Dana Incorporated

My name is Carmen, and I will be your conference operator today. Please be advised that our meeting today, both the speaker's remarks and Q&A session will be recorded for replay purposes. There will be a question and answer period after the speaker's remarks, and we will take questions from the telephone only. If you would like to ask questions during this time, press star 1 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's Senior Director of Investor Relations and Strategic Planning, Craig Barber. Please go ahead, Mr. Barber.

Thank you, Carmen, and good morning, everyone, on the call. Thank you for joining us today for our second quarter of 2020 earnings call. You will find this morning's press release and presentation are now posted on our investor website. Today's call is being recorded in the supporting materials of 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 expectation 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 statements found in our public filings and included with our reports with the SEC. On this call this morning is Jim Kamsiskas, Chairman and Chief Executive Officer, and Jonathan Collins, Executive Vice President and Chief Financial Officer. Thank you all, and Jim, the call is yours.

OK, thank you Craig and good morning and thank all of you for joining us today. We hope that you and your families continue to remain safe throughout this difficult season. As you are aware, the mobility markets have seen a great deal of disruption in the first half of the year as a result of the global COVID-19 pandemic. As we communicated at the end of the first quarter, a large percentage of customers idled some or all production in April and were not able to begin restarting production until May. The initial May production ramp-up in the U.S. and a few other countries was just a bit slower than we had expected, but since then, we've seen a steady increase in demand as nearly all of our customers are back online. As a direct result of the global shutdowns, sales for the second quarter were $1.1 billion, just over 50% decline from the second quarter last year. As depicted in the lower left side of the slide, April saw a majority of the shutdown impact. We saw an 83% improvement in May as operations began to restart and further an 84% improvement in June as demand continued to improve. Through a combination of cost management actions and efficiently restarting our operations, we ended the quarter with nearly break-even adjusted EBITDA and a slight adjusted EPS loss. Despite the challenges, we had several highlights in the second quarter as we pivoted to restarting and reengaging the business. To begin with, all our operations have safely and successfully reopened, and we continue to win new business, notably on new electric vehicle programs. We also continue to invest in EV growth through both targeted acquisitions of key capabilities and strategically partnering with industry leaders to bring new technologies to the market. But it's not just on hybrid and electric vehicle programs where Dana is growing. Perhaps you had a chance to virtually watch one of the most highly anticipated and exciting vehicle debuts of the year, the all-new Ford Bronco. The Dana brand is well known to consumers in the off-road space because, for decades, we delivered the most durable and robust driveline products capable of handling the rugged terrain that these vehicles experience. In other words, with Dana, It's more than the products alone. It's also about brand loyalty and the consumer experience. Moving to slide five, I'd like to talk about how we've successfully restarted our operations. Starting in the left-hand third of the page, As you can imagine, restarting approximately 150 data manufacturing and technical facilities was challenging enough. But then you factor in the execution required to ensure supply chain continuity from our Tier 1 integrated global supply chain across nearly 50 countries. I cannot possibly thank the Dana team and our supply partners enough for their amazing and continued efforts in helping us safely bring our operations back online around the world. They have committed countless hours establishing and sharing best practices, and especially from the initial high-impact COVID areas, such as China and Italy, and collaborating to ensure that everyone stayed safe as we brought high-volume manufacturing back online quickly and efficiently. Looking to the center of the page, approximately six weeks ago, we started to ramp up operations in line with our customer startup schedules, most aggressively in the light vehicle North America market and global agricultural markets. As a reminder, this was all occurring while Dana never stopped operation in what was characterized as essential businesses, such as aftermarket and industrial products, thus making our operational challenge, let's say, that much more interesting. Specific to the light vehicle North America markets, throughout May, there was uncertainty as to how fast the customers would be able to restart and when the supply operations would be permitted to resume, especially in Mexico. In the end, the May ramp up was somewhat slower than expected, but ultimately, all operations came back up at a very good cadence. As we moved into June, we experienced accelerating customer demand as they looked to replenish low dealer inventories. In addition, many of our customers have indicated that they will have limited or no summer shutdowns. In our European and South African operations, our light vehicle customers started a little slower, but they too have largely returned, not quite to pre-COVID volumes, but to reasonable volume levels. Pivoting to our commercial vehicle customers in North America, they too restarted in May after several weeks of downtime. Obviously, volumes are down from the record highs of the previous years, but there is resiliency there more than some would have predicted. The global off-highway markets have restarted because they restarted across the board with varying run rates, depending on the region and the end markets. We continue to see stronger demand in agriculture and weaker demand in construction. And as I stated earlier, our aftermarket business continues to operate uninterrupted. As you can imagine, with different end markets ramping up production at different rates, cohesively and consistently executing a very robust global operational and supply chain management system is essential to success. The Dana operational purchasing and supply chain management team did a remarkable job navigating through the ebbs and flows of the dramatic customer requirement changes. And of course, this was not only on a country by country basis as the pandemic altered manufacturing around the world, but often on a state by state or providence by providence basis. Drawing your attention to the center of the page, Customer engagement may have slowed for a brief period of time, but today we are back, albeit in its new normal of digital communications, where we left off pre-COVID. Customer satisfaction starts with having great people who have a tremendous passion for creating value for our customers. At Dana, customer satisfaction is in our DNA, and the team is executing product design reviews, product validation testing, launch readiness reviews, and all other facets of the business. Most importantly, we're all doing this safely. As you will notice on the right-hand side of the page, coincide with the new normal, we have thoughtfully not only increased safety protocols in our operations in many ways, we clearly understand that the new normal work environment could result in any manufacturing company deviating away from standardized operating processes. Accordingly, we have also elevated our focus on quality to be more proactive than ever, as our operating challenges are required in the manufacturing environment. For example, as we adjusted shop floor operations to support social distancing protocols, we have ensured that all processes are revalidated to ensure that product and process characteristics meet our customers' requirements. Of course, This much translates over into new product launches as illustrated in the bottom right-hand corner of the page. We continue to see minimal delays in new product launches for future programs. Furthermore, to continue the steady stream of new product launches in the future, we continue to make investments in new product technology to support our customers' needs as they move from internal combustion engine to electrified vehicles, which will drive growth across the businesses we serve. Now turning to slide six, I'd like to share some exciting news about another new electrification program we're working on. Our customers continue to recognize the strong value proposition for turnkey suppliers with full e-powertrain capabilities. I will briefly remind the audience what I mean by complete e-powertrain capabilities. As you can see in the bottom left-hand side of the page, Dana, of course, has the e-propulsion system capabilities including the motor, inverter, and driveline. Moving to the right, we also provide power electronics and battery system to complete the full e-powertrain system. By having all of these capabilities in-house, Dana, including our e-thermal competency, is the only supplier with complete e-powertrain supply capability, thus enabling us to partner closely with our customers to provide optimized and efficient solutions to meet their needs. Specific to the presentation page and announcing the exciting new business award, We were recently sourced the e-powertrain by a major European commercial truck manufacturer for a new battery electric medium-duty truck that will be used for urban and regional product distribution. The vehicle production is slated to start next year. The zero-emissions electric truck will be equipped with the data content and upfitted to the chassis. We'll supply the e-powertrain system, which generates and stores and manages the energy for the vehicle production. consisting of the battery packs and the electrified auxiliary systems. The vehicle will also utilize a Dana CO300 inverter, as well as what we describe as a Sumo HD motor coupled to a Dana driveshaft. Dana developed software and controls will run the diagnostics and telemetry of the complete system. As the global demand for fuel-efficient, low-emission vehicles continue to expand, our ability to leverage our longstanding leadership in truck driveline capabilities, now coupled with our full e-powertrain capabilities, provides our customers with highly efficient solutions to support their reduced emission and total cost of ownership objectives. In furtherance to this, a key element of our enterprise strategy is to lead in electric propulsion. Accordingly, we continue to strive to develop the best and most innovative solutions. This can only be accomplished by having the right team, and more specifically, the most experienced people. Please turn with me to slide seven to discuss the most recent step we have taken to strengthen our capabilities in software, controls, and engineering services. I am often asked the question, you've been filling out the white space via executing on M&A opportunities and especially in electrification, does Dana have everything that we need? And my response to that question has been something like, we always keep our eyes open, especially in the area of software, controls, and systems. Accordingly, earlier this month, Dana acquired Rational Motion GMBI, a company with a rich history and proven technical expertise in software, controls, and system integration for electric vehicles. With more than 10 years of proven capability, And drawing on many decades of experience from its talented lineup of engineers, the skills and expertise of the Rational Motion team will increase our localized support for European-based customers, as well as further strengthen our global development of software and controls for complete electric vehicle integration. And by the way, the timing of the acquisition and Dana winning the new program in Europe is not a coincidence. The former Rational Motion team members will be involved in the launch of the previously announced new European electric truck, as well as numerous other projects that Dana is working on. Please turn with me to slide eight to learn more about new hybrid electric class eight truck application hitting the market this year. There's been a lot of buzz about Hyland, a company We first told you about earlier last year. We are excited about the opportunity or market opportunity through our strategic partnership and equity-linked investment with Hyliion. Earlier this year, Hyliion delivered the first of three hybrid Class 8 vehicles to a leading transportation services provider with the remaining vehicles slated to be delivered later this year. Through this partnership, Dana is their source for the e-propulsion system, including traditional driveline components, as well as fully integrated e-axles, which include motors, inverters, controls, gearboxes, as well as thermal management technologies. The Hylian system converts a traditional 6x2 into a hybrid by adding Dana's e-propulsion system. The system allows for easy installation and simple servicing. It's an engine type agnostic and can be installed on any Class 8 vehicle from any manufacturer. This is another example of how we are committed to helping our customers navigate the electrification journey with industry-leading technologies and programs. Thanks to strategic partners such as this one, we have a unique opportunity to implement high-value proposition, long-haul solutions that revolutionize power commands and help our customers to meet their sustainability goals. Please turn with me to slide 9 to hear about... the more exciting and highly anticipated vehicle debuts in years. As I'm sure you're aware, Ford unveiled its 2021 built-wild two-door and four-door model Broncos and the new Bronco Sport a few weeks ago. You may not be aware of this, but Dana's involvement with the Bronco program dates back to its initial launch in 1966. And we are excited, once again, to be collaborating with Ford to offer a robust suite of advanced driveline, ceiling, and thermal management technologies for this exciting new vehicle family. Our feature technologies on the Ford Bronco include the Dana 44 Advantech solid rear axle and the Dana Advantech independent front axle. From those who want extreme performance, there is an optional upgrade to the Dana 44 Advantech independent front axle. All of these axles are available from the Spicer Performatrac electric locking differentials. The Bronco also uses a Spicer rear driveshaft with Dana-designed constant velocity joints and our industry-leading thermal management and sealing technologies. We first announced this program win back in 2017. In fact, Ford has stated that they selected Dana's axles even before they decided the frame of the vehicle, and we are looking forward to seeing the Bronco out on the trail. What we were not able to announce at the time was Dana's driveline system would be featured on the all-new Ford Bronco Sport. This new vehicle will be equipped with Dana-Spicer Advantech Ultra rear axle and Spicer SmartConnect disconnecting 4x4 system. Dana and Ford have a long history together, and we're proud to once again be partnering on these exciting models, which are part of one of the fastest-growing vehicle segments in the United States. In fact, in 2019, sales for the SUVs in the United States were nearly 50%. As our customers increase their offerings in this segment, we are looking to leverage driveline solutions to deliver the best on-road experience, as well as the high-performance pickups and SUVs used for off-roading as well. Dana's support of this growing segment and their desire to enhance, customize, and personalize their vehicles with aftermarket solutions by offering technologies exclusively designed for maximum off-road performance will only help to further grow this market. Thank you, and now I'd like to turn the call over to Jonathan for a look at our financial results.

Thank you, Jim. Good morning to all of you listening in. I'd like to begin with an update on the progress we made on our near-term financial priorities, which I outlined on last quarter's call. So please turn with me to page 11. Starting on the left side of the slide, our first priority as we faced the market uncertainty was to conserve cash as production schedules and sales began to fall off due to the global pandemic. We focused on four key actions to achieve this objective. First, we aggressively managed our supply chain by reducing material orders and lowered our inventory by more than $75 million in the first half of the year. Second, we flexed our conversion costs by utilizing temporary layoffs of direct and indirect hourly associates, temporarily reducing compensation for salary associates, and aggressively lowering our overhead spending across all non-labor categories. The combination of these actions led to decremental margins of less than 25% on an organic sales decline of more than 50%, which I'll discuss a bit more in a few moments. Third, we continued to make prudent decisions on where to invest capital. In the second quarter, we reduced our capital spending by more than 35% compared to last year, while continuing to serve our customers on current and new programs. Finally, our common stock dividend remained temporarily suspended as a means to further preserve cash during this unprecedented time. Our second priority, as shown on the right of the page, was to maximize our liquidity. We took several actions in the second quarter to that end. We issued $500 million in new senior unsecured notes. Proceeds from this issuance added to our cash balance, which at the end of June was more than $700 million, an increase of over $50 million compared to the end of March. We used a portion of the proceeds to repay the $300 million revolver balance from the draw we made in March. We now have access to the entire $1 billion of ready capital on the facility and terminated the $500 million undrawn bridge facility that was put into place at the beginning of the pandemic out of an abundance of caution to guarantee our access to additional liquidity. We've maintained the amended terms of our senior credit facility to allow additional headroom under our sole maintenance covenant. As a reminder, we do not have any significant debt maturities for the next few years. In total, we had $1.7 billion of liquidity at the end of the second quarter, which is typically the seasonal working capital peak in our business. Please turn with me now to slide 12 for an overview of our second quarter results compared with the same period last year. Second quarter sales were $1.1 billion, a decrease of $1.2 billion compared to the same period last year, driven by lower demand resulting from production shutdowns due to the COVID-19 pandemic. Adjusted EBITDA for the quarter was nearly breakeven at a loss of just $5 million, $291 million lower than the same period last year. Net income was a loss of $174 million, $106 million lower than the second quarter of 2019. Earnings were reduced due to higher income tax expense resulting from the establishing $56 million in valuation allowances in foreign jurisdictions. The second quarter of 2019 was reduced by $258 million in one-time pension settlement charges related to the transfer of future pension liabilities from a U.S. pension plan to third-party insurers. Partially offsetting this one-time charge was a net tax benefit of $87 million in the second quarter of last year, driven by the pension termination and foreign tax credits. Excluding these one-time tax and pension charges, the second quarter net loss was $118 million in 2020, compared with net income of $103 million in 2019, reflecting the lower operating earnings this year resulting from lower sales due to the COVID-19 pandemic. Diluted adjusted EPS, which excludes the impact of non-recurring items, was a loss of 69 cents, $1.56 lower than last year, largely attributed to the lower adjusted EBITDA. Adjusted free cash flow was a use of $133 million, $176 million lower than the same period last year, as lower profit more than offset lower working capital requirements, cash taxes, and capital spending. Please turn with me now to slide 13 for a closer look at the sales and profit changes in the second quarter. The change in second quarter sales in adjusted EBITDA compared to the same period last year is driven by three key factors shown here. First, organic sales were nearly $1.2 billion lower than last year, primarily attributable to a large portion of our customers halting production in mid-March with reopenings towards the end of May. Throughout this period of extremely low demand, our effective cost-flex actions held decremental margins on the organic decline to 24%, tempering the overall margin impact. Unlike the first quarter, we own the Graziano and Fairfield businesses for the entire second quarter last year, so there's no year-over-year impact in Q2. Second, the U.S. dollar was stronger against key foreign currencies compared to the second quarter of last year. This translation impact lowered sales by $27 million with a negligible impact to profit. Finally, lower commodity costs provided a slight margin benefit as gross commodity costs decreased by $5 million for a net profit gain of $1 million. Please turn with me to slide 14 for a closer look at how adjusted EBITDA converted to adjusted free cash flow, leading to the overall change in our cash position in the quarter. As you can see in the middle of the page, adjusted free cash flow for the second quarter of this year was a use of $133 million as there was no profit to fund interest, taxes, and capital expenditures, despite the fact that taxes and CapEx were considerably lower than last year. Working capital was a slight use of cash despite the lower sales volumes in the quarter. This was due to the fact that at virtually idle production levels in April and May, there was little opportunity to meaningfully reduce inventory until June, which will lead to significantly improved cash flow in the third quarter. At the bottom of the page, you can see our cash balance increased $66 million as a result of the net proceeds from the bond offerings after repaying the revolver. Please turn with me now to slide 15 for an overview of our market conditions based on what we're seeing in our July sales as well as releases from our customers for August and September. First, in the light vehicle market, full-frame truck demand is a bit stronger than we would have expected just a few months ago, particularly in North America where vehicle inventories for our key platforms remain low, providing for a robust production environment. As was the case in China after production started there in the first quarter, our key North American light truck market is experiencing a faster recovery than other regions. Second, in the commercial vehicle market, Class 8 truck demand in North America remains challenged, though order rates are showing some encouraging improvement. However, we've yet to see this have a meaningful impact on our production schedules. Outside of North America, customers in India are ramping up production more slowly than other hard-hit regions, such as Brazil, as the health crisis continues to weigh on the regional economy. Finally, in our key segments of the off-highway equipment market, agriculture demand remains reasonably strong, while construction and mining lag with much softer demand around the world, with the exception of the Chinese market. The combined impact of these market conditions should result in sequential sales growth in excess of 50%, leading to a return to profitability and cash generation in the third quarter. The entire Dana team remains focused on protecting our employees with safe work environments, supporting our customers as demand continues to improve, and flexing our cost structure to match that level of demand to deliver improving financial results to our shareholders. Thank you for listening in. We'll now turn the call back over to take your questions.

Thank you. At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. Your first question comes from online of Eileen Smith with Bank of America. Eileen, please go ahead.

Good morning, guys. First question, I noticed that you excluded your free cash flow breakeven slide that you presented at 1Q reporting and you've talked about at conferences since. Is that breakeven estimation still valid or based on your operating performance in the quarter and some of the cost and cash saving actions that you've taken, could it potentially be even higher?

Sure. I think from our perspective, it still remains pretty consistent. We may have made a little bit of progress with some structural cost reductions to improve that, but I would highlight that the indication we've given on sales demand for the third quarter would be a bit better than the demand level in that scenario. So from an outlook standpoint, at least in the third quarter, demand is better than that.

Okay. And now that you've terminated your bridge facility and repaid from your revolver, what does the decision tree look like in terms of reinstating the dividend or potentially repurchasing shares? And specifically, what would you need to see across your end markets to feel comfortable enough to get more aggressive on this front and put the balance sheet to work?

Sure. You know, I think it would have to be stable demand with a significantly reduced probability of any types of future shutdowns. So as the health crisis further comes under controls and the numbers would start to move down and we'd have more confidence in consistent demand, we'd be in a position to look at moving back towards a more normal capital repatriation approach.

Great. And last question, if I may. You've cited a lot of progress you've made on the electrification front in the commercial vehicle market. Another segment that's starting to get a lot of attention and hype is around electric pickups in the light vehicle market with new products coming from GM, Tesla, Ford, et cetera. Can you remind us where Dana sits in terms of quoting for some of these new programs? Are you heavily involved in these discussions or are many of the architectures being pursued more internally at the customer level?

Hey, I mean, this is Jim. Thanks for the question. Thanks for joining today. I would say it's a mixed bag of things. Certainly, as I've said since the beginning, your initial pull through was in the bus market. Then it moved into even to what we talked about today, more of that last mile. We're involved in one form or another when the light vehicle side, obviously not here to communicate or announce anything, but I would just say there's plenty of involvement across the board. That's about as much as I can give you.

Great, thank you very much for the questions. Your next question is from the line of Dan Levy with Credit Suisse. Please go ahead.

Hi, good morning. Thank you, everyone. So I wanted to start just with a couple questions on the decremental. If I look at a commercial vehicle, Decrementals is only 20%. That's obviously better than the rest of the business. A little color on that. And then similarly, off-highway decrementals of 24%, which I would think is lower than what you would get for a segment like that, which is going to typically have higher decrementals. So just some color on the decrementals for those two segments, please.

Sure. Dan, I'd point to two things. The first is both of those business units on the heavy vehicle side have strong aftermarket presences. So in this environment, when OE production was idled, trucks were still on the road and needed to be repaired. So I would say that the aftermarket business, which in both of those is a good and profitable business, helped to bolster that a bit. The second thing is that the widespread cost flex actions that I referenced were really across the board. So, you know, we ended up with better decrementals in those businesses, partly because of the severity of the cost actions that we took, combined with the support that we received from the aftermarket segment, if you will.

Okay. And then, I mean, specific to Off-Highway, you know, revenue down 40% and you still put out a 10% margin. That's That's pretty good. It sounds like there's nothing, you know, I mean, those are the typical cost actions that you're taking to keep that margin intact. And is that, you know, indicative that when things finally recover, we can get back to that sort of 16% type margin profile?

Yeah, absolutely. The margin potential of the off-highway business remains very high, particularly because of the acquisitions, the cost synergies that we've achieved, and then the strong cost discipline through the operations. The combination of all of those make that a very attractive segment from a margin standpoint.

Great. And then just a second question on electrification. For your win on the electric truck program in Europe, could you just give a sense of how the sourcing decision was made at that customer? Were they at all considering insourcing or was it multiple supplies for the powertrain or did they specifically choose you because you mentioned you're the only one out there doing complete solutions and so they wanted a complete solution and just more broadly on the competitive landscape, It sounds like you're the only one with a complete solution, you know, if that's correct. And to what extent are your customers in the heavier applications looking to insource on electrification?

Yeah, that's a big question. And I would tell you there's no one shoe fits all, each customer. I would tell you kind of... emphasizing the complete system capability, speaking in example terms, I'm pretty sure you're aware we've been in the thermal management business for 100 years. And when you think about a full e-propulsion system and the impact on cooling batteries, electronics... all of the other moving parts associated with it, and I'll couple that with all of our capabilities. That's kind of how you get to the full system. Differentiation is one differentiator, but coming back to your question more specifically on how do the decisions get made, one, I'm not in the boardrooms at the OEM specifically to know how they're thinking about things, but I will tell you this, is that it all starts at the engineering level, engineering the products. And your engineering teams have to have, with the OEMs, have to have great confidence that, you know, they're going to bet their business on somebody that can actually make sure that the whole system is going to integrate. When it's on the road, you're going to be able to react to it. You're going to be able to diagnose it. You're going to be able to, you know, supply parts to it. You're going to have to have everything. And if everything... is shopped out and everything is kind of just kind of trying to cobble things together from the outside looking in, I don't know that that gives customers a great deal of confidence that when their vehicles are going to get on the road that they're not going to get a brand pop in the face for it. We believe that that's a competitive advantage, that it's all in-house. And, you know, Joe Engineer talks to Susie Engineer, talks to Tony Engineer, and they find a way to get it done. And we think we find that many of our customers see it the same way. So it's a long-winded answer to your question, but that's about the best I can give you.

Okay. Thank you. That's helpful. If I could just squeeze in one more. Just housekeeping, if you could provide some parameters on what to expect in working capital in the second half.

Yeah, similar with what we communicated with the break-even analysis that we shared at the end of the first quarter, we would expect in this significant of a sales decline for working capital to be a substantial source of cash. It's really going to start to happen in the third quarter. So inventories came down late in the second quarter. That's going to convert to cash in the third quarter. So we would expect to have a significant generation of cash from working capital in the second half of the year and also on a full year basis.

Okay, great. Thank you very much.

Noah, your line is open. If you're on mute, please unmute your line.

Hey there, it's Joe on for NOAA this morning. Thanks for taking our questions. Just circling back on the decrementals, are you expecting similar decrementals in 3Q as you saw in 2Q? And if so, that would imply 3Q EBITDA of potentially more than $100 million. I get that decrementals are material worse sequentially. Can you just point to any puts and takes regarding that?

No, I think as far as the decrementals are concerned, when we shared the break-even scenario at the end of last quarter, it implied full-year decrementals in the mid-20s. So I think we expect to remain pretty close to that range on a year-over-year basis in the third quarter. So I think that's a pretty reasonable assumption.

Got it. And then I guess also in the past quarter, we've seen quite a bit of attention and policy development and access to capital for hydrogen fuel cell powertrains, particularly in commercial vehicles. So you guys have already supplied fuel cell stacks, but wondering if you see the opportunity or need going forward to expand your offerings in this area, similar to how you've done with EVs. And if so, where you'd like to focus your investments?

Thanks for the question, Joe. Appreciate it very much. You know, you never say never. You're right. Our experience in fuel cell goes back decades as well. It certainly helps us be in the game relative to the full driveline solution or integration solution as we're working on many projects in that regard, and especially in the in the commercial vehicle segment to do more as it relates to the the actual stack that's not our intention right now it's to support our customers like we have for years but you know we'll see it we'll see how the how that market continues to unfold as you know it's a little bit further out there and a lot of folks are thinking about it working on it but you know we keep our ear to the ground and keep our technology roadmaps in place to be flexible.

Sure. I'm going to squeeze one more in circling back on the product launches. You've announced a number of these wins for the fully integrated powertrain supply. Are those launches generally tracking timeline-wise similar to your expectations? And then second, can you talk a little bit about how you're managing the supply chain and make first buy decisions for EV components given the limited scale in the industry?

Thanks again for the question. I would say first of all, yes, they're tracking. As I said in previous calls, the way I would look at it, I think most people are, there's a bit of a bubble for everybody in the world of whatever you want to pick, six, eight weeks. You can argue that launches are delayed a little bit by that amount, but that's not substantial anyway. Back to your supply chain piece of it, you're right. That's a good observation that you don't have as much history on that, but don't think by accident that our acquisition and roll up of various electrified assets out there, people that have been doing some form of electric vehicles and components for well over decades, such as obviously TM4, Ashwoods, the list goes on, SME, et cetera, even today's announcement on Rational Motion, the best of the best supply base they've worked with, we're working with them and we're working off of that to build up the most sophisticated and robust supply chain we can. Thanks, guys.

Welcome. Your next question comes from the line of James Carrillo with KeyBank Capital Markets. Please go ahead.

Hey, good morning, guys. Morning. If we compare your cost structure next year to 2019 as a base, excluding any impact from acquisitions, is there a structural cost savings number we should be considering for 2021? Or would that maybe just be captured in a mid-20% incremental margin contribution?

Yeah, you know, at this point, we're not giving a specific number, but we would indicate that of structural cost actions taken in the second quarter, some of them will be permanent. It won't be insignificant, so we do think it's going to be something that's going to help the margins be higher on the upswing or the incrementals to be higher than they would have been prior to that. Certainly, there's a combination or a number of temporary actions that we refer to, but there are some permanent ones as well there. And as we get towards the end of the year and start providing an outlook for next year, we'll provide some more color on that.

Okay. Got it. And as we think about your backlog, new business backlog contribution for the back half and maybe within the context of the full year, right, the original guide of 350, just Wondering if there's any order of magnitude color you could provide on your thoughts. It does seem as though you're seeing minimal launch delays for new programs. Any color.

Yeah, I think that's right. The only color we'd give there is what we shared before, which is the reduction of the backlog is going to be pretty much in line with what we're seeing in our overall change in sales. So certainly the dollar amount is going to be lower by a comparable amount. As Jim mentioned, the program shifts are relatively insignificant at this point, and we still expect to have a pretty similar cadence of launches going into next year that we would have expected earlier this year.

Have you worked with Rational Motion in the past? And do they, from a vehicle mix or customer channel standpoint, who have they been working with?

Good question, by the way. The first part of the question, I'll give you a... Kind of a yes, but answer to it. Yes, our TM4 team that we acquired whatever it was a year and a half ago or so, they can literally finish each other's sentences. They were essentially the outlet for TM4 in Europe for all the activities, anywhere from quoting to design to whatever the case may be. And their background, and back to your engineering question, if that's what we call it, and products background, actually they started and spent a large portion of their early days in their business tied into Formula E racing, in particular with Toyota, and then into multiple other products. And you can see some of those ghosted pictures we've seen. They've worked on the coordination and integration of various electrified components. So got a really good background in history.

Thanks.

Sure. Your next question comes from the line of Rod Lash with Wolf Research. Please go ahead.

Good morning, everybody. A lot of focus, obviously, on the Bronco, and I wasn't aware of your position on the Bronco sport. I was hoping you might just be able to speak to us a little bit more broadly about the backlog of new business that you're looking at in light vehicle as you... You look at the 2021, and then also on the new business front, just given this intensity of activity that we're hearing about in EV programs, have you updated your view on the trajectory that you see for EV growth for you, how big this could be at a certain point in time?

Sure. Just to the backlog, specifically on the Bronco, Rod, all three of the vehicle variants and the technology that Jim talked about just a few moments ago have been contemplated in our backlog. So that's been a part of our calculation the entire time. We really think that the trends... And, you know, consumers shifting from cars or sedans to full-size SUV and many of them that have off-road capability is really moving in the right direction. So we're really excited about the launch of that product. On the electrified side, as we highlighted earlier this year, there's a more significant portion of our backlog that's now in electrified vehicles. Certainly the one that we announced earlier on the call will be accretive to that. It was not in the backlog when we started this year, and we continue to see that. So more opportunity to grow our backlog on the electrified products, particularly in the heavy vehicle markets. So a lot of activity there, as Jim mentioned, in last mile or urban delivery of medium-duty vehicles. But then also we're really excited about the potential for the through-the-road hybrid via Hyliion that could come to via the Class 8 over-the-road applications in the coming years as well, too.

Any thoughts? Comment on just the magnitude of the opportunity for you. I know that you provided some color on the investor day, but that was a while ago, and it sounds like the opportunity is bigger than what you suggested back then.

Yeah, there's certainly a tremendous amount of opportunity, but we remain pretty convicted in our ability to deliver a half a billion dollars of electrified sales by 2023. And all of the programs that we've talked about so far keep us on track to that. And, you know, probably early next year, we'll take a look at refreshing those projections. But at this point, we're tracking pretty well.

Okay. And just lastly, your slide 15 question. you gave some sort of directional color on a commercial vehicle off highway. Can you just maybe be a little bit more specific on what your expectations are for those or what the, I don't know, is there a, the different colors for those arrows, maybe you can just give us a little bit of a key, a decoder key to magnitudes.

Sure. You know, from the indications we put on that page, that's really how the third quarter is shaping up compared to what we expected. So what we were trying to give a sense is that the light truck market in North America is certainly that green represents that it's performing better than we would have expected. So sales of those vehicles during the second quarter remained stronger than we would have anticipated. There was little production there. in April and May with some production coming back in June. So inventory levels for our key platforms are better than we expected. Demand in July for those products would have been higher. So we're just indicating that the light truck market is coming back a bit better. Commercial vehicle, whether it's Class 8 or medium duty, both of those continues to be soft. And if anything, Class 8 is probably a little bit softer than than we would have expected just a couple of months ago. So that's what that arrow is intending to represent. And then off highway on balance across all three segments is probably pretty consistent with what we thought. As we said, ag continued to do reasonably well, but really construction and mining have been quite soft around the world with the exception of in China where that came back quite strong. So on balance, that's what we were trying to indicate as compared to what we expected. And that all gets to the sense that we think we're gonna be, you know, 50%, better than 50% from a sequential standpoint in Q3 compared to where we were last quarter.

Okay, all right, thank you.

Sure.

Your next question comes from the line of Emmanuel Rosner with Deutsche Bank. Please go ahead with your question.

Hi, good morning, everybody. Good morning. Your third quarter outlook for positive adjusted EBITDA and adjusted free cash flow seems like a pretty low bar. You know, if your revenue is going to grow more than 50% and decrementals are still in the mid-20s, you could probably do, you know, quarter bits more than, I guess, more than $100 million. So any other factors that we're not thinking about in terms of negative offset, or are you trying to just stay a little more base?

Yeah, it's more the latter, Emmanuel. We were just indicating that, obviously, conditions are improving significantly on the top line, and they will. So we weren't saying we're going to be just above break-even on both. We're going to generate a significant amount of cash flow in the third quarter based on what we see right now as working capital growth. becomes a tailwind and moves from a headwind to a tailwind in Q3. And we would expect to see strong sequential conversion on the incremental sales. And on a year-over-year basis, it certainly implies that we would still be lower than last year, but we still think those decrementals on a year-over-year basis, they're going to be in the mid-20s. So we think giving all those points, we're giving enough information to give people a sense of where we are without being too specific.

Great. And then second, I was hoping to learn a little bit more about your work in relationship with Harian. Can you just go over some of the motivations there? Do you think that natural gas solutions for truck will take off or is it sort of a good use of existing capacity that you have? Also curious sort of like how the relationship works and if you're willing to comment on how much did you invest or how much of the company do you own?

I'll take the first part, at least, Emmanuel. Good morning. Thanks for the questions. Thanks for joining us today. The one key thing, I don't know that anybody has a crystal ball, but certainly the OEMs would have more of a crystal ball than I would or most any supplier relative to fuel cell and all that other stuff. What I will tell you is you've often heard me use the word, what is Dana's strategic plan relative to future mobility, all that. And it's always been these set of words, which is to be energy source agnostic in terms of our drive lines and powertrains. And when we're talking about fuel cell vehicles, we're working on plenty of projects that you take our drive lines and they're essentially adaptable for those type of energy sources. So that's probably the best answer I can give you as you're trying to evaluate what's going on at Dana. Jonathan, I don't know if you have anything on this.

Sure. And just a reminder, what we discussed in our investor day last year, we've concentrated our investments on the medium-duty segment for fully electrified vehicles because we see more of a near-term opportunity. So the platform that Jim spoke about earlier that we've won in Europe obviously fits with that. But on the heavy vehicle side, particularly over-the-road, long haul, we believe that hybrid applications are going to carry the day in the near term. you know, as the infrastructure comes in place for fully electrified solutions in the longer run. So we're really excited about the opportunity to get the Spicer electrified e-propulsion systems on the road in that category. From a financial standpoint, we made an equity-linked investment early last year. There will be a nice return on it, but, you know, we're not a major owner in the company. We will have a stake that will give us a nice return, but it's not going to be anything that's, you know, overly significant for Dana.

Okay. And in terms of the way the relationship works, are you, besides for the financial one, are you a tier two supplier? Do you sell them the Spicer systems? And do you also do the integration? How does it actually work in practice?

Yeah, the partnership has, aside from the financial aspect, has a couple of aspects. Number one, we will be their supplier of the e-propulsion system. So that electric axle or driveline that Jim referred to that had the motor, the inverter, and the torque transfer via the gears is going to be the Dana system. That will be combined with their e-power system, you know, their power. hybrid controller, the battery pack, and all the auxiliaries to provide the full hybrid electric powertrain. The second aspect of the relationship is from a manufacturing standpoint. You know, we have offered our manufacturing expertise to help get the full systems put together, manufactured, and delivered to customers. So that's a part of the relationship as well, too.

Great. Thank you.

Okay, your next question is from the line of Ryan Brinkman with JP Morgan. Please go ahead.

Hi, thanks for taking my question. I'd like to ask on morning capital allocation. I think you'd already planned to march toward one-times leverage or investment-grade credit metrics even prior to the crisis. Of course, now it would take longer. You've not levered three purchase shares, thankfully, in recent years like some other suppliers. And I see you're still doing bolt-ons. But just maybe broadly, does the experience with coronavirus change at all how you think about capital allocation or leverage going forward?

No, I don't think so. I think, as you noted, it's going to take us a bit longer to get there given this environment. So as we pre-crisis, we had anticipated generating substantial cash flow in the business and intended to use that to delever. That remains our priority, but it's going to take a bit longer. So as we see the second half of this year play out. Hopefully things stabilize and market conditions improve in 2021. You would be seeing us look to generate more meaningful cash flow and use that to continue to deliver the balance sheet. And as you noted, the cost of the rational motion acquisition is very small. So we'll continue to make smart plays to position ourselves to deliver great electrified products to our customers in the coming years, but you're going to see most of it go towards continuing to get towards that target of the one-term net leverage.

Okay, thanks. And then just, you know, obviously there's been a tremendous amount of enthusiasm in the public markets recently with regard to Tesla, Nikola, hopefully for you in relation to Hylian soon. Just curious the extent to which you think that coronavirus may delay or accelerate the transition toward sustainable transportation, just knowing what that means for you guys potentially from a content per vehicle perspective on the commercial side.

I can only go based on the inputs I have, of course, in answering the question. It doesn't mean I have a crystal ball for everybody, all the OEMs, capital allocation plans and everything else. But at least from my chair, our chairs, really it's nothing's changed. Every program we're working on, everyone we're quoting, everything we're hearing or seeing is still steady as you go. That's a direct answer to a question much better than I did earlier. So I hope that helps. Very good. Thank you. Sure. Thanks, Ryan.

Your next question is from the line of Joseph Spack with RBC Capital Markets. Please go ahead.

Thanks, everyone. Maybe just some follow-ups and some topics that were already brought up. The first is, you know, on that slide 15, I think you sort of talked about, I guess, maybe a little bit more negativity on Class 8 as, you know, versus prior. You know, a competitor we were just talking pretty positively about the September quarter build and being above the third-party forecast. And I think we've even seen some positive revisions there. So can you just tell us what you're seeing in your conversations with customers? Because there's a little bit of, you know, at odds with some of the other commentary out there.

Sure. You know, I think in the prepared remarks what we indicated was we are seeing the orders, the same information that the orders are getting a bit better. We're not necessarily seeing that as a meaningful impact to our production schedules compared to what we were anticipating, but, you know, certainly some improvement will take. I think we're probably just remaining a bit cautious. We anticipated this year on Class 8 was going to be a soft year coming into it, and obviously the current dynamics have only exacerbated that. So So, you know, I think just generally we're a bit more cautious. The other thing is, as a reminder, you know, the medium-duty segment for us in commercial vehicles is important, and that has been quite a bit softer than we would have thought at the beginning of the year. The recovery there is going a bit slower. So I would say it's a combination of our views on heavy and medium-duty vehicles in that segment that put us at a place where we're a bit cautious on the commercial vehicle segment.

Okay. And, Jim, thanks for the good explanation about rational motion. I guess I'm just still trying to wrap my head around a little bit more. Is this really more for now, at least of the way we should think about this as sort of like, you know, an engineering acquihire. So you get better competency internally about how these systems work. And then eventually you can sort of help your customers or, or did I misinterpret that?

Yeah, I think you're absolutely all over it for usual. It is. I've said it since the very beginning. People thought you're about acquisitions and electrification and top line and go, okay, sure. Yeah, all right. Not really, though. I mean, it's really more about being ahead of the curve, getting the best people with the best talent so that you have the learnings throughout your organization. Your learnings throughout your organization, not sitting at your headquarters, but sitting at your distributed technology centers around the world and being prepared for that. Because ultimately, one thing about vehicles and any industrial system, if you want to call it, the winner comes back to the efficiencies between the moving parts and the systems and controls. And all those learnings and ability to go through this is what's really important for from future efficiencies and best systems that are out there. So to answer your question, yes.

Okay. And then last one, just on Helian. So you're providing the, you know, the E-Axle Spicer product. Is there a major difference between what you would provide and what you're doing for them, which is effectively a retrofit hybrid solution versus what you would provide to you know, like a brand new sort of OE, you know, whether either it's a BEV or fuel cell e-axle solution. Or is it basically the same product?

No, it's a good point. It's basically the same product. So the three-in-one system with the motor, the inverter, and the gears is essentially comparable to what you'd see on a fully electrified vehicle. Most of the difference in the powertrain would be north of that, so into the size of the battery pack, the controls, all of that would be different in the e-power system. So the e-propulsion system is very comparable. Okay. Thank you very much. Sure. Thanks, Joe.

Hey, your next question is from the line of Brian Johnson with Barclays. Please go ahead.

Yeah. And, you know, just the final housekeeping talk and the question. So between when you gave your guidance for adjusted FCF breakeven to use when you updated it at a June conference, was it really the swing in inventory or other parts of working capital that was the big difference in your thinking?

Yeah, Brian, just to be specific, at the end of the first quarter, we said that adjusted EBITDA would be about break-even, but we did say that we would be a use of cash in the quarter. We specified that a bit for midway through the quarter to make sure it was clear that people knew that it would be slightly more than what we saw in Q1. And you're right, the primary driver is, you know, we didn't have a crystal ball to when production was going to go down and come back up. So we tried to clarify that the inventory reduction really happened in the month of June when customer schedules were really back up and running and we could bleed off some of the inventory. So you got it. It was the cash use in the quarter is driven by that. We're going to see the cash benefit of the inventory reduction in June, and inventories are going to come down in the third quarter as well, too. So the combination of that will help augment the cash benefit.

And does it make a difference? Was it raw mass, finished goods, work in process, or kind of all of the above?

No, you're right. It's really across the board. Days on hand are going to come down across most categories because demand is lower than when we started pre-crisis. So you'll see adjustments across the board.

Okay. And second, and sort of similar to the last question, but If you compare your European e-truck win to the business you're doing with your joint venture partner in North America for Class 8 Highland, what's the additional data content? And in particular, where is there software or electronic content that could offer better margin profiles?

Sure. So the real difference between the two on those two pages is what we refer to as the e-power system. So all the battery pack, the battery management system, all of the auxiliaries would be included in the e-power system. So the wind in Europe includes those, and obviously, you know, that's much higher content, very high-value content. But I'll just remind you that in the e-propulsion system, it also includes all the software and controls included. in the inverter to manage the moving of the vehicle. So there's good content in both, but certainly there's greater content in the e-power system. And in the case of Hylion, they have that part of the system and we're providing a propulsion system. So great opportunity for us compared to a traditional vehicle, but there are some differences between the two, as you noted.

And just to follow up, I mean, you have a focus on class five to seven, but when you get into that, are any Class 5s used for last-mile delivery, and would those go electric? And then when you look at the next thing down, since you do provide sort of the three-quarter-ton truck and many of the traditional van platforms in North America were built off of that, would you see, even though you're focusing, would you see going into the LCB kind of larger van market as those electrify?

Yeah, no, I think you have the right assessment. You could see medium-duty vehicles being used for a lot of those applications that are being electrified. So I think broadly you're correct there. And absolutely that has been our target market because we think the duty cycle for the applications those are used for is attractive economically to be electrified. So that's why we put so much energy and effort in that segment.

Okay, thanks.

Thanks, Brian. Okay, this is Jim. Thanks everybody for calling in today and for really good questions and dialogue. Appreciate that very much. A quick shout out or extension of my appreciation and recognition for our light vehicle group and for that matter, our off-road enthusiast group, leading us to what I call anyway, value creation for our customers and example of the new Bronco family of vehicles. But even more so to the overall SUV high performance market, at least as we describe it, And as I'd like to call it, the, you know, business school 101, it's certainly better to grow the pie than it is to carve up the existing size of the pie. And that's an exciting market. And, you know, our decades of experience at Moab and off-road enthusiast activities, all those learnings, I keep coming back to learnings are critical in our product design, critical in our customer engagement and so forth. So thank you all. You moving on quickly to the, you know, the relative electrification, new energy preparedness, all of us would agree, who knows exactly where things are gonna stop and end up and who does what and all that stuff, infrastructure readiness, et cetera, et cetera. But from our standpoint, we know what our strengths are and our strengths are is to have great people, people finding a better way, miles on the road, how long people or kilometers on the road for that matter, how long have people actually been doing this? What is their experience? What are their lessons learned? All these learnings, all of these capabilities roll over into, again, who knows what's going to be next in new energy, but we know we're going to have markets and area work platforms or buses or underground mining or medium-duty last mile or whatever it is. All of it's shared. All of it's tied, and it's how our business model is coming together. So thanks, everybody, for your time and attention. We look forward to talking to you at the next opportunity.

Thank you. Thank you, everyone, for joining today's webcast. This concludes the call. You may now disconnect.

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