump in the road there, stepped on our toe, call it what you want. First and foremost it's performing and we are absolutely performing extremely well with that customer and all of our customers for that matter as it relates to quality delivery, warranty all the important ingredients it seem cliché but their impact what drives the business. The other one is certainly the technology roadmaps and the things we're doing and again we’re driving those for all the customers. So although I can't commit to tell you, we are here today and we're going to be there tomorrow and we don't have a crystal ball in terms of what the customers are going to do. I would tell you that I'm bullish on our commercial - I'm bullish on all of our segments but commercial vehicle and we are in very good standing with all of the commercial vehicle customers. So, we’ve been growing you know that, we've been talking about growth every quarter and we are not faking it and we are going to, we expect to certainly grow in the commercial vehicle group as well.

Patrick Nolan

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

Jonathan Collins

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

Operator

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

Brian Sponheimer

Hi Jim and Jonathan, congratulations on a good quarter.

Jim Kamsickas

Thank you very much.

Brian Sponheimer

Jim, if I'm thinking even on certainly less than a year but you got a good sense of the businesses now and the changes to the balance sheet to increase liquidity, should we take that possibly as a more aggressive stance towards looking to expand the portfolio from an inorganic standpoint?

Jim Kamsickas

I'm going to answer that in two-part, but first of all thank you for the call and for joining in the question. I wouldn't read into it that way necessarily. Jonathan will give you some more color commentary outside of his scripted remarks on why we did it. I think for one before I overcook it a little bit, I think the timing by the Dana team, financial accounting team was fantastic in terms of everything else that happened in recent times with BREXIT and everything else. But from our standpoint, we certainly, we want to always be in a position to pull any lever if that lever is going to be inorganic, if that lever is share buyback or whatever, but the thing that’s most important for us as you can see by our organic, which is our most preferred avenue for growth.

We are growing sizably and we need to make sure that we’re in a position to support that. And as the industry is going more and more global, the customers want to go with the same design, same engineering, same people to talk with, same products. We need to make sure that we’re in a strong position to do that, not just here in ’16, but for years to come. So from an operating standpoint, from a customer standpoint, that's what's important to me. Jonathan, I'll ask you to add some color.

Jonathan Collins

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

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

Brian Sponheimer

That's good, thank you. And maybe just a step back from how you look at your standing with investors. You’ve got a power technologies business that's bumping up against 20% EBITDA margins, which you put it up with really any in the industry, how do you strategize as to how to get investors aware or more aware of this business that Dana is really a technology leader and not necessarily just thought of as an old axle company?

Jim Kamsickas

Great question again. No surprise, Brian. Great question. What I would tell you, it actually, I’ll toggle it back to your opening comments that I am coming up on a year, not quite a year yet. Jonathan has been in the saddle here for two or three months now, getting his feet on the ground and the team is doing a great job. So what does that mean? It means we, also as part of our responsibilities and the thing we work on is really developing our go forward strategy. I can tell you in the last couple of months, that's been kind of a key point of what we have been working on and I would tell the audience today, not just yourself, but the audience today, you should expect more on that in the near term, maybe the October timeframe, but certainly by the end of the year.

Brian Sponheimer

Thank you very much.

Operator

Your next question comes from the line of Irina Hodakovsky with KeyBanc. Please go ahead.

Irina Hodakovsky

Thank you. Good morning, everyone. Thank you for taking the question. Wanted to ask about your Brazilian exposure. The market there continues to decline, cost reduction would eventually hit limits at some point. If we are looking for 20%, up to 20% [indiscernible] just wondering where are you in terms of limits on cost reductions and then you only really have 5% exposure there, if you do begin -- if operations hit unprofitable levels, use the material to your bottom line?

Jonathan Collins

Sure. Thanks for the question, Irina. This is Jonathan. Just relative to where we are with Brazil right now from an outlook standpoint, we're generally of a view that we are pretty close to the bottom in Brazil from a demand standpoint. Certainly, there is a lot happening that Jim mentioned in his comments earlier in the call, relative to the political environment and we're hopeful that some of the changes there will catalyze some economic growth. Broadly speaking, we are bullish on Brazil. We have a very strong presence, we have taken a little bit of a different approach in the past few months. We have been able to, as suppliers in the region, undergo financial stress due to the low volumes, we had the opportunity to pick up business.

We’ve also addressed the cost structure very aggressively. We’ve worked to put the programs in place to get arrangements with the union to be able to address lower labor costs as demand is lower, which has positioned us really well. From a financial perspective, we're hovering right around breakeven in that market. We’ll continue to watch demand carefully. There are some additional opportunities for us to improve the operations and trim costs to stay at or near that level, but certainly Jim will probably want to add something to this, but we have a very good outlook on Brazil and we remain committed to that market.

Jim Kamsickas

Yes. Irina, I can only just paint a picture for you, none of us can be there, but if -- we are very vertical in Brazil. We have a very talented team in Brazil, long-standing foundation there. Anybody that’s ever done business in Brazil recognizes probably the most from a vertical standpoint, probably the most important country in the world with all of the taxation and other challenges that come along with it. So the team has done a very good job of kind of holding the line and not being a big drag on the company. So we’re going to stay due course there and I think it's going to turn out very good for us, especially back to my other comments as it relates to global platforms and I think everybody in the call gets it. You're not going to, in the long haul, if you're not in a position to be able to support the same platforms around the world, you're going to be at a significant disadvantage. We're in a very bullish and a very strong position in there from a manufacturing footprint.

Irina Hodakovsky

Thank you very much. Congratulations on a great quarter.

Operator

Next question comes from the line of Justin Long with Stephens. Please go ahead.

Brian Colley

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

Jim Kamsickas

Thanks for the question, Brian and thanks for the comments. Appreciate that very much. As I often say, not to overcook it, but as I often say, there is always the M&A opportunities that are circulating through. We always keep a keen eye on those. I won’t try to hint towards anything too much, but typically, I’ve had a tendency like anybody as an investor in anything, and that's an investment, of course, is to kind of look for the buy low, sell high type of thing. And there are certainly some targets out there. There are some weaknesses in the various geographic markets. There is some weakness in particular product and end markets. So we are very keen on keeping a close eye to that. We’ve done some structuring internally here recently to make sure that we’re efficient and effective at definitely phishing and looking and making sure we do a quick assessment, get in, get out and know where we’re at, as it relates to if we should do something on the M&A front.

Brian Colley

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

Jim Kamsickas

This is Jim again. From my point of view, just less than a year on the job, I've said this a couple of times, but the Dana team over multiple years has done a very good job of synthesizing and aligning the product. I mean, we are largely a driveline company with our power technologies group, not only supporting the engineering, but supporting our driveline products. So they’re very connected. We’re not a company that’s got some legacy history. It's trying to do bumpers and tires and seats and all sorts of other stuff. So we are very core to our products. I feel pretty good about it from a product standpoints, from a synergy standpoint, from a value proposition standpoint for our customers, our ability to grow, our leverage off of the footprint, et cetera.

We ever -- say never to some type of play where we would move something out. Sure, you are always open-minded to it, but I would tell you that we are much more on I would call, we’re more slanted towards being a buyer side than we would be looking to move something out. There is a very powerful engine here, as it relates to Dana hovering and we’re interconnected with our power technologies group, along with our three driveline businesses.

Brian Colley

Understood, that's helpful. And lastly, I just wanted to ask about the new light vehicle driveline facility you guys announced in Toledo, could you guys just kind of talk about that, the returns you’re expecting on that investment, do you expect something in the range of at least mid-teens on a return basis. And then secondly, when would you expect a top line impact from that investment to become meaningful?

Jonathan Collins

Sure. Brian, this is Jonathan. I’ll just touch on the numbers and then let Jim talk you through the rational and the strategy associated with the facility. As far as returns are concerned, the project most certainly met our internal hurdles of requirements. We look at ROIC. We target in the mid to high-teens in that category and this project absolutely met that criteria. In terms of the sales coming on supporting new program launches, that will be coming to market towards the end of next year. So we are actively engaged in getting that facility up and running and ready to launch well for our customer.

Jim Kamsickas

Yes. I would only add to it, I don't expect anybody on the call to know our complete manufacturing footprint, but it means, it’s still what happens with suppliers or companies in general, just for one thing happened after another and it ended up the way it did, but if you looked at the Dana footprint for our light vehicle business, we didn't have a facility near the Toledo slash metropolitan, Detroit slash area where there is a lot, obviously needless to say, there is a lot of light vehicle production. So it was a necessity for us to take care of our customer and be in a position and win. And so, as announced, we’re going to support two customers and then on beyond that, hopefully more. But we needed from a bull's-eye manufacturing strategy standpoint, we needed that footprint here and so that's why we’re moving forward, but we’re very bullish on the facility for sure.

Brian Colley

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

Operator

Your next question comes from the line of Christopher Van Horn with FBR & Company. Please go ahead.

Christopher Van Horn

Good morning. Thanks for taking my call and congrats on the quarter. Just a question on the backlog as well as your pipeline coming up, could you give us a sense of what the mix is between new customer opportunities as well as maybe some program extensions or program rebates. And then secondly within that, within that pie, I guess, could you break out regionally where you’re seeing that opportunities or kind of end market wise, where you’re kind of slanted?

Jonathan Collins

Sure. Christopher, this is Jonathan. Just a couple of comments on the backlog. I will just remind your relative to some of your points about how, what that's composed of, keep in mind our backlog takes into account or nets any lost business, which is why Jim emphasized today, the securing of our major replacement business in our light vehicle driveline business through the end of the decade, that’s really significant, it provides a really strong basis for growth. So this does not include any of those replacement business, but if we weren't to give on, it would count against us. So this is truly incremental business.

Relative to the customer and segment and geographic dispersion, the backlog, all four groups are contributing to the backlog. So, all of them have positive backlog. The majority of it is coming from the light vehicle group. So they are a major contributor. We’ve had a lot of success with new business. Most of it is coming from existing customer relationships. So we have a strong relationship with our major customers and the growth is spread across that customer base. From a geographic standpoint, again, all regions are contributing to the backlog around the world, but the majority of the concentration is within North America. So we see a heavy weighting to growth within the North American geographic segment.

Christopher Van Horn

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

Jim Kamsickas

Thanks for the question, Chris. Just a quick snapshot to that. What we seldom talk about, but it’s important to us of course is because it’s unconsolidated, let's take commercial vehicle first, we have a joint venture with Dongfeng over there. It's a very sizeable business, so we are a big player there, just doesn’t rollup in to the consolidated numbers. So that's where we are at there. So we’ll continue to be relatively strong from that standpoint in the commercial vehicle side going further in China and US more specifically for Asia. That's actually where our strongest growth on a percentage basis is certainly in the China market. Last year, I believe we reported that overall consolidated business, it’s only about -- China only about 3% of our sales, but that’s headed north quite a bit and over the next couple of years and heading north because of some -- actually the technology side of our business is that where there is not as much truck vehicle production there as you know. Our products, we made some pretty significant moves in different, our rear disconnecting unit type of products, our power technology products as well as our PTU business, our other products in the all-wheel drive market are heading really nicely in the China and Asia market.

Christopher Van Horn

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

Jonathan Collins

Yes. We’re operating under a different authorization. Also, we have a 3 million -- 300 million authorization to purchase this year and next year. We actually accelerated the rate of purchase in the second quarter, given where the stock price is. We bumped up our purchase levels. Just relative to our approach going forward, I think we've been pretty clear that our primary place where we want to invest capital is in growing the business organically and supporting this growing backlog. We’ll continue to look at inorganic opportunities as well too and at the right price for assets that will add technology that will help us grow our business profitably, we’ll certainly be willing to deploy it there.

And then finally, we will repatriate it to shareholders in the event that those don't materialize. So it does hit, if you will, at the bottom of the priorities, relative to the other alternatives, but the answer compared to last year is we’re operating under a program that’s a little bit lower because of the growth phase that we’re in, but just seasonally we actually did step up the rate in the second quarter due to our conviction on the price of the stock.

Operator

Your final question comes from the line of Joseph Spak with RBC Capital Markets. Please go ahead.

Joseph Spak

Thanks for squeezing me in here and congrats. Jonathan, maybe, just a quick clarification, I thought in the prepared comments, so let me take it back, talking about the recovery in LVD, again I thought in the prepared comments, I heard you mention you thought margins would continue to improve in the second half as you launch the new business and there is going to be some corresponding commercial recoveries. Then later on, I thought you implied that the recoveries implied in the back half were basically neutral. So did I mishear something, did I misinterpret something, maybe just could you just clarify that?

Jonathan Collins

Sure. No problem. The comment early on was relative to the light vehicle business. Light vehicle is expected to improve from first half to second half and on a half-over-half basis, the recoveries in the second half for both light vehicle and all of Dana will help to improve margins. I think the comment I made relative to flat margins is I just wanted to signal that our third and fourth quarter margins, we expect to be in line with second quarter margins, which is unique from what you've seen seasonally from us in the past couple of years. Typically, the second and third quarter, our peak margins and margins taper off in the fourth quarter, but the issue here in the fourth quarter is that because of the timing of recoveries, we expect on an aggregate basis for Dana that margins will be in 11.5% range in both quarters. So I think I apologize if that was a little bit confusing, but the intent was to just give you some feel on cadence for the third and fourth quarter there.

Joseph Spak

Got it. So just with staying within LVD, the recovery is plus 8 million this quarter, can you give us a sense as to how much it can help the back half within LVD?

Jonathan Collins

So the 8 million is a year-over-year variance. We do expect them to be positive relative to the second half of the year, but the 8 million is on a year-over-year basis, it's slightly more than that in the back half of the year compared to prior year, but that's both the third and fourth quarter.

Joseph Spak

Okay, thanks. And then you talked a lot about how the mix on commercial vehicle in North America is moving more towards 5 through 7 versus 8, so maybe, just and sort of I missed this, but of the 66 or two-thirds roughly percent of CVD in North America, what is the breakout between class 8 and class 5 through 7?

Jim Kamsickas

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

Joseph Spak

Okay. And the last one, and this is more, I guess a little bit of housekeeping, so commercial vehicle margins in the back half. I know if you look on a year-over-year basis, in the fourth quarter ‘15, there was a big impact from the warranty expense. So that's I think was 16 million [indiscernible]. That would still get you -- that would still sort of imply a good improvement in sort of efficiencies or can you just remind us on a year-over-year basis, was there something beyond warranty that was more punitive from an efficiency perspective that sort of reverses in the fourth quarter this year?

Jonathan Collins

Yes. So a couple of things, you will remember, we did incur some premium costs associated with the supply chain in the back half of last year, which will be a help on a year-over-year basis. The other factor is that volumes took a pretty steep decline in the fourth quarter in class 8 in North America. We've talked about the fact before that, while we are generally very good at responding to changes in market demand, when they happen very rapidly, we sometimes get caught there for a period, and that's what you saw happen in the fourth quarter. So it's really a combination of those two factors that add to the fourth quarter improvement compared to last year in CV.

Joseph Spak

Okay, thanks a lot.

Jim Kamsickas

Okay. This is Jim. Just to close it out, thank you for joining the call. I hope it’s obvious that we continue to execute on our strategic priorities for this year. Again those, that is the enhancing of our competitive position, growing our core business by winning new business, protecting our base business, driving customer satisfaction through operating performance and solution providing innovation. We’re continuing to drive profit margin improvement by focusing on manufacturing excellence and cost management and of course we’re continuing to maintain a strong balance sheet by managing the capital structure. Thank you all for your questions, attention, and have a great day.

Operator

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