Dana Incorporated

Good morning and welcome to Dana Incorporated's third quarter financial webcasting conference call. My name is Lisa and I will be your conference facilitator. Please be advised that your meeting today, both the speaker's remarks and Q&A session will be recorded for replay purposes. For those participants who would like to access the call from the webcast, please reference the URL on our website and sign in as a guest. There will be a question and answer period after the speaker's remarks and we will take questions from the telephone only. To ensure that everyone has an opportunity to participate in today's Q&A, we ask that the 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, Lisa, and good morning, everyone. Thank you for joining us today for our third quarter 2022 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 and supporting materials are 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 and including our reports with the SEC. On the call this morning are Jim Kamciskis, Chairman and Chief Executive Officer, and Timothy Krause, Senior Vice President and Chief Financial Officer. It's my pleasure to turn the call over to Jim.

Good morning, and thank you for joining us today. Moving to slide four in our update for the third quarter, Dana had another quarter of strong sales totaling $2.5 billion, a $330 million increase over last year driven by continued robust customer demand in all of our end markets. While our strong customer requirements, Dana's new business backlog, and cost recovery fueled sales growth in the third quarter, our input costs continue to increase due to the global inflation. Additionally, volatile customer demand schedule fluctuations continue to create a challenging environment across the entire mobility industry, pressuring profit margins. Where possible, we're taking actions across the company to mitigate the impact on our profitability, positioning us for a strong rebound once the environment stabilizes. Moving to the lower left side of the page, adjusted EBITDA for the quarter was $192 million, down slightly from last year, but up $30 million sequentially. For this quarter, we again generated strong free cash flow of $77 million, an increase of $247 million over the prior period, driven by lower working capital requirements as we managed through the choppy demand environment. Lastly, for our results, adjusted earnings per share for the quarter were $0.24. Moving to the right side of the page, some of the key areas we will discuss today include an update on critical market drivers for our business. Next, we will share exciting information relative to Dana receiving our eighth Automotive News PACE Award. This year, we were recognized for the complete integration of e-propulsion, e-power systems in electric vehicles, which has proven to be a critical and foundational capability in helping to drive further EV penetration across all of our end markets. Lastly, we are announcing that we have been sourced for the next generation of the Jeep Wrangler and Gladiator programs, building upon over 80 years of Dana partnering with Stellantis as their complete driveline supplier on this iconic vehicle platform. Please turn to page 5, where I'll provide an update on prevailing market conditions. External market factors continue to dominate the discussion across all of our mobility markets. First, on the left side of the slide, many of our OEM customers are still experiencing issues in their broader supply chain, which, although somewhat improving, are impacting our ability to run our operations as efficiently as we have been accustomed to. As we detailed in previous quarters, OEM production stability is key to our manufacturing plants operating efficiently. This is primarily an issue in our light vehicle markets, but we are seeing it in a varying degree across all markets. Rapidly fluctuating demand generated higher costs for us in the form of unplanned downtime, line changeover costs, expedited freight, trapped labor, and higher inventory. As we look forward to the remainder of this year, we see some improvement compared to the third quarter. However, operational demand volatility will remain a headwind likely into early next year. Second, moving to the middle of the page, the greatest impact we have faced this year has come from external forces, notably cost inflation, currency translation, and commodity costs. In the third quarter, we continued to see higher prices for operating costs such as energy, labor, and fuel that are used to transport goods. Sequentially, gross inflation was higher in the third quarter, and we expect continued headwinds in the fourth quarter. This outlook is in line with our current financial guidance. As we continue to bear the burden of inflation and other cost increases, we've been in constant discussions with our customers regarding cost recoveries. We have achieved positive developments in recovering some of these costs, and we will continue to pursue an equitable position. In addition to cost inflation, we're also facing macro headwinds from currency translation as the U.S. dollar has continued to strengthen against a basket of foreign currencies, most notably the euro. These currency movements are linked to global inflation and geopolitical conflicts and will not ease anytime soon. The lone bright spot is that commodity costs, primarily steel, have come down somewhat from the record highs we saw in the first half of the year. We continue to have significant success in recovering commodity cost increases from prior periods. Combined with falling input prices, the recoveries are generating a slight profit benefit for us this year and should continue into early next year before leveling out and returning to a more neutral position. Moving to the right of the page, vehicle inventories remain at historically low levels in all of our end markets, while at the same time, end market demand for key vehicle platforms remains strong. OEM fulfillment of the pent-up demand will likely take some time as our customers continue to improve their production rates. In Dana's case, we also look forward to new vehicle launches such as the highly anticipated Ford Super Duty, which was recently unveiled at Churchill Downs in Louisville, Kentucky. The market for heavy vehicle remains resilient, with OEMs reporting strong order books leading into next year. For instance, in the North America Class 8 market, demand has outpaced supply this year, and with the limited dealer inventories, orders for new trucks appear to be quite strong. The combination of low inventory and pent-up demand could provide a buffer should there be any short-term demand weakness next year. Turning to slide six, I'll walk you through why Dana was selected for one of our industry's most prestigious honors. We are pleased to share that Dana was recently honored with a PACE award for the integration of e-propulsion and e-power systems. This year's award was our eighth win and is unique, and it showcases capabilities that only Dana provides to the marketplace. In previous years, Dana was honored as a PACE winner for a specific product innovation or technology, but this time, Dana was recognized for our ability to integrate our complete package of e-propulsion and e-power systems into an electric vehicle, highlighting how we are supporting our customers throughout the entire process of bringing an electric vehicle to market. We believe this truly illustrates the shift to electrification taking place in the mobility market, and it's significantly different than the traditional supplier OEM business model that has evolved over the last century. If you recall, more than six years ago, we identified electrification as a megatrend that was real, thus leading to the foundation of our strategy to ensure that we establish the product portfolio and capabilities to support our customers across all mobility markets. From there forward, we never wavered from our very intentional commitment to lead in electric propulsion. we developed a deep understanding of all aspects of electric vehicle engineering and e-propulsion systems, bringing a foundation of in-house designed, engineered, and manufactured electrodynamic products and systems. Our goal has always been to create value for our customers, and we do this by providing a complete portfolio of EV components that we combine and integrate into an OEM's platform, enabling them to move into the electric vehicle market quicker in a more cost-effective manner. When you think about e-propulsion and e-power, you likely think about components such as gearboxes, motors, inverters, software, and controls, and battery cold plates, just to name a few. But Dana has taken a leading position in the natural evolution of EV by leveraging our vertical in-house assets and expertise to develop in-house complete 4-in-1 e-propulsion, e-transmissions, e-power systems, including complete thermal management products and capabilities. In fact, we are the only supplier capable of delivering all elements of a complete, fully integrated electrified system across all mobility markets. The differentiator is our ability to move past just developing and manufacturing components and systems to also help our customers design vehicles and then develop and integrate a complete customized e-propulsion and e-power system. With a global network of suppliers, market expertise, and EV technical centers, we leverage these capabilities across all markets, whether it's the light vehicle delivery vehicles, mining or electric access equipment, or Class 8 long-haul trucks. Dana assists in determining how these systems are best integrated into a fully electric vehicle, no matter the application. Our customers across all markets turn to us to help them accomplish their EV goals and rely on our strong institutional knowledge in the EV space to provide them with full turnkey solutions. From identifying market needs to design, technology development, and full integration of complex systems that make up today's zero-admission vehicles, we are able to help our customers meet their needs. Please turn with me to slide seven. Slide 7 highlights the proof points of how our ability to serve the customers at all levels and across all markets is making a direct and substantial impact as we deliver the next generation of electric vehicles. To date, we are providing world-class and award-winning components and systems to some of the world's leading manufacturers across light vehicle, commercial vehicle, and off-highway markets. Combined with our vehicle integration capabilities, Dana has a multitude of electric vehicle platforms currently in production with many more under development. In fact, we're in the process of securing a number of confidential new programs that we will share in greater detail early next year. Whether it's long-established global OEMs requiring full customized integration to non-traditional vehicle manufacturers in the market who may prefer an off-the-shelf solution from Dana's established and validated product of electrodynamic products, we are able to provide the capabilities and solutions for their specific needs. In doing so, we're creating opportunities to provide value to our customers for decades to come. Please turn with me to slide eight, where I will share some exciting news about a new business award that will serve as one of Dana's foundational programs for years to come. While it's very clear the mobility industry is rapidly moving towards electrification, internal combustion engine powered vehicles remain very prominent dependent on end market and application. In fact, some OEMs recently communicated with the media their intent to not electrify large full-frame vehicles in the near term. And while we talked a lot today about how Dana is helping our customers transition to electrification more quickly, we have also shared with you on numerous occasions that our sales backlog includes a good balance of traditional ICE programs as well as EV programs. As you will recall from July's earnings call, Dana has numerous launches taking place this year that support traditional ICE programs. Today, I have the privilege on behalf of the Dana team to announce that we've been sourced the next generation Jeep Wrangler and Gladiator programs beginning for the model year 2024. This program has been and will continue to be one of Dana's largest programs. Both multiyear programs will launch next year and will feature Dana's award-winning driveline, including axles and driveshafts, which deliver unparalleled performance, allowing Jeep enthusiasts to handle some of the most extreme off-road conditions. In fact, Dana has provided high-quality driveline and aftermarket products for this historical Jeep brand since it was first manufactured 81 years ago. The Jeep vehicle concept was born in answer to the U.S. Army's call for design of an easily transportable 4x4 general-purpose vehicle during World War II. Many historians acknowledge that the Bantam general-purpose vehicle was the original inspiration for the design that eventually became the Jeep, and its production version used the Dana Model 25 front axles, Model 27 rear axles, Spicer prop shafts, and a Dana 18 transfer case. Today, our products continue to enable Jeep owners around the world to tackle some of the most extreme conditions, whether that is on or off-road. Thank you for your time today. Now, I'd like to hand it over to Tim to provide you a financial update. Please go ahead, Tim. Thank you, Jim.