Craig Barber - Dana, Inc. James K. Kamsickas - Dana, Inc. Jonathan M. Collins - Dana, Inc..

Joseph Spak - RBC Capital Markets LLC Justin Long - Stephens, Inc. Brian A. Johnson - Barclays Capital, Inc. Samik X. Chatterjee - JPMorgan Securities LLC Brian C. Sponheimer - G.research LLC.

Good morning, and welcome to Dana Incorporated's Fourth Quarter and Full Year 2016 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 Q&A session will be recorded for replay purposes.

There will be a question-and-answer period after the speaker's remarks and we will take questions from telephone only. At this time, I would like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations and Strategic Planning, Craig Barber. Please go ahead, Mr. Barber..

Thanks, Brent, and thank you to everyone on the call for joining us today for Dana's fourth quarter and full year 2016 earnings call. Copies of our press release and presentation have been posted on Dana's website. Today's call is being recorded, and the supporting materials are the property of Dana, Inc.

They may not be recorded, copied or rebroadcast without our written consent. We will end our call with a Q&A session. In order to allow as many questions as possible, please keep your questions brief. Today's presentation includes forward-looking statements about our expectations for Dana's future performance.

Actual results could differ from those suggested by our comments today. 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 reports with the SEC.

Presenting this morning are Jim Kamsickas, President and Chief Executive Officer and Jonathan Collins, Executive Vice President and Chief Financial Officer. With that, I'd like to turn the call over to Jim..

our SmartConnect Disconnecting all-wheel-drive technology, our MultiTwister air-oil separation products as well as our thermotrek (5:54) family of electronic cooling products.

To close the page, our current product lineup along with our recent business awards, which are included in our new business backlog of $750 million through 2019, strongly position Dana through the next business cycle. However, we need to keep one foot in today and one into tomorrow.

Accordingly, Dana's talented engineers are focused on providing our customers solutions for both hybrid and electrified vehicles. This is supported by our new Spicer Electrified brand, which has us laser focused on developing and commercializing differentiating products for these vehicles.

This is no different than how Dana established our existing battery cooling and hydrogen fuel-cell lineup of products which are in market today. The Dana team is making great progress by leveraging expertise across our enterprise. Please turn to page 6 for an outlook on the global markets.

In North America, we are still expecting low single digit economic growth and while light vehicle production is expected to be mostly flat this year, we should see growth due to our recent and upcoming program launches on the Ford Super Duty and the Jeep Wrangler.

We are expecting the production of the Class 8 trucks to be around 200,000 units this year. While Class 8 demand will be lower than last year, we should continue to benefit from a strong medium duty truck market in 2017. In the North America construction market, despite the talk of higher infrastructure spending, this year, we expect stable markets.

If we do see a push for infrastructure from the administration that could certainly be a positive for all four of our business units. As you well know, uncertainty persists over the direction of U.S. policy when it comes to tax and trade.

I believe Dana remains in a well-position from a tax, footprint and supply chain perspective and will be able to react quickly to any changes.

Moving to Europe, we expect economic growth to slow this year and we expect continued weakness of the euro, which will have a translation impact on sales, mainly from our Off-Highway and Power Technologies segments.

While the off-highway end markets are expected to be flat, we expect some growth from our power technologies business due to better light vehicle engine build this year. Looking at South America, we remain cautious but optimistic that the Brazilian recession has reached a bottom.

We are not expecting rapid recovery, but we do expect some improvement in truck demand over the next several months. Argentina is looking a little brighter, but there is still currency and regional economic headwinds.

And finally in Asia-Pacific, we are seeing stable to moderately improving conditions in India and Thailand, somewhat offset by slower growth in China due to lower stimulus. We believe this year our business in Asia will benefit from higher demand for light vehicles. As we look forward to this year, we are excited to continue our momentum from 2016.

Overall, our end markets are mostly stable with some bright spots and our new business backlog will drive our top line growth. Please turn to slide 7. As announced, we closed the acquisition of the Brevini fluid power and power transmission businesses just last week.

We worked diligently to close the transaction in less than three months since the signing of the definitive agreement. I was able to personally meet with the Brevini global leadership team in Verona, Italy earlier this week.

There were associates from across the globe including New Zealand, Finland, Ireland and numerous other countries where Dana had not previously had people on the ground. I would like to take just a second to officially welcome the Brevini team to the Dana family.

For this audience, this acquisition immediately expands Dana's product portfolio and increases our addressable market with adjacent technologies. This establishes Dana as the only solutions provider that can manage energy and power commands that drives the vehicle and controls the motion of the equipment to do the work it was designed for.

It strengthens our global footprint, including the addition of two facilities here in the United States.

This acquisition also provides proven technologies that can be leveraged not only in the Off-Highway segment but also across Dana's Light and Commercial Vehicle end markets as well, including contributing to the development of our Spicer Electrified portfolio of products.

While I have you, please note that we have renamed our Off-Highway Driveline Technologies business unit to the Off-Highway Drive and Motion Technologies business unit. And in the event that you are unaware, the term motion is often used by other industrial parts companies to describe their work products.

Dana's new portfolio of work and/or motion products such as industrial gearboxes, planetary hub drives and winches are pictured on the left side of the page. Now I will turn the call over to Jonathan for details on the results and outlook..

Thank you, Jim. Slide 9 provides an overview of the fourth quarter and full-year 2016 financial results. Fourth quarter sales of $1.5 billion were up 5% from the same period in 2015, primarily driven by conversion of our sales backlog.

This is the first time we've seen quarterly year-over-year growth in the last three years and demonstrates positive momentum as we move into 2017. Full-year sales were $5.8 billion, down $234 million from 2015, driven mostly by foreign exchange headwinds.

Adjusted EBITDA for the quarter was $166 million, up $37 million over last year, yielding an 11.5% margin, an increase of 210 basis points. On a full-year basis, $660 million in adjusted EBITDA is $8 million better than last year, delivering an 11.3% margin, a 50-basis-point improvement over 2015. The fourth quarter contained a couple episodic items.

The first, losses on the sale of subsidiaries that we announced in our January meeting adversely impacted EBIT or operating income by $80 million and net income by $52 million. The second was the release of our valuation allowance against our U.S. deferred tax assets.

This valuation allowance was put in place a number of years ago as at the time our U.S. operations were not expected to generate the level of profit needed to utilize the deferred tax assets. As we've been highlighting over the past several quarters, we've been monitoring the performance of our U.S.

operations, and at the end of 2016, we concluded the valuation allowance is no longer necessary, yielding a $501 million tax benefit. Excluding the impact of both of these items, net income was $191 million for the full year in 2016.

Diluted adjusted EPS, which excludes the impact of non-recurring items such as the valuation allowance release was $0.59 per share for the fourth quarter, an improvement of $0.25 per share compared to the fourth quarter of 2015. Full-year EPS was $1.94 per share, up $0.20 compared to 2015, driven primarily by our share repurchase program.

Free cash flow for the year was $62 million lower than 2015 as a result of higher capital spending this year to support our sales backlog. Please turn with me to slide 10 for a more detailed look at the changes in sales and adjusted EBITDA for the fourth quarter compared to 2015.

Sales grew 5% or $72 million in the fourth quarter of 2016 compared to the same period in 2015. And adjusted EBITDA increased by $37 million yielding a 210-basis-point improvement in margin over 2015. The adjusted EBITDA growth is attributable to four key factors.

First, currency translation was a $28 million headwind to sales due to the continued strength of the U.S. dollar against other currencies. However, the adverse impact of translation on profit was more than offset by transactional currency gains resulting in a $3 million benefit to adjusted EBITDA.

Second, a combination of volume, mix and pricing added $100 million to sales as we ramped up production on key programs in our backlog and contributed $16 million to the adjusted EBITDA growth.

Third, we saw an additional $10 million in improved performance as we stabilized our Commercial Vehicle business and we benefited from the non-recurrence of operational costs we incurred in the fourth quarter last year.

It's worth noting that the combination of increased volume and performance improvements drove a greater than 25% conversion on incremental sales. Finally as we discussed in January, recoveries associated with the recently divested Dana Companies subsidiary added $8 million of adjusted EBITDA.

The fourth quarter margin expansion was a combination of strong volume conversion and cost management and demonstrates the ability to convert our sales backlog at attractive incremental margins. Let's now turn to slide 11 for a look at the full year.

Sales decreased from the prior year by $234 million while adjusted EBITDA increased by $8 million, yielding a margin of 11.3%, a 50-basis-point improvement. Again, the same four factors affecting the fourth quarter were the key drivers of the full-year change.

Currency translation reduced sales by $173 million and resulted in a $20 million reduction to profit.

A combination of volume, mix and pricing reduced sales and adjusted EBITDA by $61 million and $19 million respectively, as strong demand, pricing and new business volume in Light Vehicle Driveline and Power Technologies were more than offset by lower market demand in the Americas Commercial Vehicle and global Off-Highway end markets.

Performance drove a $32 million improvement in adjusted EBITDA, more than offsetting the $19 million loss due to volume, mix and pricing. Lastly, the full-year impact of the gains related to the recently divested Dana Companies subsidiary added $15 million to adjusted EBITDA.

The delivery of 50 basis points of margin expansion in the midst of challenging market conditions in two of our key end markets and the largest launch in Dana's recent history, the Ford Super Duty driveline, demonstrates our ability to improve the profitability of our operations as we move forward into 2017.

Please turn with me to slide 12 for a closer look at our free cash flow. The business generated $62 million of free cash flow in 2016, just over 1% of sales. This represents a decrease of $84 million and approximately 100 basis points lower than the prior year.

This change is largely attributable to the elevated capital spending level required to deliver the sales backlog. Net interest was $15 million higher in 2016, primarily due to the timing of interest payments related to the bond refinancing we completed in June.

You'll note the additional detail provided in our cash flow as we've called out the discrete impacts of transaction cost and the settlement of currency hedges that mitigate the volatility associated with intercompany loans. These items were previously included in the working capital and other line item.

The $21 million use of cash required to settle currency hedges on intercompany loans were primarily driven by the rapid devaluation of the Mexican peso in the fourth quarter.

These cash settlements when combined with higher working capital requirements due to production schedules in the fourth quarter caused our free cash flow to come in below our expectation for the full year. Slide 13 provides a comparable level of detail for anticipated free cash flow in 2017.

Free cash flow is expected to remain at approximately 1% of sales in 2017 and remains in line with the guidance we provided in January, which included the recently closed Brevini acquisition. Adjusted EBITDA is expected to contribute an incremental $50 million of free cash flow this year.

This is the primary driver of the growth in cash flow from operations, as lower taxes and intercompany currency hedge settlements offset the impact of higher cash requirements for previously announced restructuring actions.

The growth in cash from operations will be directly reinvested into the business to support the elevated capital expenditures required to deliver the sales backlog. We do expect this to be a peak year for capital spending and that it will moderate to replacement level over the next couple of years.

Slide 14 provides more information around our balance sheet and in particular the trends around leverage and liquidity levels. As you can see in the chart at the top of the page, we ended the year at 1.4 turns of leverage and $1.2 billion of liquidity.

Leverage increased modestly this year as we utilized cash on hand to fund the SIFCO acquisition without an immediate benefit to profit and had approximately $100 million of cash leave the balance sheet through the Dana Companies divestiture.

This cash was effectively ring-fenced and not available for operating uses, which is why we had previously excluded it from our operating liquidity. The chart on the bottom of the page provides the key contributors to the nearly $150 million increase in our operating liquidity. While there were multiple changes, I will highlight the two key drivers.

First, in the second quarter, we refinanced our asset based credit facility into a cash flow based revolving credit facility, which increased liquidity by over $200 million and provides us more consistent access to the funds. The second was the Dana Companies subsidiary divestiture.

While the primary and secondary benefits of the divestiture were the elimination of future earnings volatility and the avoidance of potential cash flow requirements associated with future asbestos claims, it also had the tertiary benefit of improving our operating liquidity by $43 million from the net sale proceeds.

As we look to 2017, we continue to use our strong balance sheet to deliver value to shareholders through acquisitions that are accretive, enhance our competitive position, and catalyze future growth.

With the recent closure of the Brevini transaction, we expect our debt to increase by approximately $200 million as we assume their debt and our cash position will decrease by approximately $100 million at closing. However, we expect net leverage will remain under two turns and our liquidity will remain over $1 billion by the end of this year.

Please turn with me to slide 15 for an overview of the changes in sales and adjusted EBITDA expected in 2017. We anticipate sales will grow by 8%, or $0.5 billion, from $5.8 billion to $6.3 billion and profit will increase by $50 million, which is attributable to four key factors.

First, we expect currency to be a headwind to sales of about $150 million and about $20 million to profit, mainly due to the strong U.S. dollar compared to the euro. You will find a table of our currency exchange rate expectations in the appendix.

Second, sales growth will add about $250 million this year through a combination of new business and some market improvement, and we expect to convert this growth to profit at approximately 20%, or $50 million. Third, the Brevini acquisition is expected to add about $350 million in sales and about $35 million in adjusted EBITDA.

The 10% conversion is indicative of the standalone profitability in a market that's at trough with a modest amount of cost synergies expected to be recognized in the second half of the year.

Finally, we'll face a $15 million headwind due to the marketable securities gains and recoveries last year in our Dana Companies subsidiary that was divested at the end of the year. Page 16 outlines our full-year financial guidance for 2017, which includes the impact of the Brevini acquisition and remains unchanged from what we provided in January.

We expect sales to be in the range of $6.2 billion to $6.4 billion with adjusted EBITDA between $695 million and $725 million, yielding a margin between 11.2% and 11.4%, which is in line with last year.

However, it's important to note that the midpoint of this range, 11.3%, actually represents a 20 basis-point improvement in our operations as we overcome the headwind from the gains in the Dana Companies subsidiary that will not recur this year.

Capital spending is expected to be between $350 million and $370 million as we continue to prioritize organic investments to deliver our sales backlog. Free cash flow is expected to be between $50 million and $90 million, or about 1% of sales due to the elevated capital expenditures and working capital to deliver future growth.

While our projections for adjusted EBITDA have increased, diluted adjusted EPS is expected to be lower than 2016 at $1.60 to $1.80 per share. The lower EPS level results primarily from our 2016 release of the U.S. valuation allowance discussed earlier. While there is no impact on cash taxes, income tax expense will increase since the tax on U.S.

income will no longer be offset with the valuation allowance credit. The other offset to adjusted EBITDA growth is the higher depreciation expense as a result of recent capital spending to support our growth. Overall, we anticipate 8% sales growth and $50 million of incremental profit as result of solid conversion on organic and inorganic growth.

Page 17 highlights that we remain competitively strong with our global presence, diverse customer base, and expansive portfolio of technology assets.

Over the course of the coming years, we expect to deliver sales growth that exceeds market rates as a result of our $750 million of backlog and are well positioned to benefit from the improvements in the Americas commercial vehicle and global off-highway end markets.

Both of these factors will help us meaningfully expand our margin as we deliver these sales. We remain committed to retaining a strong balance sheet and continue to prioritize our investments in organic growth, inorganic growth, and in cash repatriation to shareholders. Thank you for listening in today.

I'll now turn the call back over to Brent to take your questions..

Thank you. At this time, we'd like to begin the Q&A session. Your first question comes from the line of Joe Spak with RBC Capital Markets. Please go ahead..

Good morning, everyone..

Good morning, Joe..

I know you've provided a little bit of color here and there through your prepared commentary.

But I was wondering if you could maybe at a high level on an annual basis give some outlook by segment, both in terms of growth but also margin performance, because specifically if you look at segments like Off-Highway, you've had really good decremental margin performance and same in Commercial Vehicle.

And now it seems like some of those markets might be at least bottoming if not turning the other way..

Sure, Joe. This is Jonathan. Just relative to the top line, the Light Vehicle segment is expected to grow next year as they bring on additional new business backlog. The majority of the backlog comes from that segment. Commercial Vehicle will see a bit of a headwind due to the Class 8 build in North America being closer to 200,000 units.

We essentially expect Off-Highway, apart from the Brevini acquisition, to be relatively in line with this year's sales. And then Power Technologies, some modest growth due to market and backlog.

From a margin profile perspective, you can essentially expect Commercial Vehicle and Off-Highway to be relatively flat with this year just in light of the market dynamics, but we do expect some margin expansion within Light Vehicle Driveline and Power Tech, albeit modest in both categories to get us to the 11.3% margin in 2017..

Okay.

And Off-Highway, that's inclusive of Brevini or when you add in Brevini, it will be a little bit dilutive this year?.

Brevini will take the margins down just slightly. So on an organic basis, it would be essentially flat, but Brevini coming in at 10% will pull the margins down slightly..

Okay.

And then just on the working capital drag as we think about 2017 free cash flow, as we build our models out, would you expect that to reverse out in 2018, because it would seem like some of that would be timing related to the launches?.

Yeah. And, Joe, while we haven't given a specific guide for working capital for 2018 and beyond, I would generally say, we would expect it to be a use of cash over the next few years as we grow. So as we continue to bring this business online, we would expect to be investing more in inventory and in receivables than we'll get back in payables.

But some of that is going to be dependent on launch timing and customer schedules at the end of the year, but broadly, we would expect that use to continue over the next couple years..

Okay. And then one quick housekeeping, I noticed equity income was up in the fourth quarter versus rest of the year, it was in 2015 as well.

Does that have something to do with the timing of some of your ventures and what should we think about for 2017 or what's embedded within guidance?.

We have a little bit better performance out of the DDAC joint venture in China. They've had some sales growth and solid cost management, and we would expect that to generally be in line with 2017 as well..

Okay. Thanks a lot. Congrats..

Your next question comes from the line of Justin Long with Stephens. Please go ahead..

Thanks, and good morning..

Good morning..

Good morning..

I just wanted to start by asking about the Off-Highway segment incremental margins. You've always talked about this segment having strong incrementals, but you referenced it earlier, the guidance assumes 10% incremental margins for Brevini.

So I'm just wondering, pro forma for Brevini, has the incremental margin profile in Off-Highway changed? Or do you still think it can be above that 20% consolidated average that you've historically discussed?.

Yeah. Justin, this is Jonathan. A couple of things. When we think about Brevini, their margin profile will improve pretty dramatically over the course of the next 18 months because of the cost synergies that we'll be recognizing.

So we laid out in that acquisition that we'll have $30 million of cost synergies that will be fully implemented by the end of next year, and that will bring those margins more in line with what you would see from Off-Highway. We remain convicted that the incrementals in Off-Highway are going to be very attractive in the market recovery.

We've not given a specific number, but just due to all of the work that we've done on both the variable and the fixed cost structure, we're really excited about what will happen when that market starts to recover..

Okay, great. That's helpful. And secondly, you've talked about being more optimistic about South America reaching a bottom, but this is a geography where we've hoped for that multiple times over the past few years and it somehow keeps finding a way to go lower.

So could you help provide some more color on why you have confidence that we've hit a bottom and just your general visibility around the positive inflection in that region?.

Yeah. Thanks for the question. This is Jim. We don't have any better crystal ball than anybody else. I think you summarized the situation extremely well. The only thing we can say is those of us that have experience down in South America and particularly in Brazil is it's not very much a rail system type of geography. It's largely truck.

Our business is largely commercial vehicle in Brazil. Sooner or later the wheels figuratively are going to fall off. So there's a lot of basically carnage in reuse of parts et cetera, et cetera.

So, inevitably it's got to come back, that's what it is saying (30:15), with probably at least -maybe not anybody on the call, but certainly in my experience over the course of my career I've not seen as long as extended kind of economic downturn as it's been down there. So I'm optimistic from that standpoint.

As we said, we're not projecting that into our numbers so much, but we are saying ultimately it's got to come back. The population is too high and there's too much need for new trucks down there..

Okay, great. I'll leave it at that. I appreciate the time today..

Thanks, Justin..

Your next question comes from the line of Brian Johnson with Barclays. Please go ahead..

Yes. I want to start with just some housekeeping questions around the cash flow.

Can you help us understand these intercompany FX hedges, just kind of what they are, and then how do we think about – you say they're coming down but just want to try to get our heads around it?.

Sure. Yeah, these are positions put in place, Brian, intended to protect essentially investments we've made in foreign subs in the form of intercompany loans. So you can see they were a modest use of cash last year as some of the currencies deteriorated against the dollar.

Moving late into this year, it looked like the position on those was going to be relatively small, but with the devaluation of the peso and the euro post the election here in the U.S., we saw some larger settlements that had to be posted when (31:42) expected.

So, broadly speaking, based on where the currencies are expected to go next year, we think the impact of those is going to be relatively small, but that's what went against us towards the end of the year..

Okay.

Is that $5 million predictable or is that if the peso gyrates around, it could be a higher or lower number?.

Both are accurate. So we've projected the $5 million based on what we see rates, what we believe they'll be through the remainder of this year. But your point is valid to the extent that if the peso devalued more significantly, we could see additional exposure on those..

Okay.

And then second question, also kind of just trying to understand this, the restructuring expense of $50 million, do you have a sense of as we go into 2018, 2019, how that ramps down, are these multiyear restructuring programs or just most of the spend around Brevini integration and other things just in this year?.

It's really three things that are driving this year's expense. We had announced a plant closure here in the U.S. last year, much of the cash expense associated with that will actually be spent in 2017.

We also had some restructuring actions in our off-highway business in Europe that we announced towards the end of this year, the cash investment will come in 2017. And then also, we will have some Brevini restructuring that's included in that number as well too.

As we look forward, the only thing that we're really committed to is the continual investment to deliver the synergies for Brevini, but we'll continue to look at opportunities and if the investment is attractive and the timing is right, we could make more investments in 2018 and 2019, but it'll be discretionary..

And just final question to the subject of border adjustment tax, and if I missed it I apologize. Can you at all quantify the value of the materials you're sending down to Mexico? The COGS that you're bringing back up from Mexico or in from Canada, just so we can – recognizing that you could shift that over time into your U.S.

plants, but just a sense of what your starting point is in terms of product flows?.

Hey. Brian. Good morning, it's Jim. We're not going to be able to quantify, we're not going to quantify specific on the numbers, although we appreciate the question. What I would say is that we feel like we're in a very good situation.

Perhaps it's unaware, but approximately 30% of our major facilities, our facilities are actually located in the United States. And we're actually adding quite a few jobs, you're aware of, for example, the plant that we'll be adding here in Toledo at about 300 to 350 jobs.

We've made significant or in the process of making significant investment in Auburn Hills, Michigan; Louisville, Columbia, Missouri; Fort Wayne, you name it.

And because we have essentially a capability, if it's in Mexico or America, to do the same thing, in the event that the border tax legislation moves in a direction that – making the right business case, we very much have the ability from an operating standpoint to do so..

And in terms of just the cost of that relocation, are they – assume somewhat higher labor costs offset by logistics.

Is that something you would bear? Is that something your customers understand might be coming?.

I wish I could give you a direct answer on it. I think it's very premature to be able to answer any of those questions right now.

I mean, there's so many things implying into that, how much excess capacity do you have in America to start with? What's the timeframe to do it? Is it to do on an existing program? Is it to do it to roll it into the next program that you're going to be deploying capital for anyway, so it's easier to drop it on the concrete in the states at that time.

I could go on and on, everybody on this call could go on and on on that, so it's really too premature to answer that question..

Okay. Thank you..

Thanks, Brian..

Your next question comes from the line of Ryan Brinkman with JPMorgan. Please go ahead..

[technical difficulty] (35:48-36:07)..

Ryan, we can't hear you.

Ryan?.

Hi, good morning, this is Samik on behalf of Ryan. Sorry about that. I was on mute.

So I wanted to firstly ask on the Brevini business and over the years you've given us quite a lot of details on your backlog, if you could share your thoughts on what the Brevini backlog looks like and what are the order cycles there? Are they very similar to what your core business is and what is the sort of revenue visibility you have on that business?.

Yeah. Just to the latter part of the question. The award cycle is similar to what you'd see in our off-highway business, so this is business that we will quote and launch a year or two, in some cases after award just to give you some general timeframe. Relative to quantifying the backlog, we've not called that out discretely.

We certainly have opportunities that we highlighted that we're focusing on from a cross-selling perspective, which was a part of the investment thesis in acquiring the Brevini business and then also making the investment to apply the planetary hub drive technology to the track vehicle markets.

So, while we're looking at both of those, we've not called that out discretely in the backlog. But it certainly does create some opportunity for us to grow the backlog in the next couple of years..

Got it.

And secondly, relative to the four segments, are you able to share what your capacity utilization looks like across these four business units in the sense to give us sort of a view or a guide point about what the incremental margins might look like as the markets sort of recover, the end markets there recover?.

Yeah. So broadly speaking, the Light Vehicle Driveline and the Power Technologies are operating closer to a high level of capacity just based on market demand for light vehicle, just given where pickups and SUVs and then larger vehicles within that segment are running. So those are both at a higher capacity.

It's no secret that both our Off-Highway and our Commercial Vehicle Driveline business are essentially a trough, Off-Highway globally it's very low. Commercial Vehicle for us is largely in North America and South America and those markets are at trough. So our capacity utilization is much lower in both of those segments.

And it does create the opportunity for a much more significant conversion on incremental sales. We've not quantified either of those, but we really are excited about what happens when North American Class A volumes come back, when Brazil begins to recover, and when the global off-highway demand starts to improve..

Great. And lastly just a quick housekeeping question.

I did see that your free cash flow for the full year tracked at $62 million and there might be some definitional difference et cetera here, but were you guiding to more like $120 million at the time of the Detroit Auto Show and if I'm reading that correctly, was there a sort of variance there due to certain factors?.

Yeah, I indicated in the script, the two drivers of that you can see on page 12 of the presentation were the intercompany FX hedge settlements. I mentioned that the rapid devaluation of the peso at the end of the fourth quarter drove the vast majority of those losses.

And then as well I mentioned in the script that in the remarks in our presentation that essentially the working capital requirements were higher towards the end of the year as a result of increased production schedule. So we ended up having more working capital investment than anticipated.

And those two were the primary drivers of the lower cash flow..

Got it, great. Thank you. Thanks for taking our questions..

Your next question comes from the line of Brian Sponheimer with Gabelli. Please go ahead..

Hi, good morning, gentlemen..

Hey, good morning, Brian..

I want to dig in a little bit into North American on-highway and just maybe what you're hearing from customers about expectations towards the back half of the year and on their own situation of inventories?.

Good question, Brian. Probably not a lot different than here, I wish I could give you more color. Just in general, I would tell you only from a temperature check, if I would just dimension in, I'd feel better and it seems like they feel better than maybe they did in November. I'm not quantifying or projecting anything with that.

But I think there's some more encouraging sentiment coming from the general one-off conversations that we're having, other than that I can't give you much..

Okay. And I appreciate that, given where we are.

Regarding M&A, it looks like everything you've done so far has really been very wise from a strategic standpoint, are there other areas or other targets that are potentially within your reach in 2017? And does your balance sheet give you effectively the room to do something of the size of Brevini again?.

Thanks for the question.

Actually just for fun I guess I would call it as, we met as well as many of the people on the call early on when I first came to Dana just over 18 months ago or whatever, and we used some terminology such as white space and I referred to that as some pockets in the organization that we felt we could fill, but we wouldn't have some deal fever and do something silly.

We would do it at the right price. We have the right balance sheet to do it. All of that still holds true today. Thank you for your commentary on our success up to this point. I echo those comments. Our team did a great job.

Consistent with what I've been saying for the last 18 months, we're not looking or likely to be focused on any type of transformational deal, our balance sheet is still extremely strong. If the right tuck-in opportunity is there that fits with our technology strategy and our overall enterprise strategy, I would say, we would move forward with that.

But again, this is a very comfortable area for me and we will not have deal fever for purposes of having deal fever..

Understood. And Jonathan, if I can sneak one in here.

The $1.70 in earnings obviously inclusive of the valuation allowance, can you maybe give some perspective as to what that might be without the valuation allowance this year or maybe what 2016 would have looked like if you were able to do the reversal last year?.

Sure. It would be about $1.90 or pretty close to it, if we still had the valuation allowance moving into 2017. So it's almost $0.20..

All right. Terrific. Thank you very much..

Yep..

executing, making a reasonable commitment and living to that commitment. Our Light Vehicle Group did that despite very high volumes in the industry and some massive program launches. Our Commercial Vehicle Group, many of us have that history and knowledge of where that business was back a couple of years ago.

It's night and day different, it has transformed into incredibly customer centric organization and it's really headed to really high performance business if we can get a little help out of Brazil. The Power Tech business has done fantastic for years, that team continues to do a tremendous job and leads the way as it relates to profit for the company.

And Off-Highway, put that one into perspective for just a half second here, when you think about it from a decremental standpoint and how that group has performed over the last year, and by the way, let's do a built-on, relatively significant acquisition along the way. The team continues to execute.

We appreciate all of your support for those of you on the call and we're going to move forward and we are pretty optimistic about 2017. We will talk to you soon..

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