Dana Incorporated

Good morning, and welcome to Dana Incorporated's second quarter 2023 financial webcast and conference call. My name is Josh, and I will be your conference facilitator. Please be advised that our 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 callers limit themselves to one question at a time. If you'd 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, Greg Barber. Please go ahead, Mr. Barber.

Thank you, Josh, and good morning, everyone, on the call. Thank you for joining us today for our second quarter 2023 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 supporting materials of the property of Dana Incorporated. They may not be recorded, copied, or rebroadcast without our written consent. Allow me to remind you that today's presentation includes forward-looking statements about our 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 statement found in our public filings. 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. I'll now turn the call over to Jim. Jim? Good morning, and thank you for joining us today.

Please turn with me to page four, where I will discuss our highlights for the second quarter of 2023. Starting on the left side, we're pleased to report that Dana achieved record second quarter sales of $2.7 billion a $162 million increase over the same period last year, driven by continued strong customer demand, the roll-on of our new business backlog across all of our end markets, and our ongoing cost recovery efforts. Adjusted EBITDA for the quarter was $243 million, up $81 million, or 50% over the second quarter of last year, driven by our strong operational execution and improving customer schedules. Pre-cash flow was $134 million, which is a good second quarter performance driven by higher profit and our working capital efficiency. Lastly, for our results, adjusted earnings per share for the year were 37 cents, an improvement of 29 cents per share. Dana remains on track and extremely focused on the execution of our company-wide transformation that has securely positioned us to be a leading supplier to the world's most prolific ICE and zero-emissions vehicle manufacturers. While this ongoing transformation has not been easy in light of the challenges that continued to impact the mobility industry between 2020 and 2022, it was necessary to completely reposition the company for long-term profitable growth as the industry transitions to a zero-emissions world. Dana recognized that this industry transition early on and took measures actions to enhance our product portfolio and ensure that we are an extremely cohesive and aligned organization spanning all markets to drive forward our technology excellence with the goal of being a leading energy source agnostic mobility supplier with the capability to design, engineer and manufacture fully electric powertrains in-house across all mobility markets. That is why I'm very proud of how the Dana team has continued to relentlessly drive operational efficiency, exceed customer satisfaction expectations, and leverage our best practices and technology capabilities across the entire organization to ensure that we can meet whatever needs our customers have in this quickly changing market. Moving to the right side of the slide, I will be highlighting the following key items today as we reach the midpoint of the year. First is an update on the current operating environment and outlook for the remainder of the year. While we continue to navigate numerous challenges, including inflationary pressures, customer demand volatility, supply chain disruptions, and currency fluctuations, market conditions have begun to stabilize, and we expect them to continue improving through the back half of the year. I will also give you a brief update on a few of the key high-volume new business launches that have just concluded or are now underway and gradually accelerating serial production volumes. Moving to the lower left, we are excited to report that Dana continues to win new electrification business, partnering with the world's largest OEMs for some of the most marquee programs in our industry. Lastly, we will highlight another example of how Dana is intentionally leveraging our expertise to develop the most advanced e-propulsion systems In this case, e-transmissions across all three mobility markets. Please turn with me to page five, where I'll walk you through an update on our operating environment. As we shared with you last quarter, we are anticipating an overall improved operating environment as we go through the second half of 2023. Beginning with commodity costs and currency impacts on the left side of the slide, we continue to see steel prices moderating compared with 2022, And though we expect commodities to remain a tailwind for the rest of the year, prices have not fallen quite as fast as we have previously expected. Commodity recoveries continue but are returning to a more normal pace as base material prices fall. And finally, for this section, foreign currencies, as translated to U.S. dollars, were a headwind in the second quarter, but we expect that will moderate in the back half as the relative strength of the dollar weakens. Moving to the center of the slide, cost inflation continues to be an issue as many input costs remain high, including labor and European energy. Pricing actions are muting the impact of inflation, but will not completely offset it in the second half. There has been a sequential improvement starting late in the second quarter in customer production volatility, and customers are indicating that their supply chains are improving, which should help us to reduce production volatility and schedule disruptions through the rest of the year. Moving to the right of the page, demand across all end markets remains strong as vehicle manufacturers are working to restock inventory. Like everyone in the industry, we continue to monitor the possibility of an OEM labor disruption. With approximately 120 active program launches this year, including a great balance of EV and ICE programs spanning all of our markets globally, The preparation and efforts our team members committed to over the prior years have paid off as all of our launches continue to progress exceptionally well. We are successfully through the launch of the Ford Super Duty and are currently ramping up the GM Altium and beginning the launch of the new Jeep Wrangler program. We also expect higher EV volumes to benefit battery and power electronics cooling product sales in the second half of the year, primarily impacting our power technology segment. As we move into the back half of 2023, we expect to see the benefits of increasing production volatility somewhat offset by higher net inflation. Let's now turn to page six, where I'm excited to share with you another new and transformative EV program with a major OEM. Dana has been at the forefront of developing and manufacturing electrified vehicle powertrains for some of the world's most recognized brands across the entire mobility market. Previously, we shared with you how electrification adoption is rapidly accelerating in the light vehicle segment and that there are a number of new programs that Dana is working on with major customers. Today, I'm pleased to announce that Dana has been selected as the electrification supply partner for an all-new high-volume electric vehicle program with a major North America OEM. While I'm not able to name the customer or the vehicle yet, we will be supplying our rigid beam e-axles for a highly anticipated light and medium-duty truck program. The first models are slated for production in the next few years, and will include Dana's designed and manufactured rigid e-beam that will include Dana's electrodynamics and e-thermal management components. Consistent with our commercial vehicle and off-highway customers, our light vehicle customers recognize and are turning to Dana complete in-house e-propulsion capabilities, including motors, inverters, e-thermal, software, controllers, and of course, e-mechanical capabilities to differentiate their vehicles for the future. It is another great example of how the transformation to electrification is providing Dana an opportunity to supply three times the vehicle content versus traditional ICE drivelines on programs big and small. Stay tuned and we'll be able to provide you more details about this major EV program award in the coming months. Please turn to slide seven, where I will talk about how Dana is successfully leveraging our class leading e-transmission capabilities across all three of our end markets in multiple applications. If you recall, I shared that Dana would have a prominent presence at the Advanced Clean Transportation Expo, known as ACT Expo or ACT, which features some of the world's leading OEMs and commercial transportation technology providers showcasing the latest products and solutions designed to decarbonize transportation and pave the road to a zero-admission future. The show was a huge success with countless industry leaders taking part. During the week, Dana announced the expansion of our Spicer electrified e-powertrain offerings to include a family of e-transmissions for a wide variety of medium-duty electric vehicle applications. Launching on a global electric vehicle platform in early 2024, Dana-Spicer electrified 06 e-transmission optimized operating range and vehicle performance for applications ideally suited to a central drive e-propulsion system with a conventional axle and drive shaft layout. It is a significant step towards further electrifying the medium-duty commercial vehicle market. Dana's superior engineering and technical expertise in EV and hybrid transmissions provide us with the inherent capability of leveraging our proven expertise across all the markets that we serve. If you recall last quarter, I shared how our e-transmission capabilities are driving some of the world's most notable and advanced high-performance vehicles, such as Aston Martin, Audi, Ferrari, Lamborghini, and McLaren. In addition to the supercars and commercial vehicles, our e-powershift technology is translating to our off-highway market as well, where we are already leveraging it across numerous vehicle types, including wheel loaders and rough terrain trains in construction, large lift trucks, empty container handlers, reach stackers, terminal tractors and material handling, load haul dumpers in underground mining, and forwarders in forestry. As the markets continue to evolve, we are in a leading position to provide solutions that fit our customers' unique needs, whether it's for light vehicle, off-highway, or commercial vehicle applications. Thank you for your time today. Now I'd like to turn it over to Tim, who will walk you through the financials. Thank you, Jim, and good morning. Please turn to slide 9 for a look at Dean's second quarter 2023 results. Sales were $2.75 billion, $162 million increase over last year, primarily driven by strong demand in our driveline segments and recoveries of cost inflation. Adjusted EBITDA was $243 million for a margin of 8.8%. That is $181 million higher and a 250 basis points increase over last year. While we still experienced some lingering customer-driven production inefficiencies, our profit improvement was driven by lower net manufacturing costs, strong operational execution, and the timing of EV investments. The net income attributable to Dana was $30 million, compared with $8 million last year driven by higher operating income. Diluted adjusted earnings per share was $0.37, a $0.29 improvement over the second quarter of last year. Lastly, Free cash flow was $134 million, down $33 million from last year, driven primarily by higher capital spending. Please turn with me now to slide 10 for a closer look at the drivers of sales and profit change for the second quarter of 2023. Beginning on the left, traditional organic sales growth of $137 million was driven by higher demand, improved pricing, recoveries, as well as product and market mix. Adjusted EBITDA on higher sales was $45 million, which improved margin by 130 basis points. Cost inflation was offset by customer recoveries in the quarter, and improved operational execution muted cost headwinds from inefficiencies driven by volatile customer production, which, while lessening in intensity, was still an issue early in the second quarter, primarily in our light vehicle segment. Next, EV organic sales were $36 million higher in the second quarter of in the second quarter versus last year. Adjusted EBITDA was $4 million higher for negligible margin impact. As we noted last quarter, our electrification business remains profitable on a contribution basis, but will generally show negative profit and margin when we factor in continued investment we are making to bring EV business up to scale. However, this investment is variable, and this quarter our required investment was lower than it was last year, which is why the walk shows some profit growth. This is just a matter of timing, and we expect investment will ramp up in the second half of 2023. Third, foreign currency translation lowered sales by $21 million as the dollar increased in value against several foreign currencies. This lowered profit by $5 million for a margin impact of about 20 basis points. Finally, the recovery of prior period commodity costs increased increases added $10 million in sales and net profit benefit of 37 million, driven by lower commodity costs compared to last year. This resulted in 140 base point margin benefit. Next, I'll turn to slide 11 for a closer look at the drivers of free cash flow change in the second quarter. Free cash flow was $137 million in the second quarter. Higher profit this quarter was offset by smaller incremental improvement in working capital and higher capital investments. A few items of note, cash interest was $5 million higher due to higher interest rates and an accelerated payment relating to our debt refinancing. Working capital improvement was $74 million lower in this year's second quarter, primarily driven by increased sales and higher inventory to support new program launches. And finally, capital spending was $32 million higher than last year to support our backlog of new business. Please turn with me now to slide 12 for our revised guidance for 2023. We have revised our full year guidance ranges due to solid first half results and our expectations for a stable second half. We now expect sales to be approximately $10.7 billion at the midpoint of our guidance range. This is an increase of $100 million from our prior outlook and an increase of $545 million over 2022. The sales increase is being driven by lower currency headwinds and higher expected commodity recoveries as material prices have remained elevated longer than previously expected. Adjusted EBITDA is expected to be about $850 million at the midpoint of our revised guidance range, which is up approximately $50 million from our prior outlook and $150 million higher than last year. The increase in guidance is driven by improving operational efficiencies slightly lower EV spending, and a beneficial product and market mix. Profit margin is now expected to be approximately 7.6% to 8.2%, a 40 basis points improvement at the midpoint of that range from our last guide, and 100 basis points improvement over last year. Free cash flow is expected to be approximately $75 million at the midpoint of the range, which is a $50 million increase from our prior guidance. Diluted adjusted EPS is expected to be 80 cents per share at the midpoint of the range, a 30-cent improvement. Please turn with me now to slide 13, where I will highlight the drivers of the full-year expected sales and profit changes from last year. In line with our revised guidance ranges, we are updating the drivers of our year-over-year change in sales and profit for 2023. Beginning with traditional organic growth, compared to last year, we now expect $380 million in additional sales from traditional products through a combination of new business, market growth, market share gains, and customer recoveries. This revised estimate is about $50 million lower than our previous outlook due to anticipated lower gross inflation and subsequent recoveries from customers. Adjusted EBITDA increases over the last year for traditional organic sales growth is now expected to be about $125 million, or about $45 million higher than our previous estimate, due to a more efficient operating environment and beneficial product and market mix. Note that net cost inflation compared to last year is still estimated to be about a $50 million headwind. Our outlook for EV organic sales remains unchanged as we expect about $150 million in incremental EV product sales this year. However, the timing of investments we are making for development and commercialization of this new technology has shifted out a portion of the cost, meaning our expected EV sales to be about $20 million decrease in adjusted EBITDA this year compared to our prior estimate of a $35 million decrease. Foreign currency translation on sales is now expected to be a slight tailwind of approximately $15 million, primarily due to the relative strength in the Euro and Brazilian Real. However, due to the blended basket of currencies in which we contract, we still expect a slight profit headwind of about $5 million. Finally, our revised commodity outlook is expecting material prices to remain elevated longer this year than previously planned. meaning that our prior estimate of $35 million lower sales due to lower recoveries has been revised upwards so that recoveries will be equal to last year as we continue to recover the higher costs. We still expect total material prices to be lower than last year. Our revised outlook is a net profit tailwind of about $50 million. This is about $20 million lower than our previous estimate. Please turn with me to slide 14 for our outlook on free cash flow for 2023. Our revised full-year free cash flow outlook is about $75 million at the midpoint, primarily due to higher profits. We expect about $150 million of higher free cash flow from increased profits on higher sales and lower input costs. Lower one-time costs will offset higher taxes due to the increased profit. Working capital remains unchanged in our current outlook as we continue to improve capital efficiency. Our sales growth and launch cadence this year will likely result in about $190 million less in free cash flow generation compared to last year. Capital spending remains unchanged. To support our sales growth and technology transformation, we are expecting to invest about $70 million more in capital expenditures as compared to last year. Finally, turning to page 15 for an update for a strong balance sheet and our second quarter refinancing action. On the left side of the page, you can see that we have ample liquidity of about $1.6 billion at the end of the second quarter. Our maturity profile is illustrated on the right side of the page. During the quarter, we took proactive actions to bolster our debt capital profile by extending maturities and balancing our geographic borrowings. In May, we issued 425 million in new euro notes maturing in 2020, or excuse me, in 2031. Proceeds of this issue were used to redeem half of our US bond maturing in 2025. The remainder was used to repay outstanding borrowings on the revolving credit facility. We expect to redeem the remaining 2025 bonds over the next 12 months. Our balanced liquidity, attractive long-term debt maturity profile, and free cash flow generation continue to give us sound foundation to continue to transform our business for an electrified world. Thank you for listening on this Friday. I will now turn the call over to Josh to open for questions.