Dana Incorporated

Good morning and welcome to Dana Incorporated's first quarter 2020 financial webcast and conference call. My name is Thea and I will be your conference facilitator. Please be advised that our meeting today, both the speaker's remarks and the 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 the telephone only. If you would like to ask a question during this time, press star and the number one on your telephone keypad. To ensure that everyone has an opportunity to participate in today's Q&A, we ask that callers limit themselves to one question at a time. If you would like to ask an additional question, please return to the queue. At this time, I would like to begin the presentation by turning the call over to Dana, Senior Director of Investor Relations and Strategic Planning, Craig Barber. Please go ahead, Mr. Barber.

Thank you, Thea, and good morning to everyone on the call. Thank you for joining us today. You'll find this morning's press release and presentation are now posted on our investor 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. Allow me to remind you that 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 found in our public filings, including our reports with the SEC. Before we begin this morning's call, you may have noticed that our presentation cover image was not the usual product or market pictures, but highlighted what is the focus for Dana today, namely getting fully back to work safely and taking care of those around us. And we have fully embraced the separated together concept. So joining us remotely this morning are Jim Kamsiskis, Chairman and Chief Executive Officer, and also Jonathan Collins, Executive Vice President and Chief Financial Officer. Jim, would you please start us off?

Thank you, Craig. Good morning and thank all of you for joining us. I hope that all is well with you and your families. As we've been navigating through the coronavirus for three to four months now, starting in China earlier in the year, certainly everything has changed in the world since we last spoke with you in February. We knew that COVID-19 was serious, but that was before we understood it would become a global pandemic and have such an impact on our lives, businesses, and communities. While these are unprecedented times, I want to assure you that our business is strong and our priorities are to continue protecting the safety of our employees and communities, supporting our customers, and being prepared for the future. Our financial health is very good, in a very good condition, as our unique multi-market business approach allows for operational flexibility needed to be responsive during this difficult situation. Now turning to slide five, I'd like to share with you some of the measures we are taking to help ensure the safety of our most important asset, our employees around the world. Over the past several months, we have felt the power of the Dana family, not just from the formal actions implemented across the organization to navigate the crisis, but also the individual behaviors that have made a significant impact on the safety and welfare of our people. Together, everyone has done their part to ensure that we remain safe, and to act responsibly, whether on the job or in the communities that we call home. Through it all, we've communicated a regular cadence with our employees so that they can feel confident, whether they're working safely in a Dana facility or in their home. The sharing of information with our teams across the globe over the last months has helped us to make informed and quick decisions, instilling confidence, educating and enabling our global team to take quick and decisive action to protect our people while serving our customers. In the end, we are a manufacturing organization and the real action begins inside the factory premises. Accordingly, we've expanded our safety protocols, including implementing stringent disinfecting, social distancing, and hygiene practices in all facilities and asking employees who can do their job remotely to work from home. In addition to the many safety protocols we've implemented, our global purchasing Health, environmental and safety, and human resources teams have worked tirelessly to acquire the necessary PPE equipment as we work towards bringing more facilities safely back online. We will continue to follow government and health official guidelines globally to ensure that we are doing everything in our power to keep our employees safe. Now turning to slide six, I'd like to share with you some of the measures we are taking to help the communities where we do business around the world. One of the best ways to manage through crisis is to look for opportunity, and that is exactly what the Dana family is doing. As we all work to navigate the COVID-19 pandemic, I'm filled with tremendous pride at the efforts of Dana People Finding a Better Way, innovating and doing extraordinary things to help others in spite of such stressful circumstances. During the height of the pandemic, much of the world's health systems were, and sometimes still are, in dire need of protective equipment to protect healthcare workers. To respond, a number of manufacturers and suppliers in the mobility markets announced that they would utilize their world-class engineering and manufacturing capabilities to help meet that need. And I'm proud to say Dana has been part of this movement. At our Advanced Manufacturing Center in Maumee, Ohio, our engineers designed, tested, and produced 3D printed face shields for local healthcare professionals in less than a week. We used our engineering expertise to reduce the amount of material needed to produce a version that is strong, durable, and lightweight that can be sterilized and reused. To date, we've provided more than 3,000 face shields. But this was not done alone. We're proud to work alongside many frontline providers and great partners in our community. We also helped to develop plexiglass intubation, and extubation enclosures that allow doctors and nurses to have full visibility of and access to the patient and can be sanitized and used multiple times. Notably, in order to create more impact outside of Dana's local communities, we made the face shield and intubation enclosures open source by allowing designs to be freely downloaded on our Dana Cares website. As I'm sure you're aware, we have a large presence in Italy. we have been extremely impacted by the COVID-19. With hospitals and medical staff overwhelmed and a shortage of ventilators for critical patients, our team in Italy worked to do 3D printing and test components to convert CPAP breathing machines into ventilators. In addition, our global purchasing team served as a matchmaker for hospitals to help source critically needed personal protection equipment, such as gloves, shoe covers, glasses, and masks, to help protect medical professionals and first responders. In China, we donated 50,000 masks to the local governments in the Jinshu province. The Dana Charitable Foundation in the United States also donated financially to organizations such as the United Way and Red Cross that are on the front lines of fighting the COVID-19 pandemic. These are just a few examples of the extraordinary efforts made by the Dana team members around the world. We've also had countless individuals who are helping their local communities by giving blood, donating money, delivering food, or even making masks. In fact, in India, some of our colleagues pulled their personal resources to purchase N95 masks for local law enforcement officers in Pune. Whatever is needed to make a difference. Turning to slide seven, I want to talk to you about what we're doing to help our customers navigate this difficult time. Our customers have taken extraordinary precautions around the world to ensure that the manufacturing facilities are safe, including but not limited to, are doing their facilities when and where appropriate. Largely speaking, our customer plant closures across most of our end markets were gradually announced beginning in early March in Western Europe, and then on March 18th, our light vehicle customers in North America announced that they would halt production. Soon thereafter, essentially the balance of Dana's largest regions such as South America, India, South Africa, and Thailand ceased operations. Accordingly, these customer shutdowns triggered the need for Dana to either completely or near completely shut down well over 100 manufacturing facilities, which employed tens of thousands of employees. The efficient and effective planning, coordination, and execution to accomplish this around the globe by the Dana operating team was remarkable. My most sincere appreciation goes out to all the Dana team members that have executed through this incredibly challenging situation. However, this was certainly not the end of the challenges. At the same time that we were winding down facilities, the operating team was also maintaining production and supply for customers that remained open, such as the aftermarket, agriculture, and mining segments, as they were deemed essential businesses around the globe. Operating numerous facilities at the apex of the pandemic was extremely difficult, but supporting the essential business was critical to both our customers and the communities. Furthermore, supporting the customers does not stop at the supply of products. Dana also provides product engineering and program management services for critical components and systems to ensure that the successful launch of new vehicles across all of our markets. As a matter of simply updating today's audience, at this point, we've experienced very few customer new vehicle product development delays due to the pandemic. Of course, mobility customers also rely on sophisticated global suppliers to successfully manage a complex, shared supply base no matter the circumstance. Dana is no different. With nearly 3,000 serial production suppliers, this is no small feat for us, but we believe our supply risk management system and team members have done a good job handling the situation. We would deem our supplier status as stable and will work to continue to manage at-risk suppliers and implement risk mitigation plans as required. Lastly, manufacturing companies cannot underestimate the complexities of restarting operations. We certainly do not. Over the past week, we have restarted numerous facilities around the world at various levels of output, including many facilities in Italy where the pandemic took a terrible toll. Our supply base and Dana manufacturing facilities have done an outstanding job restarting and supporting our customers. Moving to slide eight, I'll walk you through some of the measures we're taking as we look to the future. So far, we've discussed protecting our people and protecting our customers. The third leg of the stool is to protect Dana's future. More specifically, protecting our strong balance sheet and financial health of the business. We have been accomplishing this through a series of critical actions. First, we have taken numerous what we call cost-flexing actions. It may sound straightforward, but by cost-flexing, we mean in addition to labor flexing in the form of temporary layoffs at our plants, we essentially either eliminated or flexed all of our discretional spending across the company. These actions were in addition to the compensation reductions that were enacted at the beginning of April for all salaried associates, and our Board of Directors from 20% up to 50% reduction in the Chief Executive Officer's compensation. Frankly, I could speak in greater detail regarding cost flexing. However, suffice it to say that having been a sitting CDO during the 2007 through 2009 Great Recession, the COVID-19 crisis has been very much like a do-over of the unprecedented actions that were required during that time. These cost flexing actions are aided are aiding us in aligning our cost structure with the reduced production volumes taking place across mobility markets. We also announced a new credit facility that will give us access to additional liquidity should the need arise. We took this action out of abundance of caution. This Jonathan will walk you through in a few minutes. We have abundant liquidity and the strength of our balance sheet and capital structure offers us flexibility and security as we navigate through these challenging times. We've also not lost sight of what will drive our future growth. We continue to invest in developing new technology, including advances in powertrain systems for commercial vehicle and off-highway vehicles, thermal management solutions for batteries and electronics, and electrified propulsion systems for automotive applications. As we look forward, we have assembled a global data task force that is working with various government, union, and health officials to determine protocols as we bring plants online as soon as it's safe to do so. This includes establishing pandemic control teams who oversee response plans in our facilities and to help establish preventative disinfection measures and employee health protocols. We know the world still confronts an enormous challenge, but it is encouraging that the global community now has a greater understanding of COVID-19 and can deploy lessons learned as we safely navigate our new normal. With great caution and deliberate actions to limit the risk of exposure, Together, we can begin to move forward. Turning to slide nine, I'd like to provide a business status update. As you know, mobility markets are currently very unstable. We're at the inflection point where some customers have been idle, are beginning to restart production where possible. I will take a few minutes to cover a few key points on the status of each of our markets. Starting on the left side in our light vehicle market, Our North America OE customers have been idle through April, while several of our U.S.-based customers have indicated publicly that they will restart production in May with various starting dates. A few of our European customers have remained operating with limited production, and others are planning to restart on a country-by-country basis. Most of our customers in India and South America have been idle through April. In China, production has restarted and demand for light vehicles is recovering. As we have mentioned, China represents a relatively small percentage of overall sales, but we learned valuable lessons from restarting these operations that we have been applying around the world. Moving to the center of the slide, the majority of our commercial vehicle customers in North America began idling production in late March, and we are expecting to see customers likely restart operations slightly sooner in May. While a smaller market for us, it's encouraging to see a few customers in Europe who have begun limited production. Like light vehicle, customers in India have been idle through April. Some customers in Brazil have commenced low-volume production as of today. And in China, commercial truck and bus production has restarted. In our off-highway operations, customer production in North America has been mixed. with operations supporting essential industries such as agriculture, mining, and a few other industrial sectors which remain in production. In Europe, Italy was particularly hard hit by COVID-19, and Dana has a strong presence in the country. In a positive sign, that many of the customers in Italy across the region are beginning to resume operations. While India has been idle through April, there is a limited production in South America. In China, production has restarted again, and our facilities serving the highway market in China, such as Wuxi and Yancheng, are running at near full capacity. Across all three of our end markets, our aftermarket operations have remained mostly operational, as service parts have been deemed essential, especially in the commercial vehicle markets, and we continue to see good demand, especially in Europe and North America. Through this all, our supply base has been stable and we continue to monitor our suppliers with the aid of our customers to ensure the uninterrupted supply chain. The big questions are what happens for the remainder of the year? And what about upcoming launches? As of now, we expect only minimal delays to new programs in the launch cycle, but we will continue to work with our customers as always to successfully deliver our backlog. As we look forward, production levels and end customer demand remains uncertain. However, we are encouraged that as most of the European customers are in restart mode, and we expect remaining customers to return to some amount of production in May. We are working closely with all of our customers to support them through this process. With this, I'll turn it over to Jonathan to walk you through our financials, and I'll return with a few closing comments after Q&A. Thank you, Jonathan.

Thank you, Jim. Good morning, everyone. I'd like to begin with the topic that's top of mind for us and our investors, so please turn with me to page 11 for a review of our near-term financial priorities as we navigate through this challenging time. Beginning on the left, as Jim touched on, our first priority is to conserve cash as production schedules and sales fall. We're taking several key actions to achieve this objective. First, we are aggressively managing our supply chain by reducing our material orders and eliminating non-production material spending wherever possible. The flexibility we have built into our supply chain over the last several years allows us to fine tune the inflow of material to ensure that our inventory levels fall with lower production demand. Second, we continue to flex our conversion costs across the globe, including temporary layoffs of direct and indirect hourly associates, across-the-board compensation reductions for salary associates, as well as intermittent temporary layoffs and reduced work weeks throughout the organization. We're also dramatically reducing our overhead spending across all non-labor categories. Third, we've throttled back our capital spending, making judicious decisions on where to invest as we work with our customers on current and new programs. Finally, we've temporarily suspended our common stock dividend, a step we did not take lightly, but one that we deem prudent to further preserve cash during this period of uncertainty. Our second priority, as illustrated on the right-hand side of the page, is to maximize our liquidity. We had a cash and marketable securities balance of nearly $650 million at the end of March. The undrawn portion of our revolver provides us with a comparable amount in ready capital. And earlier this month, out of an abundance of caution, we put in place a new half-a-billion-dollar bridge facility to guarantee our access to additional liquidity should the need arise. We also took the added step of proactively amending the terms of our existing senior credit facility to allow more headroom on our sole maintenance covenant. In total, we have over $1.8 billion of liquidity, and we remain laser focused on managing our cost, preserving our capital, and coming through this challenge strong and ready for the future. Please turn with me now to slide 12 for an overview of our first quarter results compared with the same period last year. First quarter sales were $1,926,000,000, a decrease of $237,000,000 compared to the same period last year, entirely driven by lower demand and production shutdowns due to the pandemic response. Adjusted EBITDA for the quarter was $205,000,000, $52,000,000 lower than last year for a profit margin of 10.6%. Net income was $38 million, $60 million lower than the first quarter of 2019, primarily driven by lower adjusted EBITDA and a goodwill impairment charge of $51 million, triggered by our lower market cap as of March 31st, which was partially offset by income tax benefits of $32 million, resulting from recording additional U.S. deferred tax assets related to foreign tax credits. The looted adjusted EPS, which excludes the impact of non-recurring items, was $0.47. 31 cents lower than last year, largely attributed to the lower adjusted EBITDA. Adjusted free cash flow was a use of $114 million, which was in line with the same period last year as lower profit was offset by lower one-time cost and capital expenditures. As a reminder, an adjusted free cash flow use is typical in the first quarter for our business due to the seasonal nature of our working capital requirements. Specifically, the cash flow impact associated with the lower demand caused by the pandemic response was insignificant in the first quarter and it started to impact the business in the second quarter. Please turn with me now to slide 13 for a closer look at the sales and profit changes in the first quarter. The change in first quarter sales and adjusted EBITDA compared to the same period last year is driven by four key factors illustrated in the roll forward bar graph on the page. First, organic sales were nearly 300 million lower than last year. The decrease is primarily attributable to the loss of volume in the latter half of March due to production shutdowns resulting from pandemic containment measures. It's worth noting that we originally expected weaker demand in the heavy vehicle markets that would have been largely offset by our strong sales backlog. Effective cost management actions in the first quarter held decremental margins on the organic decline to 21%, successfully muting the margin impact of the rapid sales decline that generated a 64 million profit headwind, accounting for 150 basis points of margin compression. Second, inorganic growth from the Graziano and Fairfield business acquisitions contributed 112 million in sales and 14 million in profit for the quarter. While the cost synergy plan has been achieved, the margin expansion impact was muted by lower production levels. Third, the U.S. dollar continued to strengthen against key foreign currencies, including the euro and the rai during the quarter. This translation impact lowered sales by 34 million and adjusted EBITDA by 4 million. However, the profit margin impact was negligible. Finally, lower commodity costs compared to the first quarter of 2019 expanded margins by 20 basis points as gross commodity costs decreased by $18 million for a net profit benefit of $2 million. Please turn with me to slide 14 for a closer look at how first quarter adjusted EBITDA converted to adjusted free cash flow. We've added some additional detail to our cash flow slide for this quarter to highlight the changes to our cash balance below free cash flow. Starting with adjusted free cash flow in the middle of the page, the first quarter of this year was a use of $114 million, which was flat compared to the prior year. The primary drivers were lower adjusted EBITDA that was offset by lower one-time cost, primarily related to acquisitions, and lower capital expenditures as we began to scale back on spending as economic conditions deteriorated. The change in working capital during the quarter was comparable to the first quarter of the prior year. The rapid sales decline occurred late in the period, and as a result, the working capital benefit will be deferred until the second quarter. Looking below the adjusted free cash flow line, you'll note a few highlights to the changes in our cash position. One, while we have suspended future dividends, we paid a dividend in the first quarter of $15 million, which was declared in February. Two, during the first quarter, we drew down $300 million from our revolving credit facility to increase our liquidity mix to include more cash. And three, the effect of translating foreign-denominated currency balance into U.S. dollars reduced cash balances by nearly $30 million. Please turn with me now to slide 15 for a more detailed look at our cost structure and the actions we're taking to align it with current production levels. You may recognize this slide from our third quarter earnings call last year, but I wanted to share it again to remind you of our flexible cost structure and how we will manage it through this downturn. In the middle of the page, you'll see that as a percentage of normalized sales, cost of goods sold represents the largest aspect of our structure at nearly 80% of sales. On the left side of the page, you can see that most of this is variable, with two-thirds as material cost, which are entirely variable, and the remaining third is conversion cost, which are largely variable, particularly in times of large-scale production declines. For example, as Jim mentioned earlier, we are meaningfully reducing our salary costs through pay cuts and intermittent temporary layoffs. We've also reduced fixed costs by closing facilities and balancing our capacity. As we shared late last year, we've recently closed multiple facilities while combining other operations and improving our overall efficiency. Manufacturing footprint optimization is a journey, and we're always examining ways to continuously improve our efficiency. On the right side of the page, you can see that we also have multiple levers to pull to flex our engineering and SG&A expenses, which comprise 3 and 6 percent of sales, respectively. While most of these costs are traditionally fixed, we have several places where we can flex our spending without jeopardizing our long-term growth, in addition to the aforementioned salary austerity measures. In engineering spend, for example, we've been diligent in prioritizing those research efforts that will support our customers' most urgent needs, such as electrification, while temporarily idling others. Another example in SG&A includes accelerating back office consolidations, such as shared services and robotic process automation. In addition to these cost elements, there are two key cash flow elements that are in our control highlighted in the lower right-hand corner of the page. We have the ability to reduce and defer capital spending as already demonstrated in the first quarter. And second, carefully managing our working capital including our inventory levels to generate significant amounts of cash flow. Please turn with me now to slide 16 where we illustrate how all of these variables can come together to minimize the cash flow impact of lower production levels. Due to the unprecedented uncertainty in the global economy that is affecting our end markets caused by the pandemic, we have suspended our full-year financial guidance. In lieu of this, we believe it will be helpful to provide some color on the second quarter, as well as a sensitivity analysis that illustrates our adjusted free cash flow break-even point for 2020. At this point in time, we have a pretty clear view of our April sales, which we believe will be down about 75% from the same period last year due to production shutdowns for pandemic containment measures. It's worth recalling Jim's previous commentary that we are not in complete shutdown mode as our aftermarket and certain OE customers continue to operate. We also have communications from most of our customers with regards to their restart plans, and while we are not in a position to comment on any of them individually, we believe the collective impact of all of these will lead to a second quarter year-over-year sales decline of at least 50% for Dana. At this level of sales, we expect to approach break-even adjusted EBITDA and anticipate a modest use of adjusted free cash flow in the second quarter. For the full year, we have estimated that the adjusted free cash flow break-even point for 2020 is about $6 billion of sales, which would represent an approximate 30% year-over-year decline. While we are not guiding to this scenario, and it should not be construed as our outlook for end market demand, it would imply production levels in the second half of the year that are comparable with the first half, albeit a modestly improved run rate from our expectations for the second quarter. At this level of sales decline, including the austerity measures we have planned, we would anticipate decrementals in the mid-20s for an adjusted EBITDA of about $400 million. This profit, combined with a source of cash from working capital in excess of $100 million, would fund one-time cost, interest, taxes, and capital expenditures for break-even adjusted free cash flow. While one-time cost and interest expense would be slightly higher than our original expectation, cash taxes would fall significantly on lower profits. The source of cash from working capital of $125 million is in line with our prior experience. For example, in 2009, when sales declined by approximately 30% from the prior year, the business generated nearly $150 million of cash from working capital. If this scenario were to occur, we would have the flexibility to lower our capital spending by about $150 million from the prior year without jeopardizing the future of our business. In summary, with a sales decline comparable to the last major economic crisis in 2009, we would not expect a cash burn on a full year basis and would end the year with nearly $2 billion of liquidity. Please turn with me now to slide 17 for a more detailed look at the strength of our balance sheet. On the left side of the page, you can see that all of our major credit metrics remain strong at the end of the first quarter. We had more than $1.3 billion of liquidity, which now pro forma for the bridge facility exceeds $1.8 billion. Our net debt remains at approximately two turns of our adjusted EBITDA, and our adjusted EBITDA covered our net cash interest costs by more than nine times. It's also worth noting that our sole maintenance covenant under our debt agreements was proactively amended to double from two to four times for secure net leverage, a calculation which excludes all $1.5 billion of our bonds in the numerator, providing a significant cushion as we manage through this downturn. For all of 2019, we maintained a liquidity mix of approximately one-third cash and two-thirds available borrowings. As the health crisis unfolded in March, we opted to shift to approximately 50-50 and plan to maintain this ratio for the foreseeable future. The maturity profile of the debt portion of our cap structure is illustrated on the right side of the page. It's very important to note that we're in a desirable position. We have no meaningful debt maturities for the next few years. Our strong credit metrics, robust and balanced liquidity, and long-term debt maturity profile provide a solid foundation to weather this difficult time and emerge as a strong and stable partner for our customers as they transform the mobility landscape in the coming years. I'd like to thank all of you for listening in this morning, and I'll now turn the call back over to Fia to take your questions.

At this time, we would like to begin the Q&A session. If you would like to ask a question, press the star key and the number one on your telephone keypad now. Again, that's star one for any questions. We'll pause for just a moment. The first question will come from Dan Levy with Credit Suisse. Please go ahead.

Hi. Good morning, and thank you. First, I want to just understand a couple points in your capital allocation framework. Could you just give us a sense of, obviously your net debt to EBITDA will come up, but where would you ultimately aim to take that down to? And then as far as priorities, deleveraging is probably going to be the priority, but how do you stack deleveraging versus other areas between internal growth, M&A, cash return? Would you be opportunistic on M&A and Under what circumstances should we expect the dividend to be reinstated?

Hey, good morning, Dan. This is Jonathan. You know, relative to our capital allocation priorities, we went into this year highlighting that delevering was near the top of the list. That is something that if we're in a situation where we generate cash this year, if the end markets end up being better than the break-even scenario that we laid out, we would certainly look to build our liquidity and de-lever. And then I would just mention on the M&A front, our position there remains unchanged as well. We'll certainly look opportunistically, but in this environment, we're thankful that we've collected all of the critical pieces that we need to compete as the market shifts from internal combustion engines to electrified. So there's really nothing that we'll need to do out of necessity, which gives us the ability to continue to focus any cash that we generate towards continuing to strengthen the quality of our balance sheet.

And the dividend, what – like, what –

Yeah, and relative to the dividend, you know, we've indicated it's a temporary suspension. I think we're going to look for the markets to stabilize. So we would imagine that this is something that will be in place for a number of quarters and that we would likely evaluate once the market starts to stabilize, which, you know, we would expect would certainly be towards the latter half of this year or early next year.

The next question will come from Eileen Smith with Bank of America. Please go ahead.

Good morning, everyone, and thanks for all the clarity in the outline today. Beyond April and May, do you have any visibility around customer releases and the velocity of recovery or rebound in production across major markets? And is there an expectation to return to kind of pre-crisis levels at some point in the next few months or quarters? or is there an incremental level of conservatism being applied as demand has potentially been impaired?

Yeah, relative to our – good morning, Eileen. It's Jonathan. Relative to the outlook that we have, you know, sitting here at the end of April, we do have releases from the majority of our customers that would take us certainly through the month of May and for many of them through the month of June. So the indication that we gave about second quarter sales being down about 50% from prior year – are based on those releases. And then based on that map, that would assume that as most of our customers come back up in May and June, it would be at levels that were lower than the pre-crisis amount. Certainly if they ramp back up to those amounts, sales would be better than down 50%. I would say that our near-term indication for the second quarter, you know, assumes that demand levels are softer than when we went in. And then, obviously, for the second half of the year, we've opted not to take a position on that just because there's too much uncertainty relative to what the consumer or the end market demand will be.

Great. That's helpful. And then following along on some of the prepared remarks about the complexity of relaunching plans across different countries and states, Do you have any approximation for how fungible your capacity might be to flex where you need it across customers and end markets and instances where your plants are restarting sooner versus later?

Yeah, Jonathan, I'll take that one. You know, generally speaking, I would look at it in these forms. Obviously, the program-specific capital, you know, and you start kind of back forward in the assembly area. You know, that could be movable and could be more fungible. You can talk to heavy capital, can be somewhat fungible, but much, obviously, it can't be moved. So, I would say the answer to the question is, is that we don't believe that we're going to be in a situation to move a lot around, but I don't think we're going to be in a situation to have to move quite a bit of it around. I can tell you right now, there's not a country that I can think of off the top of my head That's in, you know, it's just in this dramatically worse condition with a significantly longer runway of expectation as to when they think they're going to get back into operation. So I'm not predicting that, not that I should predict anything right now, but I'm not predicting that to be a scenario that we're going to have to be overly concerned about. I think we have enough inventory and enough protocols in place to manage the supply base to navigate through that.

Great. That's very helpful commentary. Thanks for taking the questions.

Thanks, Ellen. The next question will come from Rod Lash with Wolf Research.

Hi, everybody. I also want to add my thanks for this presentation. This is very, very helpful. I was hoping you might be able to just talk a little bit about incremental margins on the other side of this. Obviously, pretty impressive containment of the decrementals here, but would you be anticipating adding costs back in as, you know, as production starts to ramp?

Good morning, Rod. It's Jonathan. The short answer is yes. So, you know, for example, it depends on the level of the sales decline, but in the illustrative break-even scenario, you would see decrementals closer to the mid-20s than the low-20s. And some of that is the fact that we would be in a position where as we start to ramp back up, we would be releasing some cost and adding back the ability to support demand at a higher level. So you see that. There's also some end market mix factored in there as well, too, based on what demand would be for each of the segments. But in principle, under the illustrative scenario, we would continue some of these significant austerity measures for a good part of the year, and that would help to keep those decrementals kind of in that mid-20% range, which is just slightly higher than what we saw in the first quarter.

Right. I was just curious about the incrementals beyond this as revenue starts to ramp. Is that at a lower level than that mid-20s range simply because you have to add back costs?

Yeah, I think it would be probably comparable. So I think it would still probably be in the low to mid-20s on the way back up. So I think there would be some symmetry as we start to get on the other side of this.

Okay, great. And then just secondly, can you just talk a little bit about the business mix in off-highway and your end market exposures there? Maybe you can just remind us of what that looks like and your current expectations for the business, given that center of gravity is a little bit more European than Italy.

Sure, as we touched on in the prepared remarks, you know, for example, the agriculture segment is one of the continue to operate at certain levels around the world during the downturn. That's something that's provided some stability. We're starting to see customers in Europe in that segment that are resuming production at higher levels. That's a very important part of the business for us. But as a reminder, the construction segment is as well, too. So as construction around the world begins to resume and ramp up, which we've already started to see happening in Asia and in particular in China. That's going to add support to that business as well, too. And that includes segments like material handling, which are important for us as well, too. Mining has continued to operate, you know, reasonably well around the world, and we're starting to see signs that that's picking back up. as an important segment for us as well, too. So really, across each of those areas, we certainly saw periods of much lower production, and particularly in Europe right now, we're starting to see those ramp back up, similar to what has happened in China a few weeks before that. So we'll look for that to continue to flow through to North America here in the coming weeks as well.

Just to clarify, similar to in the light vehicle segment, the ramp is occurring but not back up to the levels that you had seen prior to this decline. Is that accurate?

Yeah, that's our expectation, Rod, virtually across all three of our end markets. We're certainly seeing production schedules for May and June that would be a bit lower than what we saw before. There are a few exceptions, but broadly speaking, that's a fair characterization.

Great.

Thank you.

Sure.

The next question will come from Noah Kay with Oppenheimer. Please go ahead.

Yes, good morning, and thanks for taking the questions. I think in the prepared remarks, how are you? In the prepared remarks, you talked about the experience of restarting production in China and the lessons that you've kind of drawn from that being helpful as you restart elsewhere. Can you expand on that? What would you say are the big lessons that you've taken away? Sure. How are those going to be applicable to restarting in North America and Europe? And any differences that, you know, we might want to keep in mind as you do restart?

This is Jim. I don't know it from the morning, and thanks for the question. I appreciate it, especially the ones that deal mostly with people are the ones I like the most. And I would tell you a couple of things. You laid it two ways. The most by far, the most important part of it was all the safety protocol. You know, everybody's basically fallen into the same playbook. But, you know, we took our team, you know, the old Mike Tyson statement of, you know, you got to plan until you get punched in the face. We didn't wait to get punched in the face in Italy. We've had, you know, very lucky or good. We've, you know, we were way out in front of it relative to separate, before people were even talking about social distancing and a lot of things like that. We took all those into account, all the other things associated with face masks, et cetera, et cetera. And if you watch the, you know, if you watch the pandemic go, we know how it went. China and Italy was the, you know, kind of next big mecca center. And, you know, we have big penetration of assets there. And so that was the big thing on that. But the other one in terms of returning to work, I'll just give you an example. And everybody did tears on operational detail. But, you know, you think about furnaces and maybe you've seen some or not. I mean, they're gigantic. Even the concept of shutting them down is a little bit reckless at times because it can be so costly and you can run into a lot of difficulties and that type of thing. You know, just following protocols in terms of getting those up in advance of when you're going to operate, making sure that you've done all the preventative maintenance in advance of that, all the other things associated with, those seem simple when it comes off my tongue. So, let me tell you, just from somebody that comes from that side of the business, There have been multiple issues across not just this year type of thing, but over the years of people underestimating the importance of that, especially on the safety side, but also on the efficiency side.

Yeah, that's very helpful. And then, you know, you talked, I guess, on a similar theme, you talked about kind of the confidence and the stability of the supply base. Are there – different considerations that you're taking into account here? I would get yes on restarting and reaching out to that supply base in the North American environment, say, versus China, understanding that production in China is pretty regionalized. Just wondering how you're thinking about that and potentially trying to increase localized manufacturing where possible.

Yeah, I think there's, thanks for the questions. I think there's a couple of questions in there. One, in the real term, you touched directly or indirectly on it, that we have to be cognizant of, one, your globally integrated supply base, you have to think about distance. As simple as that sounds, you have to think about distance from things going all over the place, and you have to think about where are shipping containers at or where are ships themselves at and all those type of things. That's certainly one of the key variables. And then the second part of it, more broader picture, is as we know the pandemic and the movement has been, it's kind of moved around the world and where the escalation points, and there's some different areas around the world that are, you know, they're not going to get to their apex as early as the United States, speaking from America here, that you have to keep into account as well. So those are the big ones that, as it relates to the pandemic. The other side of it, which is maybe where you're going, but I'll certainly, I don't hide from a direct question, you know, we all have to be cognizant of And the OEMs would tell you the same thing. It's a tiered business, tier one, tier three, whatever it may be. And, you know, the financial stability across all these organizations. I mentioned in my prepared remarks that we're close to 3,000 suppliers, whatever it may be. And, you know, if you don't have strong diligence and you haven't had it, you didn't just start it yesterday, in terms of knowing where your supply base is coming from and being out in front of that side of it, you're going to have some pretty big problems. I feel good about what we're at, but you can never feel good enough because it's just too integrated, too complex to say that you've got it all covered. So you just have to stay on top of things. So hopefully that answers your question, but that's how we're looking at it, both on the health and safety side, the distance side, and the financial health side.

Thanks. I appreciate the call.

The next question is from James Piccarello with KeyBain Capital Markets. Please go ahead.

Hey, good morning, guys, and congrats on a very resilient quarter. And I appreciate the color on your free cash flow scenario here. Just as I look at the first quarter, the decrementals were very similar across your light vehicle, commercial truck, and off-highway segments. And typically, right, the decrementals would be the highest in off-highway and lowest in light vehicle. So were there any unique factors that played into the quarter? Should we expect a more normalized relationship through the rest of the year when thinking about the decrementals?

Hey, good morning, Jim. I think in this case, you're probably going to see them move more towards what we would expect, which is what you had described off highway being a little bit higher and commercial vehicle being the lowest. I think in the near term, given all of the cost levers that we pulled across the board on austerity, I think that had a little bit of effect of balancing them. But I think your intuition in the long run is right. As the volume downturn protracts, the contribution margin loss will be higher. One of the other things that, you know, probably impacted us in the first quarter is just the benefit of the aftermarket. So given the volume decline was more concentrated on OE production, that helps a business like commercial vehicles, decrementals, to do a little bit better. So I would say that's one of the other factors that played in in the short term, you know, that kind of evened those decrementals out.

Got it. That's helpful. And then just on the break-even, the free cash flow break-even scenario, you know, the strong working capital conversion makes sense. I just want to ask about, you know, CapEx. In the scenario you provide, CapEx would still be, you know, just north of 4.5% of total sales. You know, this would be almost in line with the prior year. So you clearly don't expect to cut this level of spend, you know, commensurate with the sales decline, you know, or maybe in prior downturns, the level of CapEx cuts. So I do view that as encouraging. If you just talk about, you know, maybe some of the key investments you still intend to make this year, I imagine there's, you know, commercial vehicle electrification programs, new launches within light vehicle, you know, any color there would be helpful.

Sure, that's a really fair point. I mean, it's helpful to remember that we still have a significant amount of backlog. You know, the amount we disclosed earlier this year, $700 million, will be affected by the volume decline. So we'd expect on a volume-adjusted basis, you know, this year's and potentially even next year's number could be lower. It's a significant amount of new business coming online. So out of that scenario, with the $275 million that we would still spend, there would be a meaningful amount of capital that would go towards launching new programs and bringing new technology to market. So we do see that as a benefit. But we also think it's important to demonstrate that there are some discretionary investments in there that we can defer and we can delay to make sure that we balance near-term financial health with the longer-term opportunities for growth. So I think it is fair to point out that we're able to flex it to keep it in line with the percentage of sales, but that more importantly it's not a fixed amount and that we are able to adjust it down when the market is softer.

Thanks, guys.

Sure. Thank you, James.

The next question will come from Ryan Brinkman with JP Morgan. Please go ahead.

Good morning. Thanks for taking my question. Congrats on the decrementals. Question, just how should we be thinking about the $700 million 2020 through 22 backlog? Do you see the risk there relating more to just simply there being lower numbers of vehicles produced or Do you sense the potential already for some programs to be delayed or probably less likely even be canceled? I ask because we've seen a couple of delay announcements already from GM and Ford, including, I think, as it might relate to the Bronco that you are on, seemingly as they look to preserve capital. Thanks.

Sure. You know, just it's probably the greater impact is going to be the overall vehicle volume coming down. So certainly the $700 million will be affected by that. And really, because it's hard to call the end market right now, whatever projection you have there for the end markets could be reasonably applied to the backlog as well, too. You know, relative to program delays or timing, Jim mentioned in his prepared remarks that Those have been relatively minimal in terms of the impact us right now. What we're seeing are some what we'd call shorter delays that are measured in months, not all out program cancellations or things being pushed back a year or two. So you may see just a modest move to the right, but based on what we can see right now, The core programs in our backlog are important to our key customers. We're continuing to work on preparing those. And while overall volumes are likely going to be softer, you know, we think that the program cadence there has held up pretty well at this point in time. But we'll continue to monitor it carefully and support our customers, you know, with their product development roadmaps.

Okay, very helpful. Thank you.

The next question will come from Brian Johnson with Barclays. Please go ahead.

Yes, good morning. And I wanted to ask him sort of a broader question. And I'll probably get a more diplomatic answer than a OEM CEO gave you last night on the state of lockdowns. But my question is just what advice would you give policymakers both at the federal level, your old boss, for example, Mr. Secretary Ross, and at the state and local levels about what needs to happen to get North American Lake vehicle production restarted.

Well, that's a good question, per usual, Brian. Thank you for that. You know, I think the – maybe so come across a little bit pedestrian, you put me in spot with a direct question, you'll get the direct answer. My view is that, to use an adage, I'll be the first one as a CEO to say if the going back to work, and any of our facilities is unsafe, and I've told some OEMs that have asked me to go back to work, no, already, because I didn't think it was right, I would say I wouldn't support it. But if I do feel that all the protocols and governments feel the protocols are in place, you know, by now many of the governments have their own audit people. They have their own audit sheets and checklists and all the other stuff. If you feel like the manufacturing environment, in fact, is doing their job, um in theory i can say this much this is the pedestrian way of getting at it i feel better that many of our manufacturing plants if not all our manufacturing plants are probably going to be safer than going to the local grocery store or maybe going to local pharmacy so that's the only thing i can kind of frame up is it relates to is an example form i know our diligence uh our diligence and what we're doing from anywhere as you saw in our prepared remarks with temperature scanning With distancing, I mean, we've had really, knock on wood, we've had really, really good performance, if that's a word for it, relative to the number of cases we've had. And I think it can be done. And I think everybody is learning from each other and pulling with each other. So I guess that's the best way I can answer that question, Brian.

And how does the age or health status of the workforce fit into that, especially with what you might have learned? In Italy, you know, the data seems to show that the COVID virus is more dangerous for older, obese, diabetic men than for the broader population. And just stereotypically, that's a lot of workers are in that category or factory workers. So how have you kind of dealt with that in Italy and how do you expect to deal with that in North America?

The other great question, I can honestly tell you, we did not differentiate on age. We didn't. Personally, maybe some other companies did. Maybe they took some other unique precautions or whatever. You know, when you manage kind of the peak, not the trough in terms of your focus and your commitment to safety, there is no age limit. You have to do the same for everybody. You know, I say it to see inside of our company, we've had spectacular safety performance. Thank you to the team out there. And it's great safety in any form or fashion has nothing to do with reacting to metrics or reacting in any form or fashion. It's everything about being preventative and looking for an opportunity that something will go wrong before it goes wrong. And that's exactly the same thing on the pandemic and managing COVID-19. And that's what we're doing in our facilities, doing many things that are probably unique, but we're passing along all best practices for all those that are interested.

Okay, thanks. We'll follow up later on some financial stuff.

The next question will come from Joseph Spack with RBC Capital Markets. Please go ahead.

Thanks, everyone. So, you know, if we take a sort of face value that, you know, second quarter sales down 50% breakeven EBITDA, then the decremental margins are a little bit worse in the second quarter versus the first quarter, despite a much more significant decline. And I know you went through the cost structure in great detail, but I was wondering if you could maybe bridge on the margin where you expect more of those offsets to the variable costs to come in the second quarter versus the first quarter.

Sure. Hey, good morning, Joe. It's Jonathan. Some of it's going to have to do with the end market mix and also some of the estimates on where we would think the aftermarket would be. But I wouldn't take the break even as an exact indication. We do think the longer this lasts and the more significant the downturn, the decrementals are likely to be a bit higher than what we saw in the first quarter. But just broadly speaking, you know, we think Q2, we're going to see a more broad spread reduction across, you know, all of our product groups than what we saw just in the last couple of weeks of March. We're trying to make sure that we're, you know, we're prepared for that in the next 60 to 90 days. Okay.

And then this was sort of touched on, but just on the – in the illustrative scenario, which, again, is helpful. Like that two, you know, I know you're not guiding to six billion, but that 275 in CapEx, can we interpret that as sort of a fixed amount or sort of look at more sort of the percent of sales and then use that for whatever we think, you know, sales are going to be? And I was a little bit curious about you know, your comment about how you don't think that really impacts growth because it would, you know, it would seem like that would, since that was planned at one point, it would need to come back. So is it fair to assume that, you know, maybe 21 and beyond CapEx is now looking higher than previously thought?

yeah sure relative to capex you know the 275 is representative of the choices we would make at that level of sales and certainly we would preserve um you know the critical equipment or the products that we have to make for the programs that we're launching but you know we have choices that we can make relative to what we're going to do in-house what would we do on the outside some of that flexibility there's capex that we spend on continuous improvement exercises or other things that we could continue to defer. So I would look at that as a thoughtful prioritization of the CapEx that we really would feel we need to spend at that level of sale. And it does include some level of growth. As programs continue to come online in the next couple of years, it's possible that CapEx could be a bit higher going forward coming out of this. We may choose to spend some more as the market recovers. But being about $100 million lower than what we originally expected, so just as a reminder, we expected CapEx to come down relative to last year as we got some of the major program launches behind us. But certainly some of the levers that we would pull here would be because of the softness in the end market.

Okay, but that sort of, you know, hundred odd million, you know, there was, there were obviously programs associated with it. So as those programs come back, it needs to get spent eventually.

Some of it will, but there are other areas that don't relate to new program spending that would not come back. So we may just choose not to do some things that we thought could create some efficiencies. We prioritize the new programs over other areas of CapEx that don't directly relate to new business. Okay, very helpful. Thank you. Sure.

The next question is from Brian Sponheimer with Gabelli. Please go ahead.

Hey, good morning, everyone. Good morning, Brian. Just two real quick ones. If we're thinking about the ramp and the potential for broader shutdowns occurring again or, you know, just kind of as hotspots develop, Is there going to be a need for greater working capital to be kept in order for you to maybe give yourself a two-week cushion if Tier 2s and Tier 3s have issues in geographies where you're buying from?

Yeah, it's a really fair point, Brian. Even with the significant working capital that we demonstrate in the break-even scenario or the significant use of cash or source of cash that we would get from working capital, the days of inventory that we would be carrying would be higher than normal. So it's not – the inventory reduction is not at 100% efficiency if we were carrying – you know, 60, 70 days of inventory at year end, you know, under any outcome in the second half of the year, we're probably going to be carrying more days than that because of what you highlighted. We're going to want to make sure that the customer is protected and that we're making sure that we're in a good position. But even with maybe slightly less efficient inventory levels, there's a significant amount of cash flow to be generated as sales levels fall.

Yeah, thank you. And then just, Jim, you know, going back to when you went through this in 08 and 09, obviously it's a different sort of challenge that you're facing here. And apart from maybe where the balance sheet is now relative to then and some post-retirement obligations, what's most structurally different about the auto industry? I know you weren't at Dana at that time. What's more resilient now than before?

Well, I hope that just answers your question. Thanks for the question, Brian. I think the biggest thing is just lack of having a cure to the pandemic and to the virus and that leaving seemingly so much more uncertainty as to how long it could be prolonged. I guess if I fell back into 07, 08, 09 and all that, back then we probably would have said to ourselves, how long is this really going to go? We don't really know, but this one's real and this one's dealing with human life. So that's the biggest thing is to go along with it. As it relates to the operating of the company, though, at least in my view, you know, obviously, I was CEO in that period of time. But like many of us, we were all involved in anywhere from, you know, the grid loss in the United States, the volcanoes in Iceland that impacted Europe and all the things. I mean, I can tell you this, the chair of the CEO, you're pulling off all of those levers, and you're remembering all those best practices you took into account. And you're just making sure that the food stays united. And that's why I overemphasize the need for communication is cheesy. Maybe is that sound the ability to communicate on a, on an incredibly regular basis via your business unit leads your country leads your continent structures, whatever it may be has been mission critical, but there is a small silver lining in a blessing in the skies. Many of us have been through it in one form or fashion and do the 08-09 crisis. And we're executing it. The biggest lever to it is just nobody had any idea that we'd have to manage something like this on the health and safety of our people, the most important asset we have.

I appreciate that. And best of luck and health to all of you and everyone at Dana and their families. Thanks, Brian.

The final question is from Dan, is a follow-up from Dan Levy with Credit Suisse. Please go ahead.

great thank you so much for uh squeezing in sorry for the drop earlier uh yes you mentioned thank you you mentioned um you know that that you're not seeing much in terms of launch delays and i imagine in any case most of your discussions with customers are really limited to how to get through today rather than bidding on new programs but i guess i'm wondering what do you think disruption might do to EV program development at your customers? How does the EV story change at your customers, if at all?

Yeah, I would tell you, and there's some pretty good public information out there. If you Google, for example, the CEO from Daimler was out recently. You can Google it, but he made some pretty direct comments about where he was focused, like many of the CEOs, and with a pretty strong conviction behind his EV platforms and I can tell you generally speaking, maybe even more than generally speaking, you know, it's still full speed ahead on electrification, at least on the products that we're working on. And I guess we're working on them in all of our end markets. So that should tell you something.

And this does not change any of your spend. In fact, I would imagine it's still probably skewed to the upside.

If you called, go ahead, Jonathan. No, no, go ahead, boss. Well, I was just going to say, I mean, spend to the upside, yes, it was already on it in upside. Are we ultimately taking some costs out of there via the short-term, hopefully short-term actions relative to reduced wages and all the other stuff? Absolutely. But other than that, I would say, you know, we're just going to stay on the same path. We're not going to – we are definitely not going to cut the throat of our future in electrification in this tenure. We will – we have a lot of other levers to pull. The team is doing a spectacular job pulling all those levers. So that's how we're looking at the business.

Great. Thank you very much.

Thank you very much.

There are no further questions. Are there any closing comments?

Yeah, I'll take the wheel for just a second. First, I'd like to thank everybody. I understand, of course, you're all dealing with the same fears, challenges, issues that we are, and I think I appreciate you taking the time to spend time with us. Second, I'd like to say I wish on the one hand we could have provided you even better color and information around markets and restart and all that. But, frankly, I think, of course, we all know this. We're just facing an uncertain demand environment, and it is what it is. On the other hand, hopefully, by talking to Dana, talking to us, we can hopefully provide you some more color that maybe you can't get elsewhere relative to all of the end markets, and it triggers thought maybe relative to respective GDPs, so on and so forth. We don't know what's going to happen. That's for sure. If you take our closest to home, the United States, and the impact of the $4 to $5 trillion, it's going to be pumped into the economy. Is that going to get spent? Are we going to go right back into new vehicle sales or not? Are people going to save the money? Who knows what's going to happen there? Is it going to be recovery? Is it not? Who knows? All I know is we're prepared as a company. to handle whichever that is, and hopefully that came through in the presentation and the response today. I will tell you hopefully one other thing you took from today's presentation. We talked about it a lot in terms of how we kind of reorganized the organization, potentially even transformed the organization with what we titled the Leverage the Core Strategy, which is all about a matrix organization to make sure that we have cooperation and teamwork is really what it means. across business units and, you know, in some companies that's just, let's just call it, it's lip service. It's not real. We would not personally have been nearly as effective if we didn't have the Matrix organization leveraging the core, working as a team, and oh, by the way, getting to where we wanted to from at least the last five years, getting that balance across the business with 50% of our business being a heavy vehicle and 50% of it being a light vehicle, even with all the growth in light vehicles. All those things all in, they're playing out as good as people expected, but this is certainly not the end of this game. We've got a lot in front of all of us, and I appreciate all your support through this. With that, we'll look forward to talking to you in the next call.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.