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

Joseph Spak - RBC Capital Markets LLC Steven Hempel - Barclays Capital, Inc. Colin Langan - UBS Securities LLC Brian C. Sponheimer - Gabelli Asset Management Justin Long - Stephens, Inc. Ryan Brinkman - JPMorgan Securities LLC.

Good morning, and welcome to Dana Incorporated's First Quarter 2017 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 speakers' remarks, and we will take questions from the 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 today for joining us for Dana's first quarter 2017 earnings call. Copies of our press release and presentation have been posted on Dana's investors website. Today's call is being recorded, and the supporting materials are the property of Dana Incorporated.

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 is 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..

Thank you, Craig. Good morning, everyone and thank you for joining us for the call. It was a very active and successful quarter for Dana. So let's jump right in to some of the most important and notable highlights for Q1.

As communicated over the past several quarters, we have positioned the company for significant growth by providing differentiating product technology, new program launch performance and overall outstanding customer service. Accordingly, you've noticed that these efforts have translated into significant top line growth.

Specific to Q1 2017, revenue was $1.7 billion, which was a 17% year-over-year sales increase, 12% of which is organic.

This growth was attributed to new vehicle programs completing their planned launch acceleration, reaching full volume run rates; improved end market demand in our light vehicle and off-highway markets; and incremental sales associated with Dana's recently completed M&A actions, which I will speak to in just a few minutes.

Our adjusted EBITDA came in at $205 million, resulting in a strong 12.1% margin. Consistent with Q4 2016 and full year 2016, all four of our business units improved margins for an overall 190-basis-point year-over-year Q1 margin improvement. And finally, diluted adjusted EPS increased 85% over last year's first quarter.

This increase was primarily due to our improved operating results. Now to a few business highlights. First, as discussed with you in February, we completed the acquisition of Brevini Power Transmission and Fluid Power businesses. The integration of that acquisition is proceeding to plan.

Perhaps interesting to the audience, please notice in the upper right-hand corner of the slide, we have included a picture of an area work platform manufactured by Haulotte. The vehicle does not have a traditional axle, but instead, it has four individual planetary hub drives that convey power to the wheels.

Brevini, now Dana, also supplies planetary hub drives for track vehicles and other industrial products. Second, we are excited to report the completion of the U.S. manufacturing Warren, Michigan facility acquisition in our discussion. I will return to that topic shortly.

Third, it's an honor to share with you on behalf of the Dana family that we were recognized as an Automotive News award winner, a premier technology award in our industry. I'll provide greater detail on the PACE Award in just a few moments.

Please turn your attention to slide 4 which visually illustrates how our Shifting into Overdrive enterprise strategy is successfully (04:39) our strategic priorities to our tactical actions and results. The left side of the page displays the main elements of our enterprise strategy.

Of the five strategic priorities or gears, we've elected to focus this business update page on customer centricity, which simply means that we are laser-focused on partnering with our customers to create value, develop and strengthen relationships, provide cutting-edge innovation and execute on our commitments.

As you look to the right side of the page, you will notice customer and industry recognition that Dana has received over just the past few months. These awards serve as tangible proof points that our customers acknowledge and appreciate Dana's relentless passion to provide exceptional customer satisfaction.

I'm especially pleased that all four of our business units have been recognized.

While the PACE Award is centered around innovation and advancements in technology, the other awards largely demonstrate quality, delivery, service and an ability to partner with our customers to help them deliver value-driven innovative products and solutions to the marketplace.

Speaking of the PACE Award, please turn to slide 5 for a brief description of Dana's 2017 PACE Award winner. As you are all well aware, the Automotive News PACE Award is recognized around the world as an industry benchmark for automotive innovation.

In its twenty-third year, it showcases the game-changing innovations that drive the automotive industry. In April, Dana was presented with the 2017 Automotive News PACE Award for our Dana Victor Reinz multi-layer steel transmission pump gasket.

Congratulations to our entire engineering community for their relentless perseverance and commitment to engineering excellence. This is the fifth PACE Award Dana has won since the inception of the award, and it marks the sixth consecutive year that Dana has been named a finalist, something only six global suppliers have achieved.

Notably, Dana was the only supplier with three technologies recognized as a finalist this year. We are truly honored to once again earn this prestigious award. There is no question that when customers think technology, they think of Dana. Please turn to slide 7.

While we announced our acquisition of an axle housing and driveline manufacturing facility from U.S. Manufacturing Corporation, also known as USM, earlier this quarter, we have not had the opportunity to discuss it before today.

This Warren, Michigan based facility in the heart of metropolitan Detroit is not only a key, now vertically integrated supplier to Dana, but it has a nice complement of direct product sales to OEMs, such as Ford and General Motors.

However, make no mistake, this acquisition was as much about accumulating a team of incredibly talented professionals that are already supporting not only our Light Vehicle business, but also our Commercial and Off-Highway businesses to reduce weight, reduce cost, and further strengthen our innovation portfolio.

The value of the acquisition was approximately $100 million, which is an implied multiple of about five times. The USM acquisition, along with Brevini, SIFCO, Magnum, marks Dana's fourth acquisition over the past 13 months.

While it's still early, we are very confident that each addition will not only provide significant financial benefit to Dana, but also additional value through opening new commercial channels, accelerating our innovation initiatives, and improving our footprint, which will help us expand our global markets.

Please turn to slide 8 for an overview of market conditions. In North America, we are still expecting low-level economic growth, and while light vehicle production is expected to be flat to slightly down, we saw good growth this past quarter due to our recent launch of the Ford Super Duty.

We are holding our expectation for Class 8 truck production range to 190,000 to 210,000 units this year. While the current annualized build rate is running above that level, uncertainty remains on how the rest of the year will unfold. We will monitor and review our outlook as necessary.

Moving to Europe, we expect economic growth to remain somewhat challenged this year due to continued political and economic uncertainty. Our currency expectations have remained stable, but we will likely see some headwinds from the euro and the pound.

And finally, while we saw some strength in the agriculture market in the first quarter, we expect the full year to be in line to slightly down with last year. Looking at South America, we remain cautious but optimistic that the Brazilian recession has reached a bottom.

We are seeing some improvement in the commercial truck market, but that is being tempered by continued weakness in the bus market. Both of these end markets are key to our Commercial Vehicle business in Brazil. Argentina is mostly stable; however, we are still seeing good demand for our light truck programs.

And finally, in Asia-Pacific, we are seeing signs of improving conditions in India, but the commercial truck market remains flat. Demand in China, while relatively small for us, was strong this past quarter; however, we still believe the markets here (10:11) will cool a bit later this year.

Overall, we believe our business in Asia will benefit from higher demand for light vehicles, driven by relative strength in Thailand this year. Please turn to slide 9. As we look at the business by segment, Light Vehicle Driveline inventories of our key customer platforms remained stable, as we saw strong demand for the new Ford Super Duty.

The recent launch of the Toyota HiLux is also performing well, a bright spot in South America. Back in the U.S., for Dana, the Jeep Wrangler launch readiness is proceeding as planned. We expect to begin production later this year at our new facility in Toledo, Ohio.

We began construction of our new gear manufacturing facility in Hungary, with state-of-the-art technology to service our European customers. This aligns with expanding global markets, a key principle of our enterprise strategy. And finally, as I already mentioned, we are well under way with the integration of the new Warren, Michigan facility.

In Commercial Vehicle, our Class 8 market share remains stable with our existing customers as we work to expand with new customers. In fact, this past week Navistar launched the new international RH series Class 8 truck that comes standard with Dana drive shafts and optional Dana axles.

We continue to innovate in Commercial Vehicle including our integrated air disc brake technology and our compact series drive shaft which has best-in-class torque capability in a lightweight design. Finally, in Commercial Vehicle, the SIFCO acquisition we completed last year is nearly fully integrated into our core operations.

We remain positive on the market in Brazil, and this acquisition will be a real benefit as the market recovers. Our Off-Highway business had a nice first quarter driven by favorable product mix and some strength in the aftermarket.

While we are not yet calling it a recovery, it's good to see some optimism return in key end markets such as mining and construction. We are well on our way with our Brevini integration synergy plan and are seeing positive customer response to the product cross-selling initiatives.

In Power Technologies, what can I say? A record quarter for sales and earnings. All parts of the business performed well and demand was strong. But we remain somewhat cautious on our outlook for the rest of the year.

In North America, we have reintroduced the well-respected Victor Reinz brand to the aftermarket and the customer response has been very positive. Expanding our aftermarket is a key element of Shifting into Overdrive strategy as we leverage our existing infrastructure to open new commercial channels.

Now I'd like to turn the presentation over to Jonathan for a review of the financials..

Thank you, Jim. Slide 11 provides an overview of the financial results for the first quarter of 2017. Sales of $1.7 billion were up $0.25 billion versus the same period last year, delivering growth of 17%.

The majority of the growth was organic, as conversion of our sales backlog and strong demand in the light vehicle and off-highway end markets contributed to double-digit organic growth of 12%.

Adjusted EBITDA was $205 million, up $57 million over last year, yielding a 12.1% margin, which is a 190-basis-point improvement over the first quarter of last year.

Net income was $75 million, a $30 million improvement over last year, as the adjusted EBITDA growth was partially offset by higher depreciation expense due to the increased level of capital spending, higher tax expense due to stronger earnings and higher transaction expenses due to the business acquisitions.

Diluted adjusted EPS, which excludes the impact of non-recurring items, was $0.63 per share, an improvement of $0.29 per share compared to the first quarter of 2016, driven primarily by higher earnings. Free cash flow was a use of cash in the quarter, as it normally is, due to the seasonal working capital requirements in our business.

The $85 million use was favorable by $13 million compared with the same period last year, as the growth in adjusted EBITDA was partially consumed by higher capital spending and the settlement of trade payables from an acquired business.

Please turn with me to slide 12 for a more in-depth look at the drivers of the improved sales and profitability in the first quarter. Sales increased by $252 million compared to 2016 and adjusted EBITDA was higher by $57 million for a 190-basis-point year-over-year improvement in margin. The adjusted EBITDA growth is attributable to three key factors.

First, currency translation was a $6 million headwind to sales due to the continued strength of the U.S. dollar against other currencies. Transactional currency impacts provided a headwind of $10 million to adjusted EBITDA, resulting in the atypical profit conversion on the lower sales.

Second, organic growth added $178 million to sales, as strong demand for key light vehicle programs, such as the Ford Super Duty, and refreshingly improved demand in the off-highway market meaningfully contributed to sales.

Strong profit conversion on the organic sales of more than 30% added $60 million to the adjusted EBITDA comparison, as we continue to benefit from improvements in our overall cost structure. Third, the acquisitions closed in the first quarter, Brevini and USM, added $80 million in sales and $7 million in additional adjusted EBITDA.

We expect that the profit conversion on the inorganic growth will improve as the cost synergy plans are implemented through the year. You'll note that although we expect an unfavorable full year impact as a result of the gains recognized in the Dana Companies subsidiary that was divested last year, there was no impact in the first quarter.

Slide 13 provides more details associated with the use of free cash flow in the first quarter compared to the same period last year. Net interest was $10 million lower than the first quarter last year as we continued to shift our debt servicing from U.S. dollars to euros and benefit from the rate differential.

Increased cash outflows related to restructuring are driven by previously announced actions in both our Commercial Vehicle and Off-Highway segments. Transaction costs were $10 million higher than last year, as the Brevini and USM acquisitions closed in the first quarter.

Cash requirements associated within our company foreign exchange hedges were lower by $10 million, as these exposures have been mitigated and the majority of these positions are no longer required.

The USM acquisition caused a $25 million use of free cash flow in the quarter, as a portion of the approximately $100 million cash consideration paid at closing was attributed to settling a trade payable from Dana to USM.

Apart from this issue, the working capital use in the quarter was comparable with last year but on significantly higher sales this year, demonstrating an improvement in working capital efficiency. Capital spending was $25 million higher than the same period last year as we continued to invest to convert our sales backlog.

Let's now turn our attention from the first quarter results to the full year outlook. Slide 14 provides an updated view of the changes in sales and adjusted EBITDA expected in 2017. While we expect 2017 results to remain in our guidance range, the addition of USM will push us to the high end of our sales and profit ranges.

There are four key factors driving the 10% sales growth in the $65 million accretion of adjusted EBITDA. First, we expect currency to be a headwind to sales of about $75 million and about $20 million to profit, mainly due to an expected strengthening of the U.S. dollar compared to the euro.

While we had previously expected about a $200 million headwind to sales, current expectations are for a slightly stronger euro and Brazilian real. You'll find a table of our currency expectations in the appendix.

Second, organic growth is expected to add about $250 million this year through a combination of new business and some improvement in our end markets. We expect to see about a 20% profit conversion on the incremental sales.

We do not anticipate the profit conversion to be as high as it was in the first quarter due primarily to the start-up costs we'll incur on the Jeep Wrangler program which launches later this year.

Third, inorganic growth, namely the USM and Brevini acquisitions, which closed in the first quarter, are expected to add about $425 million in sales and about $50 million in adjusted EBITDA. Finally, we will experience a $15 million headwind due to the gains last year in our Dana Companies subsidiary that was divested at the end of the year.

Please turn with me to slide 15 for a closer look at how we expect the adjusted EBITDA will convert to free cash flow. We expect full year free cash flow to be in line with last year.

This refined outlook now includes the impact of the recently closed USM acquisition, including the $25 million of the cash consideration paid at closing that's attributed to operating rather than investing cash flow.

On a year-over-year basis, higher adjusted EBITDA, combined with lower interest, taxes, pension, and intercompany FX hedge settlements, are essentially offset by higher investments in capital spending, restructuring, and a working capital adjustment due to the USM acquisition.

Our original guidance did not reflect the acquisition, which would have been essentially flat from a free cash flow perspective, were it not for the settlement of the trade obligations, which creates $25 million headwind.

This headwind will be partially offset by lower interest expense due to the refinancing completed in April, lower cash requirements for intercompany FX hedge settlements, and a change in assumptions for pension funding.

In the aggregate, increased cash flow from operations, driven largely by adjusted EBITDA growth, is being reinvested in the business in the form of capital spending to deliver our sales backlog. Please turn with me to slide 16 for an update on our expected year-end leverage and liquidity positions.

As previously noted, the USM acquisition was not included in our original guidance. We utilized cash on hand to fund the acquisition and as a result, we expect our liquidity to be at just over $1 billion, rather than the $1.1 billion we originally indicated. The impact the transaction has on year-end net leverage is negligible.

We expect to end the year with over $1 billion in liquidity and less than two turns of leverage. In terms of the debt portion of our capital structure, we have no significant debt maturities in the next four years, and we've taken a couple significant actions to improve our capital structure this year.

First, we effectively swapped $300 million of senior notes due in 2023 to euros. This lowers the effective interest rate on this tranche of bonds to 3.91%, compared to the original coupon of 6%.

Second, we issued $400 million of senior unsecured notes due in 2025 with a 5.75% coupon, and simultaneously with closing, swapped those to euros, yielding an effective rate of 3.85%.

Proceeds from the newly issued bonds are being used to refinance the local Italian debt acquired with the Brevini transaction, refinance local borrowings in Brazil, where local financing options are no longer attractive, and tender for a portion of our 2021 notes, reducing the notes maturing in that year to $350 million.

These actions lower the cost to service our debt to less than 5% in the aggregate, as well as extend our maturities. Page 17 outlines our full year guidance for 2017. Our full year projection ranges remain unchanged from what we provided in February.

Rather than being near the midpoint of these ranges, as previously indicated, we now expect to be at the higher end of these ranges for sales, adjusted EBITDA, margin, capital spending, and diluted adjusted EPS, primarily resulting from the USM acquisition.

In the first quarter, conditions across our end markets were strong, foreign currencies held up reasonably well against the dollar, and each of our business segments performed well.

Should these trends continue, we could see upward revisions to these numbers later this year, but we remain vigilant this early in the year, and will continue to monitor these variables moving forward.

We continue to believe that we are well-positioned to deliver increased value to shareholders through a combination of our strong competitive position, our impending profitable growth, and our prudent financial policy. With that, I'll turn the call back over to Brent to take your questions. Thank you for listening in today..

And 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..

Thanks, and congrats, everyone, on a very strong quarter. The first question is, can you just go into a little bit more detail on Power Technologies? Really strong incremental margins this quarter. Was there anything unusual there? And I know in your prepared commentary in the slides, you're expressing some caution there for the rest of the year.

Just maybe you could go into a little bit more details as to why you're really seeing that?.

Sure. Hey, Joe, this is Jonathan. Just a couple of things. One, I'll note on the incrementals compared to last year, it's off of a soft comp. You'll remember, Q1 of last year for Power Tech wasn't a great quarter. We had some conversion challenges on the production changes that happened pretty rapidly.

But broadly speaking, we had a really strong performance in Power Tech. Each of the end markets are doing quite well, which creates some really good momentum for this business. And candidly, the business is just performing very well.

So I think the first quarter represents the opportunity of that business that when the end markets cooperate, when the euro remains reasonably stable, then we perform well. So we're certainly pleased with that and think it indicates the potential of that business..

Okay. And then Off-Highway, we saw a little bit of revenue recovery. The incrementals were sort of 13%, I guess, overall. But in those numbers, I assume there is some Brevini as well which weighed on that.

A, is that right? And B, is it possible to sort of maybe disaggregate what the incrementals would have been without some of the Brevini costs?.

Yeah. Well, we did break that out in the bridges in the appendix which we can point you to. And you are right, the conversion on Brevini is about less than 10% growth. We did see 8% organic growth within that area and saw the stronger conversions that we would expect.

One of the things that I'll point to is the fact that the aftermarket, which is generally a pretty good leading indicator for that business, did start to see some improvement. And that's one of the areas that we're looking to as a pretty good indicator that overall performance in the end markets should continue to improve..

Okay. And then real quick on your 2019 12.8% EBITDA margin target, that was before USM. I know you provided some color here. Sort of the quick back-of-the-envelope math seems like that would add at least 10 basis points, but today – but since it's a vertical integration plan, I'm assuming there's some more cost benefits over time.

Is that a fair way to think about it? And have you begun to think about what that does to your longer-term target?.

Yeah. We're not in a position right now. We think it will certainly fall within the range that we provided for 2019. So we're not going to provide any update to that. But it certainly is a margin accretive acquisition for Light Vehicle because of the fact that it is a vertical integration play, and that was a part of the consideration in the purchase..

Okay. Thanks a lot. Congrats, again..

Thank you..

Thanks, Joe..

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

Yes. Hi. Good morning, team. This is actually Steven Hempel on for Brian. Just wanted to drill down a little bit on the margin guidance for the year, looking at -coming at the higher end of the range.

More specifically, if we look at Light Vehicle Driveline, I believe last call, you mentioned you're expecting some margin expansion in that business, and looks like would be a strong performance in 1Q that implies some downside in, obviously, for the remainder of the year.

Just wondering, I know it's related to the Jeep Wrangler launch, but can you kind of be a little more specific in terms of the timing of that launch and when you expect the margin headwinds to occur? Is that more of a second half item or do we see that kind of evenly loaded throughout the remainder of the year?.

Yeah. Hey, Steven, it's Jonathan. That's correct. So we're certainly seeing strong margin expansion in the first half of the year as we get the year-over-year benefit of the Super Duty launch, which happened mid-year last year.

The only impediment to continued margin expansion in the second half of the year is indeed the Wrangler launch, which is occurring towards the end of the year.

We've noted in the past that we're in the process of building a new facility in Toledo to support that launch, so some of the cost structure that comes with that facility will be there in advance of having the sales to cover that. So you are seeing some margin constraint in the balance of the year.

Apart from that, we do continue to see a continued margin strength in the Light Vehicle business..

Okay. And back in February, you mentioned some margin expansion year-over-year in that business.

So are you still expecting some margin expansion for Light Vehicle Driveline in 2017?.

Apart from the launch issues, which I mentioned, so you'll note if you look at how they did in the first quarter relative to the balance of the year, it infers margins being lower, and it's due to the launch inefficiencies that we expect with the Wrangler launch, which is a very big launch for us, a very large program.

We'll be doing the total driveline. So the costs with that are significant..

Got it. Okay. And then if we look at Off-Highway organic revenue growth, pretty strong, I think roughly 12% based on my numbers. But as we look throughout the rest of the year, it looks like there are some easy comps as we go throughout the rest of (28:40) 2017.

So I guess how much visibility do you guys have in that business? I know you guys mentioned aftermarket recovery which is a positive indication for that business overall.

But how much lead time visibility do you have in that business? And the reason why kind of organic growth would slow down for the rest of the year?.

We have reasonable visibility. That's one of the markets that we're cautious on production schedules and changes that can occur based on the demand changes in the market. So I think we remain a little bit cautious, but we certainly see that the pick-up in the aftermarket that I mentioned is a good leading indicator.

In the past, if a recovery is coming, we're starting to see improvements in the order rates on the production side, so we're encouraged there.

And we've continued to highlight the fact that this is an area of our business, given all the work that we've done on the cost structure as sales have fallen due to end market demand over the course of the past few years, we've actually held and improved our adjusted EBITDA margin.

But that business is very well positioned for strong incrementals on the upside, so we continue to look to that in the coming quarters and coming years..

Okay. And then one just quick final one. You guys mentioned you celebrated the grand opening of a new Australian manufacturing facility. Just wondering what that relates to.

Is that more from mining Brevini? (29:55) should we think about the contribution from that business moving forward?.

one, a sales office; two, what we call remanufacturing of service center offices over there. So we do see that we'll have an opportunity for further synergies in one form or another in the country of Australia..

Got it. Thanks for taking my questions..

You're welcome. Thank you..

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

Great. Thanks for taking my questions, and congrats on a great quarter..

Thanks, Colin..

Just broadly, I mean I think you've covered this a bit, but if we look to the rest of the year, it does imply some weakness.

So aside from the Wrangler, are there other issues that we should be concerned about that might hit results and weigh on the rest of the year?.

Colin, this is Jonathan. I think it's just our perspective on the market demand and conditions through the balance of the year. So I'll give you a couple of examples. Take Class 8 in North America. We've basically called this year at 200,000 units. You see others externally that have raised closer to 220,000.

Based on patterns that we've seen in this segment in the past and how the order book can change as you move through the year, I think we're a little bit vigilant on raising that. But if we see incremental improvement there and we do end up at the – closer to the 220,000 level, you'd see a little bit of upside in our Commercial Vehicle business.

I think the same is true across the light vehicle end market. You'll note that we're calling for a couple percentage points down on a full year basis for light trucks in North America as an example.

If the build rates stay strong there in the programs that we're on, the inventory levels stay in comfortable ranges, you could see some improvement in that area. Foreign exchange is another good example. It really wasn't much of a headline to the top line. We had some unique transactional gains or losses in Q1.

But if the currency rates stay the same and don't deteriorate in the balance end of the year, you could see a little bit of opportunity there.

So I think it's just a couple of those discrete assumptions that we've taken the view on a full year basis that after one quarter of better conditions in those areas, we're not yet comfortable calling the full year higher. So hopefully, that gives you some sense of how we're thinking about it, but there aren't performance issues in the business.

We actually to the contrary did quite well in the first quarter. The only major issue we have coming is the significant launch in the balance of the year..

Great. That's very helpful.

Can you give any color on commodity? Was that any issue in the quarter? And can you remind us like what your biggest exposures are and how the hedging and indexing work?.

Yeah. We've indicated in the past, this is a relatively insignificant issue for us from a margin perspective. We have recovery mechanisms in place for most of our commodities. So steel prices are up, so the impact for us is you'll see a little bit of an impact on the cost side before we have commercial recoveries.

But broadly speaking, it's not a meaningful issue for our performance..

And how long – is there a couple quarter lag or is it almost immediate (33:14)?.

It can range by customer, so it's probably a pretty broad range from a couple of months to more than a quarter, but generally speaking, it's within a six-month window..

Okay. All right. Thank you very much for taking my questions..

Sure. Thanks, Colin..

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

Hey. Good morning, guys..

Good morning, Brian..

I guess, Jim and Jonathan, if – just to kind of tie into Colin's question, I thought you guys did a really good job of kind of explaining what could go right.

Just from a strategic standpoint as you're kind of looking at how you look at the business financially, what would give you the confidence to raise guidance? Or I guess, asking another way, what's the philosophy about guiding that may be somewhat different than other managements in the past?.

Yeah. I think our perspective here, Brian, is that it's early in the year, and we tried to indicate that all of the things that have a meaningful impact on our financial results moved in a positive direction in the first quarter. Markets were really strong and in particular, there was good mix for us.

The programs on which we have higher content performed very well. When you look at the foreign currency environment, we thought the euro was going to be softer. It ended up doing a little bit better than we anticipated. We think there is room for it to deteriorate in the balance of the year, and it's early to call that one as well too.

Business performance, I would say, is the item within our control that we have the highest level of confidence, and our businesses are performing well. We continue to believe that they will. But I think our perspective is, it's early in the year and we'd like to see more in each of these categories before we're in a position to declare some upside.

But certainly it was a really good quarter for us. Really encouraged by that. I think we're going to continue to watch each of these factors very carefully as we move throughout the next few months, and we'll see where they land at the end of the second quarter..

Okay. Fair enough. Just a strategic M&A with Brevini and USM in the first quarter, your net leverage still isn't out of whack.

Is there still the appetite to look to add through acquisition, given your current leverage?.

Hey, Brian. This is Jim. Thanks for the question. Thanks for joining the call. Obviously, we have a strong balance sheet. We're in a position to do something. As I've said before, I believe it's a lever that any management team, CEO, should be prepared to pull if the right opportunity's there.

I would tell you right now, though, our major focus is, is we have four on our plate, they're all still going through one form of integration or another, some towards the front, some towards the end. But we are going to certainly optimize them and benefit, not just on the customer side, but on the technology side, so on and so forth.

So I would call, it's not mission critical to do it, but we keep our eyes wide open..

All right. Excellent. Congratulations on a really terrific quarter..

Thanks, Brian..

Thanks, Brian..

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

Thanks and good morning..

Good morning, Justin..

So in the prepared comments, you mentioned this quarter you saw a favorable mix in Off-Highway, so I was wondering if you could first provide some more color on that comment? And then, looking at the 2017 guidance, what are you assuming in terms of the progression of that mix in Off-Highway over the remainder of the year?.

Sure. So, Jim had mentioned that the segments in his prepared remarks to come, the areas that did well. In particular, we started to see some improvement in mining and in construction. We've indicated in the past that those are good margin segments for us, so that's where the comment was relative to mix.

And as I indicated, we saw that in a combination of the aftermarket and the production market, and we do look to the aftermarket as a leading indicator of where production will go.

Similar to the comments we just shared with Brian, if that's something that we see continue to get momentum through the balance of the year, we could see some upside there for Off-Highway, from both a top line and margin perspective. But I think that's the area that we're watching carefully.

This is a market that can move up and down, it's not always linear. You can see the orders change even a month, or two, or three out. So I think we're just careful on how we're looking at that over the course of the next few months..

Got it.

But just to clarify, it sounds like you're not assuming that that favorable mix within mining and construction continues over the next few quarters in the guidance you're currently giving?.

Yeah. I think that's reasonable. I think the balance of our year is pretty reflective of what we originally thought, so to the extent that these trends continued, as I mentioned in the remarks as well, too, we could see some upward pressure on the full year performance..

Okay. Great. And as a quick follow-up, sticking with Off-Highway, I was wondering if you could talk about how your market share in that business has evolved from the peak of the last cycle to where we are today.

And going forward, what's your confidence level in your ability to maintain or grow that market share within Off-Highway as demand recovers?.

Hey, Justin. This is Jim. Thanks for the question. I won't be able to speak with specific numbers but I would tell you, and I wouldn't say it if it wasn't true, that we feel that we've taken our share of share across all the markets.

We have a significant – we believe anyway, a significant advantage relative to our global footprint, and we've really deployed a lot of capital into innovation and technology in that segment, so we've taken share. So indirectly, that answers second part of your question, which is our confidence on being able to maintain that and grow it.

I think we're in very good position..

Okay. Great. I appreciate the time today..

Thanks, Justin..

Thanks..

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

Can you help us understand the contribution of the new program launches during the quarter? So are you able to say directionally how much they contributed to sales and profit? How should we think about the 34% contribution margin you generated in the quarter in the light of these new launches? Is it fair to say that the backlog is accretive to margin versus for most suppliers, in most cases, we'd expect incremental margin on backlog to be softer?.

Sure. So just to start with the top line and then we can touch on the bottom line. So we had indicated we have about $175 million of backlog that'll be converted in 2017.

The weighting of that is towards the front of the year because a big component of that backlog is the Super Duty incremental content that we've talked about, and from a year-over-year comp standpoint, a lot of that benefit is in the first half of the year, since it launched in the second half of last year.

Relative to a margin, what we have indicated is that the 20% incremental margin that we anticipate to deliver on all of our sales growth from 2016 to 2019, is contributed pretty evenly by each of the categories, backlog conversion, end market recovery, and then some operating leverage that we expect to get as well too.

So we have indicated that the backlog will come on at high teens margins, and we do continue to see that. And then maybe a little better than 20% on some of the market recovery, in particular, in off-highway, for example, globally, because of what we've done with the cost structure.

And as well, we've continued to point to Brazil as another area where we would expect to see a higher than normal conversion because of the fact that the volumes are so depressed in that region. So we are continuing to see, and in the first quarter, saw margin accretion based on the backlog and are encouraged that that will continue moving forward..

Okay. Thanks. And then just lastly for me, a follow-up on that off-highway comment because Tenneco yesterday talked about softness in the North America off-highway market, while you are highlighting today some strength in off-highway markets globally as having driven some of the better revenue there.

So can you just remind us of the specific regions or segments within off-highway that maybe you are sort of especially exposed to that are doing better and what you're seeing in those off-highway markets?.

Sure. We indicated in the prepared remarks that we saw improvements in mining and in construction. And we touched on the fact that those are beneficial from a mix perspective for us. But those are the areas that we started to see more signs of life and indicated that it was in a combination of both the OE production and in the aftermarket in Q1..

Okay. Got it. Thanks a lot..

Sure..

Okay. Well, again, thanks, everybody, for joining the call. Obviously, it's early in the year, so we're happy with where we came out and we performed in Q1, but there's ways to go. So that's where we're at.

As would anybody who would look at running a business, we look at it particularly from three major pillars, that either growing the business, mitigating risk in the business and getting returns to the business, and relates to the growth side of the business, obviously, we're getting good pull-through from taking care of our customers.

We're receiving very positive – I didn't mention this earlier – receiving very positive response as it relates to the numerous acquisitions that we had from our customers.

And then, certainly, when you think about the off-highway market and everybody understands that one, hopefully, there will be a little bit of gas on the floor and somebody lights that match and it will take off. But in the meantime, it's pretty solid volume and we're obviously capitalizing on that. Good job there by the team.

As it relates to risk mitigation, the team and particularly Jonathan and the finance team doing a great job of refinancing some of the debt. We've talked about that on the quarters in the past. Not to mention divesting some assets that probably were better not in our portfolio.

And then, of course, last but not least, on the return side of the business, you witnessed the pull-through, again, all four business units performing well, increasing the year-over-year, quarter-over-quarter profit and margins. So a lot of things to be excited about early in the year.

We appreciate everybody's support, and we look forward to talking to you very soon..

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