Dana Incorporated

Good morning, and welcome to Dana Incorporated's financial webcast and conference call. My name is Holly, and I'll be your conference facilitator. Please be advised at 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 a question during this time, simply press star, then the number one on your telephone keypad. Now, to ensure 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 Dania, the Senior Director of Investor Relations and Strategic Planning, Craig Barber. Please go ahead, Mr. Barber.

thank you holly and good morning everyone on the call thanks for joining us today for dana's fourth quarter and full year 2021 earnings call 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 of the property of data 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. On the call this morning are Jim Kamsiscus, Chairman and Chief Executive Officer, and joining us is Tim Krause, Senior Vice President and Chief Financial Officer. Jim, will you start us off this morning?

Good morning and thank you for joining us today. Dana has significantly stronger sales in 2021 as a result of improved overall market demand and the conversion of our new business backlog, while overcoming some of the most challenging market conditions we've experienced in our lifetimes. This included major global supply chain disruptions, commodity cost inflation, labor shortages, and erratic customer production schedules that continue to impact the entire mobility industry. As you can see on the left side of slide four, Dana achieved sales of nearly $9 billion in 2021, $1.8 billion higher than 2020. An adjusted EBITDA was nearly $800 million, a $200 million improvement over the prior year. Free cash flow ended the year with the use of $221 million, largely due to the temporarily inflated and elevated on-hand inventory levels resulting from immediate customer schedule fluctuations and reductions, as well as volatile demand fluctuations, protecting actions against major long lead item supply chain disruptions and to support higher than expected revenue growth in 2022, especially in our off-highway and commercial vehicle segments. Tim will walk you through this in greater detail later in the presentation. Diluted adjusted earnings per share was $1.66 per share, an improvement of $1.27 per share over the prior year. Last year was unprecedented for us, as it was for all manufacturing companies, but as outlined on the right side of the page, Dana had achieved numerous highlights as we continued to systematically leverage our e-propulsion capabilities across all mobility markets. We secured approximately $800 million in incremental new business over the next three years, and we've had several new EV programs launching over the next couple years, a few of which I will share with you later in the presentation. We are also pleased to highlight our continuing commitment to ESG, which are fundamental to Dana's culture and our core values and are reflected in how we operate our business every day. I will speak further to those commitments, highlighting several examples of our most recent ESG initiatives later in the presentation. In addition to discussing how we navigated through supply chain constraints, raw material cost inflation, and labor shortages, I will provide our view regarding the 2020 market dynamics as we expect demand to be extremely strong across all markets. While we do not expect commodities, labor, transportation, and customer demand issues to completely subside in 2022, we are optimistic that we will start to see more stability on the back half of the year. Please turn to page five, where I'll share with you how Dana's relentless commitment to customer satisfaction and technology leadership will yet again lead to sizable growth trajectory over the next three years. As you can see at the top of the 2024 bar in the mid-upper right of the page, Dana has established an $800 million sales backlog over the next three years with, as you can also see in the upper left-hand corner, $400 million of that revenue coming online in 2022, which is a $200 million increase from the prior backlog outlook. Importantly, if I draw your attention to the bottom right-hand corner of the page, you will notice the EV versus ICE chart that reflects that directionally half of the total three-year backlog is coming from electrification. Including in this year's $400 million of incremental new business is the extremely popular Ford Bronco, which was recently named the North America SUV of the Year and the long-anticipated Raptor version. Both of these vehicles are equipped with Dana's Adantech drivelines, which are renowned by off-road enthusiasts around the world. Moving back to the backlog, allow me to remind you that Dana's sales backlog is calculated on a net basis, which includes incremental new sales net of any losses. As an example, you will see in the 2023, the current GM Colorado Canyon program will build out and Dana will not produce the axles for the future vehicle. but we have more than offset these sales through other programs such as the new Volkswagen Amarok pickup truck, Line C full-size electric school bus, Conquest, Agco, Fendt 700 series tractor axle business, as well as other ICE and electrification programs. On the upper right-hand side of the slide, you can see that our sales backlog is well-balanced across end markets and regions. For 2022, 400 million of our total three-year backlog represents nearly one and a half times incremental growth versus the overall market. Moving to slide six, I would like to illustrate how our complete portfolio of electrification offerings has moved far beyond new business wins and into full vehicle development programs with our customers across all of our end markets. Dana's addressable market for electrification will be nearly $20 billion by the end of the decade. Thanks to our past successes, present capabilities, application know-how, and clearly defined strategy for the future, we're able to partner with and create value for our customers at any stage in their electrification evolution. As we outlined for you this past September at our Capital Markets Day, our customers have confidence in us, as evidenced by the number of program awards showcased on slide 6. As you can see, our EV solutions are being utilized across all mobility markets. For example, in our off-highway segment, we're partnering with customers to meet their unique electrification needs in construction, underground mining, material handling, and even some new green shoots in agriculture applications, as well as the fast-growing compact utility vehicle market. In commercial vehicle, our initial focus and commitment were to medium and heavy-duty trucks and buses, and I'm extremely excited about our success in the EV bus market, which I'll talk more about on the next slide. Most of our recently announced light vehicle programs utilize Dana's industry-leading battery and electronics cooling technology. We also have major new business wins for the emerging technology of hydrogen fuel cell metallic bipolar plates. On slide 7, I'd like to turn your attention to our electrified product range for an important part of the commercial vehicle market, electric buses. As countries seek to limit emissions, electric buses will present significant opportunities in the shift to fully electrified platforms. In fact, it's expected that 75% of buses will be electric by 2030. In North America, where electrified school buses have been a major focus, Dana supplies EV dynamics to the top manufacturers that make up a vast majority of this market. First, Navistar selected Dana for its electric school bus application, and Lion Electric chose Dana as its preferred supplier for traditional electrified componentry for the Lion C full-size electric school bus, which has been in production since 2016. We are also proud to be supplying the motors and inverters to the Bluebird Vision electric school bus, which can go up to 120 miles on a single charge. In Europe, we are pleased to be supplying our motors and inverters to Safra, French-made fuel cell buses, and also Temsa, one of the leading coach manufacturers. In Asia, we are providing motors and inverters to Volvo Aisher for their 9- and 12-meter buses, as well as the Tata Starbus EV series. Early on, we identified the bus market would be a natural fit for the adoption of electrification. Our leadership, strong global presence, and more than a decade of experience in heavy vehicle electrification is evidenced by these wins. Please turn to slide 8 with me. As you can see on the page, I have moved from some of the largest vehicles on the road to a vehicle that will be one of the most capable on the road in the future. The vehicle on the page is the all-new Aston Martin Valhalla Hybrid Electric Hypercar. The European high-performance sports car will feature Dana's hybrid 8-speed dual-clutch transmission system. Dana's iconic Graziano high-performance transmission capabilities and experience made it possible to create the cutting-edge DCT hybridization product. In this system, electric power is channeled through the internal elements of the transmission thanks to an unprecedented level of integration, thus providing the consumer significantly more capability than a traditional electrified DCT transmission. Needless to say, serving as a core supplier partner to Ashton Martin speaks volumes relative to Dana's depth of knowledge, capability, and technological know-how in the electrified mobility space. Let's now turn to slide 9 to yet again display how our PAN Dana electrification capability supports another one of our important end markets. As you're well aware, Dana is a significant drivetrain supplier in the agriculture market. Historically, we've not participated in the outdoor power equipment subsegment of the market, though. With Dana's advancements in electrification systems, we're excited to announce that we'll be providing electric mechanical drive and auxiliary motors to Toro, one of the most successful companies in the professional turf equipment market. The all-new Toro electric professional lawnmowers will feature everything customers have come to love about Toro, Toro's quality and performance, but with a quieter, eco-friendly design. The examples we have shared on the last few slides illustrate the breadth of our electrification capabilities and how we are helping our customers bring innovative and sustainable solutions to market, no matter how big or small. Turning to slide 10, I believe that you may be interested in learning about some real-life examples of how Dana and the Dana team are very dedicated to sustainability and taking real actions to support our commitment. As we have shared with you, sustainability directly aligns with our leadership and vehicle electrification, and it's critical supporting our customers as they work to achieve their goals. Our focus is more than just advancing innovative products. It is also about striving to improve operational efficiencies around the globe in ways that can achieve real results. Currently, Dana has more than 300 active initiatives that focus on energy efficiency, renewable energy, waste elimination, and water conservation. Each one is helping us to move closer to our goal of reducing greenhouse gas emissions company-wide by more than 50% by 2030. Slide 10 illustrates how our focus on small but important changes are reaping big results. By leveraging ideas and resources globally, we have reduced electricity consumption by approximately 4,700 megawatts hours through the use of LED lighting and machine optimization. And by utilizing solar arrays throughout five facilities, we have successfully produced more than 7,000 megawatt hours of renewable electricity annually. We have also been able to save more than 7 million gallons of water annually by installing recirculating systems in our facility. These are just a few examples of the ways we're having a large impact on our environment through innovation and leveraging our resources. Our commitment to sustainability is not going unnoticed either. Earlier this month, we announced that Dana had placed in the 90th percentile for the automotive sector on the S&P Global Corporate Sustainability Assessment in our first year participating in the assessment. We are also recognized with the S&P Global 2022 Sustainability Yearbook Member Award, which honors the top performing companies by industry. This recognition is a result of Dana's commitment across our organization to reduce our environmental footprint and advance sustainable business practices through innovation. Now I'd like to switch gears and provide you an update on our market and demand outlook for the upcoming year. Turn with me to page 11. Whether it's semiconductor shortages, transportation costs, labor shortages, or drastically rising raw material prices, I think it's safe to say that companies across the industry are having to navigate through unprecedented challenges. While we anticipate end market demand to continue recovering this year, we also expect continued cost pressures through most of 2022 requiring us to actively manage through this challenging environment. We expect the following trends to play out over the course of this year, including some easing of oem production disruptions caused by shortages of semiconductors and other key components we expect markets to remain a bit unsettled in the first part of the year with excuse me with most of the improvement coming through the second half of the year regarding transportation costs with truck driver shortages high fuel costs and drastically increased sea container costs we do not expect to see Costs improve anytime soon. If there is a silver lining, operationally, it would be that we're managing the unpredictable supply chain has almost become the new normal. Hence, we have realigned our procurement and logistics systems to adapt to dramatic real-time events in a very efficient manner. As it relates to labor... we see some stability and availability as the government support programs have largely ceased. However, hourly associate shortages will continue to be a challenge for manufacturers. To put this into perspective, in the U.S. alone, as of December 2021, manufacturing job openings are up 66% to pre-pandemic levels or around 850,000 job openings. And lastly, commodity costs, primarily steel products, are showing signs of retreating. We anticipate that a majority of our input costs will remain elevated through most of the year. Tim will discuss our material cost recovery outlook in just a few moments. As the entire mobility industry navigates these challenges through this year, continued high-end user demand combined with the constrained production have led to historically lower finished vehicle inventory levels at our OEM customers. As the environment improves and input challenges subside, we are well positioned to capitalize on this unique market dynamic of low inventory and high demand that points to a strong and sustained recovery. Moving to slide 12, I will update you on our outlook for our end markets. While we are not completely past the market disruptions of last year, we do expect a significant improvement in OEM production across all of our end markets. As shown by recent third-party forecasts, global auto production is slated to accelerate as the year progresses, and its advantageous position in the popular light truck and SUV markets aligns us well with the recovery as semiconductor shortages abate and dealers begin to fill their order backlog. commercial vehicle and off-highway segments are experiencing similar high demand, Class 8 truck sales backlogs have reached pre-pandemic levels, and finished vehicle inventory for construction and agriculture equipment are at the lowest levels in the last three years, resulting in unfulfilled end consumer demand. For the first time in several years, all end markets and regions are poised to see market growth simultaneously. With that, I would like to thank you for listening today and introduce Dana's new Senior Vice President and Chief Financial Officer, Tim Krause. Tim joined Dana in 2010 and has been a key member of our finance team and has been instrumental in helping to shape and execute our enterprise strategy. Tim, we're glad to have you here today. Please go ahead.

Thank you, Jim, and good morning. Please turn to slide 14 for review of our fourth quarter and full year results for 2021 and a comparison to 2020. Beginning with the fourth quarter, sales were $2.3 billion, $165 million increase over last year, primarily driven by improved demand in our heavy vehicle end markets and some recoveries of raw materials and other input costs through pricing actions. For the year, sales were $8.9 billion, an increase of $1.8 billion, as all of our end markets experienced increased vehicle productions compared to 2020. Adjusted EBITDA for the quarter was $118 million for a profit margin of 5.2%, which was below last year despite higher sales as margin compression from inflationary costs that Jim discussed earlier had been a headwind most of the year and continued into the fourth quarter. including higher costs for labor, energy, transportation, and especially raw materials. As we, on our third quarter conference call, the fourth quarter included period costs of $17 million related to our new U.S. labor agreement. Full-year adjusted EBITDA was $795 million, $200 million higher than previous year, yielding 60 basis points of margin improvement to 8.9%. Net income attributable to Dana was $25 million for the fourth quarter of 2021, compared with $40 million in the same period of 2020. There are a few moving parts in the quarter. To begin, the year-over-year decline was due to higher input costs for commodities, transportation, labor, and energy, combined with production inefficiencies driven by inconsistent customer order patterns. The impact of the new U.S. labor agreement was offset by lower year-over-year restructuring charges. The fourth quarter of 2021 benefited from a $51 million gain resulting from a facility sale leaseback transaction, while the full year net income was nearly $200 million compared to the loss of $31 million last year. Diluted adjusted EPS for the quarter was de minimis due to slightly above break-even adjusted net income. For the full year results were $1.66 per share, an improvement of $1.27 compared to 2020. And finally, free cash flow this quarter was a slight use. We had expected stronger free cash flow in the quarter to drive our full year as we ordinarily generate most of our free cash flow in the fourth quarter. However, we continue to experience customer schedule volatility and supply chain challenges that have required us to maintain higher inventory levels to protect our ability to supply our customers. I'll discuss this in more detail in a few minutes. Please turn with me now to slide 15 for a closer look at the drivers of the sales and profit change for the year. The change in full year sales in adjusted EBITDA for 2021 compared to 2020 is driven by the key items shown here. First, the organic growth of $1.4 billion was driven by rebounding volumes across all of our end markets. Profit on higher sales was $284 million. Incremental conversion of 20% was below our historical performance due to higher input costs and operational inefficiencies brought on by volatile customer production schedules. Second, foreign currency translation increased sales by about $138 million as the dollar weakened against a basket of foreign currencies, principally the euro. This did not affect our profit margin. Finally, commodity costs, primarily steel, rose dramatically during the year. Gross material costs were $367 million higher in 2021 than in 2020. Commodity inflation recovery mechanisms continue to function well. We recovered approximately 75% of our commodity cost increases from our customers through higher pricing. The net impact of rising costs and higher recoveries resulted in a 150 basis point margin headwind due to the lag in the timing of customer recoveries. Please turn with me to slide 16 for a closer look at free cash flow for the year. Free cash flow was a use of $211 million. As I mentioned in my overview, this was driven by higher working capital requirements, specifically production inventory, resulting from instability in the global supply chain, longer transit times for material, especially in our off-highway and commercial vehicle segments, unprecedented customer demand fluctuations, and material requirements to support our 2022 growth. This combination of unpredictable demand for our products with sudden shifts in quantity and mix, longer lead time for raw materials, and continued global supply chain disruptions has caused us to hold significantly more inventory than normal to protect our ability to supply our customers. The increased inventory drove a cash flow swing of more than $400 million when compared to year-end 2020. when the industry was actively destocking in the first half of the year due to the pandemic shutdowns and then rapidly trying to ramp back up to the first part of 2021. Nearly two-thirds of this increase can be attributed to our off-highway and commercial vehicle businesses. The anticipated stabilization of customer demand during the fourth quarter did not materialize as expected, and supply chain and transportation disruptions escalated. We expect working capital requirements to moderate late in 2022 as supply chain disruptions subside, customer demand improves, and vehicle assembly patterns stabilize. Please turn with me now to slide 17 for a look at our 2022 financial guide. As Jim outlined earlier, we will continue to see negative impacts of inflation on our business for at least the first part of this year. We anticipate that raw material costs will plateau and that supply chain conditions will begin to improve modestly late in the year. We expect 2022 sales to be nearly $9.9 billion at the midpoint of our guidance range, an increase of about $930 million from where we finished 2021. Adjusted EBITDA is expected to be about $950 million at the midpoint of our guidance range, which is up about $155 million from 2021. Profit margin is expected to be approximately 9% to 10%, a 70 basis point improvement at the midpoint of that range. Free cash flow margin is expected to be approximately 2.5% to 3.5% of sales, leading to a $520 million increase in free cash flow compared to last year as inventory levels moderate late in the year. Diluted adjusted EPS is expected to be $2.30 per share at the midpoint of the range. Please turn with me now to slide 18, where I'll highlight the drivers of the full year expected sales and profit change from last year. On slide 18, the first thing you'll notice is we're changing our walk presentations going forward. We've updated the format to be a bit more intuitive and added EV products as an element of change. The result of sales of products for use in electric vehicles is still reported within our segments, but we are showing it as a distinct walk item to give more visibility to this important emerging category. Beginning with organic growth, we expect to add about $440 million in sales from traditional products through a combination of new business and market growth. As you look down to adjusted EBITDA, incremental margins are expected to be around 30%, providing about 90 basis points of margin expansion. Included in the organic element is the impact of inflationary, non-commodity-related costs such as labor and transportation, partially offset by the non-recurrence of the period costs related to our U.S. labor agreements last year. Note that this conversion is a bit higher than we've shown in the past as we've stripped out the impact of EV investment, which I will cover next. Moving on to EV organic sales, you will see a benefit of $200 million in added EV product sales this year. This is a combination of market improvement and our strong backlog. Due to the required investment in engineering, development, and commercialization of our EV product lines, we expect EV EBITDA to be a slight loss. The added sales with little or no incremental profit is creating a modest margin headwind of 20 basis points. Next, we anticipate the impact of foreign currency translation to be a headwind of approximately $20 million to sales with no material impact on our profit margin. Finally, we expect commodity costs to begin to abate late in the year. We anticipate recovering about $310 million from our customers in the form of higher selling prices, resulting in a net profit benefit of about $30 million. While commodity costs coming down is certainly good news, the timing of the improvement and the lag in recovery mechanisms will not be a meaningful benefit to profit margins in 2022. Please turn with me to slide 19 for our outlook for free cash flow for 2022. We anticipate full-year free cash flow margins to be 2.5% to 3.5% of sales, or $310 million at the midpoint, which represents a dramatic improvement of about $520 million compared to 2021. About $155 million of the improvement will come from higher profits on increased sales and moderating costs. The majority, over $400 million, will come from lower working capital requirements, specifically lower inventory, which represents more than half of the expected improvement. As we have discussed over the last several quarters, we have been running with higher than normal inventory levels as both a hedge against unreliable shipping and transportation and to be able to react quickly to changing customer demand and build patterns. In several of our key markets, our lead times for incoming material are much longer than our delivery times for finished products. For the last several quarters, our customers have signaled that their production requirements would be higher than what they've actually turned out to be, leading to a buildup of excess inventory. There is a clear path to resolve this issue, and it begins with a more stable demand pattern, which we are beginning to see. and ends with the actions we are taking to alleviate the transportation and key commodity bottlenecks within our supply chain. These results will not be immediate, but we are planning for significant reductions as we move through the year. Page 20 provides a summary of our outlook for the coming year. Starting with a 10% sales growth driven by rebounding in markets, strong backlog growing faster than the market, and an accelerating EV business. End market variables are moving in the right direction to support the higher demand, with supply chain disruptions easing and investment in our heavy-duty end markets ramping up. As the top-line environment improves, key drivers of profit and free cash flow are stabilizing. Input costs, inflation, such as transportation, will be with us this year, but we are aggressively working to mitigate the impact. Commodity costs are showing signs of improving, and we expect to see a Our inventory reduction plans are in full swing and will yield results as customer build patterns stabilize. All of this combines for an outlook of adjusted EBITDA improving nearly 20%, margins increasing 70 basis points, free cash flow increasing $520 million, and EPS advancing nearly 40% or $0.65 a share. Thank you all for listening this morning. I will now turn the call back over to Holly so we can take your questions.

Thank you. At this time, we would like to begin the Q&A session. If you would like to ask a question, please press the star key and the number one on your telephone. Again, that's star one. Please keep questions brief. Our first question will come from the line of Aileen Smith with Bank of America.

Good morning, guys. I wanted to start with the 4Q performance. If we rewind back a bit to your capital markets day in October and then your third quarter earnings a few weeks later, You updated your 2021 financial outlook at both with the obvious read being the fourth quarter. In the past three months, can you talk about what might have developed in that timeframe that was different than your expectations heading into the quarter? I think some of the elements like production inefficiencies on choppy schedules and commodity costs would have been pretty well understood, but if you can just give some color on the biggest surprise cost buckets for you, that would be helpful.

Good morning, Eileen. This is Jim. Let me take a best shot at trying to kind of, that's a swallowing the ocean question from the standpoint. There were so many moving parts in the quarter that it's kind of hard to put in a quick, succinct answer. But let me start with some momentum around it anyway. If you just start with where we were at relative to inbounds from our customer base, which was obviously we're not just light vehicle, but we're across, you know, probably 10 different markets when you include agriculture, underground mining, whatever the case. But a pretty consistent theme back then would have been these most recently published releases or schedules are accurate. We have record demand. We're going to make every one of those vehicles by the end of the year. The semiconductor shortage is improving. Those type of things was what's basically the theme of how we were setting up the back half of the year. And it's not the customer's fault that semiconductor issue became a bigger issue than maybe anyone expected. And we buy, obviously, PCB boards and semiconductors ourselves, so we understand it. But in big picture, we have contractual responsibilities across. We don't have like 10 customers or 20 customers. We have hundreds of customers. And the big picture way of looking at it, all those moving parts that I just said, Most of them didn't come true. So when you think about our ability to be able to flex, it would be, you know, basically, in many cases, customers were building products, especially an off-highway and commercial vehicle where there's a lot of lower volume, high complexity customers. They were building vehicles based on whatever their material availability was of the day. So you can imagine the inefficiencies that it drove customers. really throughout late October, throughout November, all the way into December. It was just a kind of survival thing in some of the circumstances we deal with, with an entirely different customer base than many people that you would typically cover. So that's the starting point to it. We wish we could have had a better line of sight to that, but we didn't. We just had to continue to work through the same basically pandemic-related issues that everybody else did, just on steroids.

Okay, got it. And in the past at fourth quarter reporting and with your forward year outlook, you very helpfully provided a kind of quarter cadence chart and how to think about revenue and margin seasonality. I'm not sure if I saw that in this deck, but are you able to give some directional commentary on the trajectory through this year? And specifically, I'm trying to get a gauge on how we think about that 5% EBITDA margin exit rate in the fourth quarter or I think it was 6%, you know, X sum of the period cost for the labor agreement getting to the 9% to 10% range for full year 2022.

I mean, this is Tim. I can handle that one. I think, you know, there's – we're going to see some – We see inflationary costs abating as we go through the year, so I think there'll still be some margin pressure in the earlier parts of the year. Obviously, we're working pretty diligently with the commercial teams to get recoveries from the customers and all that, but I do see that the inflationary costs will be with us in the short term, probably more so than over the longer term.

Okay, one last housekeeping one, if I may. Can you – yeah, that $17 million period cost from the new U.S. labor agreement in the quarter, it's fair to characterize that as more one-time in nature, correct? And is it possible to disclose what the structural labor cost inflation that's incorporated into your new labor agreement is?

Yeah, so to answer your first question, yes, that is an absolute period cost. So it was a one-time cost for the ratification of the labor agreement. As far as the labor costs, obviously there's a lot of moving parts that are driving input costs. Labor is just one of them, and all of them are part of, you know, what we're seeking to try to get some recovery from and to manage through operational efficiencies and whatnot. So it's not something that we're going to break out at this time.

Okay, great. Thanks for taking the questions. Our next question will come from the line of Emmanuel Rosner with Deutsche Bank.

Thank you very much. Good morning. First question is just a point of clarification on the commodities. I'm looking at your slide 18. I was curious, what is your line of sight on the expected 110% recovery? You know, how much of this is expected? you know, contractual versus negotiations that still need to happen. And I believe I understand from the earlier part of the call that some of the non-pass-through inflation might be in the traditional organic conversion piece of the walk. And if that's the case, what are you assuming in terms of recovery ratio for the non-pass-through inflation?

Hey, Emmanuel. So, yeah, the recoveries on the commodities tend to run somewhere between 70 and 80 percent. So what you're seeing on page 18 with the over recovery is is really driven in part by recovery. by the view that we're going to have commodity costs abate in the back half the year. So given the lag, you'll get that over-recovery on the downswing, and that's what's driving the over-recoveries. And then, yes, the inflationary costs are included in the traditional organic column. So, you know, obviously we're not going to break out what we're calling in terms of how much that recovery is going to be. Obviously those are costs that we're going to cover through a myriad of different ways, including both customer recoveries, obviously plant efficiencies and the like. So that's all kind of tied up in that conversion cost.

Okay. So is it fair to say that the 70 to 80 percent normal recovery, this is something that's, you know, largely contractual, or I guess, yeah, largely contractual. And then, you know, the rest of it is, you know, we can back into your assumption for how much you think commodities are coming down in the back house? Correct.

And just to be clear, the over-recovery is still the same 70% to 80%. It's just the lag in the fact that we're going to see commodity costs reduce, and then we still have the lag of the higher costs coming through our sales line, which is why we get that over-recovery when we start seeing those costs decrease. Okay, great.

And then I was hoping to, I guess, put your – you know, your outlook and, you know, margin targets in the broader context. So I guess the, you know, the previous sort of, you know, midterm framework, you know, for, you know, performance and data was you expected to potentially go back to 12% EBITDA margin by the time you can get, you know, towards about $10 billion in revenues or so, which, you know, may have been around 2023. Obviously now, in your guidance, you're pretty close to about, you know, $10 billion, but, you know, in terms of revenues, but at the margin side, obviously meaningfully below, you know, the 12%. So I guess, is 12% still the midterm goal? And what needs to happen, either in terms of company performance or environment, you know, to essentially reconcile and walk towards that target?

Yeah. So, hey, Michael, nice talking to you this morning. Just to give you some color, maybe if Tim has any on the backside of it, he can add it as well. You know, what has to happen, obviously, the most important thing is you get commodity costs to come back in line and overall inflation to come back in line. But even if that doesn't happen, I guess the most important thing we all know in the mobility supply industry, you have roll-on, roll-out programs and growth, and things are all reset. I'll call it that. They would be reset overnight. when that happens. And Dana has a lot of growth. I think you can see that. We don't have to wait on the if-come of something happening in five years or ten years or something like that. Multiple new programs launching across our company this year because of the massive backlog we've had over the last couple of years. So that's a very key ingredient to everything that we're doing. So, in general, do we believe that we'll still get back to 12%? Absolutely. And is that just a drive-by comment by a CEO? No. It's the way we've structured the organization to be able to be on that trajectory. All you have to do from a proof point standpoint is go back to the trajectory of the you know, the 18 and 19, and then the world kind of came to an end here the last two years. So the playbook, the same people, the same operating system, everything that we do in terms of taking care of the customer, nothing's changed. If anything, it's improved. So we'll get back on that trajectory once we turn over some of the... Some of the issues I just referred to, not to mention we'll continue to get commercial recoveries and not just in commodities alone. It's going to be like it has been probably on your other calls. It's going to be very difficult to define getting recoveries and get realignment on such things as transportation and labor. But I can tell you that our customers are definitely talking to us across the board and working with us across the board. So there's going to be a pretty big element. What we can't do is go put a pin on it as to exactly when that's all going to hit the bottom line. but we're going to keep you informed as we move forward. But I think we're probably good there. Unless you have any other questions, Emmanuel? No, this was it. Thank you. Okay, thanks.

Thank you. Our next question will come from Brian Johnson with Barclays.

Yes, good morning. I just want to understand a little bit more of the commodity, especially as we kind of think through the segments. I had thought in light vehicle driveline that with the work your predecessor, John Devine, did renegotiating contracts way back when that most of that would have been passed through. So that's, you know, is that still the case? And then, Is it different in off-highway and Class 8 in terms of commodities recovery or repricing the axles in the catalog? And then finally, kind of related to that, steel is indeed rolling over as we speak. It has been for most of 4Q. So are there longer-term contracts that you executed earlier in 2021 that are causing your pricing not to roll over along the spot?

I'll take the first one. Let's go back to your – I didn't know John Devine, but I know of John Devine. But the punchline, I think that he probably did a great job, and he was probably the tip of the spear as it relates from starting from a standing position of probably zero recoveries. I think if we go back to that window in time, it wasn't a lot different on resin programs. It wasn't a lot different in copper programs. It wasn't a lot different. But that be said, and I think you'd have a hard time finding any – any of the light vehicle suppliers that would have much of a different programs than we do as it relates to especially the driveline and powertrain and so on and so forth. And as Tim said earlier, that's around the 70 to 80 percent mark in, you know, in light vehicle, if you want to call it that. And so across the board, I would say more for a company. But the punchline is, is that there, you know, nowhere across the board is there complete protection for any supplier. They just have gotten where they have gotten. And again, we have different We have different programs with different customers across all of our end markets. So that answers the first part of the question, I think.

Yeah, Brian, I think on your second point, so to think about the other markets, I think off-highway is one where, you know, a lot more of it's direct negotiations with the customers. Obviously, they tend to be slightly different types of customers than we have on the light vehicle side, so probably a little less in terms of what's contractual, but I think they're We've shown over time that it's been very, excuse me, very effective at getting those recoveries from the customer. In terms of your point on steel, so, yeah, I think, you know, hot rolled is certainly – we're seeing hot rolled come back. But most of what we're tied to is SBQ or specialty bar quality steel and scrap prices. And those are continuing to be at elevated levels. And we're seeing the most likely outcome in what we're calling for is a softening of those later in the year.

Okay. And just a quick strategic question. Any thoughts on the potential acquisition of your – a competitor in class eight and being duty axles by a large engine maker?

Yeah, no problem. It's an appropriate question from my standpoint. I would tell you big picture doesn't really change how we think about things, right, from our perspective. We're running with the same enterprise strategy that we had the first mover on back in 2016, and we do it differently than most others where we have the full three-in-one capability in-house. So our five or six years now of building the infrastructure, building the team, finishing each other's sentences, and having pull in-house efficiency benefits, on the product efficiency benefits on the on the cost and everything associated with doesn't change we were going to have a strong competitor or two no matter what it is so if it's with a different uh different name on the outside of the door that's good let's go let's go compete okay thank you our next question is going to come from the line of Dan Levy with Credit Suisse

Hi, good morning, and thank you for taking the questions. I wanted to just go back to your fourth quarter margins and the flow through, which I know is being impacted by inflation costs, but maybe you can unpack that in a couple of segments. First, you know, I'm looking at light vehicle. I see the decremental margin was over 100%, you know, just talk about what's going on there. I know that, you know, Super Duty had some challenges, but, you know, was that just, you know, supply chain that impacted that? And then second, you know, I'm looking at commercial vehicle, the implied numbers like revenue in fourth quarter up 40 million, but you had a $7 million EBITDA decline. So maybe you could just talk about the dynamics there that led to the decline despite higher revenue. Yeah.

Yeah, Dan, hi, this is Tim. Sure, a light vehicle, I think, you know, as we discussed during the prepared remarks, you know, light vehicle customers' build patterns have really been unprecedented and has led to, you know, led to significant amounts of inefficiencies in the plants. They could tell us on a Sunday that they're going to run Monday morning and then Monday morning call us off. And so it's been really impactful on the business over the latter part of 2020. of the year. We do see that starting to get a little better, but, again, and it differs from customer to customer. But, you know, as Jim said, you know, these guys, I think, come into the plant each morning and try to figure out what they can actually build with the parts they have. So very unpredictable. On the CV side, you know, the biggest driver there is, you know, we continue to invest, you know, a significant amount of money on the EV side. That's where a lot of our big EV programs are. are, you know, as Jim mentioned, not only are in development, but are now in launching. And so there's cost pressure, obviously, on the margins and profitability and CV related to those upfront investments to get those programs up and launched.

Absent those, the R&D or the launch costs on CV, how much better would the margins have been?

You know, I'd have to get back to you on that. I think, you know, it's a significant headwind for that. Obviously, if you just look at the walk for 22, we're showing, you know, basically slight margin EBITDA loss on that at 20 BIPs. So, you know, obviously when you think about that in the context of CV, it can be pretty impactful.

Okay, thanks. And then my second question is just on the backlog. And you're noting here 50% is related to EV, you know, so you're clearly making that transition. You know, maybe you can give us a sense over time, you know, where is this number going to? Are we effectively going to see a data in the future where essentially all of the growth or the entire backlog is eventually going to be from EV just because, you know, maybe there's not as much renewal on Pais or you're gaining more traction. So maybe you could just give us a sense over time of how that revenue is going to transition because, you know, 50% backlog going from EV sounds like it's going to eventually be a higher amount.

Dan, thanks for the question. This is Jim. You know, that's the thing that's definitely different about Dana in terms of how we purposely established the company. We still will get, there's no question, I'm probably the most bullish about electrifications coming for all the right reasons, right, over the course of 10 to 15 years or whatever, but That said, when you look at our end markets, we're still getting, we're still this year, and I'm to expect for a couple more years, are still going to be sourced ICE-specific programs. They just will, especially, I won't, there'll be some in even the light vehicle, but they're even out in the, if you think about the construction industry or the agriculture industry or underground mining and and whatever. There is still plenty of sourcing that comes through the system for us in ICE, and it's good business because there's going to be a long runway on the vehicles. Again, remember, with the exception of our power technologies business, we don't participate in the past car business at all, and that's not by accident. So anyway, long story short, you're going to see that trend, but will we be to that point where Like by, we're just a pass car guy or something, and it just ends up being that, you know, it's almost to that point maybe by mid-decade, but certainly by the end of the decade, absolutely not. So the answer is somewhere in between. And if you wanted an answer, when does it become all electrified for it? If one person's guess, I would say by the end of the decade would be all of our sourcing would, but I wouldn't say any time sooner than that.

Great. Thank you very much. You're welcome.

Our next question will come from the line of Colin Langan with Wells Fargo.

Oh, thanks for taking my questions. Just wanted to follow up on the earlier question about your competitor being acquired. It seemed like one of the logics of it was their capability. I mean, any color on how you think, you know, you're lining up versus what their capability is today? Okay.

Not a lot, Colin. Good morning. Not a lot. I mean, again, the two companies you're referring to are very sophisticated. I have a lot of respect for those companies. I'm sure they'll continue to do a very good job, as they have for decades. I look at it, I have to look at it compartmentalized as to what is the value creation that our customers expect for us to be put in a position to win. And our focus is, albeit, we're putting vehicles on the road with customers with full vehicle integration this year. And I didn't say the three-in-one propulsion system, but instead, as you're well aware, full vehicle integration. But that's only to help our customers kind of get into the space and get there faster. So we're doing that. But our focus is to do what we've always said we're going to do, was to do the full e-propulsion system. We have the full vertical key thing, vertical integration capability. And when I say vertical, it's just not the parts and pieces, but it's the people that make it happen relative to cybersecurity, open ECU platforms, and everything associated with it. We're obviously very prepared to go move forward with it. Our customers wouldn't be choosing us to do so. And like I said, we're not naive. Everybody's going to have competitors. So we'll have a different competitor by the name on the door, but I think we're in a very good position to continue to focus on what we're doing.

Got it. And if I look at slide 12 where you're, you know, indicating the market is a $240 million help in 2022. I think that only translates to about 3% growth. So a good chunk of your business is still light vehicle. This slide actually indicates North America up 10. A little surprise is not better than three. Any color on what the underlying assumptions are? How does your light vehicle assumptions align with IHS forecasts? And is there maybe some platform mix that's incorporated in there that's dragging it down?

I mean, the biggest thing, of course, is program mix associated with that. But the other thing is not to maybe paint the obvious on this is volume. With light vehicle, it takes one program to cover off a lion's share of what would be multiple programs in the different segments. So I think that's going to proportionately change, make the numbers look what they look like. But I can tell you, as you can see by the collage of pictures we seem to put up every single quarter, you can see that on a total, if you look at it more on total programs, you're going to see a greater win rate in the other end markets because there's a more diversification of products, there's more proliferation of needs, so on and so forth. So I know I understand what you're looking at as it relates to just the revenue piece of it, but I wouldn't look at Dana that way. I would look at it like we're You know, we're at the table. I always call it a seat at the table. We're at a seat at the table for wins across all, let's call it, eight to nine markets of which we – our major markets of which we participate. And we're more than winning our fair share, as the scoreboard doesn't lie. It says that.

I thought that slide was talking about your growth outlook, though, right? It's not about your backlog, the market outlook for this year. So I guess it's just – So is the main sort of drag of the 3% versus the markets, which North America being your biggest is up on the slide, says over 10. Its customer mix is diluting it a bit, or am I misunderstanding you?

Colin, you know, so, yeah, so it's both program mix versus the market. And then, you know, we start with the third-party, you know, services, and then, you know, we adjust based on, you know, the fact that we're just, you know, light truck and then where each of our programs are in their life cycles and make those adjustments on our volume outlooks to arrive at sort of what we think the market's going to do for us. for Dana relative to the end markets. Got it. That makes sense. Thank you.

Thank you. Our next question will come from the line of Ryan Brinkman with J.P. Morgan.

to my question, maybe just approaching yesterday's Meritor and Cummings transaction from a different perspective. You know, regardless of if the go-to-market or competitive dynamics may be roughly the same, do you see any implications from this in terms of how industry participants expect electrification to play out? So, for example, does the transaction maybe confirm the likelihood of a move toward, you in-axle e-motor solutions, which I think benefits you from a CPV perspective relative to other potential electrification configurations. What's the latest that you're seeing there?

Good question, for sure. I would tell you that there are There's absolutely no one-shoe-fits-all with each customer. And if you kind of go through and reach back into some of the awards that we've had in electrification wins, if we're going to stick to electrification for a minute, there's some where there's no question it's going to the full vehicle integration, where we're doing the onboard controller, charger integration, you name it, all the way through the system. or we go to the other extreme of just selling motor, just selling the inverter and doing the software. And then, of course, the sweet spot, where we think, for the most part, our customers expect us to create value with them and help them win, is to just do the three-in-one e-propulsion system. So I know that's an ambiguous answer, but I don't think it's that much different, maybe not just in mobility, but in any industry, is that customers have different different strategies to how they get things done, and we put ourselves in a position to be able to adapt to whichever one of those they do, more on a component level, system level, or full vehicle level, whatever they want us to do.

Okay, thanks. But just as a follow up there, do you think there may be other industry participants with more of a vested interest in the motor, the electric motor being located sort of forward of the axle in the vehicle that could be interested in diversifying by gaining access to your leverage to the in axle solution?

So that's a little bit beyond my ski. I could give you an answer and an opinion on that one, but I'd be beyond my skis on that. I'm not sure on that. From my standpoint, I can only tell you this as it relates to our systems could be anywhere from, and to speak into your example with motors, our systems could be single motor, they could be dual motor, they could be in the front, they could be the mid motor. I'm seriously, like, for example, they could be what we call, we have a program out there that's similar to what we call a P2.5. I mean, they're everywhere in the sun. We're flexible and adaptable to be able to do whatever we need to do.

Very helpful. Just lastly, relative to the trend in the non-commodity supply chain costs you talked about earlier and relative to your ability to price for those costs, what differences, if any, are you maybe seeing in, you know, your ability to price for those costs by business segment or by end market? And, you know, how do you expect your different businesses to fare on this dynamic, you know, relative to either the timing or the completeness of the recoveries?

Yeah, good question. I'd answer it with a little bit of tongue-in-cheek, but the old phrase goes, follow the money. And what I mean by that, if you can do your own kind of projections or mathematics or whatever you want to call it, algebra, and recognizing our commercial vehicle has a tremendous amount of investment for all the right reasons, and so you pick your number there. But getting back to follow the money, you can see that our recovery rates are going to be where our profitabilities are more so. It's harder in one segment than the other. So you can see, based on the number of customers, as I said, hundreds of customers and off-highway, being able to work with them, it's a little bit, I won't call it easier. I would just call it, it's more routine for us to work with them, where then maybe some of the other segments is not as easy or as routine. So just, that's the best way I can answer the question. Great, thank you.

thank you and our last question for today will come from the line of noah k with oppenheimer okay good morning thanks for taking the questions um first is one can we just dimension if possible what the step up in ev investment spending is and give us some figures for 2021 versus 2022.

Yeah, obviously we're investing in a myriad of different products and competencies, and so trying to dimension that and break it out is not something we're prepared to do at this point.

Yeah. I guess the question here is really about you're expecting a little bit of contribution margin from some of the early volume programs that are ramping. but at the same time you're stepping up your level of R&D investment, right? And so I guess our reasons is that, you know, from an R&D intensity perspective in terms of the revenue R&D, you know, you're still very much in growth mode, right? I think if we go back to your investor day outlook, you know, that continues to be the case for a number of years. So I guess the question is just are you, are you relatively on track with where you thought you'd be in terms of R&D spending on EVs, or is it pacing ahead of your expectations?

Yeah, I don't think we have any real change from what we showed last fall.

Okay. I guess one more, Jim. I mean, you know, you talked about how challenging a production environment this is, and, you know, it seems like every OEM and a lot of suppliers have, talked about increasing visibility through the supply chain and taking advantage of all sorts of modern innovations around automated production and forecasting and reaching deeper into the supply chain. Is that going to show some tangible results, you think, as we kind of get out of the worst of these bottlenecks into 2022 and 2023? What, I guess, can you point to in terms of any improvement in the outlook for production and how some of those tools might benefit?

Yeah, good question. I'm not sure if you're asking my overall opinion for the industry or the OEMs or something like that. What I'll try to do is answer it, at least from Dana. I can tell you this, we've invested significantly, not so much monetarily, but invested in our time and our people as it relates to getting better access and going back deeper into the tiers. It wasn't like we didn't manage them before, but I can tell you that crisis is a terrible thing to waste and forcing systems and elevation of issues because you've got the data to be able to react to it and all that stuff, that is all real. What that means to the bottom line on a go-forward basis, I can't really dimension that for you. I can just tell you it's been a very, very much, as I think I said in my prepared remarks, you have to manage the business, hold managing the business in a new normal of wondering if a sea container is going to get caught at sea or if the cybersecurity attack hits some shipping company and does something to you or whatever it might be. I mean, if you don't have really good access now, working back to your Tier 2 and Tier 3, you're in deep trouble, at least in my opinion. And if you take our company in particular, you know, our value stream or our supply chain is probably much more extended than others for a multiple of reasons, meaning from a logistics standpoint, we get a lot of stuff from overseas and sea containers for a lot of different reasons for another day, but the right reasons. And, you know, now think about it. If your tier one supplier is overseas and then chances are their tier two and tier three is overseas overseas and even further away from whatever the home base is, I mean, you better have good access to it. You better have a good understanding of it. And what better way to kind of put a finer point on that to recognize the challenges we've all dealt with as it relates to semiconductors. So I would tell you, yes, it's going to create value, and this has been a good thing for the industry on a go-forward basis. You just nobody sees it maybe necessarily today.

All right. Really appreciate the perspective. Thank you.

Thank you. And with that, we'll conclude the Q&A session of today's call. I would like to turn the call over to Jim Kamsikas with closing comments.

Well, first of all, I'd like to thank everybody for the call and just giving your attention and the privilege of your time. I would just add as well, you know, like we said in 2016, we went on the offensive. We believed in electrification would become the powertrain of the future. Call it We expected ourselves to be the disruptor or not. That's some people's words, not mine. But we definitely went in, and it turned out to be the right thing by chasing and getting prepared to support our customers in the first pull-through markets. As you recognize today, the bus market was first, and we were ready. And the last mile delivery is kind of second. We were ready. Underground mining was already there, but with expansion, and we were ready. We feel like we've positioned the company to be prepared for all of our end markets. There will be different puts and takes as to what customers do and what industries do, not only by end market but by region, et cetera, et cetera. And what we've set the company up to do is to have that optionality across all of our markets to be able to be prepared to support our customer bases, which ultimately will support our shareholders. So thank you very much for your time today, and we look forward to talking to you in the near future.

Thank you. And with that, we will conclude today's conference call. You may now disconnect.