Dana Incorporated (DAN) Q3 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to Dana Holding Corporation's Third Quarter 2014 Financial Webcast and Conference Call. My name is Brent, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and the 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 Director Investor Relations, Craig Barber. Please go ahead, Mr. Barber.

Thanks, Brent. And thank you, all, for joining us today for Dana's third quarter 2014 earnings review. Copies of our press release and presentation have been posted on Dana's investor website. Today's call is being recorded and the supporting materials are the property of Dana Holding Corporation. They may not be recorded, copied or rebroadcast without a written consent. Today's call will include a Q&A session. [Operator Instructions] Today's presentation includes some forward-looking statements about our expectation for Dana's future performance. Actual results could differ 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 public filings including our annual, quarterly and current reports with the SEC. Presenting this morning will be Roger Wood, President and Chief Executive Officer; Bill Quigley, Executive Vice President and Chief Financial Officer; and Mark Wallace, Executive Vice President and Group President of our On-Highway Driveline Technologies. I will now turn the call over to Roger Wood.

Thank you, Craig, and good morning, everyone. I'm pleased to report another good quarter for Dana. For the third quarter of 2014, we recorded sales of about $1.6 billion and net income for the quarter at $90 million, with diluted adjusted earnings per share at $0.57. We improved our adjusted EBITDA margin by 20 basis points over third quarter last year to 12.1%, which is a sequential improvement of 10 basis points over the last quarter. We continue to generate free cash flow, with this quarter coming in at $61 million. Our ability to manage our business and generate cash has enabled our Board of Directors in July to authorize an additional $400 million for our share repurchase program. And in this quarter alone, we repurchased 3 million shares, returning $68 million to our shareholders. Since we started the program 2 years ago, we've been consistent in our execution and have returned over $1 billion to the shareholders. Also this quarter, we've simplified our capital structure by converting all remaining preferred stock into common. We now have just one class of shares outstanding. As we look forward into next year and beyond, I'd like to take a minute and give a brief update on a few of our important program launches that we're in the middle of. On Slide 5, we've talked before about our new business backlog that will come online beginning in 2015 and beyond, and we continue to feel great about how that is shaping up for us. One of the most notable and earliest of these programs is the Chevy Colorado and GMC Canyon midsize pickup trucks, which feature our front and rear axles. We have just completed the final launch stages and expect to be in full production in 2015. These trucks are creating a buzz in the marketplace, with dealer orders exceeding expectations according to automotive news. Not only will these be the most powerful midsize pickup trucks on the market, but they're being touted as the most fuel efficient as well. In fact, Green Car Journal recently named the Colorado a finalist for its Green Truck of the Year award. Dana's Spicer AdvanTEK front and rear axles contribute to the efficiency and performance of these trucks by improving the fuel economy while, at the same time, reducing noise vibration and harshness. On Slide 6, we show a sampling of some of our other exciting new programs that have recently launched or are currently being launched. In the off-highway market, Caterpillar recently introduced the CAT 910 K and 914 compact wheel loaders, which are setting a new standard for productivity, fuel efficiency and comfort. Both are equipped with complete Spicer drivelines that include drive axles, drive shafts and either our single motor hydrostatic dropbox or our dual motor hydrostatic CVT gearbox, which provides more power, greater efficiency and better overall performance. Our Spicer AdvanTEK 40 Tandem drive axles are also proving very popular with both PACCAR and Navistar taking orders for them. PACCAR's Kenworth unit calls it an excellent fuel efficient addition for new Kenworth Class 8 trucks. And Navistar's new ProStar uses the system to attain higher torques at lower RPMs in order to enable engine down-speeding, which we all know is a significant enabler of improved fuel efficiency. Combined with our Spicer Life Series main driveline and inter-axle shaft, this system offers the fastest axle ratio in the industry to achieve even greater fuel efficiency, at the same time, a reduced emissions. It's designed to handle the additional torque demands with less weight and greater reliability versus the conventional 6 by 4 tandems. And finally, our Power Technologies group has exciting new programs with some very important strategic customers. Cummins' latest ISX inline straight-6 diesel engine now features Dana's next-generation Victocor 500 cylinder head gaskets with multilayer steel inserts. These customized gaskets aid heavy-duty engines in meeting the extreme durability, the high stress and pressure requirements for today's over-the-road hauling. And in addition, Volkswagen and Audi are offering transmissions with Dana's multilayer steel transmission valve body separator plates, which improves sealing, efficiency and durability for advanced multispeed, dual clutch and continuously variable transmissions. We're very proud of this technology and, as you can see on Slide 7, this transmission technology was selected as a finalist for the 2015 Automotive News PACE Awards. By leveraging our industry-leading expertise in multilayer steel technology, we can offer a product that's capable of withstanding 3x the sealing pressures of current products in the market. The technology replaces traditional single air valve body plates that uses paper gaskets that have limited sealing capability. And I'm happy to say that this technology is rapidly gaining acceptance with manufacturers of the most advanced multispeed, dual clutch and continuously variable transmissions. So with those product introductions summarized, let me turn it over to Bill for the detailed financial review for the third quarter and the rest of the year. Thank you.

Thanks, Roger, and good morning, everyone. Our third quarter financial results are highlighted on Slide 9. As Roger noted in his comments, our third quarter sales totaled $1.637 billion, slightly lower than last year with the change mostly driven by currency movements and lower demand, principally driven by further weaknesses in South America and global off-highway end markets. While sales were a bit lower than last year, adjusted EBITDA for the third quarter totaled $198 million, equal to 2013, providing a margin of 12.1%, a 20 basis point improvement compared with last year. Net income totaled $90 million compared with $68 million a year ago, a $22 million increase, driven principally by lower amortization, restructuring and pension expenses, partially offset by higher net interest expense in the quarter. Diluted adjusted EPS of $0.57 compares with $0.47 a year ago, reflecting both higher net income in the quarter, as well as a lower share count related to the continued execution of our share repurchase program. As Roger noted as well, we posted a strong free cash flow in the quarter of $61 million, $7 million better than last year's performance. Now let's go into some further detail. Slide 10 provides a sales comparison for the third quarter, our business segment performance and the key drivers of the year-over-year change. North America sales totaled $780 million for the quarter and represented 48% of sales compared to 44% a year ago, as demand was higher for both light and commercial vehicles. Europe represented about 28% of sales, totaling $462 million for the quarter, $20 million lower than last year, largely driven by lower off-highway equipment demand. South America sales totaled $203 million or 12% of sales, lower than last year by $58 million. Lower volumes accounted for $26 million of the comparison while weaker currencies, principally in this region, provided a further headwind of $32 million. While we did experience a slight increase in South America demand compared to the second quarter, that movement was weaker than what we had previously anticipated driven principally by a lower light and commercial vehicle demand. Asia Pacific sales sold $192 million or 12% of total sales in the quarter, about $6 million lower than a year ago, largely attributable to lower production demand in Thailand and off-highway equipment demand in China. The chart to the bottom left shows a change in sales by business segment, while the chart to the right shows the key drivers of the change. Currency lowered sales by $35 million, largely driven by weaker Argentine and Venezuelan currencies, with our Light Vehicle Driveline business being most impacted. Volume and mix lowered sales by $23 million in the quarter. Our Off-Highway business accounting for $35 million, reflecting persistent low demand for mining and agricultural equipment, which began last year, as well as some softening in the construction equipment demand in the current quarter out of Europe. Strong demand in North America for light and commercial vehicles was a partial offset by weaker end market demand in North -- in South America. Finally, pricing and recoveries, principally benefiting our light Vehicle Driveline business, increased sales by $26 million in the quarter. Now let's review our adjusted EBITDA performance in the quarter. Similar to a sales comparison, Slide 11 provides a comparison of our adjusted EBITDA performance in the quarter, with the year-over-year change by business segment presented on the bottom left and the key drivers presented on the bottom right of the slide. Adjusted EBITDA for the quarter was $198 million, equal to last year's performance, while margin increased by 20 basis points to 12.1%. Focusing on the key drivers of the comparison, currency impacts reduced adjusted EBITDA by $7 million in the quarter, primarily representing weaker currencies in Venezuela and Argentina, impacting our Light Vehicle Driveline business, net of some transaction gains. During the third quarter, the Venezuelan bolivar is measured by the SICAD I rate devalued by VEF 10.6 to VEF 12 to the U.S. dollar, which resulted in a $3 million devaluation charge in the quarter. Also during the quarter, the Venezuela government approved a portion of Dana's pending U.S. dollar request at the official exchange rate of VEF 6.3, which did produce a gain of $1 million, although that was comparable to last year's results. Volume and mix lowered adjusted EBITDA performance by about $1 million in the quarter, reflecting sales changes across our business units, lower sales on our Light Vehicle and Off-Highway businesses, offsetting gains in our Commercial Vehicle and Power Technologies businesses. Finally, net pricing, recoveries and cost performance of $11 million offset the impact of currency and volume mix in the current quarter. Let's move to Slide 12 to review the performance of our business segments. Light Vehicle Driveline posted sales of $608 million compared to $629 million last year. Currency lowered sales by $32 million reflecting weaker Venezuelan and Argentine currencies. Volume and mix lowered sales in the quarter by about $11 million, increased demand in North America, offset by lower volumes principally in South America. Performance increased sales by $22 million and driven principally by pricing and inflation recoveries in South America. Segment EBITDA was $70 million in the quarter, improving by $3 million compared to last year. Currency and the further devaluation of the Venezuelan bolivar lowered segment EBITDA by about $8 million and lower volume and mix contributed an additional $2 million. Cost performance is a net improvement, though, of $13 million, reflecting a net impact of pricing and inflation recoveries in the quarter. Segment EBITDA margin of 11.5% improved 80 basis points compared with the year ago. Commercial Vehicle Driveline sales of $487 million were $22 million higher than the third quarter last year, reflecting a higher volume and mix in North America of about $40 million, tempered by a further weakness in Brazil. Pricing recoveries of $5 million in South America rounded out the sales comparison to last year. Segment EBITDA was $47 million or 9.7% of sales, $5 million or 150 basis points lower than a year ago. Higher volume and mix was a positive $3 million in the quarter. A couple of specific items contributed on the favorable performance in the quarter. First, we have a number of initiatives and process that are targeted to further optimize our supply chain for long-term flexibility and efficiency. And while our commercial vehicle supply, our team is very focused on the execution of these initiatives, we did incur some higher costs in the quarter to meet increased production demand in North America. But we do expect these initiatives to be largely completed by the end of this year. The second item was a true-up of our warranty reserves in the quarter as we are seeing some elevated claims experienced for certain legacy products. And finally a year ago, we recognized some currency gains in Argentina in connection with funding actions we took to execute the restructuring of our operations in the country, which obviously did not recur this year. Off-Highway Driveline and Power Technologies sales and segment EBITDA performance are outlined in the next slide. Off-Highway Driveline third quarter sales totaled $283 million in the quarter, $35 million lower than last year. Continued weakness in global mining and ag equipment demand accounted for almost 70% of the decline, with the remainder due to lower construction equipment demand in Europe as well as Asia that developed during the course of the current quarter. Even with this decline in end market demand, Off-Highway posted segment EBITDA of $40 million, equal to last year's results, and improved margin performance by 150 basis points to 14.1%. While lower sales impacted earnings by $3 million in the quarter, net cost performance of $3 million in the quarter offset that entire variance. Power Technologies sales of $259 million were $2 million higher than a year ago, driven by increased volume of $6 million ratably across North America and Europe, partially offset by currency headwinds of about $3 million, principally a weakening of the Canadian dollar, and net pricing of about $1 million. Segment EBITDA of $37 million was slightly lower than a year ago, reflecting currency and lower net performance. Our year-to-date sales and adjusted EBITDA performance are highlighted on Slide 14. On a year-to-date basis, 2014 sales totaled $5.035 billion, $110 million lower than last year. As highlighted in the lower left of the slide, currency effects accounted for the majority of the change, reducing sales by $107 million. South America alone lowered sales by $110 million. Volume and mix accounted for $42 million principally attributable to lower global off-highway demand, lower demand in South America, partially offset by improved demand in North America. Pricing and recovery actions, principally reflecting actions taken in our South American operations, increased sales by $39 million compared with last year. We continue to improve our margin profile, posting an increase of 20 basis points to 11.3% compared to last year, with adjusted EBITDA totaling $568 million through the third quarter. Performance, including the favorable impact of recovery actions initiated during the course of the year, has continued to mitigate the impacts of currency and lower demand. Now let's turn to free cash flow for the quarter. Free cash flow in the quarter totaled $61 million compared to $54 million last year. As highlighted here, working capital was a use of $9 million compared to a benefit of about $28 million a year ago, although this swing in this quarter is largely due to timing of accounts receivable collections. Pension contributions for the quarter were $3 million, $33 million lower than last year, as we are not required to make contributions to our U.S. pension plans given the significant funding actions taken in 2012 and 2013 and the resultant funding [ph] status of the plans. Cash taxes were $22 million, $17 million lower than a year ago, largely reflecting the timing of estimated tax payments as well as jurisdictional profitability. Capital spending was $48 million in the quarter, slightly lower than last year. And on a year-to-date basis, free cash flow totaled $158 million, $12 million lower than last year, largely reflecting higher capital spending to support our new program launches as well as slightly higher net interest. Slide 16 summarizes our cash, debt and liquidity positions at the end of September. Cash and marketable securities totaled $1.272 billion while outstanding debt was about $1.6 billion, resulting in a net debt position of $337 million at the end of the quarter. Our liquidity positions, highlighted on the right hand side of the slide and at the end of September, stood at $1.576 billion, including $326 million of availability under our U.S. credit facility. And as noted here as well, through the third quarter, we have returned $211 million to shareholders in the form of share repurchases and dividends, and we continue to actively focus on capital allocation. And Slide 17 summarizes actions we undertook in the third quarter. As Roger mentioned previously, at September 30, we did complete the conversion of our remaining Series B preferred shares into common stock, greatly streamlining Dana's capital structure. As well on July 30, our Board of Directors authorized an additional $400 million for our existing share repurchase program, bringing the total program to $1.4 billion since initiating in late 2012. But just as important, we continue to execute on this authorization, returning $68 million to shareholders by repurchasing 3 million shares of common stock in the third quarter. And since we started our share repurchase program, we have returned over $1 billion to shareholders and have redeemed or repurchased 47 million common share equivalents. Finally, we continue to actively manage our pension exposure, with the focus on reducing obligations. During the quarter, we initiated a program that will allow our former salaried employees in the U.S., who are vested but not yet retired, to be eligible to voluntarily elect to receive a lump sum cash settlement. The existing plan and assets will be used to fund the ultimate settlement, and we don't expect to change the overall funded position of our U.S. plans post completion. We also expect to conclude this program in the fourth quarter of this year. These actions reflect our focus on executing capital initiatives that drive long-term shareholder value while retaining financial flexibility to continue to invest in the business. And finally, slide 18 provides our full year financial targets for 2014. We have revised our full year sales and adjusted EBITDA targets to reflect currency headwinds in South America, as well as a weaker euro, and lower demand in South America and off-highway end markets. We expect full year sales to be about $6.65 billion, providing an adjusted EBITDA of about $745 million, although affirming our expected adjusted EBITDA margin performance of about 11.2%. We are increasing our expected diluted adjusted EPS guidance to a range of $1.93 to $1.96 per share, primarily reflecting a lower share count. We do still expect capital spending to be about to $230 million for the year, and we have raised the low end of our free cash flow target to a range of $285 million to $295 million. We continue to expect our free cash flow to be at the higher end of that range. For the fourth quarter, we expect sales will be slightly lower than our third quarter results. On a sequential basis, we expect Light Vehicle Driveline sales to be slightly higher than the third quarter, as we continue our ramp-up of program launches. On the Commercial Vehicle Driveline front, we expect a further decline in South America demand, with North America commercial vehicle production basically flat, which will lower sales in the fourth quarter compared to the third. Off-Highway Driveline sales are expected to be slightly lower due to now anticipated end market weakness in construction equipment demand. And finally, we expect Power Technologies sales in the fourth quarter to be slightly seasonally lower than the third quarter. We expect adjusted EBITDA to be lower in the fourth quarter compared to last year, obviously in line with our sales expectations. The third quarter was another good quarter for Dana, and we are well positioned to close the year achieving our margin and cash flow targets, despite the impact of demand, and currency movements our businesses have encountered. As we view 2015, at this time we are expecting several markets to remain relatively weak, in particular South America demand, as well as global off-highway end markets. But for the time being, we don't expect a significant rebound in Europe nor India and Thailand. However, North America currently remains a bright spot for both commercial and light vehicle demand. And at this time, we are optimistic that the trend will continue into 2015. Yet as all of you know, 2015 is an important year for Dana for new business launches, and I am pleased to say that those remain on track. And even in a varied volume environment, we will execute our launch plans to drive profitable growth into the future. And we'll provide an update of our sales backlog and 2015 outlook in early January of 2015. So this concludes our presentation, and we will now turn the call over to the operator for any questions. Thank you very much.

[Operator Instructions] Your first question comes from the line of Brett Hoselton with Keybanc.

You guys continued to prove to be very, very good executors, so congratulations. Tough end markets in many respects, but very good executors, so really well done there.

Thank you.

My question here is the performance numbers on Slide 12. I was hoping you could kind of talk a little bit about, both in Light Vehicle Driveline and the Commercial Vehicle Driveline, and I know you gave us a little more insight into the CV issues, but you did $13 million to the positive in the Light Vehicle side, can you talk a little bit about what's driving that? That's a very nice number.

Sure, Brett. This is Bill. And certainly, appreciate your commentary and reflection on our results very much. So just really kind of focusing on Light Vehicle Driveline. Let me walk through a couple of the drivers here. You'll see currency, obviously -- or just start at the top here. That's a $32 million headwind, driving about a $5 million move on EBITDA. That headwind of $32 million, largely driven out of Venezuela and Argentina, really those 2 countries drive the bulk of that currency movement. And then on the EBITDA impact, certainly, we've had -- with those movements, we've had increases in costs in those operations that are being muted somewhat by some transaction gains that we've had, in particular, in Venezuela. So that movement may be a little higher given the countries that we're operating in and the impact of that currency move. If you turn down the volume and mix of about $11 million and then the resulting $2 million, it's about an 18% contribution margin, largely, really, out of South America and Asia Pacific, as we view those markets from a demand perspective. And to your point, last but not least, Light Vehicle has continued, really, during this quarter as well as previous quarters, to initiate actions, discussions with customers on recovery of not only inflation but potentially currency in a number of the markets that we operate in. And you can see here the performance, increasing sales by $22 million. That flow through of about $13 million to segment EBITDA is really offsetting the inflation that we've incurred from prior quarters as well because there is a lag on recovery, but they're also performing within the business. So obviously, recovery action is very important, given the countries that we're operating in and maybe the condition of those current countries, Light Vehicle continues to execute on that front. I can turnover -- very quickly over to Commercial Vehicle Driveline. I think the story here, really, from a volume and mix perspective is we've got an uptick demand environment in Class 8 in North America. If you kind of bifurcate North America from South America, it's increasing sales by about $40 million. The downtick, obviously South America, most notably in Brazil, that was a headwind, if you will, year-over-year, about $20 million, so that's effectively driving that increase in volume and mix. On the performance side, you'll see that negative $7 million on a year-over-year basis. A couple of the issues are items that I identified in my commentary. One was -- and we've maintained this all along, an opportunity we continue to see at Dana, moving our margins forward, is to continue to execute on the material front of the company. We have a number of supply chain initiatives being executed by our Commercial Vehicle group both external and internal. And while they are keenly focused on executing as efficiently as possible, we did incur some higher premium costs given the demand that we saw in North America. That accounted for about $4 million of that $7 million. And then last but not least, we did talk about some elevated warranty experience that we're seeing. And we adjusted our warranty reserves by about $4 million in the quarter. So that kind of rounds it out.

And then share repurchase, $400 million additional authorization here. You've been repurchasing, let's say, at a rate of, give or take, around $50 million per quarter. What kind of a pace do you anticipate going forward? Is that probably a representation of the pace that you might expect going forward? Or do you think you might accelerate or decelerate the pace of share repurchases?

Yes, Brett. It's Bill again. I think our run rate has been probably about $65 million or so, let's say, a quarter. We've maintained all along, other than the actions, obviously, we took up in -- with respect to Series A, and then a large ASR last year, that we are going to be very disciplined, execute the remaining authorization under the $1.4 billion program throughout the course of not only this year but into 2015. The program does extend through the end of 2015. So I think we'll keep the pace. Obviously, acceleration or deceleration may be, if you will, influenced by the market with respect to the stock price. But again, we are trying to be very, very disciplined and consistent in the execution of cash return to the shareholders.

Your next question comes from the line of Patrick Archambault with Goldman Sachs.

I actually -- I just had a couple of questions on Slide 21, just some of the changes that you've made. You took up your Class 8 guidance. You now have this 10,000 -- I guess, it's a 10,000 variance that seems kind of -- between your upside and your downside, that seems kind of big just given there's 2 months left in the year. I guess my first question is, like, what are some of the factors that you think are affecting whether you come in at the bottom or at the top end of that range? And then kind of related to that, how do you see your capability? I guess that's a market number, but like how do you see specifically your capability to address and increase towards the top end?

Well, Patrick, this is Roger. I'll take the first shot at that and then I'll let Mark provide some clarity around it, it's easier with us as well. But from being able to meet the increase that we put in there, I don't see an issue with that, really. And you may be asking that question because of the performance in the third quarter of the CV group. But as Bill articulated, the supplier initiatives that we are working on are setting the CV group up in a great way for going forward in the future to accomplish what we've already articulated our goals are out there. And so we feel very, very good about that. And despite some of the short-term challenges that the group has been working through, we feel real good that they're getting through those challenges in an effective way, and we're going to be able to handle the uptick. In terms of whether the uptick is solid or real or quite a sharp increase, we feel good about that only because of what we see out there in the marketplace as the backlog is forming out into the 2015 time frame, not only in the first quarter, but even out into what is beginning to be end of the second quarter. So we're feeling good about those and we're feeling good about our ability to meet those. And Mark, I don't know if you have anything else to add into that.

Yes. Patrick, just looking in the near term, we are continuing to see backlogs grow especially at our major customer. So that has given us a lot of confidence walking into Q1 that we'll continue to see very strong Class 8 production in North America.

Okay. That's helpful. And I mean, are there any kind of just on that, like -- now that you're making some of the supplier initiatives to sort of free up your own capacity, if you will, like, what kind of -- I mean, without even trying to predict where guidance is going to go on this market number, but what kind of an increase are you -- do you see yourselves as able to handle next year because, obviously, the build rates for this year already have come in much higher than we saw it at the beginning of the year and even a couple of months ago?

Yes. Patrick, just on 2 fronts. One, from a pure capacity perspective, we think we've got the market demands covered with our new initiatives. Second, part of those initiatives are around our cost base in the business, and we do expect that to be a tailwind into 2015 and beyond.

Okay. So I guess we'll get a feel for what increase you're contemplating in January.

Yes.

One follow-up there, just on Europe. I noticed that, that hasn't changed in the heavy truck side. It has on the mining and construction, but on medium/heavy, you're still looking for kind of a 5% -- 4%, I think, decrease. Now I know that's not a real big business for you compared to the off-highway stuff, but still, I guess I was a little surprised by that just given some of the negative headlines we've had about -- from companies like MAN and the like, taking out capacity and stuff like that. So maybe a little comment on that would be helpful.

Yes. I mean at this stage, it is a small market for us in commercial vehicle, primarily our driveshaft business, and we do expect pressure into 2015. But nothing significant we're seeing at this stage that would make us have a radical change in where we position the market at this stage.

Okay. So I guess the post -- pre-buy [ph] decline in production in kind of the second half is playing out as you expect it's at.

Exactly.

Exactly. Yes.

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

Thanks for the preliminary view on '15 by region. I was wondering if we could talk a little bit about Off-Highway and -- I mean, I know you said, sequentially, you expect a little bit of a decline as we go into Q4. Do you think -- I mean, are we finding a bottom in that market? Do you worry that we're going to see kind of continued kind of downward movement as we move into the first half of '15? Or do you think we've kind of stabilized at this low level? I know it's hard to say at this point, but we're just wondering your view.

Yes. No, it's a great question, Patrick. And this is Roger. I think from a mining perspective, we take it probably as about as low as it can probably go over the past several quarters. That said, our group is managing that piece of the business really, really well. In terms of the other pieces of the business, we think that ag may taper down just slightly, maybe into the beginning. But we don't see that as a major, major headwind for us. Obviously, we'd rather see it go up. And we're very, very confident that in the long term, whenever that is, it will go up. But ag may be an area that could taper down just a little bit. But again, I want to reiterate on the Off-Highway business that we have. We're really excited about that business in spite of where we are in the marketplace and in many of the segments that they play in because of the performance demonstration that they've had and the simultaneous increase in the engineering investment they we're making there and the products that they're putting in the market and the customer draw, if you will, on those products. I know it doesn't mean much in the very, very short term when we talk about that, but I feel very good about the long-term prospect for that business because of where they're at in delivering performance now. And I know what's going on with the new product draw in the marketplace. So when those markets come up, I think we're really, really well positioned.

If I could ask just one follow-up to that. Have you seen any change in the new business kind of bids that have come up based on the fact that the volume has been weakening for the customers in that business? Have they still been looking to put in some of the same type of innovation near-term that you had seen over the past couple of months as far as pending activity?

In the off-highway sector, you mean?

Yes.

Absolutely. There's no question about that. They are looking at the regulatory framework that's facing them coming down the road. And there's no question about it, they are very, very interested in adopting the technology that's going to help them with those regulatory frameworks. And that's particularly true in some of the emerging areas of the world where their aspirations are to sell globally. They're really demonstrating a pull for it.

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

Just a question on Off-Highway. Given that you're in a flat -- or in a down year from a sales perspective, you are flat in EBITDA, should we start thinking about this as a structurally more profitable business than it's ever been given the cost that you've taken out and despite some of the headwinds in mining and ag?

I think fundamentally, Brian -- this is Roger again. Fundamentally, that would be a true statement. I mean the work that, that team has done in restructuring that business and positioning it as a technology player and putting those solutions into the customer marketplace, I think, fundamentally, what you said is true. You should think about it as a reset, if you will, of the margin performance of the business.

And Brian, it's Bill. I think it would be different if it was a 1 quarter phenomenon, but I think what you've seen in the Off-Highway side of the house, if you will, just really continued execution despite, obviously, a volatile end market demand. And even on a year-to-date basis, I think they're posting up about 13.3% EBITDA margin...

Yes, sure. It's been a straight march up from 11.8%, 12.3%, 13.7%, 14.1%.

Yes. This has continued to move up. So it's not what -- I would say, when you say structural, certainly I think vast improvements made in the business, focus on efficiencies, material utilization, all the things. And those guys should be very proud of their performance.

And we were asked -- Brian, just to add, we were asked in an earlier call one-time about whether or not we had cut too much in the organization from a cost basis. And my answer then was the same as it is now that, no, we've not done that. We've actually increased our spending on the engineering side, both in terms of the percent and the absolute dollars. So we're putting the money investment where we think it's going to prove beneficial long-term for the shareholders. At the same time, they're doing a tremendous job on the cost side of the business with the current performance.

I appreciate that. If we're thinking about your exposure on ag. And I think when everyone -- when the analysts here at ag right now, they're saying, big, big North American tractors and combines heading into it, that 3-year downturn here. Just talk about kind of how you're exposed in the ag markets and why you're only seeing just a little bit of softness.

Yes. Brian, it's Bill. I think ag represents let's say about 30% of off-highway sales, right, total sales, so that's one piece of the puzzle. And I think the other piece that you're getting to is we don't really participate in the high-end, if you will, from the large combines, the mega farms, so on and so forth. We're kind of that middle -- I'll call, the middle market -- or mid-engine size. And that market, actually, has been fairly stable. It's coming down, but it's been probably more stable than the top, if you will. So that's kind of the positioning of the business with respect to off-highway. So as we kind of move forward, to Roger's point, we could see some continued softness maybe going in 2015. I think even with the technology pulls that are going on with those customers as well. In particular, it goes back to your other question, I think the profitability of the product we provide into that market will be better actually as we move forward. So from a profitability perspective, on an equal basis of sales, we expect to see improved profits over the next several years with respect to the actions being taken by the Off-Highway group. But again, we're middle-market, not real top-end guys with respect to the ag side of the house.

Great. And just one more if I can. Before changing over the Super Duty next year to aluminum, do you guys anticipate any kind of pull-forward maybe of some earnings from '16 into '15 for Light Vehicle Driveline as they did build up a safety stock and then change over?

Brian, just a little bit of clarity. The F150, it will be launching here at the end of the year and first of next year.

No, no, just Super Duty. The one that you're on.

Yes. So Super Duty launch is in 2016. I don't know that we're expecting any major pull-aheads. The volume continues to be very strong at Super Duty platform. We have seen inventories remaining low on a year-over-year basis, so I expect next year to be a strong year in the Super Duty. I mean we will see some changeover that will begin to occur late next year and in 2016. But at this stage, we don't see anything that would say we'd see a significant increase or a significant decline in the volume of the current Super Duty.

Your next question comes from the line of Colin Langan with UBS.

I actually had a question -- looking at your Commercial Vehicle North America mix, it looks like your sales are up about 8%, but the market's up quite a bit more. I think, year-to-date, up something like 18%, 19%. Any color on the year-to-date underperformance in North America? Is that a customer mix issue or a product mix issue?

Colin, it's Mark Wallace. You're correct. It's definitely -- we have a large customer in PACCAR and we basically follow as they do in the market share gains. So that's kind of the basis of how our revenue has been moving throughout 2014.

Okay. And when I look at the income statement. Other income was a positive $20 million. I believe, it's happened last quarter. But I thought it was mostly FX-related. But when we look at the segment walk, it looks like FX was a negative. So what is driving that other positive -- other income to be so positive?

Yes. Colin, it's Bill. It's not only FX in there. We also have -- what gets recorded in other income is we've got interest income, we do have FX if it's transaction gains. Also, what gets -- what's recorded in the current quarter was a pension benefit of about $6 million or so. So it's basically those types of items. And if you look at it, it's basically flat, maybe slightly down, to the third -- the second -- or the third quarter of a year ago. So that number is just an ambient reflection of what's in the accounts. So as far as the interest income and, again, any type of FX transaction gains that are outside the business unit has been reflected there.

So the FX transaction gain, okay. And then any color on Venezuela in the quarter and how you're looking at it for the rest of the year. And where you're starting the cash balance that's there now after the activity.

Yes, I'll take a shot at that, and my colleagues here, I'm sure, will follow up. I'd go to your last question, and we'll be disclosing this in the 10-Q that we file later on. The cash balance and, obviously, bolivar denominations about USD 31 million at the end of September. And what we're seeing, as you recall, when we talk at the end of the second quarter, we expected to see an uptick in volume from first to second half, largely around a restart of OE production. I mean that restart has begun, largely and probably latter part of August for our one customer; a couple of other customers, latter part of September. And we expect that production, obviously, to kind of increase as we move into the fourth quarter. With respect to the performance of the business, I will tell you that I think our team in Venezuela, via meetings with government officials on settling at the official rate with respect to currency transactions, working with the customers on a change in how we conduct business in Venezuela as well as, I would say, just all the cost things that you would be doing regardless of what country you're domiciled in, they're doing a great job. As we look at it right now, we expect still probably total sales, we've got $120 million and probably an EBITDA loss, you'll recall that we said last quarter, about $10 million for the full year. We seem to be on track on that. I think there's going to be some puts and takes with respect to currency movements, really, over the next quarter or so. But I think we're in line on where we expected to be, harkening back to the discussion we have updated at the end of the second quarter.

Okay. And just one last question. When we think of cash priorities, you've announced some actions on derisking your pension plans. How would pension transfer type transactions weigh in sort of your uses of cash going forward? Is that something you think is a right long-term move because, obviously, a lot of companies have made these offers to buy down pensions and then followed it up with full transfers to insurance company.

Yes. And Colin, it's Bill again. I think, just to clarify is the pension plan assets will be used to settle whatever that participation rate is with respect to our current initiative for those terminated and vested salaried employees, if you will. So those would be pension plan assets used not necessary cash call, if you will, on the company. But to your question, I think over the longer term, certainly, those plans, those 2 U.S. plans, in particular, frozen plans. And I would say, and any time you can make a net pension plan smaller, reduces volatility, reduces risk. So I think to your point, could that be a potential use of cash in the future? I don't think you can ever say never. But certainly, we're taking the first step with respect to, again, managing that pension obligations there and making the plan smaller as we proceed forward.

Your next question comes the line of Brian Johnson with Barclays.

A couple of questions, Venezuela and then just longer-term aluminum light duty trucks. On Venezuela, can you remind us of roughly what your PP&E and cash is down there? And given the divergence between the official rate and the black market rates, what could be in store in terms of write-downs there? And then, would you be flagging those as special items if they occur?

Brian, it's Bill. Let me first -- your first question on the net asset position. Our net asset position is about $65 million at the end of September, cash is about $35 million and then PP&E is about $35 million, right, so that's our net asset position in Venezuela. With respect to a divergence, if you will, from an official rate, a SICAD I rate, a SICAD II rate and then, obviously, a black market rate. So certainly, they're large spread. I think one step that was positive for automotive in general is in the third quarter. The fifth official authorization by the Venezuelan government that automotive and related suppliers would be operating into SICAD I rate. But to your question, moving forward, there is still a lot of volatility in the currency rates. I think long-term, having multiple tranches or currency controls probably isn't -- it isn't going to be a long-term thing, quite frankly. So you could see some convergence. There's been a lot of discussion on convergence. And we just even put and disclosed in our SEC filings that, if you were to have a move from VEF 12 to VEF 20, it's a 66% devaluation, you can kind of do the math on what would happen to the net assets of the business. I think the black market is probably trading at VEF 90 to the dollar. But -- so I think that's where we stand currently. I think what's more important, though, with respect to what or how we are viewing the business is, and it's no different than the discussion that we have in the first quarter nor the second quarter is, anywhere around the world where we operate, we operate to provide our customers the best product service available and the capability that we have. But at the same time, we're there because, potentially, customers are there. So I think we've worked very diligently with the customers with respect to this particular situation. We've implemented different business models, if you will, to minimize to growth, if you will, on the balance sheet of Venezuela and, certainly, the growth of U.S. denominated balances, if you will. So we're continuing to take all of those levers and actions as well as our team working with the Venezuelan government on, quite frankly, settling long-standing claims, I'll say, at effectively the official rate still. So a lot of hard work's going on there. But ultimately, we'll address Venezuela as we address it in every quarter. And quite frankly, we look at every alternative available to us, and we're continuing to have those discussions internally here, obviously, and with our Venezuelan teams.

Okay. And if you were to do something in terms of revaluing the assets or the cash there, would that be a special item or would that be in EBITDA?

We have taken to date, obviously, the tos and fros in Venezuela through our adjusted EBITDA. If it was to be -- I think, what you're intimating, a some type of a higher level transaction, I'll call it, or approach, I think we'd make the call when we make that call.

Okay. And then probably more a Roger question. You talked about the F150 Super Duty, which is now aluminum truck which it sounds -- I guess can you confirm whether you have content on the new platform that replaces that, which is rumored to be aluminum? And then two, there's another large customer who's talked about taking one of their iconic SUVs, too, in aluminum. And what would that mean for the axle position there? I mean kind of is that a threat or is that an opportunity for some of the lightweight things like driveshafts that you have?

Yes. So sure, about the first one, on the F150, we don't have driveline, a significant driveline content, but we do have [indiscernible]...

I meant the F250, right. Sorry.

Oh, F250, I'm sorry. Sorry. So with respect to that -- sorry about that, I was going to finish my thought on the F150. For the folks that were wondering what I was -- might have -- going to say, we have content on the engine side of the F150 from a PTG standpoint, not on driveline side. But from a 250 standpoint, as things move to aluminum, I think it -- in some ways, we're a bit agnostic with that, but in some ways, it's actually a benefit for us to be able to offer our customers with those kinds of platforms, the same durability and performance by contributing to the weight reduction that they're trying to ultimately achieve with the vehicle. So I don't see that as a negative in any way for us. But I'll let Mark kind of pick up and provide his input because he's much closer to the actual applications and what we're doing with those.

Yes. Brian, we do have content on the Super Duty as we do today, but we're also growing that share as well on a go-forward basis in 2016 and beyond. So when, with the applications, we do have aluminum body or not, it doesn't really have a major impact on the axle option or driveshaft option. But the main thing it does, it definitely changes some of the dynamics of the vehicle, which we're able to codevelop with our customers to ensure the best when it comes to weight stage, efficiency and the noise reduction or vibration and harshness reduction as well.

And what if a remaining body on -- it looks solid, rear axle SUV that you're involved with were to go all aluminum, would that necessitate moving to a independent rear axle or could you still offer a solid rear axle? Or -- and would there be other opportunities to do wait a platform like that?

Yes, good question. We actually have both options. So based upon the architecture of the vehicle, we can support a full axle or an independent axle. As you may know, we already supply with Jaguar land Rover some very high-end independent axle combinations for their vehicles already. So we have the alternative to go either direction to support the customer on vehicle architecture.

Brian, this is Roger. I just want to throw in, you're asking some very good questions, and it really highlights the value that we're able to bring to our customers when we think about the investments that we've made in systems -- systems engineering and systems integration and product solutions, if you will, because not only do we take a look at our individual product and component solutions, we look at those in context to the overall vehicle platform. And so what we are seeing, as customers are working on these things, is much earlier involvement and much more extensive involvement during the design phases of the whole vehicle. So it's actually something that we're able to bring to our customers in a different way than we were able to do before.

Okay. So just because a large customer might be thinking of aluminum alternative on their current iconic platforms doesn't necessarily mean that's a threat to your content long term.

No. And we think, in some cases, it may be a benefit because of the ability to bring that full systems engineering to the party.

Your next question comes from the line of John Lovallo of Merrill Lynch.

First question is in Power Tech. You guys cited a positive mix impact in EBITDA. I'm curious, is that mix between light vehicle and commercial vehicle? Or is that bringing on products within the Light Vehicle business?

It's Bill. Let me go back to that. I think -- I don't think we've really mentioned a favorable mix. I think what we mentioned was, if you look at the year-over-year, the move in the EBITDA margin, was some unfavorable cost performance. We certainly don't think it's a trend with the business. But just on the quarter, that's where we had called out. If you look at the contribution margin, it's probably a little, actually, south of what we would expect out of our Power Tech group. But again, nothing really you can point to with respect to, really, any significant change in mix, so on and so forth.

Okay. That's helpful. And then getting back to the question, I believe, Colin asked earlier on underperformance in North America, commercial vehicle versus the market. And I think you guys talked about PACCAR. I'm curious though, is it also due to some of the less profitable programs that you let roll off on a year-over-year basis?

The PACCAR discussion that Mark hit obviously, they're a great customer of ours and a very large customer of ours, so we follow those in terms of market share. But there are different things that go on underneath that as well with other customers, some gains that we have with some other customers. There were some actions most recently in the second quarter in Mexico where there were some decisions with some competition to take some pricing actions and we decided not to follow that. And so there was a little bit of a down on sales on our part. I think it was the right thing to do because it would -- it's supported our goal to make sure that we're doing the right thing for our shareholders. So those little -- that wasn't a huge impact, but it was a little bit of an impact. And so those changes, up and down, can affect it a little bit.

A question comes the line of Matt Stover with SIG.

You may have gone into this earlier, but I just was wondering, if we look at the Light Vehicle business and we look at the $13 million in performance, how much of that was associated with recoveries related to pricing, currency and engineering that were in period and out of period?

Matt, it's Bill. I think in period and out of period, we certainly have some recoveries in that line that are out of period, right, because you're basically -- think about what we do, for example, in Argentina. So we have positions that we take where we experience inflation and then we're into a recovery process with a related customer. So there is certainly in period, out of period. But I think what we've seen during the course of, really, quite frankly, most of this year as well as part of last year is it's almost becoming an ambient level of in period, out of period because it's a constant inflation going on, using Argentina as an example. So to bifurcate between what's in and out, kind of difficult maybe to do, but there certainly could be the opportunity to do a bit of that.

Well, if I look at the currency and the devaluation, let's just say those are at 8, would those recoveries have been equal to or greater than $8 million?

Equal to or greater than $8 million?

$8 million.

Oh, yes. You're talking about the currency line of the $5 million and the VZ deval of $3 million, right?

That's right.

So really, those recoveries would've been about $9 million, actually, for those items.

Okay. Okay. And If I look at the Off-Highway business, the margins is [indiscernible] we're working through, if it nicely improved to this year. If we look at the impact of aftermarket in that, what is the proportion of aftermarket sort of this year versus last year? Has that been a contributor to that margin increase? I would've mentioned it would, but I'm just not sure.

Actually, if you think about the aftermarket, that business -- our total aftermarket sales is about $900 million full year. Certainly, Off-Highway has a fairly sizable piece of that. I think at aftermarket, actually, we saw very significant downtick last year, and it sort of stabilized right now. So from a margin perspective, and if you look at what's going on Off-Highway, it's really not a story for the quarter, it's almost relatively equal to last year on the aftermarket side. Now it's in a -- I would say, a low demand environment. But year-to-year there hasn't been much real change in the aftermarket side of the house in Off-Highway.

Because I've been thinking about that right just from a margin standpoint of if those revenues are flattish year-to-year and the margins on that are higher, then if the OE businesses are declining due to the weaknesses in the end markets, then the mix of the aftermarket would have a favorable impact.

Yes. It certainly would, Matt. But concurrently, I think what you'd also see is, given where we've seen downticks, if you will, from an OE perspective demand, the work that has been done by the Off-Highway guys, quite frankly, is to offset, if you will, obviously, variable cost, but even go further into it from a fixed cost structure. So you're right, apples-to-apples, lower OE volume and neutral aftermarket volume year-over-year should provide a margin uplift as long as every cost associated with that OE business is variable. And we all know that that's not the case. We have to work both sides of the house, which we're doing very well.

Your final question comes the line of Justin Long with Stephens.

First thing I wanted to ask about, the margin performance in a tough market has been impressive, but I wanted to ask about the longer-term guidance you've given, to hit that 13% to 14% EBITDA margin exit rate by the end of 2016. I guess first from a high level, do you expect that improvement to be weighted more towards 2015 or 2016? And secondly, how much of that is within your control due to productivity, higher margin products, things that you can control?

Yes. So Justin, this is Roger. Thanks for the question. As we look at what we had indicated for the '14, '15, '16 time frame, we also indicated at the same time that it was a gradual progression, and '16 was where we thought that we would have the more full scale of the production, if you will, in the launches. And so '16 is where the real benefit would come from a margin expansion as a result of the product introductions. That said, we also talked about half of the growth coming from the new business or the net new business, if you will, that we have booked. And the other half of the growth coming from the market that we discussed. We talked earlier in this call about how we feel very good about the first half of the net new business that's launching, and we continue to win new business and that's -- we feel very good about that. We also know on the other half, the market is volatile in some respects and has declined a little bit from what we had anticipated in 2014, as we've already talked through, through this whole call. By 2016, I'm not sure where those markets will be, I don't -- I wouldn't anticipate that they would be down for the full 2 years. But if they were, that could have some kind of an impact on it. But we would expect some of these markets to come back by that time. So I think, 2015, we're optimistic. About 2016, from what we know now, we're optimistic about it and we think that's realistic only because we don't think that these -- the markets that have kind of declined during the year, this year and last year, are going to stay down for that long period of time. We think they're going to start coming up by the time we get out there.

Great, that's a helpful update, I appreciate it. Last question. I just wanted to see if you can give an update on your view on South America when you look at that market longer-term. Obviously, there's been some weakening recently. But is there anything that gives you confidence or close to a bottom in terms of demand?

Justin, this is Mark Wallace. Looking mainly at Brazil, just for this instance, when you -- we got an election coming up on Sunday, we hope that turns out to be a favorable pro-business government. And if you look historically, you see the same type of cycle that has been occurring in the past. And we still have confidence in Brazil. So by all stretch of -- our viewpoint, we continue to weather through the storm. We continue to take cost out from a structural perspective, but we do plan on continuing to focus on that market as potential growth in the future, albeit it may not be in the near-term, but we do expect it to grow over the course of the next few years.

Thank you, Justin. And also, this is Roger, I just want to thank everyone for joining our call this morning, and we really appreciate the positive comments and the recognition of the performance. We're excited about moving forward, and we look forward to talking with you again. Thank you.

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