Edited Transcript of DAN earnings conference call or presentation 20-Oct-16 2:00pm GMT

I will also highlight our most recent Automotive News PACE award recognitions, resulting from Dana’s relentless passion and tenacity to provide differentiating technology and innovation to mobility industries yet again this year. And finally, I’m excited to have the opportunity to inform you that Dana has reached a definitive agreement to acquire SIFCO SA, a supplier of significantly important forge products located in Brazil.

Please turn to slide 4, for an update on global market conditions. Global market conditions continue to be mixed. Starting in North America, our outlook for the rest of year continues to be positive, as the economy remained stable, and the light truck market remained strong. We’re off to a good start, with the ramp up of the Ford Super Duty program, and we expect to stay on track with our production in the fourth quarter for the [SKE] program.

For the commercial vehicle market in North America, we are seeing slightly reduced production for the Class 8 trucks. Our expectation is for production this year to be around 220,000 to 230,000 units. Medium duty, while seasonally weaker later in the year, remains within our expected range.

Moving to Euro, the market continue to be stable, the stronger light vehicle markets offsetting a weaker market in South Africa. We’re expecting some continuing headwinds from the construction vehicle market, but still within our expected range. Looking at South America, we remain cautious, and while the political situation in Brazil is stabilizing, we don’t see the economy improving near-term Commercial vehicle demand has stabilized, but remains at a low level, and will likely need government incentives before we see meaningful improvement.

Political stability should provide an important first step. We remain committed to Brazil and the Brazilian market, which has long been one of the top 10 economies in the world. In fact, we believe it is appropriate time to selectively invest and enhance our product offerings, and support our customers in advance of a market rebound.

Elsewhere in the region, our light vehicle operations in Argentina continued to do well in a tough market, driven by the successful launch of a new program with Toyota that we talked about last quarter. Our light vehicle business in Argentina will also benefit from improved conditions in Brazil, as a portion of the vehicles produced in Argentina are exported. And finally, in Asia-Pacific, we are seeing stable to moderately improving conditions, with light and commercial vehicle markets faring better than the off-highway markets. Demand is picking up in China for light trucks and commercial vehicles, and we will certainly benefit from a stronger light truck markets here, as we begin launching several new programs over the next few years.

The same is true in India, while after several years of weak demand for light vehicles, we are seeing improvement in some of our key programs in the country. We see both China and India as growth markets, where we can leverage our existing footprint, and our ability to design product in-country, meeting local customer needs, while utilizing our core technologies.

As we turn to slide 6, I appreciate having the opportunity to communicate how and where Dana’s technology leadership continues to be recognized in our industry for providing innovative solutions to the marketplace. As you see on slide 6, not one, not two, but three of Dana’s technologies were named as finalists for the 2017 Automotive News PACE awards.

We are one of only three suppliers with more than one technology to be recognized as a finalist, and the only supplier with three technologies named this year. It marked the sixth consecutive year that we have been named a finalist. To put this into perspective, only six automotive suppliers have achieved this distinction. This reaffirms that our technology strategy is effectively impacting the industry. We continue to build our innovation pipeline, and solution providers for our customers.

The three technologies Dana is being recognized for include our Adaptive Air/Oil Separation system. The maintenance-free solution optimizes engine horsepower and performance, reduces oil consumption, and improved vehicle emissions. Also, Dana’s Spicer Optimized Tire-pressure Management system. This is a first of its kind technology, helps fleets extend their tire life, and reduce preventable tire blowouts by monitoring and adjusting tire pressure.

And lastly, Dana’s Victor Reinz multi-layer steel transmission pump gasket, which improves performance and fuel economy on vehicles with high-speed transmissions. We’re very proud to have three outstanding technologies up for this distinctive award. Our entire team is extremely committed to the ongoing development of innovative products, and to helping our customers efficiently commercialize these advanced technologies. We believe this philosophy truly serves as a differentiating value proposition for us. We are also adding value in other ways.

Moving to slide 7, we recently announced a definitive agreement to purchase assets of the SIFCO SA, a leading producer of forged and machine components located in Brazil, as a long-term supplier to Dana’s commercial vehicle business. The agreed-upon purchase price is approximately $85 million. The assets we are acquiring will not only support our commercial vehicle business, but will generate incremental revenue and open additional commercial channels with current and new customers. We expect incremental revenue to be about $50 million on a normalized basis.

Operationally, this acquisition will enable us to leverage SIFCO’s extensive experience and knowledge of sophisticated forged components, further enhancing our vertically integrated supply chain capabilities, and improve our cost structure. It also enables us to further assist our customers to accommodate local content requirements, which reduce regional specific costs. Additionally, it further strengthens our position as a central source for products that use forged and machined components, importantly across all three of our key end markets in the region.

For nearly seven years, Dana has designed, manufactured and distributed products in Brazil for virtually every major global producer of passenger vehicles, commercial trucks, and off-highway equipment. We feel this is an appropriate time to invest in strategic and selective assets that will further strengthen our position as one of the most trusted top tier suppliers to the mobility industry, thus positioning us for future profitable growth throughout the region, as well as align Dana as a supplier of choice for global vehicle platforms.

Finally, on slide 8, I would like to remind everyone that we will be hosting an Investor Day on November 9. At this event, we will be detailing our strategic priorities over the next several years, and providing an outlook of where we can take the business. I hope you will be able to join us.

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

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Jonathan Collins, Dana Inc – SVP, CFO [4]

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Thank you, Jim.

Please turn with me to slide 10 for an overview of the third quarter financial results. Third quarter sales of $1.38 billion were down $84 million from the third quarter of last year, due partly to foreign exchange as the US dollar continued to strengthen against foreign currencies. The remainder of the difference was due to lower end market demand in our commercial vehicle and off-highway businesses, which was partially offset by growth in our light vehicle driveline and power technology segments.

Adjusted EBITDA for the quarter was $168 million, up $1 million over last year, yielding a 12.1% margin, which is 70 basis points higher than last year. This quarter’s results include a gain in marketable securities. However, even removing that gain, we bettered our margin by 20 basis points over last year on lower volume. Net income was $57 million, down $62 million from the third quarter of last year. The third quarter of last year included $100 million tax benefit from the release of certain US deferred tax valuation allowances, and a $24 million after-tax impairment charge.

Adjusting for these items, net income for the third quarter of 2016 increased $14 million compared with last year, primarily due to lower expenses for interest and income taxes, partially offset by higher restructuring expense of $16 million, as we reduced staffing levels in our off-highway segment to align with expected near-term demand levels. Capital expenditures were $68 million, in line with last year, as we continue our investments to support our growth through program launches and delivering our backlog. Free cash flow for the quarter was a use of $26 million, $94 million lower than last year, primarily due to higher working capital requirements.

Slide 11 provides more detail about the changes in sales and adjusted EBITDA, compared to last year. Sales of $1.38 billion were down $84 million from last year, with currency accounting for a third of the change or $29 million, and lower market demand in commercial vehicles and off-highway equipment accounting for the remainder.

Adjusted EBITDA of $168 million was essentially flat to last year on lower sales, as pricing and commercial recoveries combined with strong cost performance to offset the impact of lower volumes and weaker foreign currencies. We posted a 12.1% margin, a 70-basis point improvement compared to last year. Again, if we factor out gain and marketable securities, margin would have been 11.6%, right in line with our expectations, and a 20-basis point improvement over last year.

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 $7 million, compared to last year, driven by a $29 million headwind to sales, primarily due to the devaluation of the Argentine peso and the South African rand against the US dollar.

Volume and mix lowered adjusted EBITDA by $18 million, on $67 million in lower sales, driven mostly by lower end market demand for Class 8 trucks in North America compared to last year, and lower demand in global off-highway end markets. Pricing and commercial recoveries added $12 million to sales and adjusted EBITDA compared to last year.

Net performance was a $14 million improvement over last year, due to our continued cost management and improved supply chain performance, which more than offset significant inflationary cost increases in countries such as Argentina. Note that the gain in marketable securities that I mentioned earlier is included in the consolidated performance, and held at the corporate level. As such, it’s not reflected in our business segment results that we’ll discuss on the next slide.

Slide 12 provides a closer look at the year-over-year changes to segment sales and EBITDA. In the upper left-hand corner, you can see that the light vehicle driveline segment had another good quarter, with sales of $631 million, up $26 million, or 10% on a constant currency basis, due to higher demand across all regions and new business.

As we mentioned last quarter, we have transitioned a customer program from our commercial vehicle segment to our light vehicle segment in the third quarter, which added $13 million of sales to light vehicle. Segment EBITDA was $73 million this quarter, $10 million higher than last year, providing a margin of 11.6%, higher than last year’s third quarter by 120 basis points. We expect light vehicle margins to improve in the fourth quarter of this year due to the commercial recoveries on our new business launches.

As we look at the segment EBITDA drivers for light vehicle, currency lowered earnings by $6 million and sales by $33 million mainly due to the Argentine peso, South African rand, and the British pound. Volume and mix was very good this quarter, increasing segment EBITDA by $8 million on an additional $43 million of sales, which represents 18.6% incremental margin, 20% higher than the second quarter incremental margin as new business ramps up in North America.

Pricing and commercial recoveries were a $16 million benefit, principally offsetting inflationary commodity and other costs in Argentina that are included in the performance bucket The net favorable price recovery and performance improvement in segment EBITDA of $8 million was driven primarily by material cost savings, which more than offset some start-up costs and higher warranty expense in this year’s third quarter.

In the upper right, you can see that commercial vehicle driveline sales were down $73 million compared to last year, primarily due to lower market demand. While margin is down from last year, this is in line with the end market volume decline. A slightly stronger Brazilian real contributed to a $3 million translation benefit to sales. Volume and mix lowered earnings by $11 million on $44 million in lower sales, driven primarily by lower market demand for Class 8 trucks in North America.

Performance provided a benefit of $10 million compared to last year, driven mostly by material cost savings attributed to the supply chain improvements implemented last year, and continued cost reduction efforts. In the lower left, you can see that off-highway driveline, sales were lower by $47 million due to lower end market demand. Once again, due to our focus on cost management, margin was held nearly flat compared to last year at 14.1%, only a10-basis point decline despite the lower sales.

Volume and mix lowered earnings by $11 million on $44 million in lower sales. This higher than normal decremental margin is the result of less favorable mix, as demand was disproportionately lower in the construction equipment market. Pricing was a slight negative compared to last year, due to the timing of changes in commodity costs. Overall cost performance was a $6 million benefit due to continued cost management and material cost improvements.

And then finally, in the lower right, you can see power technologies posted a 3% growth on a constant currency basis, and a 20-basis point improvement in margin over the prior year, yielding a 16.2% margin for the third quarter. Volume and mix benefited segment EBITDA by $4 million on $12 million higher sales, due to continued strength in the light vehicle markets. Lower pricing of $4 million was partially offset by material savings of $2 million. Overall, all four of our segments performed well in the third quarter.

Slide 13 highlights our free cash flow in the quarter, as well as on a year-to-date basis. The third quarter was a use of cash of $26 million, a decrease of $94 million compared to last year. This change was primarily driven by higher working capital requirements, partially offset by lower interest and tax payments. Working capital was a use of $58 million in the quarter, compared with a source of $40 million last year. This $98 million difference is primarily due to the timing of customer payments in our light vehicle segment in both 2016 and 2017.

In connection with the customer program changeover this year, timing of customer receipts reduced this year’s cash flow. The use of cash related to working capital on a year-to-date basis is much more reflective of the normal cadence in customer receipts. And as such, more in line with last year, with a greater use attributable to higher inventory levels and timing of customer payments in the other three segments.

Lower net interest of $5 million this quarter was primarily due to the debt refinancing we completed in June, which shifted an interest payment to the fourth quarter from the third quarter. The higher cash interest year-to-date is due to the accelerated payment of accrued interest related to the debt refinancing I just mentioned. Cash taxes were lower in the quarter, simply due to the timing of payments, and are in line with last year on a year-to-date basis.

On slide 14, you can see that our liquidity remains strong, with our cash and marketable securities balance at $845 million. Combined with our revolver capacity, this results in nearly $1.2 billion of operating liquidity.

The slide also includes a snapshot of our US pension plans funding position. Although lower interest rates have increased pension obligations, our assets are heavily concentrated in fixed income, which are portfolio-immunizing investments designed to buffer interest rate movements, and as a result, our asset returns have essentially offset the increased liability, resulting in a well-funded position that is unchanged from the end of last year.

As a reminder, these are frozen plans with no new entrants. With our solid position, we do not expect there to be a funding requirement for our US plans this year or next.

Slide 15 provides our refined outlook for the full year, which remains essentially unchanged. We expect sales to be about $5.8 billion, coming in near the low end of our range, due primarily to the fact that commercial vehicle and off-highway end market demand appears to be near the lower end of our expectations.

In spite of these slower sales, we remain sanguine on our profitability. Adjusted EBITDA is expected to be at the midpoint of our range of approximately $655 million, yielding a full year margin at the high end of our range of about 11.2%. We’re essentially expecting margins to remain consistent from the second and third quarter levels, adjusted for the marketable securities gain in the third quarter.

Free cash flow is expected to be about $120 million, as we continue to invest $320 million this year in capital to support our current and future customer programs. As a reminder, the fourth quarter is traditionally our highest cash flow generating quarter, with working capital being a source of cash as production levels taper off at year end.

Diluted adjusted EPS is expected to be $1.75 at the high end of our range, and in line with our adjusted EBITDA targets, benefiting from the share repurchases in the first half and lower income taxes. While we did not repurchase shares in the third quarter under the existing authorization, we do expect to return essentially all of the free cash flow we generate this year to shareholders in the form of our quarterly dividends, and the share repurchases that were made in the first half of the year. Overall, we’re on track to achieve our targets this year, and look forward to providing some insight on our long-term outlook, when we host our Investor Day in a few weeks.

Now I’d like to turn the call back over to Brent to take your questions. Thank you for listening in today.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Brian Johnson, Barclays.

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Brian Johnson, Barclays Capital – Analyst [2]

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Yes, good morning. I have a few questions. First, maybe the $12 million of pricing recoveries overall, is that primarily in Ford Super Duty — I mean, excuse me, not Ford Super [Canada], but is that primarily in light vehicle?

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Jonathan Collins, Dana Inc – SVP, CFO [3]

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There was a meaningful portion there, Brian, but it’s really a combination of inflationary recovery and commodity costs. I just want to make sure you’re not conflating that with the recoveries we have in the fourth quarter that are related to program specific engineering and testing.

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Brian Johnson, Barclays Capital – Analyst [4]

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Okay. So this is commodity and other inflation pass-throughs. Does that mean a fair chunk of them are coming from South America?

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Craig Barber, Dana Inc – Director of IR [5]

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Yes. I think I mentioned Argentina was one of the areas in which it was concentrated.

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Brian Johnson, Barclays Capital – Analyst [6]

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Okay, okay. So we can think of these, I guess, the question on the investor’s minds is to what extent are these one-timers, versus things that go along with running a business?

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Jonathan Collins, Dana Inc – SVP, CFO [7]

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Yes, they’re really the latter, but just keep in mind, there’s that lag that we have in recovery, so you get a little bit of a dislocation as the recovery comes on. But on a normalized level, they essentially stay with us.

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Brian Johnson, Barclays Capital – Analyst [8]

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Okay. And then, two more strategic questions. I have lots of others for the Investor Day. In terms of buying SIFCO, are you buying assets that were dedicated to serving Dana before? So as we think about revenue impact, there isn’t any, you’re just moving it from bill of materials, cost of goods sold to owned, to vertically integrated? And does this, or will you be serving other customers, and would you still be having other forge and casting suppliers down there?

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Jim Kamsickas, Dana Inc – President and CEO [9]

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Good morning, Brian. It’s Jim. Nice to hear your voice, and to talk to you. Two questions in there, to cut right to it. SIFCO was certainly, we were the largest customer of SIFCO, but we are not the only customer of SIFCO.

So it is certainly a vertical integration play, as one of the pillars of the page suggested, but it’s also a new customer entry point as well. They have some customers we don’t have, and they do some products at the same customers we have, that we don’t do. So for example, I’ll speak to it on the off-highway side of the business, some of the things that they supply, we don’t. So it helps us in that regard as well.

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Brian Johnson, Barclays Capital – Analyst [10]

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Okay. And then, another one, and then I’ve got more product questions for a couple weeks. One of your customers, PACCAR announced a branded in-house axle, at least I’m thinking that a competitor is private labeling that for them. Is this, how does this affect your market share assumptions at that customer? We’re assuming there is an impact, but want to know how you guys are thinking about it?

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Jim Kamsickas, Dana Inc – President and CEO [11]

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Yes, it’s a great question. No impact, is cutting to the chase on it. It’s, as you can appreciate, and you hear from your other people you cover, you’re quite regular — we’re quite regular in different conversations with our customers on branding and strategies and associated with that.

That’s what’s that is. That’s not a — that’s cutting to the chase on it. It’s not insourcing play or anything like that. It’s a branding play, so it’s a non-impact item for us.

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Brian Johnson, Barclays Capital – Analyst [12]

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Okay, thanks.

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Operator [13]

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Joe Spak, RBC Capital Markets.

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Joe Spak, RBC Capital Markets – Analyst [14]

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Thanks. Good morning, everyone.

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Jim Kamsickas, Dana Inc – President and CEO [15]

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Good morning, Joe.

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Joe Spak, RBC Capital Markets – Analyst [16]

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I guess, just a first question just on — I wanted to better understand the free cash flow, which I guess, is now at the lower end of prior guidance. But the EBITDA still at the middle. Doesn’t look like CapEx changed, so is there something else we’re missing there? Just want to understand that, that sort of push towards the lower end of the guidance there?

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Jonathan Collins, Dana Inc – SVP, CFO [17]

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Yes, the only other element that you didn’t hit there, Joe, is just working capital. So based on where we see timing of payments, and you can kind of see us running a little bit behind on a year-to-date basis. We think that working capital is going to be less of a source of cash than we had originally anticipated. That’s the only other element.

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Joe Spak, RBC Capital Markets – Analyst [18]

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Okay. And is that a timing — so as we think about 2017, is there more of a recovery on working capital there?

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Jonathan Collins, Dana Inc – SVP, CFO [19]

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Yes. We see it as largely a timing issue.

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Joe Spak, RBC Capital Markets – Analyst [20]

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Okay. And then on the commercial vehicle business, as we look at the fourth quarter. Can you just help remind us on a year-over-year basis. Obviously, a challenged fourth quarter last year. I think there was a like $16 million warranty adjustment. So that doesn’t repeat clearly, but anything else we should be thinking about in terms of the margin profile in the fourth quarter on commercial vehicle?

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Jonathan Collins, Dana Inc – SVP, CFO [21]

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No. I think that is the most significant one on a year-over-year basis, Joe. The only other comment, third quarter relative to fourth quarter it’s just the normal build schedule, particularly in North America is going to be softer in the fourth quarter. So while you will have the improvement on a year-over-year basis from the performance issues, it’ll add a little bit of margin pressure in the fourth quarter, compared to the last couple.

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Joe Spak, RBC Capital Markets – Analyst [22]

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Okay. And then, just a clarification on LVD, the negative for warrants in the third quarter, you said that should dissipate in the fourth quarter?

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Jonathan Collins, Dana Inc – SVP, CFO [23]

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Yes. The biggest driver in the performance in light vehicle was the launch, which we have been expecting. But on a year-over-over basis, Super Duty is a very big launch for us, so we have some inefficiencies built in. We get past those moving into the fourth quarter. But the other thing I would remind you is we still have some pretty significant commercial recoveries for engineering and testing that are going to be coming into the fourth quarter that will also put some wind in the sails for light vehicle margins in the fourth quarter.

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Joe Spak, RBC Capital Markets – Analyst [24]

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Perfect. Very helpful, thank you.

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Jonathan Collins, Dana Inc – SVP, CFO [25]

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Sure.

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Jim Kamsickas, Dana Inc – President and CEO [26]

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Thanks, Joe.

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Operator [27]

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Ryan Brinkman, JPMorgan.

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Ryan Brinkman, JPMorgan – Analyst [28]

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Thank you for taking my question. Maybe a couple on M&A. So first, is there anything you can say about the relative profitability or attractiveness of SIFCO, just based on what you have disclosed so far? Purchase price and revenue, it looks like the transaction value of SIFCO at maybe 1.6 times price to sales, versus parent Dana, more like 0.4. So is there some attractive technology that you’re getting? Or maybe revenue is really not the way to look at it, because it should rebound a lot with the industry down there?

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Jonathan Collins, Dana Inc – SVP, CFO [29]

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Hey, Ryan, this is Jonathan. Yes, I think your latter comment, is more how we’re thinking about it. I guess, just a couple of elements, quantitatively that may help. The commercial sales that Jim mentioned two of, had a normalized production level or approximately $50 million. So we will have some top line increment here. But that’s really as you highlighted on a normalized production level, which we think will probably happen in about 2018, is how we’re thinking about it.

Relative to the valuation, I think we think about it more from a profitability perspective, keeping in mind, their operation is similar to our operation in Brazil right now. They are hovering at or near breakeven. But we think in a normalized production level, which I think we’ll get to by 2018, we think we paid about 5 to 6 times adjusted EBITDA for the asset. So from a valuation perspective, that’s how we think of it. And when you look at that it with comps in commercial vehicle space, which this will largely support, it’s generally in line with what we expect.

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Ryan Brinkman, JPMorgan – Analyst [30]

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Okay. That’s super helpful, thank you. And then, just last question is, backing up a little bit more broadly on M&A. Given SIFCO and then the aftermarket gasket business a couple quarters ago, should we think about M&A being a little bit more regular course now, than maybe it was at the Dana prior?

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Jim Kamsickas, Dana Inc – President and CEO [31]

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A good question. Thanks, Ryan. I mean, prior yes, it’s been — as you know, you’ve been covering Dana for quite some time. There had been quite a pause there, numerous years of a pause of M&A. So certainly, they’ll be — already you can see there’s traction behind where it’s been in the past. As I like to say, it certainly a lever in the playbook, that you have to make sure that it’s something you’re capable of doing.

I said earlier in the year, that we structured the Company slightly different to make sure that we are cultivating opportunities, reviewing opportunities. And if it’s at the right value, we’re going to do that. Not really in the mindset of anything crazy transformational at this point. We’re just doing kind of more of the bolt-on and so on and so forth. But if they’re there, we will, and if they’re not, we won’t. But the SIFCO situation falls right into a sweet spot of kind — I would almost put it into like [Magna, Magnum], it’s just a no-brainer, so we did it.

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Ryan Brinkman, JPMorgan – Analyst [32]

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Okay, thanks. Great.

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Operator [33]

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Brian Sponheimer, Gabelli.

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Brian Sponheimer, GAMCO Investors, Inc./Gabelli & Co. – Analyst [34]

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Hi, good morning everyone.

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Jim Kamsickas, Dana Inc – President and CEO [35]

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Hey, good morning, Brian.

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Brian Sponheimer, GAMCO Investors, Inc./Gabelli & Co. – Analyst [36]

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Just, a couple things, as we start to think about 2017, and clearly, you’ll go more to this on the 9th. Timing of launch costs for the $700 million or so in backlog that’s expected to come on, should we be thinking about that as any sort of drag, in maybe 4Q and 1Q that alleviates as we work through 2017?

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Jonathan Collins, Dana Inc – SVP, CFO [37]

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Brian, just generally the launch cycle next year will be somewhat comparable to what we have this year if anything, maybe just a little bit later, but so generally speaking you can think of it as in line with this year.

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Brian Sponheimer, GAMCO Investors, Inc./Gabelli & Co. – Analyst [38]

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Okay. And again, I guess, along with that, should CapEx be — should we be thinking about CapEx for 2016 and 2017 as elevated relative to maybe something that we’ll see down the road? Or is there really a growth trajectory that’s going to require this elevated level of CapEx as we go forward?

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Jim Kamsickas, Dana Inc – President and CEO [39]

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Yes, I really think it’s the former. We talked about this some. We think our CapEx is certainly elevated this year due to converting on the backlog. We see that continuing into next year, but we do see it dissipating beyond that. And we’ll talk a little bit more about that in a few weeks, when we give you a better sense of how we see the next few years shaping up.

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Brian Sponheimer, GAMCO Investors, Inc./Gabelli & Co. – Analyst [40]

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All right. And then, if I could ask just finally, the European construction market, is that a sense from your customers that there’s just excess inventory in the channel, or do you think that there’s some demand degradation, that we should be thinking about as we look ahead?

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Jonathan Collins, Dana Inc – SVP, CFO [41]

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Yes, I think it’s probably a little bit of both. We see the market just being a little bit softer than we expected. And as we’ve indicated longer term, we do see demand picking up, but we definitely did run into a little bit of softness in demand, here in the second half of the year.

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Brian Sponheimer, GAMCO Investors, Inc./Gabelli & Co. – Analyst [42]

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Okay. Thank you very much.

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Jonathan Collins, Dana Inc – SVP, CFO [43]

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Sure, thanks.

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Operator [44]

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Matt Stover, SIG.

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Matt Stover, SIG – Analyst [45]

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Thanks very much. I just want to clarify two things. The first thing was on the recovery in light vehicle. If I have it clear, there was a $16 million pricing in recovery, that sounds like it’s largely associated with inflation commodity. And then there was a negative $8 million in performance, so was that net $8 million? Is that how we should think about that?

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Jonathan Collins, Dana Inc – SVP, CFO [46]

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Hey, Matt, this is Jon — (multiple speakers) No, I’m sorry, go ahead.

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Matt Stover, SIG – Analyst [47]

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So does that mean, at 20% of EBITDA, just — I know these things can be a bit lumpy.

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Jonathan Collins, Dana Inc – SVP, CFO [48]

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Yes. So you do have — we are showing the numbers separate, so there are some inflationary unfavorable cost impacts in cost performance. We’re showing the $16 million of recovery, that we’ve got from a customer for both inflation and commodities separate and distinct on that. So that’s part of it. The other pieces, just compared to last year, the Super Duty is a huge launch for us.

We performed very well, very happy with that; but there are some inefficiencies that we saw this year in the third quarter, that we didn’t have last year. And that becomes a pretty meaningful difference. You’ll note that we planned for it. It is generally in line with the launch of this magnitude, but that’s really the primary driver of that fourth item, over which is the performance.

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Matt Stover, SIG – Analyst [49]

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Okay. And then, the working capital side, the delta here is on receivables and payables, and nothing really on the inventory side?

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Jonathan Collins, Dana Inc – SVP, CFO [50]

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A little bit on inventory, I think we mentioned in the comments that in some of the groups, a little bit higher inventory than expected in the third quarter. But the primary driver is the timing of receipts from customers, and payments to suppliers.

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Matt Stover, SIG – Analyst [51]

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Okay. And then, the last was, it’s $50 million of incrementals for SIFCO. If we were looking at this business on standalone basis, because I assume they are selling into you. How would that business’ revenues look on a standalone basis right now?

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Jonathan Collins, Dana Inc – SVP, CFO [52]

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It’s as Jim had mentioned, they sell more to us than to others. We not disclosed the full purchase to us, but I think that’s a general range you can look at. On a normalized production levels, the internal consumption that we’ll have, will be slightly higher than the commercial sales or the trade sales.

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Matt Stover, SIG – Analyst [53]

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Okay. Thanks, guys.

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Jim Kamsickas, Dana Inc – President and CEO [54]

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Sure.

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Operator [55]

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Colin Langan, UBS.

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Colin Langan, UBS – Analyst [56]

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Great. Thanks for taking my question. Just one clarification. In the release, it says there’s a $7 million gain on the sale of marketable securities. Where does that end up? Is that in the corporate expense line, or is there anything unusual in that item?

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Jonathan Collins, Dana Inc – SVP, CFO [57]

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You got it. So from a segment standpoint, it is not attributed to one of the four segments. So it sits as a benefit to the corporate costs, that other income that we recognize.

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Colin Langan, UBS – Analyst [58]

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Is it unusual? It seems kind of large, just for the quarter.

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Jonathan Collins, Dana Inc – SVP, CFO [59]

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It’s similar to what you’d see, in some of the [E&T]) recoveries. It’s somewhat lumpy, a little bit more than what we had expected in the third quarter, but we have had these over the years in the subsidiary, and this is generally how we treated them.

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Colin Langan, UBS – Analyst [60]

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Got it. And any color, can you just remind us of your steel exposure, I know prices are going up. How much is on pass-through contracts, and what is the typical lag, is that — as we go into the fourth quarter?

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Jonathan Collins, Dana Inc – SVP, CFO [61]

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Yes, Colin, just to confirm, you did say steel, is that correct? Just want to make sure I heard you right?

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Colin Langan, UBS – Analyst [62]

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Yes, steel, yes, yes.

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Jonathan Collins, Dana Inc – SVP, CFO [63]

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So the vast majority, a little over three quarters of what we have on steel buy is recoverable in the contracts. So our exposure, it’s not something you see driving much volatility for us. The only nuance to that is most of those recoveries are set up on a modest lag. So if there are quick movements in the price, you may see a period where we incur a benefit or detriment until that recovery catches up with the cost change.

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Colin Langan, UBS – Analyst [64]

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And any color on the impact this quarter, and how we should think about it in the next quarter? Because there’s been a lot of volatility, and I’m not sure for the specific type of steel you’re using?

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Jonathan Collins, Dana Inc – SVP, CFO [65]

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Yes, it’s been relatively modest for us, because of the protections that we have in place. So we did not note a meaningful impact in the third quarter from commodities on a net basis, and don’t expect a significant one in the fourth quarter either.

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Matt Stover, SIG – Analyst [66]

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Last question. Any color on tax, it came in a little lighter than I was expecting. I mean, how should we think about that? I know you guide to cash taxes, but any color on the GAAP tax rate or (inaudible)?

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Jonathan Collins, Dana Inc – SVP, CFO [67]

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Yes, the primary driver there from a expense perspective is jurisdictional mix. We have had higher profits in lower tax areas. You remember, we are in a valuation allowance position in the US, so income there does not — isn’t met with any tax expense. So that’s certainly a driver of it. From a cash perspective, I think I just noted, it’s purely timing related. If you look at us on a year-to-date basis, we’re pretty much in line with last year.

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Colin Langan, UBS – Analyst [68]

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Okay. All right. Thank you very much.

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Jim Kamsickas, Dana Inc – President and CEO [69]

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Sure.

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Operator [70]

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Christopher Van Horn, FBR & Company.

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Dan Drawbaugh, FBR & Co. – Analyst [71]

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Hi, guys. This is Dan Drawbaugh on the line for Chris. Thanks for taking our questions.

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Jim Kamsickas, Dana Inc – President and CEO [72]

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Sure. Hey, Dan.

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Dan Drawbaugh, FBR & Co. – Analyst [73]

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Hey, so just wanted to touch on two of your end markets quickly. When you have a look at the commercial vehicle segment, it seems like the decline there is at least slowing. How close would you say we are to the bottom? And in terms of your segment, what do you think the margin structure can do, when we begin to flatten, and then eventually rebound?

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Jim Kamsickas, Dana Inc – President and CEO [74]

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Hey, Dan, this is Jim. I’ll take the front end, and I guess, I’ll hand Jonathan, the back end of it. But on the volumes and where they’re going, I will tell you, our feel, obviously, we have a temperature check, because we’re talking in conversation with the customers, and then they’re closer even to the fleets and the end customers. Our sense is, you never know where the bottom is, for sure in any circumstance.

But I would say that — I’d say it’s tempered. It feels like it’s going to run it, where it’s been running here for a bit. But I would tell you that’s reasonable, and it should maintain some stability in the market, would be how I would kind of characterize it.

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Jonathan Collins, Dana Inc – SVP, CFO [75]

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Yes, and just quantitatively, Dan, I think as we think about next year — well, I’m not sure we’re calling a bottom. I think the run rate we’re exiting at, certainly implies lower Class 8 volumes for next year. So while we’ve not given a specific guide for next year, we think we’ll be at a lower level next year. Medium duty is holding up well. We talked about the fact or Jim mentioned earlier that seasonally it’s going to be lower this part of year, but that market has held up real well. It’s become a growing part of our business, so that bodes well for us.

Relative to your point on the margin structure, the way that we think about commercial vehicle is, this certainly had a reasonable Class 8 production level in North America, even low to mid [200s], which is historically a pretty good market. The real issue for us, that business not being a double-digit margin business is Brazil. So as I mentioned earlier, Brazil is essentially a breakeven for us. We’re at historical lows.

As Jim mentioned earlier, when we talked about the SIFCO acquisition, we are very bullish on the Brazil market long-term. The demand for moving product via commercial vehicles is very high, with an undeveloped rail system. So we feel good about that in the long run. And that’s really the path to this being a double-digit margin business is Brazilian recovery.

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Dan Drawbaugh, FBR & Co. – Analyst [76]

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Excellent, thank you. That’s very helpful. And then, turning to off-highway, I know Europe was a bit of a headwind in the quarter, but can you comment, at least a little bit on how the Asia Pacific and North American off-highway markets are looking? It was, or if I am not mistaken, 10% or so of your business there?

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Jim Kamsickas, Dana Inc – President and CEO [77]

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Yes, I would tell you — as you know, another good question. As you know, they’ve been down, they are down, but it feels it is, it’s kind of stable at that point. We’re not seeing any major risk of it getting sizeably worse, not seeing any major upside or getting sizeably better. It feels like it’s going to bounce around where it’s at here for a while.

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Dan Drawbaugh, FBR & Co. – Analyst [78]

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All right, great. Thanks for the color. I will jump back in queue.

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Jim Kamsickas, Dana Inc – President and CEO [79]

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Thanks.

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Jonathan Collins, Dana Inc – SVP, CFO [80]

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Thanks, Dan

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Operator [81]

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Justin Long, Stephens.

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Brian Colley, Stephens Inc. – Analyst [82]

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This is actually Brian Colley on for Justin, but congrats on the quarter, you guys. I was wondering if you can provide some initial commentary on how you think light vehicle production could trend for your customers heading into next year? And then, when you look at that new business backlog for light vehicle that’s rolling on in 2017, what the market assumption is that you’re factoring into that number?

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Jim Kamsickas, Dana Inc – President and CEO [83]

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Hey, Brian, thanks. This is Jim again, thanks for the question. We kind of — it’s appropriate for business, you probably are aware of this. We differentiate a little bit more between truck SUV and pass car, and so we don’t as much correlate particularly to the LV number across the board. So for — and that’s kind of comment one.

Comment two then, we obviously look at the major platforms on which we’re on. And we’re very bullish, very bullish on where the volumes are today, and where we think they’re going to be in the future. So answering question more specific for Dana on the major platforms we’re on, we feel good about it, despite a lot of the rhetoric and communication that’s going on in the broader light vehicle industry. So that’s where I would go with that.

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Brian Colley, Stephens Inc. – Analyst [84]

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Okay.

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Jonathan Collins, Dana Inc – SVP, CFO [85]

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Yes, and just relative to our assumptions on backlog. As Jim notes, it’s very platform sensitive, so we’re focused on the key platforms. But generally we expect those volumes to be in line with where they are.

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Brian Colley, Stephens Inc. – Analyst [86]

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Okay. That’s helpful. And then, and I know there’s some changes going on in the manufacturing footprint, including the announcement about Toledo recently. I was wondering if you could give us any goalposts on the opportunity you have to rationalize and optimize the manufacturing footprint, just any way to help us size that up, on what it could mean financially?

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Jim Kamsickas, Dana Inc – President and CEO [87]

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Yes, I don’t know how much I can give you in detail. I’ll leave that one to Jonathan a little bit, on anything relative to the financial piece of it. But I will just give you some color, in case you didn’t have it, on the — I will use the term, restructuring piece. You may or may not be aware that we announced a major plant closure, a very large plant closure in the United States, correlated with volumes in a particular segment, at commercial vehicle in particular.

Even in the last quarter, we’ve made some decisions to take out some capacity, probably more human capacity then physical capacity. On the off-highway side of the business, we found ways to be more efficient, and to do kind of more with less. But we again, I’m not taking out, or we’re not taking out capacity to be able to support the customers, when the volume comes back. But we, those are two significant restructuring actions that we have taken already in 2016. So we will continue to pull those levers on a go-forward basis, if that’s the right lever to pull.

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Jonathan Collins, Dana Inc – SVP, CFO [88]

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Yes, we haven’t dimensioned the specifics, this is Jonathan, on the plant closure, in terms of the dollars for next year or anything. But generally, and in that case, we expect the payback to be about less than two years, of taking out that capacity. So hopefully, it gives you some general sense.

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Brian Colley, Stephens Inc. – Analyst [89]

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Yes, that’s helpful. I appreciate the time.

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Jonathan Collins, Dana Inc – SVP, CFO [90]

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Sure. Thank you.

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Jim Kamsickas, Dana Inc – President and CEO [91]

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Okay. Well, this is Jim. Just to close real quick, thanks again for joining the call. At least from our perspective, we believe that we had a very solid quarter. But besides having a very solid quarter, we believe we’re just living to our commitments, and that’s what it’s all about.

Besides that, we’re pulling all the levers we believe good companies do, if that’s a combination of growing organically, driving operational excellence, which is of course, flexing your costs and leveraging on the sales you have, launching well. You hear didn’t much conversation on, despite major launches in the company, you didn’t hear much conversation about launches, which is a good thing. We’re restructuring. We just answered a question there a few minutes ago, relative to restructuring, and pulling levers on restructuring across the Company, if that’s the right thing to do. And to give yet another example, doing the tuck-in M&A, when it’s appropriate.

You got to have the whole toolbox to have a successful Company, and then you need to know how to execute the toolbox. We believe this team is doing it. The management team is in place. As you know, you’ve gotten to know Jonathan a little bit, and you’ve certainly gotten to know me. And you know some of the other team members, plus some additional members. You’ll get to know the rest of them, if you don’t know them personally, at the Investor Day.

Hopefully, everybody will make it to the Investor Day. It will roll out our enterprise strategy. It’s the appropriate time. To have done it earlier than this, would have been inappropriate. We’re ready to do so, and we’re looking forward to having the opportunity to speak to each one of you. Thank you very much for joining the call.

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Operator [92]

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