Dana Incorporated (DAN) Q4 2011 Earnings Report, Transcript and Summary

. Good morning, and welcome to Dana Holding Corporation's Fourth Quarter and Year End 2011 Webcast and Conference Call. My name is Ashley, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session, will be recorded for replay purposes. [Operator Instructions] At this time, I would like to begin the presentation by turning the call over to Dana's Treasurer, Lillian Etzkorn. Please go ahead, Ms. Etzkorn.

Thank you, Ashley. Good morning, ladies and gentlemen. Welcome to all of you who are joining us either by phone or webcast. On behalf of the entire Dana management team, I'd like to thank you for spending time with us this morning. With me this morning are Roger Wood, President and Chief Executive Officer; and Jim Yost, Executive Vice President and Chief Financial Officer. Also in the room is Mark Wallace, Executive Vice President and President of On-Highway Driveline Technologies. Before we begin, I would like to review a couple of items. Copies of this morning's earnings release and the slides that we will be using have been posted on Dana's investor website for your reference. Today's call is being recorded, and the supporting materials are the property of Dana Holding Corporation. They may not be recorded, copied or rebroadcast without our written consent. Today's call will also include a Q&A session. In order to allow as many questions as possible within our time frame, please keep your questions brief. Finally, today's presentation includes some forward-looking statements about our expectations for Dana's future performance. Actual results could differ materially from those suggested by our comments here. Additional information about the factors that could affect future results are summarized in our Safe Harbor statement. These risk factors are also detailed in our SEC filings, including our annual, quarterly and current reports with the SEC. With that, I would like to turn the presentation over to Roger Wood.

Thanks very much, Lillian, and good morning, everyone. I'm pleased to report today that Dana exceeded all of our 2011 financial targets. We continue to build on the momentum and the potential of the company for the future. Let me cover a few of the headlines for the 2011 financial results. Our sales of $7.6 billion are up more than 24% over last year, and our adjusted EBITDA is up 38% to $765 million. This came out to be a 10.1% margin for the full year, up 100 basis points over 2010. From a bottom line perspective, we doubled diluted adjusted earnings per share in 2011 with $1.66 per share versus 2010. The quality of our earnings is strong. 2011 ended with $174 million of free cash flow, making it the third consecutive year of significantly positive free cash flow. Our balance sheet also remain strong, with total liquidity of $1.4 billion, and that's after making significant investments in our businesses. What I'm most pleased about is that we were able to drive this performance and simultaneously increase our engineering spend to more than 17% from 2010, proving to ourselves and our investors that we can increase our engineering capability and deliver bottom line results. Our sales in 2011 grew 44% faster than the markets we serve. We were able to do this by delivering innovative product technologies, as well as making a few strategic acquisitions to enhance our global footprint. Emerging markets represented more than 36% of this growth for us, further validating our strategy of increasing our engineering resources in these regional areas. Our improved margin performance reflects better operational efficiencies as we begin to see the benefits of our past restructuring efforts. We worked hard this year to offset persistent commodity price increases through pricing recovery and cost reductions. Our fourth quarter results helped us to meet our annual targets. Each of our business units reported improved sales and EBITDA in the fourth quarter versus the last year, even with the production interruptions caused by the flooding in Thailand. Our Commercial Vehicle Driveline business posted margin improvements every quarter this year, a tremendous story that still has room for improvement. Our 2011 performance sets the stage for continuing the momentum in 2012, and Jim will talk about our 2012 outlook in just a little bit. Turning to the next slide, you can see how we've achieved a better balance of share between each of the market sectors in each of the critical geographic regions that we serve. A balanced portfolio across light, commercial and off-highway vehicles helps to improve our sales mix for better profitability and also helps to balance volatility among the sectors. We have a unique advantage in being able to leverage synergies among our 3 core competencies in driveline, sealing and thermal management across these 3 different market sectors. Our sales in commercial vehicle segment have increased consistently since 2009 as a percent of our total sales. Our off-highway business has maintained a strong share in our overall sales mix at 20%. And light vehicle sales, up 17% in 2011, represent a smaller share of our overall sales volume versus just a few years ago. We're also improving our geographic balance with a continued emphasis on growing our business in emerging markets. Our investments in Asia and South America this year made a real difference. Asia Pacific now accounts for 20% of our sales when we include the sales of our joint venture in China, DDAC. With respect to South America, our expansion efforts have led to an increased share to 16% of our total sales. Our global footprint now allows us to support our customers in each region that they operate in. One of these global customers, Ford, recently emphasized this importance by noting that 85% of their product volume will fall into 9 major global platforms over the next few years. They are expecting their suppliers to align with this global platform framework, and Dana is already there. As you can see on Slide 6, Dana continues to win new business in all regions of the world. In 2011, we were awarded more than $1 billion in cumulative net new business for the 2011 to '15 time frame. 42% of these awards were conquests over competitors, and our customers are valuing our product offerings for their applications. About $225 million of our total net new business will be booked in this calendar year. So now let's take a look at each of our business segments. Turning to Slide 7, our on-highway Light Vehicle Driveline sales were up 13% in 2011. Of that, about 3% was due to the global rebound in production volume and the remaining due to our ability to grow faster than the market, a key metric that we will use in each of our businesses. Segment EBITDA was also up 15%, an improvement of 20 basis points to 9.7%. The light vehicle technology is focused on improvements in fuel efficiency. This has been demonstrated by our line of smaller, lighter, more efficient AdvanTEK axles, and these axles are now available for an array of on-highway light vehicles. Light Vehicle Driveline won new business from a major Asian OEM to provide gearboxes for all electric SUVs and minivans. This marks Dana's entry into the driveline products for electric vehicles with this aluminum encased gearbox. Suzuki is another new customer. We were recently awarded business to supply driveshafts for a future Suzuki 4-wheel drive vehicle to be manufactured in Europe. And we continue to make inroads into the China market with several new business wins. We are positioned very well to compete in the world's largest automotive market there. I'd also like to mention that we've made real progress in developing a variation of our award-winning, heavy-duty Spicer Diamond Series driveshaft for light to medium-duty pickup trucks. This market has a potential of approximately 1 million aluminum driveshafts annually. The Diamond Series development is a good segue to discuss the successes that we've achieved with our Commercial Vehicle Driveline business. So turning to Slide 8. Our commercial vehicle team made outstanding improvements in operational performance in 2011 and was recognized repeatedly for new products and technology. This business also continued to expand its global footprint. They completed 3 key acquisitions in emerging markets and were successful in integrating these operations into the Dana fold last year. Commercial vehicle sales were up nearly 54% versus last year. EBITDA improved by more than 57%, and margin improved by 30 basis points year-over-year. The majority of that came in the latter half of the year as we delivered on the improvement plan that we discussed during the year. I'd like to mention just a few of the successes achieved by our commercial vehicle business this year. Our facility in Toluca, Mexico was recognized by PACCAR for its strong performance and product quality. I'm proud to be among the top-performing suppliers for this important customer. Spicer Diamond Series driveshaft, the lightest weight, most robust solution for the heavy-duty truck market was recognized with the Technology Innovation Award by Frost & Sullivan. And as I mentioned earlier, there's a promise to leverage this technology into light- and medium-duty pickup trucks. Our Spicer Pro-40 Tandem Axle, which weighs 100 pound lighter than its nearest competitor, was named among the top 20 new products for 2011 by Heavy Duty Trucking magazine. Our Spicer Central Tire Inflation System, or CTIS, will once again be featured in a key military vehicle program. We are also expanding this technology to other sectors, such as agriculture. Our strategic investment with SIFCO in South America transformed Dana into the leading full-service provider of driveline systems in the region. We also were awarded new business from Agrale and Navistar for suspension and drive axle products in South America. And going forward, we are making great progress and working closely with our partner in China to improve the operating performance and profitability of DDAC. We're expecting a softer first quarter in South America due to some pull-ahead sales related to a change in emission requirements. However, we are on track to meet our profitability targets for 2012 and beyond and continuing to focus on revitalizing our product portfolio, improving cost performance and pursuing new business that meets our strict financial objectives. So let's turn to our Off-Highway Driveline business now on Slide 9. Improved market conditions drove stronger sales in our Off-Highway Driveline business this year. We posted a 38% improvement in sales and nearly a 70% improvement in the segment's EBITDA. Off-highway ended the year with a 10.6% EBITDA margin, an improvement of 190 basis points. Strong sales in the construction segment contributed to this profit improvement in 2011. The Off-Highway Driveline business posted numerous accomplishments during 2011, including several new product launches. We developed a range of new value-oriented transmissions, the TZL line, specifically for the China market. The first of these, the TZL-16 will be used by 2 Chinese manufacturers in construction machines beginning this month. That's with production starting 6 months ahead of schedule, which had some impact on our expenses in the fourth quarter. Further expansion of this product range will be rolled out throughout 2012. We're building our Off-Highway Driveline manufacturing footprint in India and as a result, have been awarded incremental new business with John Deere plants in Pune and Chennai in support of this fast-growing agriculture sector. We continue to win sizable new business. For example, we will be supplying axles to a key agriculture customer for a global platform of tractors spanning 50- to 130-horsepower. Production will start next year at Dana facilities in both China and South America. As I mentioned earlier, we're leveraging the Spicer CTIS sensing technology into the agriculture sector. Originally developed by our commercial vehicle business for defense applications, now end-users of off-highway equipment can access the benefits of CTIS. Finally, we launched our newest joint venture, Dana Rexroth Transmission Systems to bring to market the hydromechanical variable transmissions, or HVTs, which can deliver up to 20% better fuel efficiency for various types of off-highway equipment. So lets go to Slide 10 and talk about Power Technologies. They also benefited from increased global vehicle production. Sales were 12% higher in 2011, and 20% of this was on new product introductions and new business and the remainder on global volume increases. We posted an improvement of nearly 11% in segment EBITDA for the year and a strong EBITDA margin of 13%. Power Technologies business unit is positioned very well as an engineered solutions provider of technology to our customers. It is also a source of great innovation at Dana. We're leveraging our capabilities in sealing and thermal management technologies throughout the light, heavy and off-highway markets that we serve, with a focus on high-demand, sustainable solution technologies. We're making significant progress at being recognized and valued by our customers for developing and integrating engineered technology solutions. For example, we recently developed an engine cooling product for a major customer that integrates sealing and thermal management products in a total system solution. Several of our Power Technologies products can be found on 7 of the 10 best engines recently recognized by Wards magazine, as well as on the 2012 North American Truck of the Year, Land Rover Evoque. Power Technologies' active and passive warm-up technology has a growing list of customers and recognition. Our active warm-up unit is a finalist in the upcoming Automotive News PACE Awards. We continue to win new business with our products that support alternative energy solutions, such as battery cooling technology for a growing number of electric and hybrid vehicles. We are continuing to develop technology to support fuel cell applications. I'd like to mention one more area of innovation for Power Technologies. Last year, we produced more than 1 million cam covers that are made from 100% recycled nylon carpet fibers. Through this product, we recycled nearly 3 million square yards of carpet. We diverted more than 13 million pounds of carpet from landfills, and we preserved nearly 1.3 million gallons of oils. As you can see from our discussion about the progress that each of our business units have made last year, we have a renewed focus on product innovation and technology to deliver value to our customers. And we have increased our commitment to technology and engineering activities so that we can create a more innovative environment and to speed product development by collaborating and sharing among our 15 R&D centers around the world. We're very excited to be able to provide our customers the service and support directly in the region in which they require it. So I'd like to say a few words about shareholder value, turning to Slide 12. Dana is focused on creating shareholder value. Everything we do supports this objective. We're driving for top line growth with bottom line profitability. We remain focused on generating strong free cash flow through improved operational efficiency, a big part of which is a tenacious focus on material cost and complexity reduction. We're committed to continuing to strengthen our margins and ultimately increased earnings per share. We recently received the annual PWC Automotive News recognition for best shareholder value from a global automotive supplier for a 3-year period. And while we don't often see stock price appreciation like we did in 2009, we are working every day to improve the value of our company to our customers and ultimately to our shareholders. Finally, and before I hand off to Jim, you've all seen the news that went out with the earnings release this morning that Jim will be leaving Dana at the end of his contract term. Jim will work with Bill Quigley, who most of you know well, over the next 10 weeks to ensure a smooth and seamless transition. I want to take this opportunity to thank Jim for his loyalty and dedication as a critical part of the leadership team that led Dana over the last 4 years through some of the most difficult times in our industry. With the end of his contract in sight, Jim will begin a new chapter in his career with new challenges, and we at Dana appreciate what he has accomplished here in leaving us with a tremendous financial position to use as a foundation for our profitable growth strategy. And now I'd like to turn the call over to Jim for a more detailed report on the financials.

Thank you, Roger. Please turn to Slide 14 for a summary of our results. As you can see on this slide, we had a terrific year, just as Roger said, more than doubling our adjusted diluted EPS and increasing our net income by almost 20x. Sales were $7.6 billion, which is up more than 24% from 2010. About $400 million of the increase is attributable to our strategic agreement with SIFCO and the axles India purchased. This, of course, excludes any sales from our unconsolidated joint venture in China, DDAC. The adjusted EBITDA of $765 million was an improvement of 38% or $212 million from 2010, delivering on our commitment of a 10% margin. In addition to strong sales performance, significant material cost recovery and cost reductions more than offset the increased raw material prices we incurred in 2011. As we've mentioned before, our net impact of materials was favorable this year, and we expect it to be also favorable in 2012. Capital spending was $196 million. And our free cash flow was $174 million, delivering consistent positive free cash flow since 2009. So how did we do compared with the plan we laid out in January 2011? As you can see on Slide 15, we met or exceeded all of our goals. This was the third straight year that we accomplished the goals we announced at the beginning of the year. Turning to Slide 16, let's take a look at the results of our business segments. In 2011, all of our business segments generated higher sales and EBITDA compared with 2010 levels. In Light Vehicle Driveline, sales and segment EBITDA were up 13% and 15%, respectively, resulting in a full year margin of 9.7%, which was slightly up from 2010. First quarter 2012 will be a bit softer than recent quarters, primarily due to mix and the lingering and far-reaching impacts of the Thai floods. Our customers are having renewed supply issues with critical vendors, and this will impact our operations in Asia, South Africa and South America. We had thought that most of that was behind us but we have seen some renewed problems, not in our operations, but in vendors of our customers. Commercial Vehicle Driveline experienced a significant recovery in 2011, just as we promised, with sales up 54% and segment EBITDA increasing 57%. This resulted in a full year margin of 9.7%. But more notably, the group ended the year with a 10.2% margin in the fourth quarter. This was the result of the significant benefits in the North American profit improvement plan, which we've been discussing in previous calls. Off-Highway Driveline also experienced significant recovery and margin expansion in 2011. Sales increased 38% over 2010 and segment EBITDA grew 69%, resulting in a full year margin of 10.6%. Fourth quarter segment results were off a bit from prior quarters, primarily due to softness in the construction market, which has a much higher margin than our Ag business and our investments in our distribution center in Hungary and our transmission business in China. Margins in this segment will return, however, to double-digit levels in the first quarter of 2012. Power Technologies sales were up 12% for the year and segment EBITDA increased 11%, resulting in a 13.3% full year margin. We expect to see margins in the mid-teen range throughout 2012. Turning to free cash flow on Slide 17. We delivered $174 million of free cash flow for the full year. This is the third year in a row that we delivered positive free cash flow. As expected with the higher sales level, working capital was a use of cash in 2011. It will continue to be a moderate use of cash in 2012. Capital spending was $196 million. This represents an increase of $76 million of additional investment in the business compared with 2010 but was still below our depreciation level, recognizing both the efficiency of our spending, as well as the continuing impact of our fresh start accounting, which artificially inflated our asset values. Interest and taxes of $212 million was an increase of $38 million over 2012. Cash taxes will increase in 2012 as we continue to improve profits in several of our overseas affiliates. Restructuring of $77 million was slightly lower than we had originally planned and reflects some re-timing of actions that are now expected to occur in 2012. Turning to Slide 18. You can see this slide highlights our strong liquidity position and how we used our free cash flow to fund the business. We generated $174 million of free cash flow, as I mentioned before, and we reinvested a net $159 million into acquisitions. Additionally, as you recall, we refinanced our debt early in the year and have further improved liquidity through increases in credit line availability. Overall, we continue to maintain a very strong liquidity and have sufficient capital to fund our growth plans. As a result of this strong liquidity, we elected to make a $150 million contribution to our pension plan in January, further strengthening our balance sheet. Our defined benefit plans in the United States are frozen, so we have no new entrants or future service accruals. Unlike many companies, the liabilities in our plans are not building, only varying with the discount rate. As detailed in the appendix, our U.S. pension plans had a year-end pension obligation of about $109 billion, with a projected funding level of 78% on an accounted basis, with an unfunded liability of about $434 million. This is just a little bit higher than we finished at the end of 2010. After the voluntary contribution we made in January, we have a projected funding level of about 85%. Turning to Slide 19. We share here our global production estimates. Our production estimates remain consistent with what we shared with you in January. We continue to see strength in most of our markets and a mixed outlook in others. Overall, we continue to expect market growth for Dana of about 4% this year. Looking at each market, in North America, we see the overall light vehicle market improving. However, we expect flat production in the light truck segment, which is a key segment for us. Most of the expected growth in the North American truck segment will come from the medium to heavy truck markets. Consistent with the economic outlook, we expect European production to decline across all markets. In South America, we continue to see steady output of the markets. And in Asia Pacific, we see significant growth in all of the segments. The off-highway market continues to recover. The agriculture equipment market is projected to be flat to modestly up from 2011, and the construction equipment market is expected to have a modest growth next year. Slide 20 shows our financial targets for 2012 that we shared with you in January. We continue to be confident in our full year guidance, but we are monitoring foreign exchange impacts as the dollar has continued to strengthen since we adopted our plan. Sales are projected to be up more than 5% over 2011 levels. This reflect the mixed economic output and outlook in the markets we serve. Adjusted EBITDA is targeted to be up approximately 13% from last year, delivering about a 10.5% to 11% margin. Diluted adjusted EPS is targeted between $1.95 and $2.05, which is a 20% improvement over 2011, and this emphasizes our continued emphasis on the bottom line shareholder value where we're growing our bottom line faster than our sales. Capital spending is projected to be between $225 million and $250 million, a little bit higher than our depreciation. Our free cash flow is projected to be greater than $200 million, excluding the $150 million voluntary contribution that I mentioned earlier to the pension plan. We continue to be on track to achieve the 12% EBITDA target we set for 2013. And overall, our sales rate will be about 25% higher than the market growth. Turning to Slide 21. We give you here a view of our growth going forward. We see a CAGR on total revenue of about 10% over the next 5 years, with market growth accounting for about 6% of that 10%. As highlighted earlier by Roger, we continue to be successful in winning new business in all regions of the world. We expect to continue that success going forward. In addition to growth of our base business and winning new business, we expect to continue to expand through strategic initiatives as we did in 2011, with the agreement with SIFCO and our ownership expansion in DDAC. With continued strong growth of our new business and initiatives, we are poised to consistently grow faster in the market in the future. So in summary, on Slide #22, we delivered an excellent year, exceeding our targets and delivering improved top and bottom line results. As we execute our plan, we will continue to focus on driving shareholder value through a focus on innovations and technologies to create value for our customers and drive bottom line shareholder value to our investors. On a personal note, I appreciate the opportunity to have served Dana as CFO for almost 4 years. It's been a privilege to be part of a great team dedicated to making Dana the best it can be. I want to thank everyone for the support that they gave me, and I ask you to extend that same support to Bill. I wish all of you and Dana the best of success in the future. With that, I'll turn the mic back over to our operator, Ashley. Thank you.

[Operator Instructions] The first question comes from Patrick Nolan and Deutsche Bank.

Just one question. I'll keep, though, one question and just 2 quick housekeeping items. Just first on the off-highway business. It looked like the margins fell there a good deal sequentially in Q4 despite revenue not really being off that much. And just on the housekeeping side, is there any quantification you put around what the Thailand impact was in Q4?

Pat, this is Jim. On the off-highway business, we had indicated in our third quarter call and in January that we expected to see softness in the construction market. Our margins are considerably higher on the construction side than they are on the Ag side, and that's an issue we're working on right now similar to what we did with the CV business. So we expect to see that improving into 2012. Fundamentally, there were 2 things that drove the margins. One was the mix of business, which was much weaker on the construction side than the Ag side, and other was that we did make some strategic investments in our new distribution center for aftermarket in Gyor. We moved that from Northern Europe into Gyor, Hungary, and that ended up with some higher cost there. We also had a number of launches in China that we pulled ahead from 2012 into 2011 on our transmission side to get into that business. So that was largely what drove the decline in the bottom line.

Is there any way you can put numbers around the Thailand impact on the Light Vehicle Driveline?

We don't have any numbers that we have at this time.

And just lastly, what was DDAC's revenue for 2011?

It was about $900 million from -- I think, I've got that. I'll just look that up here for you, Patrick. About $951 million in sales, which was slightly down from 2010, which was at about $1,040,000,000.

Next question comes from Brian Johnson and Barclays Capital.

Just wanted a couple of things. You talked a bit about first quarter. Can you give us maybe a little sense of how the cadence of the quarter is just likely to shape out, both in some of the production numbers you cite on 19 and just as we kind of think about your annual guidance?

First, as you think about the guidance, as we've said before, first quarter tends to be a little bit weaker for us, both in sales and profitability. Fourth quarter tends to be a bit the same. I think we've seen some unique things in 2012 that are going to hit us a little bit more in the first quarter. As I mentioned, the Thai flooding is a continuing issue, as well as some of the softness in the South American CV market. So first quarter will be a little bit weak. And then traditionally, our second and third quarters are substantially stronger. And we expect to see that same story going forward, I think, overall this year, probably a little bit more in the second and third quarters but largely flat across the whole year in terms of our sales.

Okay. And the investments you talk about from off-highway, those are -- when we get to 1Q, those are now behind you?

Yes.

Okay. And can you give us an update on how much of the $21 million of equity income was DDAC, and then how we should think about the progression of moving that to Dana target margins?

Of the equity earnings, about $8 million was DDAC.

For the full year?

For the full year, correct. That compared with about one in the previous year in 2010. So that obviously is impacted by fresh start accounting there. So if you did the math, it's actually a bigger number on the gross basis. That is some fresh start accounting, but we'd expect that to continue to grow. We finished with about a 5% EBITDA margin in the DDAC full business last year, and we expect that to be up at least a point this year as we continue to work with that team to improve profitability.

Next question comes from Ravi Shanker and Morgan Stanley.

Jim, can you help us with an EBIT walk from 4Q -- '11 4Q there? You've helped us in the past with pricing and materials and that sort of thing.

Speaking just a quarter-over-quarter?

Your 4Q '11 versus 4Q '10, so year-on-year for the quarter.

Yes, sales were up about $350 million or so, largely due to volume and the SIFCO acquisition, which was about $100 million a quarter of the full year impact. If you take a look at EBITDA, we were up about $40 million. Most of that -- in fact, all of that was largely the volume and the SIFCO acquisition. We did have some positive material. But then, we also had some of those investments that we talked about in some of our future business.

And pricing was positive?

Yes, pricing was positive.

Got it. And finally, we have seen some end markets, especially in Latin America, off to a slightly weaker start in January. Plus, you have this Thailand impact that's spilling over into 2012, yet your guidance is unchanged, which is a pretty strong outcome. Can you help us understand that? I mean, were you being conservative before? Do you see offsetting impacts that kind of negates the weaker start?

We had anticipated quite -- in fact, most of the softness in the first quarter. So as we gave guidance, it had already reflected a softness in the first quarter. We had hoped that the Thai situation would have stabilized, so that is a bit of a surprise. But we were also seeing strength in a few unique areas. So I would say, overall, we had anticipated most of the softness. Maybe you call that conservative. We call it good planning, but it's not surprising. And so far through January, we're on track.

Next question comes from Peter Nesvold and Jefferies.

On the construction equipment margins, it seems a step down there. I guess we can follow up maybe on mix in the quarter. But on the strategic investments in Europe and the China launches, how much longer -- is that a sort of one quarter thing or do you anticipate that, that occurs for another several quarters?

We expect that to be a one quarter item. The transfer of our aftermarket business was a fairly big undertaking. We got that completed by the end of December, and we're now up full support on that facility out of Gyor. So that was a good transition for us. That's over and done with. We had some unique cost there. And most of the cost for the launches that we pulled ahead hit the fourth quarter. Obviously, there's always ongoing launch cost, but we don't expect it to be as big an issue going forward as it was in the fourth quarter.

Okay. And then as a follow-up. Power Technologies, the incrementals there still seem to be lagging. Can you just briefly recap what the headwinds have been in that business? What actions are you taking, and how long do you think it will take before they pay off?

As we said before, some of the -- just had some onetime items that have come up, had a little bit of warranty and some other items that have hit us. But we expect that to bounce back in the first quarter. As I said, we should be back up to more normal margins in the -- starting in the first quarter of 2012.

Next question comes from Patrick Archambault and Goldman Sachs.

A couple of quick ones. I mean, just on Brazil, it sounds like based on your commentary and some of the other OEs as well, January was pretty much shut down. And I noticed that you still have it as being up year-on-year in terms of production, or at least South America up year-on-year. Can you tell us just a little bit more about that? Is it -- are the inventory situations very tight? Are there tangible orders beyond that shut down that make you confident that you can have that much of a recovery in the back half? Maybe just a little bit more on that.

Patrick, it's Mark Wallace. I'll take a shot at the question. Number one, we expected inventory build, which was happening in November and December. And pretty much with South America in the past, we did see a fairly significant shutdown in the month of January. However, I think it's too early to tell at this stage if we'll have to adjust any of our volumes out into the back half of the year. Because typically once the market comes back, it comes back very strong, as we saw last year. And in many cases, we were running well above our market demand. So at this stage, we're cautiously optimistic in the back half in Brazil, but we do have a fairly significant downturn in Q1 already planned.

Okay, that's helpful. And one other one, if I can. Just -- there was a question earlier about the walk sequentially from Q4 to Q1. Can you elaborate a little bit on what the trajectory of -- the pricing initiatives and some of the restructuring in the supply chain simplification initiatives, how those are progressing? Did you kind of go into Q1 essentially with those things fully ramped or is there still an ability to see benefits from those on a sequential basis as well?

Patrick, again it's Mark. Speaking commercial vehicle, we still -- we definitely have some continued improvement we can make in the margin line, both with pricing -- as we mentioned before, we dealt with about half of our overall contracts, we still have some, obviously, some room there, as well as we're making improvement in our materials reduction activity in 2012. And lastly, we do have the new products that are launching in 2012 and 2013 as well to keep driving our margin improvement.

Our next question comes from Colin Langan and UBS.

Can you -- you mentioned your plan for a significant Q1 decline. Any quantification of that? It looks like it's down over 60% in January. Is that already starting to improve into February or is that going to pretty much hold for the rest of the quarter?

I'm sorry, Colin. This is Jim. I'm not sure -- when you say 60% decline, I'm not sure what you're talking about, sorry.

About -- I think there's data out there saying that some of the heavy truck market in Brazil year-over-year is down about -- over 60% for heavy and medium in January, given the shut down? I mean, is that already starting to improve or...

Again, to answer the question, clearly, there's a significant amount of inventory in Brazil at this stage. We had planned -- obviously, not 60% for the full quarter, more around the 10% to 15% decline over the quarter period at this stage. And at this stage, we don't see anything that would say we need to make any significant adjustment there relative to our outlook full year.

Is that 10% to 15% was what you were thinking?

Yes.

And then in terms of the commodities, you mentioned that it would be favorable in 2012. I mean, how is that? Is that just because you're still catching up from some commodity -- how do you have favorable commodities?

That's correct. We're seeing commodities on average for 2012 will be modestly higher than 2011 due to the increase at the back half of the year. That's now going to be a full year impact in 2012, particularly as it hits us in SBQ. But we do have some catch-up on pricing. As you know, some of our pricing agreements are lagged. As a result of that, even though we did have positive net performance on material last year, we'll have better performance this year, as long as the commodities continue to hold stable, which they appear to be doing, as we catch up on that pricing.

Okay. And just one last one. I mean, Jim, any color as to why the timing of stepping down now?

Yes, this is Roger, Colin. I can answer that. Let me just start -- because I expected this question actually earlier than this, but let me just start with the statement that there are no concerns absolutely from a financial perspective, not at all. This is something that Jim and I have been talking about for a while. And with the availability of Bill Quigley, who is pretty well known in the industry and knows these industry segments very well, it was a good time for us to be solidifying our team for the long-term stability that we've been trying to put into place for some time now. So again, Jim and I have been in discussions about this, and Jim will be with us through about a 10-week transition period. We expect that to be smooth and seamless. And a number of the finance folks that Jim has been able to bring into the organization and the team that he's been able to build are really experienced and actually have some experience with Bill from their previous lives. So I expect this transition to be very smooth and seamless, and this is a good time for us to do it and a great time for Jim to be focusing on the rest of his activities that he wants to get into for the rest of his career. So for us, we think it's a good time.

Next question comes from Brian Sponheimer with Gabelli.

Just wanted to talk about the commercial vehicle supply chain right now, obviously, a highly publicized issue on some brake valves. What are you seeing as far as your customer build orders or the customer build levels? And have you had to slow your own production accordingly?

Yes, Brian, Mark Wallace. Yes, there's has been no -- from our perspective, no impact to Dana. Our customer -- actually volumes, if you looked in January, were quite strong, probably at a much higher pace than we've got forecasted full year because I think there's a lot of catch-up that's still in the market coming from people like PACCAR, Freightliner, et cetera continue to make up for some lost ground. But at this stage, we've had no impact relative to any supply disruptions in the network.

Next question is from Tim Denoyer and Wolfe Trahan.

I had a couple of follow-up questions on the net new business, I guess, Slide 6. Can you give us a sense of how that breaks down by segment? I mean, it seems like it's pretty broad across the segments. Are there any 1 or 2 segments where from a revenue standpoint -- I mean, we see the products laid out on the slide, that you're seeing significantly more of the net new business than others? And can you give a sense of what margins -- the conquest wins in particular and I guess the new wins as well, how those margins generally compare to existing margins?

I would say overall there's nothing unique about the awards in terms -- as it spreads across our businesses so nothing unique there. In terms of margins, we, as we said before, set a fairly high hurdle for us to win new business in terms of profitability, obviously, beating our cost of capital, in some cases, even better than that. So the business that we've been able to win over the last couple of years, and this year is no exception, are much, much stronger margins than the business that we've had historically. A lot of that's due to the improvements we have in the business, some new technologies that we brought out, but it is substantially better margin business than we've had in some of the business that's running off. And we've purposely targeted businesses where we think we can make higher margins. And the businesses where we don't see an opportunity to maintain good margins, we've let those dry up.

Great. And then, Jim, just one quick one on the fourth quarter margin. It seemed like the gross margin was a little bit below what I expected and SG&A was also a little bit less. I guess my question is sort of what's driving SG&A down? Is that sustainable? And can you give us any sense of what R&D was in 2011 and how that -- do you expect that going forward?

The R&D was about 2% overall for the year. We expect that to grow modestly in the upcoming years, nothing dramatic, with a 24% growth in sales. That represented a fairly significant increase in the absolute engineering expense. Now that's 2 years in a row where we've significantly increased our engineering expense. Expect that to grow again in 2012, probably faster than our sales as we continue to invest in new technologies and expanding our business. So I'd expect our R&D expenses to continue to grow and actually continue to grow as a percentage of revenue. In terms of the margins, I think fourth quarter traditionally is a little bit lower for us in gross margins. There are some year-end costs that we end up accruing for vacation and things like that. So I think that's almost always the case. I would say that our SG&A cost, on an absolute basis, have continued to be managed extremely well. We look at opportunities to cut those costs as much as we can without hurting our business and hurting our operations. I'd expect the SG&A cost to continue to decline over the next few years as a percentage of revenue as we continue to manage that very aggressively and more efficiently manage our business.

Tim, this is Roger. Jim did a great job in explaining that. I just wanted to mention that he is absolutely correct in terms of our focus on the engineering investment that we're making into the company. At about the 2% level now, we know there's a need for us, as we move forward, to increase that. And we're doing that simultaneously with looking at our business processes around the world to become more efficient at what we do in order to free up money to make that investment in engineering. So the SA&O [ph] reduction that you're seeing is a result of some of the work that we did last year in the business unit structures and opportunities that we found to reduce those SG&A expenses. And our focus is to make sure we continue doing that so that we can increase our investment in the engineering side of the business.

And it seems like the SG&A reduction is more than offsetting any increase in R&D at this point. Is that fair to say?

Yes, it is at this point. And -- but we are not cutting anything critical to the business for sure. We're bolstering the areas that need to be bolstered, and we're really focusing on engineering. It's also an important point that as we spend and increase this spending on engineering, we're doing it in a very focused way to make sure it's accomplishing the strategies that we've got laid out there and focused on products that meet the financial hurdles that we have in the organization.

If I could just throw one more in, just a question on your outlook on the China truck market. If you can give us any color on inventory levels and order trends in China truck at this point. I was interested to see that you're expecting some pretty good growth there.

Overall, we expect the market to be up on a year-on-year basis. It's a bit hard to call this early in the year, but we don't see anything unique that would stand in the way. We don't see any significant inventory issues that would be a problem for us.

Next question comes from Joseph Spak and RBC Capital Markets.

Just -- if we could focus on the free cash flow. And I realize you put this out in Detroit, but are there any other -- besides the pension contribution, any other unique items we should thinking about for 2012? Because I realize CapEx is a little higher and -- but earnings should be meaningfully higher as well. And I think you said the working capital, you should be a little bit below 2011. So I'm just wondering, is there anything else we should be thinking about?

Yes, the only other thing -- 2 other items that I'll just point out. One, is interest -- cash interest will be up a little bit year-on-year because we only had one payment last year on the bonds. That will be up modestly. Taxes are going to be up significantly on a year-over-year basis because of significantly better performance globally. We've eliminated a couple of our NOLs, our valuation allowances in a few countries, recognizing the fact that we're now back into a positive balance. So we will be increasing our tax payments globally except the United States, where we still have a significant NOL. So taxes are up. As you mentioned, we expect working capital to be -- the use of working capital will be less than 2011, but there still will be some incremental use of working capital.

Okay. And then on the equity income line, if I recall correctly, DDAC was upsized basically in the back half of the year. So if I just look at first half versus second half, they're roughly equal. So I guess what -- is there any seasonality in that or what happened, I guess, with sort of some of the other investments in the back half of the year?

As you may recall, there was also a sale of our Getrag interest, the interest in the JV that we had with Getrag. So offsetting the impact of adding DDAC was the impact of deleting the Getrag equity income.

Okay, great. And then you just -- I know you -- real quick, you mentioned watching currency. Are you using -- are you assuming a 130 rate in your forecast?

Around that, yes.

Next question comes from John Lovallo with Merrill Lynch.

A couple of quick questions. In terms of your European commercial vehicle forecast, it appears to me that they're perhaps just a little bit more optimistic than some of the OEMs. And I was just wondering if that's driven by the fact that -- I think around 20% of your volumes for export markets?

Overall, obviously, we have commercial vehicle down this year over last year. We do have export business that does supplement us in the European region. And thus far, in Q1, we are seeing a bit of favorability so far in the volumes. We're still obviously a bit cautious on Q2 with CV build in Europe. And so far, things seem to be holding up okay.

Okay, great. if I could sneak in one more here. Understanding that the DDAC, the increased investment there is going to offset -- be offset in part by Getrag. I mean, is there any difference or any shift in the amount of cash that will be coming out of these JVs? I mean, is DDAC basically going to be -- I guess, my question is, is there going to be a cash dividend or is it really just an income statement item?

We were not seeing any cash dividends out of the Getrag JV, so no significant decline there. We expect in the future, although it hasn't happened yet, that there will be a flow of dividends out of DDAC. We are planning to run that as a standalone business, along with our partner DFL, to generate good profits and to return money back to shareholders. Nothing yet, but it will happen in the future.

Next question comes from Peter Nesvold and Jefferies.

Just a quick follow-up, a housekeeping one. So you talk about taxes going up in '12. What should we anticipate in terms of a GAAP tax rate?

We expect it to be about 29%.

29%. Okay, and that's obviously reflected in the guide that you have out there right now?

That's correct.

Okay. With that, I'd like to conclude today's call. Thank you, everyone, for joining us.

Ladies and gentlemen, this does conclude today's Dana Holding Corporation's Fourth Quarter and Year End 2011 Webcast and Conference Call. You may now disconnect.