Dana Holding Corporation Q2 2008 Earnings Call Transcript

Sep.24.08 | About: Dana Holding (DAN)

Dana Holding Corporation (DAN

Q2 2008 Earnings Call

August 7, 2008 10:00 am ET

Executives

John Devine – Executive Chairman

James Yost – Financial Officer

Gary Convis – Chief Executive Officer

Analysts

Himanshu Patel – J.P. Morgan

Brian Johnson – Lehman Brothers

[Roger Cowell – Silverlake Financial]

[Gregg Pass – Imperial Capital]

[Chris Laring – Wolfpoint Capital]

[Nelson Yuman – Greenlight Capital]

Unidentified Corporate Participant

Thank you for joining us today. You should now be on slide number three of the presentation. As referenced on this slide, I'd like to remind everyone that topics discussed in today's call will include forward-looking statements. Please take a moment to review our Safe Harbor Statement. Today's call is being recorded. This conference call and its supporting visuals are the property of Dana Holding Corporation. They may not be recorded, copied or rebroadcast without our written consent.

As a reminder, our web cast system allows you to direct questions to us via the internet. We will answer as many questions as time permits.

Moving to slide number four, today's call will feature remarks by Dana's Executive Chairman John Devine, Financial Officer Jim Yost, and Chief Executive Officer Gary Convis. John will begin today's presentation with a brief overview of some key issues. Jim will follow with a review of our quarterly financial results and Gary will provide an update on our operation excellent initiatives. Following some strategic direction and summary remarks from John, our call will conclude with a question and answer session.

With that, please move to slide number five and I'll turn the call over to John Devine.

John Devine

Before we talk about Dana, just a quick note on 2008. I think the good news for this year is its two thirds done almost. The tough news is certainly 2008 in North America is a lot more difficult than any of us would have expected at the beginning of the year. In fact, in my career which is longer than I like to think about, I can't recall a more difficult year.

We've used the word significant headwinds to describe '08. That's probably understated for lots of reasons, as when you step back and look at the North American market today, the automotive market, really there's four things going on, maybe more. We're getting a cyclical downturn. We've lived with that before. It's not the first time we've seen it. But this is different because we're now getting a structural change driven by high gas prices in the segment ship, and certainly that's had a significant impact on the light truck business in North America, not only in '08 but certainly going forward.

Add to that the financial pressures on many, if not most North American companies both OEM's and suppliers. And then add on that the technical changes that are going through the business really to drive to better fuel efficiency. What that means in the close supplier in the OEM communities are very significant changes.

I would have to say this is nothing short of revolution, and I'd like to say it's limited to 2008 but it isn't. We're going to be [inaudible] with these trends for some time. It creates a lot of risk for companies but also opportunities and our game plan at Dana is to take advantage of those opportunities while we at least mitigate the downturn.

Certainly as we talk about Dana, we have made progress. I would describe our second quarter as reasonably good performance given what's going on. As you look at the operational changes we've made this year, very consistent with the priorities that we set out early this year. Restructuring our management team, I'll show you more on that in a moment.

We're spending most of our time on the North American operations and fixing that. Gary will talk about that in a moment. We have a strategic plan in place and progressing, and I'll cover that in more detail later. And financially, we maintained a very strong cash position and a strong balance sheet which I think is a real plus in this environment.

We put at the top our hit parade given what's happened on steel and lower North American volumes. A response plan, you can see that on page five, driven by pricing recovery on steel, addressing upside down contracts. We'll talk more about that later on. Right sizing North American operations in this new environment, and we'll talk more about that as well. And obviously we have to do and will do more cost reductions both this year and next.

When you step back and look at the environment, and I'll talk more about steel in the next slide. I won't go through the volume scenario; I think you all know that. But certainly a combination of light trucks are down sharply, class 5A trucks are down as well. I would characterize the commercial truck business as much different though than the automotive business.

Commercial truck business certainly is going in North America a cyclical downturn. We've seen that before. It's certainly impacting us this year. It's probably some impact on construction as well, but we expect that business to bounce back, and bounce back reasonably quickly next year both five through eight.

On steel prices, we're not assuming that we have a reduction. We're assuming that that continues for some time and if I could ask you to turn to slide six, we'll give you our latest view on steel prices. We talked to you at the end of the first quarter, and you can see on that slide that we were looking at $550 a ton for the remainder of the year. On the bottom of the page, you can see that our initial projection for '08 was more continuation of where steel wound up at the end of last year, just above $300 a ton.

I would point out that this is scrap steel we use as we've explained many times, a variety of different steels, and we're focusing here on scrap steel just to make it simple, but we use a variety of steel in castings and forgings and so on. But you can see what's happened to steel from $300 at the end of last year, the '08 actual has continued to climb well beyond the $550 projection we had at the end of the first quarter and we're now looking at $850 a ton for the rest of this year.

What that does to our profits is shown in that box in the middle. You can see in the first half that it cost us about $27 million net of recovery. There's some scrap in there and some pricing. We're getting a higher impact in the second half of the year for two reasons. One is the steel prices have gone up and even though our recovery is shown at 50%, we're still lagging with a lot of our customers so we don't get immediate recovery on steel. I'll talk about that later today.

So for the year, we're looking at a net reduction in the profitability of $127 million. We described that as $70 million to $100 million at the end of the first quarter so it's higher than we expected last quarter. And this recovery is 48%. I would tell you on the 48% recovery, that's not nearly where we want to be. Our target here is full recovery, and our issue on steel is to stop the trend line going up to the extent that's possible. We think it will stop at some time, and then get our recovery back in line so we do get full recovery on steel over time, but obviously, a hit for us this year, and it's been more than we expected.

On the next page, page seven, just a quick update on management team. This has been a top priority for us. It continues. You probably saw the note that Keith Wandell has joined our Board. Keith is the COO at Johnson Controls. Many of you know him, terrific guy; will be nice help and a welcome addition to the Board. So we welcome him.

Jim Yost, I think as you know has joined us. Jim and I spent a lot of time at Ford together. He's was the CFO at Hayes Lemmerz for several years before he joined us, so another welcome addition. And Gary and the team have been bringing in a number of new people, approximately seven to operations, leaders who are very experienced, really made an instant addition to the team. We also brought in a new head of engineering for the commercial vehicle group.

So a number of things here. This is not to say that we don't have good people in Dana. We do have a number of good people. I think we have a strong team, but it is important that we add selected talent. We're doing that. There will be more to come throughout this year.

With that, let me stop and I'll turn it over to Jim Yost.

James Yost

If you turn to slide nine, you can see there our second quarter highlights. On the financial side we achieved an EBITDA of $128 million. That's down a little bit from 2007. We'll have a slide on that later to bring that into focus. The net loss was $140 million, and that included an $82 million impairment in our drive shaft business. That's an impairment to both good will as well as some of the intangibles.

We had positive free cash flow of $38 million which was good, driven largely by reductions in working capital. Cost savings totaled over $60 million compared with 2007, and that was better than we had projected at the last conference call, and is a continuation of our efforts to restructure and reduce our costs across all of our businesses, driven to a very large degree by the work that was done while we were in reorganization.

We finished the quarter with a very strong cash position of $1.2 billion and a liquidity world wide of $1.6 billion, and we'll cover that in a little bit more detail later. In addition to the financial improvements we made, we had some significant working capital reductions, about $70 million. Gary will talk a little bit later about the manufacturing footprint and headcount reductions which we have underway, and we have been able to and continue to bring back cash from our overseas operations as we deem appropriate, and we continue to have very good capability to do that to support our cash needs here in the United States.

You turn to slide number ten, this is a numeric summary of the financial results in the second quarter of 2008. You can see there sales were a little bit higher than $2.3 billion. That's up 2%. We'll cover that in a bit more detail in the next slide. Again, EBITDA we'll cover in a little bit more detail later on.

Capital spending was a little bit down versus last year, $47 million, and as I mentioned free cash flow was very strong in the quarter, $38 million. And we've defined for this purpose cash flow, is really our cash flow from operations excluding any Chapter 11 claims, less capital expenditures. So it includes any financing actions.

Turning to slide number 11, we've summarized our sales results for the quarter, and you can see there again, we're up about $44 million overall, 2% or so. And that was driven largely by a decline in the volume and mix, a little bit of pricing in there, net. But that was more than offset by currency adjustments, translation of our sales overseas back into the weaker dollar.

For the quarter we were very strong results from the off-highway business, it was up from commercial vehicle and sealing were also up for the quarter, and light axle and structures were down because they're primarily driven by North American results.

Slide number 12 shows our change in EBITDA. As I mentioned we were down about $15 million quarter over quarter, but that was more than explained by currency transaction income. That was $26 million less than it was last year. Last year, we had in the second quarter, $18 million one time gain on inter-company loans due to a substantial decrease in the dollar, so we booked $18 million of gain last year in the second quarter on the inter-company loans which were classified as short term.

This year, because the dollar actually strengthened a little bit in the second quarter, we booked about $8 million of losses, so overall a net change, $26 million year to year. But if you exclude that $26 million, actually EBITDA was up about $11 million. You can see the explanation of that was primarily due to the very strong cost reduction actions of $64 million. Gary will get into that in a little bit more detail, but that more than offset the impact of steel costs, which was about $25 million net. The gross cost of steel increased about $38 million, offset by $13 million of pricing.

And then obviously, we had some declines in volume and mix of about $22 million.

Pricing overall for the quarter, including steel as well as other pricing changes was about $7 million favorable, but that unfavorable pricing of $6 million was primarily due to a one time favorable pricing action last year. So overall, we had no declines in pricing effectively during the quarter. But actually, it increased about $13 million due to steel pricing increases.

On the cost savings item, in 2007 we picked up about $200 million reorganization related savings and that's what we discussed in the annual call. We expected to pick up a little bit more than that $200 million this year, so if you take it on a quarterly basis, we expected about $50 million based on the work that was done last year.

Since we emerged in January, we continue to push for additional cost reductions, and we've been reducing head counts. As a result, we actually have achieved a little bit better savings in this quarter than we expected at the beginning of the year so again, a pretty strong result there.

Slide number 13 shows our segment reporting results for both sales and EBITDA, and you can see there the ups and downs on sales. The EBITDA largely tracks by segment. The results of our sales changes year to year. Below the line there on the net EBITDA, you can see shared services and administration.

These are not only our corporate expenses here in Toledo, but also represent some of our shared service activities globally which actually support the operations, but which we have not historically charged those expenses out to the operations. You can see there a significant reduction in those costs. We continue to go after not only operational costs but administrative costs.

We talked about foreign exchange. The other item there on other income is primarily due to the FIFO to LIFO adjustments. All of our segments report on a FIFO basis, but we report corporately on a LIFO basis, on a consolidated basis. With the significant steel price increases, the adjustment in the second quarter FIFO to LIFO was about $20 million. Obviously, if we had reported on a FIFO basis, our second quarter results would have been better by that $20 million, again showing that our results in the second quarter were pretty good, everything considered.

And I'll just mention that most of our peers do not report on a LIFO basis, so actually we have a better result compared to most of our peers as a result of that.

Slide number 14 shows our net/debt position. We ended the quarter with about $1.2 billion in cash, largely split evenly between the U.S. and our international operations. We have been able to bring back plenty of cash from those international operations, back to the U.S. to service debt and other requirements.

If you take a look at our total debt, on a balance sheet basis that's about $1.4 billion, so our net debt was just about $200 million, again a very strong result. Debt is down about $80 million since the end of the first quarter and that's primarily due to a reduction in the use of our European securitization program. So we have been able to reduce debt. Cash has remained very strong, so net debt is actually fairly small.

On slide number 15 you can see our global liquidity status. If you take that $1.2 billion of cash and then reduce that for the amount of deposits we have supporting our obligations, letters of credit and things like that, as well as cash in our less than wholly-owned subsidiaries, by which we don't have immediate access, we've got available cash globally of over $1 billion.

In addition to that cash, we've got two programs; a borrowing base revolver in the United States as well as a significant line of credit in Europe based on securitization of receivables. Those total a little bit less than $600 million as well as some other miscellaneous lines of credit. So in total, we finished the quarter with well over $1.6 billion of global liquidity and that's more than enough for us to manage our operations globally.

And I'll just comment that we had no cash borrowing under our U.S. facility and only about $19 million borrowed in our European securitization facility, so as I mentioned, plenty of liquidity, plenty of cash and the ability to move that around as we see fit.

That finishes the financial section. I'll turn the mike over to Gary.

Gary Convis

I'd like to give you an update on the Dana operating system that we've been working on very vigorously. As you might imagine, it's patterned after the Toyota production system, a very simple purpose to provide our customers with the highest quality parts and very competitive prices.

Really at the heart of this is also to develop our people and a culture within Dana that is sustainable for ongoing, continuous improvement. It really is about problem solving, raising issues and being able to attack them by energizing the entire team. What this does is energize an organization that begins to understand teamwork, respect and involvement.

First, we have to stabilize our organizations and we're doing that I think very aggressively. This can then lead to the improvements that have been mentioned already. This is a long term transformation. It's not something that you do overnight. We're doing it through meaningful metrics with transparent reporting and visualization in the plants, and very importantly, full involvement and support.

To do that, we're building a core team of highly qualified leaders that can help the plants where they might struggle in training and in actual floor support. And at this point, quite frankly, I'm very pleased with the acceptance and the capability, the strong initiatives of the entire Dana team members and the management that I've seen in the plants.

The next slide, 16, shows you some broad metrics that we're following. We have 17 set components that we measure, but nothing really outstanding or unusual here, but what is different is; one, they're all plant controllable factors. They're also very standard. We're rolling this out, not only the visualization process, but the management of them globally and expect to have that fully in place by October 1. The transparency helps people understand and attack problems for good team work. We are reporting this in a cadence that is both daily, weekly and monthly at various levels.

The next slide shows the progress in various key performance indicators that we've achieved. When you compare the first half of '07 to the first half of '08, this gives you a few snapshots. Safety – one of the most important aspects of managing the plant, signification improvement both in recordable incidents as well as lost time. Accidents are down 48% and 68%.

Also, the customer delivery quality, we're very proud. This is a benchmark level of 25 problems per million parts, and this is the first time I think we've overall company reduced our problems to the customers to this level, and now of course, we're on sustaining and continuing this improvement.

Additional premium freight has dropped over half. It's a very significant cost reduction we're enjoying. And I'll give you an example of some great progress at Lima, Ohio, which traditionally has been a very difficult plant for Dana. Honestly, the team members there, the management team, are producing more than 2,000 heavy duty drive shafts, perfect quality and service kits which we have a very strong aftermarket business. We improved from May around 6,000 in that month to over 180,000 in the month of July through their activities.

Also, we've been running a number of the Dana operating system pilots throughout North American primarily and have enjoyed about a 15% to 30% improvement in those pilots.

On page 20, I'd like to give you an update on the Chapter 11 activities. We're in the process of closing several plants as was enacted during Chapter 11. We pulled ahead the Barrie, Ontario plant about three-quarters and are beginning to see progress financially from those activities. Also, in Thorold and St. Mary's plants are on schedule, and we're relocating some very important assets down to South America and India that will support some new business that we've got in those regions.

On the commercial vehicle business, we're shifting production to Mexico and India, some of our low cost country initiatives. At the same time, we're installing great practices in places like Humboldt and Henderson, Kentucky, and generating signification savings in both housings and gears in that area. The new action that we pulled ahead and aggressively executed was the closing of the foundry in Venezuela, both cutting operating expenses and logistics costs, and of course, the risk of supply.

We are also studying a wide range of other actions and we are going to take quick action based on what we see both beneficial for us and our customers. And we're right sizing our work force. This is a difficult and challenging activity but overall in 2008 we are targeting about 3,000 hourly and salaried work force reduction and are on our plan to achieve that.

And now I'd like to turn it back to John who will give you a wrap up and summary.

John Devine

Just one more item we'd like to cover before we turn it over to questions, and that's a view on our strategic direction. Before I do that though, I just want to emphasis that Gary and the team and but bulk of the efforts at Dana here this year really have been focused on this operational excellence. It's fundamental that we improve our manufacturing and our production capability throughout the world.

It drives costs, it drives productivity, it drives our revenue, our own competitive position. Obviously it was an issue for us as we walked in the door, that Gary and the team were addressing very aggressively. So we talk about strategy, I don't want you to think that we're only worried about that, but we really have to fix the operations and that's been a very top objective, and frankly from my standpoint, I think the team has made very good progress there.

On the strategic direction, this has been an issue for us, probably an issue for you as well, is really what does Dana want to go to? Where do we want to drive the company going forward? If you look on page 22, and you look at present Dana, and I'll give you a little more detail on this in a moment, we have seven business lines today in a number of components; drive line, plus structural components, plus engine components.

That's been thinned down over the years, but we still have a fair amount of diverse businesses. We serve three markets; the automotive, and the North American automotive business which we talked about, certainly in the revolution we discussed, commercial truck, a much different market and we think beyond '08 we'll perform well, off-highway has been booming. With the exception of construction, we think that will continue as well.

Important as well from a Dana cultural standpoint, we've run these seven businesses quite independently one from the other with multiple processes. That probably worked at some time in our past, but it doesn't work today for cost reasons. We're not as quick to our customers. Our costs are too high. That has to change and we're in the process of doing that right now.

When you look at our future direction, there's three elements to it. In terms of our focus, it will be on drive line products. That's our 100 year heritage. We do it well. We think that market, despite the technical changes coming in the marketplace will continue to do well in a variety of different markets.

We believe the way we run the business today is correct based on the three global markets talked about before, the automotive business, and this has been admittedly basically light truck, commercial truck and off-highway. And our goal here is to get common business and operating processes as soon as we can.

The second element on the next page, on page 23 of our strategy, is to fix North American automotive business. This was our view early in the year. I think it's been more pronounced given the chaos in the North American market this year and expecting to continue. And we're looking at two options here, just to be very direct.

We have to consolidate as others will as well to reduce costs and generate cash in the North American business. We have to down size further to generate cash and lower volumes. The key element on this is that we want North American business that could well be smaller, but it has to generate cash, and that's a very important goal for us. That, of all the things we have to do was a tough one, probably more difficult now than it was thought to be early in the year, but very important to get this done. We're going to move aggressively here.

Then the last part of the equation is to leverage our growth opportunities, and we believe we have several. On the automotive side, in Asia, namely China, India, South America, we have good growth and we can continue there; commercial truck in North America, but certainly in Asia. We've talked about China in the past. We think we have substantial opportunities there, and we're pursuing those, and off-highway in several different markets.

So it's really a case of clear direction, fix some of the business and grow other parts. And that's our game plan and a game plan we want to make considerable progress with this year.

The next couple of slides, a little more background for you on Dana. You've seen some of this before, but I think it's important to refresh your memory. On slide 24, we show Dana revenues. This is the first half of '08, so this has changed a little bit with the weakness in North America. It shows it by region and business line.

On the regional side, you can see about half our revenues in North America, that was a little higher last year, about 31% in Europe, South America and Asia Pacific, and we think we can grow that Asia Pacific mix. On the business line basis, as we covered before, we have seven businesses. Obviously light axle was the biggest business, 21%. Commercial vehicle here is 14%, but I would point out that about half of our drive shaft business is in the heavy side, so if you lump that in with commercial vehicle as it belongs, that's about 40% of our business in off-highway and commercial vehicle.

Our thermal, sealing, and structures businesses are important to us. As we talked about, our focus going forward, I'm sure you have a lot of questions, what's the story with those businesses, I would say first of all, I regard these as good businesses. They're well run. We've been pleased with them. We are saying though that we are evaluating strategic options in these businesses. We're going through that process right now. We've not made any decisions yet, and we'll tell you as soon as we do.

The last schedule I think is also important - Dana revenues by customer. The point here is I think we have a very diversified customer base. Ford continues to be our largest customer and an important customer. In the commercial side, Paccar would be our largest customer, very important for us as well. But it is a diverse group that I suspect will change over time.

Nonetheless, slide on page 26, our summary, again to cap what we said before. I think we've got a reasonably good quarter despite high steel costs and North American volumes. We've not expecting a big change in those areas. We are reducing our revenue outlook for this year from the $9 billion we talked about in the first quarter to what is now a range of $8.6 billion to $8.8 billion.

Our near term focus, very clear, to respond to the steel costs and lower North American volumes. We're looking for full recovery on steel. We're being aggressive on that. We're right sizing the North American operations, still work in progress, but we have to be aggressive on that as well.

We have to resolve upside down contracts. These are contracts frankly that have been in a loss position for some time. The loss has been magnified by steel price increases recently. Those are things that are not sustainable so we're pushing those very hard to get those resolved. And across all our business activities, despite some progress on costs, our view is, this is a good start. We have a lot more to do.

We laid out our '08 priorities earlier this year. Those are the same. We're pushing those hard, rebuilding the management team, rolling out of the operational excellence, fixing North American operations, executing the strategic plan I just talked about, new business and the growth markets in particular, places like China, Brazil. And our focus overall in every business we have, our focus of earnings, cash flow and maintaining a strong balance sheet which I think is very important in the kind of markets we're looking at today.

We will begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Himanshu Patel – J.P. Morgan.

Himanshu Patel – J.P. Morgan

The 3,000 workers that you announced would leave Dana fiscal 2008, first of all what percentage is that of the '07 ending North American head count, and number two, how much of that is incremental to the prior cost savings plan?

Gary Convis

The percentage is around 17% of our North American work force and I don't recall what we had said earlier about people reduction. It's all incremental as far as I recall. Obviously given the magnitude of the volume changes, we have to go after it more aggressively as just about everybody else is as well.

Himanshu Patel – J.P. Morgan

And do these all pretty much all come out in the second half of 2008 or would there be a tail to this where some of this goes into '09?

Gary Convis

We've been accelerating the rate of this activity. Through June, around 1,000 of the 3,000 were accomplished, and then in the last month another 600 to 700. And we expect most of the remaining reductions to be done in the third quarter.

Himanshu Patel – J.P. Morgan

Could you help us, just ball park savings associated with this?

Gary Convis

I don't have the number calculated in my mind. We can get back to you and give you some details.

James Yost

We lay it out every quarter. There is no guidance in there as you can see, so we're reluctant to lay that our. There's still a lot of pieces to it, but we wanted to give you an indication of the head count. You can probably do the math yourself.

Himanshu Patel – J.P. Morgan

On the discussion of what is core and what is not core in the business, for the businesses that were identified as being non core, can you give us a sense of where you are in your thought process on that? Have you had discussions with other parties to potentially either sell these businesses or maybe partner them with someone else, or is it still a very early stage where you haven't even gotten that far in the discussions?

John Devine

I don't want to say too much on this. We're working this process hard. I don't want to go through too many details. You'll probably hear those separately, but I don't want to go through too many details. We want to lay out what our thinking was in regards to the process. I would emphasize we haven't made any decisions yet. And the decisions we make are based on one criteria; how do we achieve the best value for Dana going forward?

These are good businesses. We like them. Good teams. But like everything else, you have to make hard calls about where your focus is and where it isn't and we're doing that right now. We'll keep you up to date as that progresses.

Himanshu Patel – J.P. Morgan

You have a lot of cash on hand as relative to some of your peers and maybe some of these strategic actions would generate even more cash. What is the plan for proceeds or even the excess cash longer term? Is it simply to pay down debt?

James Yost

I think if we do make any divestitures, the plan would be to use those net proceeds to pay down debt.

Operator

Your next question comes from Brian Johnson – Lehman Brothers.

Brian Johnson – Lehman Brothers

Can you help us understand going forward the FIFO to LIFO translation adjustment and the scenario if steel stabilizes what does that look like if steel goes up or steel goes down? What would those scenarios look like so we can think about how to model this?

James Yost

For us, we obviously have recognized in all of our inventory the impact of steel as of the end of June so that was the reason for the $20 million impact, and obviously as we reflect that both in inventory and then in our cost of goods, we actually recognized the impact that steel in our production through the quarter. We will see some continuing increases in steel costs through the third quarter, but clearly a lot less than what others would recognize.

So compared with our peers, we've actually had higher costs in the second quarter than they have had and then in the third quarter our costs will be lower than their costs would be on a cost of goods sold basis.

Brian Johnson – Lehman Brothers

Because you take it in the head pin inventory?

James Yost

Any of our sales obviously on a LIFO basis have a higher cost of goods sales in the third quarter as a result of the higher steel costs.

John Devine

I think you know as well as we do is, when does that line stop growing? And we aren't here predicting steel prices, but we'll have to see. We've assumed it's flat. I suspect it will be a little more volatile than that. We're watching it intently, but who knows? But we need to see that line flatten out or go down a bit as it has in other commodities, but we're not predicting that yet in our financials. We're obviously assuming it's flat. So if we get any kind of relief that would help us.

Brian Johnson – Lehman Brothers

Does that mean that next quarter we'll be seeing a squeeze in the steel costs hitting the segment EBITDA line, but then being backed out at the bottom? I'm trying to figure out how this isn't double accounting.

James Yost

That's essentially what will happen. You'll see the segment results will be depressed a bit and I won't say there will necessarily be a reversal at the corporate because that depends upon what the steel level actually is. So we might still see an overall net increase in steel costs flowing into the third quarter on a LIFO basis, but you're correct in assessing that the segment results would be lower due to that.

Brian Johnson – Lehman Brothers

Second question is around off-highway business and the backlog. Are you still comfortable with off-highway continuing its growth rate? And then on the backlog, is any that reflected? Do you have an updated backlog number for '09 or 2010 yet?

John Devine

We didn't put on in there. It hasn't changed a great deal on the backlog since our converter call. Our March report, in March we said our '08 to 2010 backlog was $200 million. It's about $270 million right now. Most of that, or a lot of it was outside of North America. China driveshaft in India and some off-highway work in Europe and South America. We have a big contract with Volkswagen in South America. So it's up a little bit from last time, but hasn't changed that much.

The off-highway business continues to do well. When you look at the myriad of markets in that business, as you know there's a number of them, we're reasonably selective, but we still have a number of businesses. It's been weaker, no surprise in the U.S. on construction. We're seeing a little bit of reduction in Europe on construction. But agriculture is still doing very well around the world and as you know, agriculture and construction are about 70% of our business.

But we're doing well pretty much across the segment. As we look at growth opportunities, my personal belief is that that's an important area for us, and we're pushing it very hard, not only today but thinking about products and markets and people on how we grow that business going forward.

Gary Convis

I just wanted to make clarification. I know there are many different definitions of backlog and net new business and everything. I just want to make sure that you're clear on what John said. That's a net new business number. It's just the way we reported it last quarter. It's different from what other people's definition of backlog.

John Devine

We've been pretty conservative as we talked about how we define that, so you have a variety of definitions as you probably know.

We have a couple of questions over the internet. The first one is for Jim.

Your bank term loan has a 4.5% interest cover covenant which will be tested December 31. Do you expect to re-approach lenders to reset this covenant and given the six months EBITDA is $275 million?

James Yost

At the present time we don't have any plans to go back and approach our lenders. Obviously, given the volatile situation, that could change going forward and depending upon what happens with any divestitures, we still would need to go back and address those issues with our lenders. So at the present time, we don't have any plans. We have the ability to pay down some debt as we go because we do have some excess cash so no plans at the present time.

John Devine

Our second internet question is: EBITDA had another loss of $24 million in the quarter. What is it from? What's the run rate for these charges? Same question for the $8 million currency loss.

James Yost

As I mentioned, if you look at slide number 13, there was a $24 million loss that was other income loss, and that was primarily due to the impact of FIFO/LIFO adjustment in corporate that wasn't in the reporting segment. So I think we covered that.

And the same on the foreign exchange, the $26 million variance was due to a one time gain last year of about $18 million in the second quarter for the gain on inter company loans due to a weakened dollar and in the second quarter this year, we had an $8 million reversal of that. So overall, a change of $26 million due to foreign exchange gains and losses on inter company loans.

John Devine

Our next internet question is: Please provide some more details around your request to end your relationship with Chrysler. Is the auto maker demanding cost cuts or refusing to pay the increases?

John Devine

First of all, I don't want to say a lot more than we said on our press release, but to be clear, we're not looking to end our relationship with Chrysler. Chrysler has been an important, long term customer to us. We would certainly want to keep and maintain a long term relationship that works for both of us. We're not out here to pick a fight with Chrysler. We all have enough things to so.

That said, we have a business today that is a significant loss, and we need to address that. We have a dispute with Chrysler on the best way to do it. We have filed the law suit in an attempt to resolve that dispute as quickly as we can, and we're going to let it play out. But again, our intent with Chrysler is to have a good strong, long term relationship. That's our intent. But this is a dispute. It's a tough one, but we have to get it resolved as quickly as we can.

Operator

Your next question comes from [Roger Cowell – Silverlake Financial]

[Roger Cowell – Silverlake Financial]

Could you quickly bridge the change in revenue outlook? I noticed price increases, volumes down, what are you factoring into the new lower revenue outlook for '08?

John Devine

We had been in a revenue outlook of $9 billion at the end of the first quarter. That was our outlook. Given what's going on in North America, we're now looking at $8.6 billion to $8.8 billion. Our business outside of North America, and it's about half our total volume, has held up well, so we don't really see a big change in that.

But we're looking at some of the North American production volumes and you see them down 30%, sometimes more in some of the segments we participate in.

[Roger Cowell – Silverlake Financial]

A question on the commercial vehicle side. I understand cyclical. Could you elaborate a little bit more on drivers, catalysts or events that you might see happening that would lead to a bounce back in '09?

John Devine

The commercial business is different than what's going on in the light truck and the overall automotive businesses for the reasons I talked about before. I think this is a cyclical downturn. You can argue, and I would agree that the construction downturn has hurt this business, certainly in the class 5 to 7. Fuel economy has certainly hurt it so people have delayed purchases.

We've seen at least a downturn before. Just to give you some numbers, in the Class eight business, we were looking for 230,000 this year, early in the year. I don't think that was unrealistic. That's below normal kind of a standard level which is 250,000 to 260,000. Class five to seven, we're looking at initially 220,000 units. We're now looking at for Class eight, something close to 200,000, about 205,000. And the class five to seven which is hurting even more, is down to 186,000.

So it's weak this year, but I think it's a normal cyclical adjustment. We're still expecting next year to bounce back although I'd say the bounce back is not exceptional. We're looking at a Class eight number next year of about 260,000 which is about normal replacement volume. It's not extraordinary. In a Class five to seven, just a modest uptick from what it would be this year, maybe 193,000.

Some of the construction issues that we've talked about this year will extend into next year. So expect that business to bounce back, but I would not describe that as extraordinary at all. But it's good business. We do well in it. We like it, and we think it has future growth for us.

[Roger Cowell – Silverlake Financial]

On the cost savings of $64 million, I was wondering if you could break that down for us a little bit. I'm trying to get a gauge of how much that's from cost cutting or how much that's from optimization.

John Devine

I'd say probably in the range of a third of that is due to some pricing actions we've taken. The bulk of it is really labor and SG&A savings and some manufacturing footprint savings that we have. The bulk of it is labor and SG&A savings.

I'd say two additional things on the cost side. We're not at all satisfied with our pace on cost reductions. We have more work to be done there. And secondly the efforts that Gary's been leading on the production system and the overall Dana operating system are important, but they're not bearing the fruit yet. That's still pretty much in front of us.

That's not a surprise to us. It's pretty much what we expected, but we're pleased to have the cost reductions we've had in the first half of the year. That's a good start. But in our mind, we have a lot more to do here. We haven't put a target on that yet but you'll see that going forward.

Gary Convis

Just a little bit more clarification. You can imagine the dynamics going on in the light truck business in North America. The OEM's have been going have been going through some very difficult times and unprecedented times and things that were delayed. The launch of a wonderful new truck, very suddenly over a couple months, or the shutting down of factories for several weeks, these are very unusual. And our guys react to that quite frankly in a very business like and orderly way to try to offset those cuts.

So a lot of energy is just in the dynamics of going through the changes that are happening structurally in this industry as well as working on building the foundation for the new operating systems. It's a little bit more color on it.

[Roger Cowell – Silverlake Financial]

Do you have a rough outlook for '09 as these possible savings flow through?

John Devine

We're still working on it.

Operator

Your next question comes from [Gregg Pass – Imperial Capital]

[Gregg Pass – Imperial Capital]

A question on the capacity rationalization issues that are facing ahead in North America, you mentioned a 3,000 incremental headcount, 1,000 by June, 600 to 700 probably done in July and the remaining in the third quarter. Is that a moving target that could grow or is that taking a specific estimate for 2008 and 2009?

Gary Convis

We think that's a pretty good estimate of what is going to be required, but as John has outlined, this business is not normal. So we'll have to see how the economy goes, how steel prices go, how the recovery of the industry overall looks and respond accordingly. But right now, this is our best targets in reaction to what's happened so far.

[Gregg Pass – Imperial Capital]

On the cost side of that can you give an estimate of what's been spent to date in terms of severance or is there a chance that cost could grow or could become more complicated with issues as you try to cut more North American capacity?

Gary Convis

The hourly people, we have the ability to do almost immediate temporary layoffs, and when we do that, that doesn't cost us any money. So we've done that, and done it very quickly. When you're talking about longer term restructuring and exiting people on a regular basis that's a different issue so we haven't done a lot of that. We've done some of that in some of the plant changes we've had so far but obviously in this industry, we have to look at a number of things and we're now looking at our footprint going forward.

What do we need in North America? What is the volume in North America? What do we have to do to compete? And I said earlier, our strategic plan here is we have to have a business, a North American automotive business that cash flows. It's fundamental. That's what we have to get to. We're working on it. We're looking at the market every day. We're looking at our plans and we're trying to get the result as quickly as we can.

[Gregg Pass – Imperial Capital]

Is the 3,000 temporary layoffs, where do they come from? You have a process that's associated with that?

Gary Convis

Don't get ahead of us here. We'll tell you on that as we get closer. Obviously a lot of discussions with our people and with unions and so on that we have to be careful with.

Operator

Your next question comes from [Chris Laring – Wolfpoint Capital]

[Chris Laring – Wolfpoint Capital]

You said you had more than sufficient liquidity. I'm just wondering what you thought was a minimum level to run the business.

Gary Convis

Quite honestly we haven't fully assessed that yet. We're taking a look based on revised projections, working capital requirements and so forth, but just as a guidepost, generally speaking 10% of revenue is more than sufficient to run a company of this size. So I would think significantly below $1 billion would be a minimum of what we need to run the operations. But we haven't come up with any specific number that we feel comfortable with at this time.

Operator

Your next question comes from [Nelson Yuman – Greenlight Capital]

[Nelson Yuman – Greenlight Capital]

Can you say what EBITDA for North American operations was in the second quarter?

Gary Convis

I think we've highlighted that. We've looked at it, we haven't highlighted that. We don't have an easy number for you. I've gone through the numbers by region, we don't have it handy.

[Nelson Yuman – Greenlight Capital]

It's negative though?

Gary Convis

No. It's positive. The issue on our North American business is very much around our North American light truck business. It's a problem. We're not happy with it, but we're making money on the commercial truck business and off-highway business in every region we have.

When you think of our business, 40% of our revenue is commercial and off-highway. That's performing pretty well. We have more to do, more cost and so on and more growth, but that's a different issue. Our issue is really the North American light vehicle business. That is a problem. It's interesting this business has gone a couple of years ago from the most profitable in the world to what is now a problem for us but a problem for everybody that I'm aware of. And it's going to take more work and restructuring to sort out the demand and to sort out the right cost structure.

Operator

Your next question comes from Himanshu Patel – J.P. Morgan.

Himanshu Patel – J.P. Morgan

Any outlook on working capital for the second half?

Gary Convis

Historically, we use working capital. Our requirements go up in the first quarter, and you saw that in the first quarter. Second tends to dip a little bit because production volumes at the end of June is down. Normally there's a working capital increase in the third quarter. Unclear as to what's going to happen this year with the decreased volumes because we do have positive working capital that tends to be driven by volumes.

I'm not sure what's fully going to happen in the third quarter, probably not a significant move. And then in the fourth quarter, we normally have a decline in working capital. So I would say in the second half we would probably expect no change to somewhat positive working capital in terms of improvements of cash flow. So I would say there would be a reduction in the second half, but not sure. We're going to have to see how we come out on the volume decline in the back half of the year.

John Devine

This is something that we're pushing very hard. Obviously as our focus is on profitability and cash, working capital, all the components are an important piece of it. So in the operating system, we've talked about the financial focus is really putting the right pressure on working capital, to thin that out as much as we can.

Himanshu Patel – J.P. Morgan

I'm looking on slide 13 at the sub units in terms of EBITDA and external sales. Can you help me understand a little bit on what's happening with margins in the off-highway business? It looks like revenues are up sharply year over year.

Gary Convis

It's called steel. We have some other issues there I would say that we're still not performing in that business. We like it. It's profitable. It's doing well, but our profit performance has to improve. But the two periods you're looking at in terms of what happened, it's called steel costs.

Our goal here is full recovery on steel for every customer we have, but we do get a delay and we're working through that delay right now.

Himanshu Patel – J.P. Morgan

[Arvin Meritor] I believe had a con-compete with [Carlisle] in the off-highway business which I think recently expired and they've talked about getting back into that business. Have you thought that through in terms of what that could imply for your business? Any sense of which side they're looking to get into and do you have overlap or do you think it's largely a non event for you?

Gary Convis

Any competitor is an event for us so we take them all seriously. There's a lot of competition in that business today. There's a lot of overlaps and under laps. Then when you break apart the off-highway business, there is enormous complexity. But we think competition makes us a better company, so I think that's fine.

Himanshu Patel – J.P. Morgan

You said 70% of off-highway was in construction. Can you break that down?

John Devine

It depends on the year, but it's about 70% of the revenue, is in the agricultural segment and the construction segment. There's a lot of other categories, mining and so on. But the big volume is agriculture and construction. Agriculture is still booming. Construction is down in the U.S. as you'd expect given what's going on in the construction business, a little softness in Europe, but all in all, the overall business continues to perform quite well.

Himanshu Patel – J.P. Morgan

What about between [inaudible] in construction. Is it about half an hour?

Gary Convis

I don't have those numbers in front of me. It depends on the year. But they've both been growing pretty well the last several years.

Operator

We have no further questions. This will conclude our conference.

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