Oct 26, 2012
Executives
Craig Barber – Director, IR Roger Wood – President and CEO Bill Quigley – EVP and CFO Mark Wallace – EVP and President, Light Vehicle Driveline Technologies
Analysts
Brian Johnson – Barclays Brett Hoselton – KeyBanc Pat Nolan – Deutsche Bank Pat Archambault – Goldman Sachs John Lovallo – Merrill Lynch Amy Caroline – JP Morgan Brian Sponheimer – Gabelli Tim Denoyer – Wolfe Trahan
Operator
Good morning, and welcome to Dana Holding Corporation’s Third Quarter 2012 Webcast and Conference Call. My name is Sarah and I’ll be your conference facilitator.
Please be advised that our meeting today, both the speakers’ remarks and Q&A session will be recorded for replay purposes. There will be a question-and-answer period after the speakers’ remarks, and we will take questions from the telephone only.
(Operator Instructions) At this time, I would like to begin the presentation by turning the call over to Dana’s Director of Investor Relations, Craig Barber. Please go ahead, Mr.
Barber.
Craig Barber
Thank you, Sarah. And welcome to all of you that are joining us, either on the phone or by webcast.
On behalf of the Dana management team, I would like to thank you for joining us this morning. With me is Roger Wood, President and Chief Executive Officer, and Bill Quigley, Executive Vice President and Chief Financial Officer.
Also in the room is Mark Wallace, Executive Vice President and President of Light Vehicle Driveline Technologies. Before we begin, I would like to review a couple of items.
Copies of this morning’s earnings release and the accompanying slides 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 re-broadcast without our written consent. Today’s call will also include a Q&A session.
In order to allow as many questions as possible, please keep your questions brief. Finally, today’s presentation contains 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 list of factors are also detailed in our SEC filings, including our annual, quarterly and current reports with the SEC. With that, I’d like to turn the call over to Roger Wood.
Roger Wood
Thank you, Craig. And good morning, everyone.
We are pleased to report solid financial results for the third quarter despite volatile demand and a rapid softening in some of our end markets. Sales for the period were more than $1.7 billion, with currency impacting us again this quarter versus last year.
Net income for the period was $56 million, marking our sixth consecutive quarter of positive net income. And our adjusted EBITDA margin was 11% for the quarter, 80 basis points higher than the same period in 2011.
All-in-all, Dana responded very quickly and continues to respond to the changing market conditions during the quarter, judiciously spending capital and reducing costs in all areas of the business, while generating positive cash flow of $88 million. In addition to the common dividend that our board of directors declared, I’m pleased to announce that our board of directors has also authorized a share repurchase program for up to $250 million of our currently outstanding shares of common stock.
This program reflects the strength of our balance sheet, our confidence in the long-term prospects of the business and a solid commitment to delivering value to our shareholders. Turning to the next slide.
This is the latest breakdown of our sales by region for the year-to-date. Our regional diversification gives us a distinct advantage in creating synergies and leveraging products and technologies across our markets.
But more importantly in an environment of volatility, this regional diversification coupled with vehicle market and customer diversification allows us to better weather the economic storms. The right side of this slide provides market highlights from the third quarter.
As you can see, there was softening in many markets in regions that we have. While light vehicle production in North America remained strong, we saw a fall-off in commercial vehicle production, especially in Class 8, both year-over-year and sequentially quarter-over-quarter.
In Europe, volumes weakened in both the commercial and the light vehicle markets but within our previously stated expectations. Commercial vehicle volumes in South America, primarily Brazil, remained sluggish but we did see quarter-over-quarter improvement.
In the Asia Pacific region, the heavy truck sector remains depressed, especially in China, although the bus and coach market was stable for us. The takeaway is that our flexible operating model coupled with our work to significantly reduce cost in all areas of the business provides assurance that Dana will remain strong even amid volatile market conditions.
Turning to slide six, I’d like to share some highlights from the quarter beginning with a few important programs that we launched. The 2013 Ford Fusion, for instance, is arguably the biggest new car launch in North America this year and depending on engine configuration, Dana’s Power Technologies group provides a number of products that contribute to the performance and efficiency of this vehicle.
Of note is the exhaust system gasket for the 2-liter GTDi engine. Dana engineers overcame a significant design challenge because of the higher temperatures of this engine configuration.
The solution was a multi-layer steel gasket with a high nickel alloy that provides improved durability and reduced emissions. We also began producing five models of medium and large-sized Spicer mining axles at our facility in Wuxi, China.
The addition of this production capacity in China supports our strategic customers in China with production in Radian and better positions us for long-term expansion. Our light vehicle axle plant in Birmingham, U.K.
recently launched front and rear axle production for the new 2013 Range Rover vehicle. These axles include the latest generation of advanced Spicer axles providing even higher efficiency.
So in addition to the new programs launching this quarter, slide seven shows a few of the advanced technologies that we’ve introduced to the marketplace. Among them were the Spicer model 300 axle featuring GenTech Gearing.
This is the largest yet in our series of lightweight highly efficient axles and is targeted for work trucks, such as heavy-duty pickups and vans. We also introduced our proprietary tire pressure management technology for line haul tractors.
Built internally to the axle, this is the first system of its kind to automatically maintain optimum tire inflation for drive and steer axles, significantly increasing vehicle fuel efficiency and tire life while reducing maintenance. Dana will be the first in the market to offer fully integrated electronically controlled systems specifically engineered for the more complex demands of line haul tractors.
Finally, you are familiar with our efficient robust Spicer Diamond Series driveshafts for large commercial vehicles. Last month we introduced this technology for use on smaller vehicles, including compact trucks, through the larger and medium-duty work trucks.
But we’ve also made improvements to the driveshaft. Using Dana’s proprietary hydroforming manufacturing process, this new driveshaft is shaped to have an expanded center.
This allows it to run at higher speeds while offering increased strength and up to a 5% reduction in weight over the straight aluminum tube driveshaft designs. This technology continues to gain traction and was recognized earlier this month as a finalist for the 2013 Automotive News PACE Awards.
All three of these technology introductions address market-based value drivers, and all three are ready for commercialization. What’s more, in all three cases, we have taken a technology that we previously introduced in one market and leveraged it into another market.
So axles initially developed for passenger cars and light trucks are now into the medium-duty truck market. Tire-pressure management developed for the military has gone into the heavy truck market.
And driveshafts developed for Class 8 trucks are now being sold for smaller work trucks. Slide eight gives a look at one future technology.
It has only been six weeks since we announced a strategic relationship with Fallbrook Technologies and Allison Transmission to develop continuously variable planetary transmissions and driveline components. I’m pleased to tell you that we’re already making progress in commercializing this technology.
One of the original inventors of the technology has joined Dana to lead a team of hand-selected engineers in collaborating with Fallbrook and Allison as we continue to bring this technology to market. This next-generation technology will be designed to increase fuel efficiency, reduce emissions and overall performance of passenger, commercial and off-highway vehicles.
So looking at slide nine, let’s turn back to the here-and-now. Bill will be providing full-year revenue guidance in a few minutes.
But before he does that, let’s take a look at the global markets and how we see the remainder of the year shaping up. Starting in North America, the overall light-vehicle market, including the light truck market, looks flat compared with Q3.
However, we see Dana’s sales lower for that segment in Q4 as we conclude the program roll-offs that we told you about last quarter. In the North American commercial vehicle market, we see further production declines in the fourth quarter, compared with Q3.
We see the overall off-highway market as flat in North America. And while that’s not large for Dana in this region, our sales will be lower due in part to the Q3 divestiture of our business that served the leisure, utility and the all-terrain vehicle market.
We also relocated a product line to China in support of a customer that we have there. This will further impact the reported North American sales.
Looking at South America, the commercial vehicle market saw a modest improvement off its low point in Q2. But we do see somewhat lower production volumes there in the fourth quarter.
Moving to Europe, we see continued softness in light and commercial vehicle, but within the expectations that we laid out previously. As you know, construction and agriculture are the primary segments in our off-highway market.
While the agriculture market in Europe looks stable, softness in the construction market takes our overall fourth quarter forecast a bit lower. Finally, let’s look at the Asia-Pacific region.
Overall conditions for the light vehicle market are expected to remain steady from Q3 to Q4. Dana, however, should see an increase as we ramp-up production axles for the new Ford pickup truck at our Thailand and South Africa operations.
The commercial vehicle market in China is down and that is expected to continue for the remainder of the year. Therefore, we see lower consolidated and non-consolidated sales in this region.
Our off-highway business in Asia is primarily driven by China, where we see softening in the construction market. We do, however, see our relocated products from North America lessening a bit that impact.
As I said in my opening comments, we’re continuing to respond to changing market conditions. To combat some of these challenges, we’re taking aggressive steps to manage our cost.
I’m confident that this is (inaudible).
Operator
Ladies and gentlemen, we are experiencing technical difficulties, please hold the line. (Operator Instructions) And you may continue.
Roger Wood
Okay. we’re back and live again.
Sorry about that, everyone on the line. I believe where we got cut off was investing for new technology.
So I’ll end that slide by just mentioning that the next generation technology will be designed to increase fuel efficiency, reduce emissions and improve overall performance of passenger, commercial and off-highway vehicles and that was on slide eight. So looking in slide nine, let’s turn back to the here and now.
Bill will be providing full-year revenue guidance in a few minutes, but before he does, let’s take a look at the global markets and how we see the remainder of the year shaping up for us. Starting in North America, the overall light vehicle market including the light truck market looks flat compared with Q3.
However we see Dana sales lower for that segment in Q4 as we conclude the program roll-offs that we told you about last quarter. In the North American commercial vehicle market, we see further production declines in the fourth quarter compared with Q3.
We see the overall off-highway market as flat in North America and while that’s not a large segment for Dana in this region, our sales will be lower due in part to the Q3 divestiture of our business that serve the leisure, utility and all-terrain vehicle market. We also relocated a product line to China in support of a customer that we have there.
This will further impact the reported North American sales force. Looking at South America, the commercial vehicle market saw a modest improvement off its low point in Q2, but we see somewhat lower production volumes in the fourth quarter.
Moving to Europe, we see continued softness in light and commercial vehicle but within the expectations that we had laid out previously. As you know, construction and agriculture are the primary segments of our off-highway market.
While the agriculture market in Europe looks stable, softness in the construction market takes our overall fourth quarter forecast lower. Finally, let’s look at the Asia Pacific region.
Overall conditions for the light vehicle market are expected to remain steady from Q3 to Q4. Dana, however, should see an increase as we ramp up production of axles for a new Ford pickup truck at our Thailand and South Africa operations.
The commercial vehicle market in China is down and that’s expected to continue for the remainder of the year. Therefore, we see lower consolidated and non-consolidated sales in the region.
Our off-highway business in Asia is primarily driven by China while we see a softening in the construction market. We do however see our relocated products from North America lessening that impact a bit.
As I said in my opening comments, we’re continuing to respond to the changing market conditions. To combat some of these challenges, we’re taking aggressive steps to manage our cost.
I’m confident that this discipline will help Dana to remain strong even amid volatile market conditions. So looking forward on slide 10, we expect continued volatility in the macroeconomic environment.
Economic uncertainty has impacted production for us in the third and the fourth quarter. As you know, one ingredient in our financial targets for 2013 is a continuing moderate sales increase.
We’re currently deep in our planning process to understand if the market is going to continue its moderate growth or whether we are seeing the beginning of a flattening or even slight fall off in year-to-year sales revenue. That said, we are very pleased with the progress that we made by effectively using the levers of control that we have to manage our costs.
As we stated, we will continue to maintain discipline in terms of cost control and investment timing. We continue to leverage net material cost and work on fixing programs that yield less than acceptable profitability, improve conversion cost in our plants as well as structural cost in our support overhead, and reduce product and process complexity in our products.
Our confidence comes from the results that we’ve already delivered, and we will continue to optimize performance in these areas. And, as we’ve also said, we will continue to invest in new technologies that can deliver higher value to our customers and command higher margins as a result.
As far as 2013 and our 12% EBITDA target is concerned, we are confident in the levers that we can manage and will continue our disciplined response to the changes that the market throws at us. We look forward to updating you on our outlook when we release the 2013 estimate next year in January.
Now I’ll turn it over to Bill for a review of the financials. Thank you.
Bill Quigley
Thanks, Roger. And good morning, ladies and gentlemen.
Before I begin the financial review, I would like to highlight that we completed the final wind-down of our Structures business in the third quarter. And, accordingly, this business is now being reclassified and reported as a discontinued operation in our consolidated GAAP financial statements.
Just for perspective, sales from our Structures business in the third quarter and year-to-date were $8 million and $34 million respectively. We continue to reflect the results of the Structures business in adjusted EBITDA to maintain comparability with prior periods as well as our external guidance.
Also, for consistency purposes, we include Structures sales when presenting adjusted EBITDA margin throughout our presentation. Slide 12 provides a summary of Dana’s 2012 third quarter financial performance with a comparison of the same period a year ago.
As Roger indicated, Dana posted a solid third quarter while navigating difficult market conditions. Sales were $1.7 billion for the quarter, lower by $225 million compared to a year ago, driven principally by unfavorable currency and lower volume, most notably lower commercial vehicle production volume, in both North America and South America.
While sales were lower by almost 12%, adjusted EBITDA for the quarter was $190 million, about 5% lower than last year, reflecting the benefits of both our margin improvement plan and continuing cost discipline. Adjusted EBITDA margin in the quarter was 11%, an 80 basis point improvement over the third quarter of 2011.
Net income totaled $56 million compared to $110 million a year ago. As you’ll likely recall, we recognized a $60 million gain in the third quarter of 2011 from the sale of our Getrag non-controlling equity interests.
Diluted adjusted EPS for the quarter was $0.37 per share compared to $0.45 in 2011, reflecting lower net income after adjusting for restructuring, amortization expenses and other non-recurring items, including the Getrag gain of $17 million. This reduction is principally attributed to lower equity income and higher tax expense in the quarter.
Capital spending this quarter was $42 million, $14 million lower than a year ago as our operations continued to manage new investment more efficiently as well as further leverage existing investment. Free cash flow was positive $88 million in the quarter, $38 million higher than a year-ago, reflecting improved working capital flows and lower capital spending restructuring.
On Slide 13, we have provided a year-to-date summary of our financial performance. Year-to-date consolidated sales were $5.6 billion lower than 2011 by $34 million.
Favorable volume pricing and material recovery actions of about $225 million were more than offset by unfavorable currency of about $280 million. While sales are slightly lower than a year-ago, 2012 adjusted EBITDA of $627 million was $45 million higher than 2011 and margin increased by 90 basis points to 11.1%, reflecting the benefit of volume to date as well as our profit improvement and cost actions.
Net income of $212 million compares to $148 million a year-ago, an improvement of $64 million. While our 2011 third quarter results have benefited from a $60 million gain recognized on the sale of our equity interest in Getrag, as previously discussed, on a year-to-date basis this gain was largely offset by a charge of $53 million the first quarter of 2011 related to our successful debt refinancing.
Free cash flow of $158 million, after adjusting for the $150 million voluntary pension contribution we made in the first quarter of this year was $99 million higher than our 2011 performance. As we highlighted in our second quarter call, we had expected further volatility in the top line in the second half of 2012.
While volatility certainly accelerated beyond our prior expectations across a number of our end markets during the course of the third quarter, we continued our focus on margin and cash flow performance which was reflected in our third quarter and year-to-date performance. Returning to our third quarter results, Slide 14 provides a comparison of our consolidated sales for the third quarter as well as a change by business segment and the key drivers year-over-year.
From a regional perspective, North America increased to 45% of sales compared to 43% a year ago. Europe remained fairly stable on a comparable basis representing 27% of sales.
South America decreased to 15% of sales compared to 20% a year-ago reflecting significantly lower commercial vehicle production in Brazil. Asia Pacific in the quarter was slightly higher than a year-ago, representing 13% of total sales in the quarter, reflecting new program launches in our Light Vehicle Driveline business.
The tables on the bottom left highlights the change in sales by business unit, while the tables to the right highlights the key drivers of our sales performance. Currency lowered sales by $120 million in the quarter and impacted all of our business unit comparisons, but most notably our Off-Highway business with the weakening of the euro and commercial vehicle given a plus 20% weakening of the Brazil reais compared to a year-ago.
Volume in mixed lowered sales by $124 million. As highlighted here, commercial vehicles impacted the most reflecting reduced South America production as well as softening demand in North America arising in the current quarter.
Other includes the impact of raw material recovery and pricing, as well as other items which increased sales by $19 million in the quarter. Slide 15 provides a comparison of adjusted EBITDA for the third quarter.
Adjusted EBITDA of $190 million for the quarter was $10 million lower than the prior-year, principally reflecting lower volume and unfavorable currency, both translation and transaction. These impacts were mostly offset by our profit improvement initiatives, pricing material recoveries, as well as cost reduction actions.
Adjusted EBITDA margin increased to 11%, up from 10.2% in the third quarter of 2011. As previously highlighted, we continue to work diligently in the quarter to maintain our margin in the challenging demand environment by continuing to flex both our manufacturing cost structure as well as our overhead spending.
Similar to sales comparison in the previous slide, the bottom left of the slide provides the year-over-year change by business unit and the key drivers are highlighted to the right. The impact of volume in mix lower adjusted EBITDA in the quarter by $31 million while currency further reduced results by $21 million of which about $12 million were currency gains posted a year-ago.
Performance includes a material recovery, pricing and operating cost actions, that was net positive $42 million in the third quarter compared to a year-ago including slightly higher raw material cost of about $10 million. While I review the performance of each of our business units in more detail in the next slide, commercial vehicle was significantly impacted in the quarter by lower production in North America.
Our business unit segment results are highlighted in the next slide. Light Vehicle Driveline sales are lower by $30 million or about 4% compared to a year-ago.
Adjusting for the currency impact of about $26 million, sales were basically flat in 2011. On a sequential basis, sales were lower by about 10% driven largely due to the customer program roll-offs planned in North America, partially offset by increased Chrysler and Ford volume.
Segment EBITDA of $68 million was lower than a year ago by $6 million, principally reflecting currency gains realized a year-ago. Segment EBITDA margin for the quarter was 10.3%, down slightly from a year ago, yet flat to second quarter’s results, reflecting a larger profile of program roll-offs.
Commercial Vehicle Driveline sales of $471 million were lower by $140 million or 23% compared to a year-ago. The principal drivers of the change were currency of $45 million, about $85 million related to lower demand in South America and about $20 million in North America.
While sales were significantly lower, segment EBITDA margin of 9.6% declined by only 40 basis points from a year ago, reflecting the benefit of pricing and material recovery initiatives. Sequentially, third quarter margin declined by about 150 basis points, representing the impact of higher North American margins and volatile customer demand patterns, posing a challenge to our ability to fully adjust our manufacturing cost structure in the quarter.
Off-Highway sales of $343 million were lower than a year ago by about $42 million, of which currency accounted for $34 million. We also completed the divestiture of our leisure products as Roger referenced in the third quarter, which reduced sales by $5 million.
Finally, we experienced softness in construction demand in the latter part of the quarter. Adjusted EBITDA of $48 million or 14% was higher by $6 million compared to last year, reflecting pricing, material and other cost-reduction initiatives.
Power Technology sales of $242 million in the quarter were lower than a year ago by $14 million, currency accounting for $15 million. Adjusted EBITDA of $29 million, up 12%, was slightly lower than year-ago, reflecting unfavorable geographic and customer mix.
On a sequential basis, sales were lower by about $20 million, reflecting lower demand in Europe and to a lesser extent North America. Adjusted EBITDA margin was lower by 210 basis points, reflecting both lower volume and favorable mix.
Slide 17 highlights the year-to-date performance from each of our business segments. In our second quarter call we had outlined that we expected the second half of 2012 to be a more challenging volume environment when compared to our first half results.
As highlighted here, Commercial Vehicle, Off-Highway and Power Technologies all improved margins on either lower or flat sales year-to-date. Light Vehicle year-to-date margins are largely in line with our expectations and comparable to 2011 results.
And, while the third quarter was more challenging than we had previously expected on the top line, each of our businesses continue to make the necessary adjustments needed to maintain our overall margin performance. Slide 18 summarizes our free cash flow performance for the quarter.
Free cash flow in the third quarter was $88 million, $38 million higher than last year. Working capital was positive $30 million in the quarter, largely reflecting lower sales in the quarter compared to quarter two.
Capital spending was $42 million, $14 million lower than a year ago, as each of the businesses continue to assess, evaluate and adjust new investment in light of the production volume environment as well as current capacity and installed investment. Cash outflow for interest and taxes were $58 million in the quarter.
Interest payments were $29 million, about equal to a year ago, while cash taxes totaled $29 million, $10 million higher than last year, reflecting improved profitability in several foreign jurisdictions. For the full-year, we do expect interest payments and cash taxes to be about $55 million and $95 million respectively.
Restructuring of $8 million was lower than a year ago by $27 million. And for the full-year, we expect restructuring cash outflows to be about $45 million.
Pension contributions in the quarter were $24 million of which $22 million related to our U.S. plans.
Total pension contributions will be about $70 million for the full-year, excluding the $150 million special contribution we made in January earlier this year. On a year-to-date basis, free cash flow adjusted for the $150 million voluntary pension contribution was positive $158 million, an improvement of nearly $100 million compared to 2011.
Slide 19 highlights cash and liquidity at the end of the quarter. Total cash on hand, including marketable securities of $64 million was plus $1 billion, and when compared to total outstanding debt of $936 million, we ended the quarter in a net cash position of $68 million.
At the end of September, total liquidity stood at almost $1.4 billion, including $418 million of availability under our U.S. and Europe credit facilities.
And as Roger stated, we also announced today that our Board of Directors approved a 250 million share repurchase program reflecting the current strength of our balance sheet as well as expected near-term and mid-term cash flow generation. Slide 20 summarizes our global vehicle production estimates for the full-year of 2012.
In North America, we expect an increase in Light Vehicle Production in the range of 14.8 million to 15.1 million units. We have narrowed our estimate of full-year light truck production to 3.6 million to 3.7 million units as well as the medium truck range to 175,000 to 180,000 units.
We are lowering our North America heavy truck production estimate and now expect Class 8 truck production to be in the range of 265,000 to 275,000 units. In Europe, we are lowering our full-year Light Vehicle production outlook compared to our prior estimates, yet are maintaining medium and heavy truck at 400,000 to 420,000 units.
For South America, while there was a slight increase in medium and heavy truck production in Brazil from the second to the third quarter, we expect full-year production to fall within our previous estimates. Similarly for Asia-Pacific medium and head truck production, we do not expect any significant change as demand in China remains depressed.
And as you know, changes in the China heavy truck market had the largest impact in our DDAC joint venture, which has been significantly impacted through the second quarter as well as year-to-date. Year-to-date DDAC sales totaled $528 million, 27% lower than a year ago.
Finally, for Off-Highway, we’re pulling in our estimate for global construction equipment as we are experiencing demand reductions in both Europe as well as Asia. Slide 21 summarizes our updated full-year guidance.
As we’ve discussed throughout the call, we are seeing lower demand in some of our end markets and consequently we are lowering our 2012 full-year sales target to a range of $7.2 billion to $7.3 billion. We are reducing our full-year adjusted EBITDA guidance to a range of $780 million to $800 million or approximately 11% of sales.
This range represents a $15 million to $35 million improvement in adjusted EBITDA over our actual 2011 performance on lower sales of between $300 million to $400 million. We have lowered our full-year capital spending and narrowed the range, which we now expect to be in the range of $160 million to $170 million for 2012.
And we now expect full-year free cash flow to be in a range of $240 million to $260 million adjusting for the $150 million voluntary U.S. pension cash contribution.
This concludes my presentation and we’ll now turn over the call to the operator for questions. And thank you very much.
Operator
(Operator Instructions) Your first question is from Brian Johnson with Barclays.
Mark Wallace
Hi, Brian.
Roger Wood
Hi, Brian.
Brian Johnson – Barclays
Just looking at the kind of moving around to the margins in the quarter and also how we should think about those going forward, is this type of improvement we have on the margin side in Off-Highway sustainable, or is this something just for this particular quarter that drove that?
Bill Quigley
Hey, Brian. It’s Bill Quigley.
Yeah, with respect to our Off-Highway, obviously they had a very good quarter with respect to the margin that they posted given sales. In my comments I indicated that there were a number of items impacting that material pricing, certain material recoveries, pricing recoveries, and other actions.
Obviously, some of that has some lumpiness in this and we wouldn’t expect that type of trend at the margin they posted in the third quarter to continue into the fourth quarter.
Brian Johnson – Barclays
Okay. And, similarly, on Power margins, we’ve sort of become accustomed to increasing margins there.
Is it just purely an incremental volume issue there?
Bill Quigley
Yeah. This is certainly a volume issue, with respect to PT.
Obviously, there will be an impact given the end markets that they serve, but this clearly is just a contribution margin impact. Although we believe the PT group is working very hard to offset that as they move into the fourth quarter.
Brian Johnson – Barclays
Okay. And then Light Vehicle Driveline, the one program rolled-off.
I mean, roughly how big was that in terms of revenue?
Bill Quigley
Yeah. There are several programs that we had talked about in our second quarter call, Brian.
It’s not one particular program, but a number of programs. And I think if you kind of look at the movement from second to third, from a clinical volume perspective, ex-FX, the bulk of that was the roll-offs of those programs.
Brian Johnson – Barclays
Okay. And in terms of your particular, could you maybe update us just on maybe the four or five most important Light Vehicle Driveline platforms?
Mark Wallace
Hey, Brian. It’s Mark Wallace.
I’ll give you an update. Actually, the two major ones for us is the Jeep Wrangler, as you well know.
The inventory remains low, it’s around 51 days, and so we continue to see a good volume from Chrysler and Jeep. On the Super Duty, again, inventory days are up a bit on the F-150, which is the grouping that includes Super Duty.
But, overall, we continue to see strong demand there with an additional couple days of overcome plan this year for November and December as well.
Brian Johnson – Barclays
And if you think about the North America part of Light Vehicle Driveline, about roughly what percent of the revenue might that be? Those two platforms?
Mark Wallace
Yep. Brian, I don’t think we’ve given out that type of information in the past.
But just one thing to keep in mind, the bulk of the LVD business is centered around the larger pickups and full-frame vehicles.
Brian Johnson – Barclays
Okay, which is why you continue to point out those don’t necessarily move the same as Japanese-manufactured small cars.
Mark Wallace
Exactly.
Roger Wood
That’s correct.
Brian Johnson – Barclays
Okay. Thanks.
Mark Wallace
You bet.
Operator
Your next question comes from the line of Brett Hoselton with KeyBanc.
Roger Wood
Hi, Brett.
Bill Quigley
Hi Brett.
Brett Hoselton – KeyBanc
So, in answer to Brian’s question on the Off-Highway margins, my interpretation of what you said is kind of 11% range is a more reasonable go-forward range. Is that a fair assessment, Bill?
Bill Quigley
Yeah, I think that’s a fair assessment given the performance in the quarter. But again some of that lumpiness with respect to certainly the actions of the group has been taken in light of softening demand, that’s probably a good range.
Brett Hoselton – KeyBanc
And then, I could be mistaken here, but it seems like PACCAR, which is a pretty large customer of yours, is expecting to see actually an increase in production from the third to the fourth quarter. You seem to be seeing something different than that.
Is it that the other portion of your volume is significantly down and therefore net, net as a whole, CV is down?
Roger Wood
Yeah, Brett, this is Roger. The way we looked at that fourth quarter in our Class-8 market if you will in North America is, we saw some pretty rapid changes in the third quarter, as you know from what we’ve talked about here.
And, we would have probably expected this to have a little bit more foresight on those changes than we did. And, as you know, the way they came to us were through taking out specific days of production as opposed to lowering the overall volumes in the third quarter.
And that’s one of the reasons that we have to scramble a little bit to catch up on the cost side of things which our guys are doing a great job of doing. We have decided that because of that shortness of visibility, if you will, and the outlook that we see in the overall marketplace, that we are not tagging it on anyone individual customer, but we think the overall marketplace is going to show us on aggregate slightly lower volumes in the fourth quarter than what we saw in the third quarter.
And it’s just mainly due to that real shortness of visibility that we were able to see.
Brett Hoselton – KeyBanc
Excellent. Thank you very much, gentlemen.
Operator
Your next question comes from the line of Patrick Nolan with Deutsche Bank.
Roger Wood
Hey, Pat.
Bill Quigley
Hey, Pat.
Pat Nolan – Deutsche Bank
Just a couple questions. Could you give us some color on how the $42 million of performance improvement broke down in the quarter, kind of when you think about in big buckets of the internal stuff you can control versus the external stuff like pricing?
Bill Quigley
Yeah, let me see if I can kind of give you some sizing on that a bit. I think if you think about the sales walk that we provided on a slide previously, there was an $18 million to $19 million in items that were impacting the top line, largely price and material recovery.
So that’s part of the $42 million. We did see some material inflation, though in the quarter year-over-year.
We call that about $10 million. And then going down the list, obviously with respect to what the operations can do within the plant from a conversion cost perspective, as well as lower cost in both “corporate” as well as our regional structures.
That made up the bulk of it. So if you kind of go $19 million on price and material recovery, offset by $10 million in net commodity, the remainder of that is our conversion cost actions as well as our overall actions with respect to taking down our structural cost in the quarter.
Pat Nolan – Deutsche Bank
Got it. And I mean you had really strong margin performance in the quarter given the revenue pressures.
Is there any thought process that you may be pulled forward some of these cost-saving actions that maybe you don’t have a similar type of benefit next year?
Roger Wood
Well, this is Roger, Patrick. We continue to work on all the levers that have been in our control as we’ve consistently maintained to march toward that 2013 target that was out there.
We continue to do that. So, no, this is just the natural progression of continuing to pull those levers.
And as I’d mentioned in the end of my talk, as we march toward that 2013, we were not expecting a dramatic uptick in sales. But we were just expecting a continuing moderate growth as we’ve experienced over the last year or so.
As we pull those levers and we continue to pull the levers to take advantage of opportunities to become more efficient in our operations and in our overhead structure and things, without an increase in sales, obviously, we’re just continuing the margin expansion by handling the cost side. And whether it’s a decrease in sales, we’re just making up for that.
So it’s a combination of factors that we’re doing. But I don’t believe that – I know that we haven’t done anything in the third quarter as a unique thing that would pull anything ahead from the fourth quarter.
So we continue on that march.
Pat Nolan – Deutsche Bank
And if I could just squeeze one more in. How should we think about the size of the buyback authorization?
The $250 million over two years, I mean that looks like – you’ve acknowledged before that you have excess cash on the balance sheet. It looks like you’d be able to fund at least $200 million of that buyback authorization just with that free cash flow next year, even if earnings were flat.
So, how should we be thinking about this authorization as kind of a first step? Do you think it’s appropriate size?
Any color you could give there would be helpful.
Bill Quigley
Yeah, Pat. This is Bill.
Obviously within our capital allocation framework, we’ve got a number of levers and things that we focus on with respect to how we look at the capital structure of the company – how we continue to invest in the company, opportunities with respect to organic initiatives and, of course, shareholder return. To your point, I think with respect to the authorization that the board has provided us with respect to a repurchase program of $250 million over a two-year period, it’s a measured and moderate step towards incremental shareholder returns given what we see, at least, in the near-term environment, the ability of the company to continue to generate cash flow in light of even some pretty choppy markets, quite frankly, if you take a look at our third quarter results.
So I think it continues to be steps. We’ve taken steps.
We’ve initiated a common dividend this year. Obviously now announcing a share repurchase.
And it’s all within the framework of how we view the business with respect to deploying capital, both from an investment perspective. But obviously always keeping in mind in priority, shareholder return.
So a step towards that direction. Another step.
Roger Wood
Yeah. I would build on what Bill is saying.
This is Roger, Patrick, that our board is solidly committed, as are we and the management team, to shareholder return, shareholder value. And this is another stepping stone to be able to achieve that objective on top of the dividend that we started last year.
So, I would agree with Bill, this is a step, and we will continue to do that.
Pat Nolan – Deutsche Bank
Okay, thanks. Good quarter.
Operator
Now our next question comes from the line of Patrick Archambault with Goldman Sachs.
Pat Archambault – Goldman Sachs
Hi, good morning.
Roger Wood
Hi, Pat.
Bill Quigley
Good morning.
Pat Archambault – Goldman Sachs
I’m sorry if you went over this, just because I got disconnected from the call at some point. But in terms of the 12% margin target, is that something that is still within, sort of, the purview of being doable if volumes are okay next year?
How are you thinking about that?
Roger Wood
Yeah, thanks, Patrick. This is Roger.
Well, as we’ve mentioned, there’s about five levers that we’re utilizing on this march that we’ve been on here for the last few years. We talk about material and pricing leverage, and that’s within our control and that’s one that we continue to march on and make some good progress with.
Conversion and structural costs in the business, again, within our control. We’re making really good progress in that area as it’s resulting in the improvements that you’ve seen over the past several quarters.
Product and process complexity is one of the levers as well. That one is a bit more medium-term.
That’s because products need to be validated as we reduce the number of SKUs and take the complexity out. But it’s good for our customers and it’s good for us, so we’re getting a lot of support, it just takes some more time on that one.
And then our technology margin profile, if you will, as we introduce new products into the marketplace that afford better value for our customers, we are able to command better margins on those. Those are the four areas within our control on a daily basis that we work on consistently across the organization.
The fifth one was, again, not an expectation that we would see a dramatic sales increase or need a dramatic sales increase to accomplish that. But we had expected to maintain the moderate pace of increase that we’ve experienced over the last year or so.
And that one is the question right now that we’re doing – we’re right in the middle of a deep process of making sure that we can understand what’s happening with this volatility that we’re experiencing, to see if it is a flattening or a slight decrease, or if it’s just an anomaly that we’re going through a bump here and we’re going to see some increases. That’s an open question, and we believe that by January when we talk to you we’ll have the answer to that fifth one.
But those are the five levers. Four of them we continue to march on, and the one we’re watching really closely.
Pat Archambault – Goldman Sachs
Okay, that’s helpful perspective. And just on, kind of, just simplistically looking at the fourth quarter guidance, if I’m not mistaken I think the midpoint is down.
Is it 14% on a revenue basis? Obviously, the margin performance there implied is pretty good, though.
Can you just, kind of, help dimension that for us? I mean, there’s so many end markets.
Like, how much of that really is the anticipation of weaker end markets? How much of it is mix?
How much of it is other issues like some of these roll-offs that you’re experiencing in the light side?
Bill Quigley
Yeah. I think – this is Bill Quigley.
I think from the light vehicle perspective, it’s predominantly roll-offs as we kind of look at quarter three to quarter four with respect to our moves there. With respect to commercial vehicle, it certainly is the market as we’ve just taken and lower our estimates on Class 8 vehicle production for full year.
With respect to off-highway, we had some comments with what we’re seeing in the marketplace that really kind of popped up during the latter course of the third quarter, but certainly the construction market in both Europe as well as to a lesser extent for us in North America is certainly on a different trace than what we had previously thought. So I think largely it’s around volume impacting commercial vehicle and off-highway the most significantly quarter three to quarter four.
Pat Archambault – Goldman Sachs
Okay. That’s helpful.
And then one last real quick one if I may, you had a very strong improvement in margins in the off-highway, but clearly less so in some of the other segments. As you go into subsequent quarters, is there still some pretty good low-hanging fruit to see margins improve in those other segments year-on-year?
Or is it something that maybe just negative operating leverage is preventing you from being able to do?
Bill Quigley
I think certainly from the other business units just given the flight, if you will, of the sales and as well as the profitability now of those businesses vis-à-vis maybe even a year ago with respect to all the actions that the team has taken to position those businesses for the future, I think I wouldn’t call it negative leverage but obviously offsetting the contribution margins in kind of a falling demand environment, is becoming more of a challenge for the business. That’s the positive actually because these businesses are in a much different profitability picture than they were even a year ago.
So I think it’s more of volume, as Roger stated, even moving into 2013, certainly you can see from a number of past quarters that with some volume we’ve been able to convert in a contribution margin fairly well and now we are working hard to ensure that as we see down drifts in the top-line that we can offset those. But obviously it’s more challenging given the profitability of business overall.
Roger Wood
Yeah, and this is Roger, and I would also build on to that by saying in the commercial market where we saw in the third quarter in North America, it was very choppy, because the way the volumes decreased weren’t just taking the volumes down and running at a different runway. It was taking days, specific days out of the production schedule that were not well planned that the marketplace did not allow us to plan for those.
So taking days out and then coming back full-steam and then taking other days out, there’s a different way to try to manage that cost picture. So that’s the reason that we have taken the actions that we’re taking now.
We’re taking that volume down such that we can run at a more reasonable pace. But I should say even in light of that difficult challenging environment in the third quarter, our folks in the commercial vehicle business segment did a fantastic job at reacting to what they could react to and will do an even better job of it in the fourth quarter because we’ve made the decision that we’re making to get to a different level.
Pat Archambault – Goldman Sachs
Okay, great. Thank you.
Thank you very much.
Operator
Your next question comes from the line of John Lovallo with Merrill Lynch.
Roger Wood
Hey, John.
Bill Quigley
Hi, John.
John Lovallo – Merrill Lynch
How you doing? And I apologize I got cut off as well.
So if you addressed these, apologies. The first question I have is in regard to the reduction in CapEx.
Is this more of a timing issue or are you guys cutting back on investment? How would you characterize that?
Roger Wood
Yeah, well thanks for asking that question, John, because this is a really important point that we need to make sure people understand. We are not cutting back on any necessary investment that we need to make for our – for solidification, if you will, of our growth.
None of that is being cut back. But there’s two aspects of what has really affected the cutbacks.
One, our guys are doing a fantastic job as we look at the business and what the capital needs really are, they’re finding ways as we’re getting into all these levers that we’re telling you we’re working on. They’re finding ways to do more with less of an investment, and that’s kind of an ongoing thing that we’re discovering in the organization that our investment in certain areas is less now than it may have once been at Dana to accomplish the same thing.
So, greatly reducing the amount of capital in some of those areas that we need to invest to get the same amount that we did before. The second area is from a capacity standpoint.
In light of this, what we’re doing to understand where next year is going, we’re not rushing into putting the capacity in for the high growth that we thought once might be there. We’re holding that back because we don’t need it in there sooner than what we really need it.
So we’ve taken the decision to not put some of that in because we don’t think at this point in time that’s going to be needed. So those are the two areas that have affected the reduction in capital, but we are not at all, in any way, restricting the investment in places in the company that we need it.
John Lovallo – Merrill Lynch
That’s very helpful. Next question is, there seems to be a couple of programs in Brazil to try to stimulate commercial vehicle demand.
I think one is lower finance rates and the other is basically incentivizing novice to local source. Are you guys – how are you thinking about these programs?
Mark Wallace
Brian, it’s Mark Wallace. You know honestly South America obviously has been quite a negative surprise this year, as we continued to see weakness all throughout the entire year.
And right now we’re very cautious on Brazil specifically. I think we’ll see additional continued weakness in Q4.
Additional down days or weeks in December. So I think we’re very much in a wait-and-see.
I mean clearly we have the capacity available to ramp back up, but we’ve taken aggressive actions in South America to offset the temporary labor cost, et cetera. But right now, we’re still in a wait-and-see attitude with Brazil and its recovering commercial vehicle.
They are doing quite well in the passenger car market at this stage. But we have not seen the benefit of those incentives in commercial vehicle yet.
John Lovallo – Merrill Lynch
Okay. Great.
If I could sneak one more in here. Given the volatility that we’re seeing in the market, are you guys seeing any additional push back from OEMs on pricing?
Roger Wood
This is Roger. On that subject I wouldn’t say that it’s any different than any other times.
In good times, in bad times, neutral times, the pressure is about the same and it’s always there. So we’re not seeing anything different.
John Lovallo – Merrill Lynch
Okay. Great.
Thanks very much guys.
Roger Wood
Thanks.
Operator
Your next question comes from the line of Ryan Brinkman with JP Morgan.
Roger Wood
Hey, Ryan.
Amy Caroline – JP Morgan
Hi. This is actually Amy Caroline for Ryan.
Roger Wood
Okay. Hi, Amy.
Bill Quigley
Hi, Amy.
Amy Caroline – JP Morgan
Hi. Just one quick question.
You talked about the different levers that you can pull. And I just wanted to understand this a little bit differently.
If you could just help us think about in terms of percentage of completion, of how much you think you have achieved relative to your expectation? Like for improving in pricing?
What percentage or where along the line do you think you are on that?
Roger Wood
Well in virtually all the levers that I talked about where we control them, the four that we control, that will always be an ongoing process. Five years we’ll be sitting here and telling you that we’re still working on those things in a continuous improvement mode.
You’re right though that in certain instances there are areas that, there are lower hanging fruit than other areas. And, I’d say the real low hanging fruit has already been mine.
But we were very confident in the march toward that 2013 objective with the four levers and remain very confident that our cost picture on each of those four is going to be where we had anticipated it to be. The question in our mind at this point is that fifth lever, the one that is more market based and that we have to react to and understand where that market is going, whether it’s going to continue its moderate climb, be neutral, or even slightly down.
And that’s the one question right now that we’re still working with our internal folks, as well as some external folks, to try to get a better answer to that one. But to give you a percentage on each of those, I guess the best way to answer that, Amy, is just that they are where they need to be, where we anticipated they needed to be for the march that we’re making towards that 2013 objective.
Amy Caroline – JP Morgan
Okay. And when you say the weighting on all the levers are about roughly the same?
Roger Wood
No. Because material cost and conversion costs are things that we can affect on the inside of the company.
Product complexity, reducing product complexity and introducing new technologies is something that requires validation and engineering testing and thinking in coordination with our customers’ platforms that has staggered ability, if you will, to implement. So the four are on different schedules, if you will.
Amy Caroline – JP Morgan
Okay. And then just one last housekeeping question.
Can you just remind us what the inside of your off-highway, what the mix is between ag and construction?
Roger Wood
Yeah. We’re about 40%, 40%, 20% is a good mix.
40% construction, 40% ag, and then the 20% with mining and all the other areas, material handling and so forth.
Amy Caroline – JP Morgan
Great. Thank you.
Operator
Your next question comes from the line of Brian Sponheimer with Gabelli.
Brian Sponheimer – Gabelli
Hi. Good morning.
And very good job on execution.
Roger Wood
Thank you.
Brian Sponheimer – Gabelli
Couple of questions. Given, or first of all, can you bucket the friction cost that you saw in the Commercial Vehicle division because of the lost days in the quarter?
Mark Wallace
Oh the, Brian, you’re referring to the impact of the choppy demand pattern that we saw...
Brian Sponheimer – Gabelli
Yes.
Mark Wallace
With respect to Commercial Vehicle in the third quarter. We haven’t necessarily mentioned that, but make no doubt about it, obviously, given how those production schedules were coming and then going, there is certainly, if you look at it kind of overall, we had about 16% or so margin impact, contribution margin impact, in the business in CV.
One is obviously the profitability of that business is much different. But two, it’s certainly posed additional challenges to the manufacturing folks to try to realign the operations given, kind of, an hang-off switch being made.
So it’s probably a touch high with respect to that. But as they kind of move forward, to Roger’s point as well, we’re working towards a different – maybe a different expectation of production throughout the course of the rest of the year that maybe other customers may not be.
So we’re working hard to align to a level of demand that we’re comfortable with or expected demand through the fourth quarter. Because we certainly had some challenges with respect to addressing the demand patterns that we saw in the third quarter.
Brian Sponheimer – Gabelli
Okay. Thanks.
That’s helpful. Second question, given that you saw the commercial construction market fall off in Europe, do you anticipate having to do any additional restructuring there as far as head count or footprint to handle what you might think of as some prolonged weakness?
Roger Wood
Yeah, good question. We don’t anticipate major footprint changes or restructuring activities.
And as I mentioned before, we’re always looking at our entire cost structure, which includes support and overhead costs in it. Those areas we always continue to look at to make sure that we’re optimizing it in relationship to the revenue streams that we see out there.
But major footprint changes we don’t really see. Once in a while we’ll be doing those things as an ongoing basis, but no major initiative.
Brian Sponheimer – Gabelli
Okay. And then last one, if I can.
You called out the Ford Super Duty as an important platform for you on the light vehicle side, and obviously with housing coming back, at least as strong as it has thus far, why shouldn’t we think that the light vehicle side could be a major source of improvement for you next year?
Mark Wallace
Yeah, Brian. Hi.
It’s Mark Wallace. And I’ll see you Monday, actually.
Actually on the Super Duty, year-over-year we see that volume is already up year-over-year on the Super Duty. So that Super Duty volume along with the Chrysler JK, as we talked about the last couple of quarters, is offsetting those programs that rolled off starting in August of this year.
So, overall, we’re not saying that there’s not tailwind from these type of programs. But again with the roll-offs that happened, it may not be as dramatic as we’re expecting or what you may expect by looking at potential increases in programs like Super Duty.
Brian Sponheimer – Gabelli
All right. Thank you very much.
See you Monday. And excellent execution, once again.
Mark Wallace
Thank you.
Roger Wood
Thank you.
Operator
Ladies and gentlemen, we have time for one final question. Your last question comes from the line of Tim Denoyer with Wolfe Trahan.
Roger Wood
Hi, Tim.
Tim Denoyer – Wolfe Trahan
If I could ask the CapEx question a little bit differently. In terms of 2013, do you think that the reductions in CapEx this year would cause 2013 to be a little bit of a catch-up year, where things might be above the $225 million to $250 million that you were initially planning for this year?
Or is that kind of range more realistic?
Roger Wood
You know, I think we’re just kind of finalizing our plans for what 2013 will be and we’ll announce that in January, Tim. But I do not anticipate that the changes that we make next year would be reflected – the changes that we’ve made to the forecast this year will be reflected as an addition to whatever would be next year.
I do not anticipate that at all.
Tim Denoyer – Wolfe Trahan
Okay. Thanks.
And then one quick one on the Europe truck market. You said on slide five that the volumes were down about 15% from 2Q to 3Q.
Is that just the two weeks of seasonal downtime? Or are you talking about production rates on a per-day basis there?
Mark Wallace
Yeah, Tim, a couple things on Europe. Again, for Dana, we were pretty pessimistic on truck production in Europe, especially Q1 and Q2.
In reality, it actually has been better than we expected. But, again, when you look at the year-over-year volume, it’s down about 11% roughly year-to-date.
We had been expecting that we would see decreases in Q3 and Q4, a lot of that driven by the fact that just the economic situation in Europe is pulling down those volumes. So I would say that we’ll see the weakening as we did in Q3 again in Q4 as well.
Tim Denoyer – Wolfe Trahan
Okay. Thanks.
And then, Roger, if I can ask the question about the 2013 margin target in a different way? Can you quantify perhaps or just give us a sense of how much of the 100 basis points of implied margin improvement in that 12% target is within those levers that are within your control?
Roger Wood
No, we haven’t broken that out, Tim, in the past. We’ve been looking at those on the aggregate, because in the answer to one of the previous questions here, each one of them is on a different time schedule path, if you will.
Revenue is the only one that’s on a fixed path; it is when it is. So we have not been able to break that out yet, but in January we’ll be able to let you know where we’re at in that whole thing.
Tim Denoyer – Wolfe Trahan
Great. Thanks very much.
Operator
At this time, there are no further questions. Presenters, do you have any closing remarks?
Craig Barber
No, I think we’ll say thank you, everybody, for joining us. And if we didn’t get your question, we can follow-up with you later.
Thanks.
Operator
This concludes today’s Dana Holding Corporation’s third quarter 2012 webcast and conference call. You may now disconnect.