Dana Incorporated (DAN) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you to those who have joined our earlier fireside chat sessions, and welcome to everyone who is tuning in just now. My name is Aileen Smith, and I will go, alongside by John Murphy, on BofA's U.S. autos team. As a reminder, through the course of this discussion, we will be receiving audience questions, which you can submit through the Veracast system on the right-hand side of your webcast interface. You will also, on the right-hand side, be able to click into a slide presentation that the Dana team will be referencing in some of their prepared remarks. With regards to questions, you can e-mail myself, [email protected], or ping me on Bloomberg, if you would like to submit questions that way, and I'll try to stay on top of them as well. We'll be reading all these questions anonymously and closing them alongside a number that we have compiled already. If you experience any problems with the webcast at any point, please e-mail [email protected], and they will get back to you in very short order with assistance. Next on this track, we have Dana, a leading provider of axle driveshaft, structural, sealing and thermal management products for global vehicle manufacturers and, specifically, one of the largest manufacturers of light and heavy-duty driveshafts. The company is also one of the most diversified in our coverage universe with a broad array of global customers across the light vehicle, commercial vehicle and off-highway end markets. Dana has also been very diligent in repositioning itself as a propulsion technology company through a number of key acquisitions over the past several years and boast a relatively diversified product set across combustion, hybrid and electric drivetrain configurations for each of its end markets. Representing Dana, we are very pleased to welcome Jonathan Collins, Executive Vice President and CFO, a position that he has held since 2016. Prior to joining Dana, Jonathan served as Senior Vice President and CFO at ProQuest. And he's also served in a number of executive, operational and finance positions in the automotive supply base, including at IAC and Lear. We also have Craig Barber, who serves as Senior Director of Investor Relations and Strategic Planning for Dana. First, I want to thank Jonathan and Craig for joining us in our summit and supporting it year after year. Jonathan is going to start off with a few slides. So again, as a reminder for folks, you can view and flip through these slides on your own through the link on your Veracast portal, and the team will reference them as we go along. With that, I'll pass it over to Jonathan.

Well, good afternoon, Aileen. Thanks so much for having us. And as you mentioned, I'm going to go ahead and start with just a couple of comments on the company, so I'll go to Slide 3 in the materials that we shared in advance. This is just an overview of our business, give you a sense of what types of products we provide in our end markets and where we're positioned. I'll draw just a couple of things to your attention. First, what makes us a bit unique maybe from some others participating in the summit over these couple of days is that, while light vehicle is about half of our business, about half of our business comes from the heavy vehicle market, so both commercial vehicle and off-highway. And essentially, we're providing the driveline products that you referenced to all 3 of those end markets, giving us the benefit of scale in the investments we make across the broader mobility complex. We do about half of our business here in North America and half of it around the world. With that on the next slide, I'd just like to provide a reminder of the enterprise strategy that we laid out a few years ago, and I'll draw attention to a increasingly important aspect of that strategy, and that is our ambition and aspiration to lead in electric propulsion. And what that means for Dana is that electric vehicles are going to have axles in them, and there is an opportunity for Dana to recognize a meaningful increase in the content per vehicle that we supply to our customers by having the ability to design 3-in-1 e-drive systems that integrate our mechatronics -- or our mechanical capabilities and our electrical capabilities into a mechatronic system. On the next slide, you can see that we have built that competence through a series of acquisitions over the past few years. So if you go back 3 or 4 years ago, we were primarily a mechanical company. We initiated our path to develop 3-in-1 systems by acquiring a controlling stake in TM4. We're partnered with Hydro-Québec, North America's leader in clean energy production, and that brought us permanent magnet, high-voltage capabilities in motors and inverters. We then moved on to build out our low-voltage suite of capabilities through SME and through Ashwoods, and a series of other acquisitions over this period that have helped deliver additional capabilities. What that's provided us with, on the next slide, is the capability to deliver these 3-in-1 systems that are mechatronic in nature. So you take the -- in the lower right -- or lower left of the Venn diagram on the left-hand side of the page, those electric traction motors, combined with the power electronics that control them up on the top, integrate those with our historical mechanical capabilities, and we can deliver the mechatronic system that is referenced on the right-hand side of the page. And that system not only provides torque transfer but, in addition, has the propulsion embedded inside of it with the motor and the inverter. So everything that we've been working on for the past few years is to be ready for this point. We're very excited about the traction we've seen in the market as our customers, existing customers and new customers are looking to electrify the larger part of the global mobility fleet, which is what we serve. So hopefully, that serves as a little bit of a general overview on the journey that we've been on, and we're really excited at our last earnings call to debut some of the new wins that we've had across all of our end markets, and we think that bodes really well for our growth prospects in the coming years.

Great. Jonathan, that's a really great place to start. And I would kind of commend you guys, this is a manifestation of what has been a broader strategy that was outlined back at your Investor Day in 2019. So the electrification emergence, let's say, in the Dana portfolio is less so kind of what's been the past 6 to 12 months of acceleration on the EV front broadly and more so a very coherent-driven strategy coming down from the top for you guys. So kind of sticking with that, I'd love to kind of focus our early questions on the strategy element and specifically around EVs. So you recently disclosed your 2021 to 2023 backlog that is impressively split about 50%, 50% between ICE and EV. Do you have a rough approximation of how this EV backlog splits out across your end markets? And specifically, is it more driven by commercial vehicle and off-highway where electrification is taking off first? Or is there a significant portion that's coming in on the light vehicle side as well?

No. You're absolutely right. It is a bit more weighted towards the heavy vehicle markets at this point. So when we showed the example platforms when we highlighted our backlog in a chart during earnings, we pick some of the representative vehicles that are making that up. And you saw largely in our commercial vehicle business, the backlog is all driven by new electrified products coming to market this year and the following couple of years. We've also seen quite a bit of traction in the mining and scissor lift categories within the off-highway space. So we debuted a couple of wins there that are coming online in the next few years. Other things like drayage, ports for sea containers are a good example of where we're seeing electrification in the off-highway space. Still early for us in light vehicle because it's important to remember that the products we provide to our customers today on traditional vehicle architectures are for body-on-frame architecture. So these are heavier vehicles with higher payloads, higher towing capabilities, and those are a little bit later in our customers' lineups to be electrified. So a lot of what's happening so far in electrification for light vehicle has been in the unibody category, which is typically where we don't play passenger cars and CUVs. So we're excited for those products to become electrified in the coming years, and our teams are working diligently to support our customers in that segment, just like the heavy vehicle areas.

When you look at then the -- there was $150 million year-over-year increase in your next 3-year backlog versus the estimate that you disclosed last year. Is that primarily attributable to electric vehicles? Or is it a function of adjacent products or certain end markets being stronger relative to what you were perhaps assuming last year?

Yes. It's a fair point that the 2021 tranche of our 3-year backlog was about $150 million higher than what we had expected the same time last year. So we thought we'd be stepping up about $350 million. It's more like $0.5 billion this year. That's largely due to some conservatism around new vehicles that we had included in that backlog. The Bronco is a perfect example. We've always been very excited about the platform. But anytime there's a new model coming to market, we're a bit reserved. So that vehicle has done incredibly well. I'm sure you and others have read how well that is sold from a prelaunch perspective. So we're incredibly excited to be on that platform. That's been a big driver as well as some new business wins on the electrification side that are coming to market a bit quicker, taking some of the products that we had off the shelf and putting them into newer vehicles. So the combination of those are what are really driving that. It's also important to reference that the $700 million of backlog for us is on a net basis. So if you hold volume and currency constant, this is the amount that you can add to our top line each year as you look to project our revenue.

That's helpful. And to follow on one of your earlier comments is as you think about the light vehicle market, and specifically where the position that you guys occupy in body-on-frame light trucks, the initial thought process is that's probably one of the last segments to electrify just given the customer necessity for payload and torque and everything else. But has that outlook changed at all as some of the incumbents and newer entrants have been in a race to introduce electric pickup? You've got companies like Lordstown and Canoo, Rivian as well, which have, I think, ignited a competitive response from the likes of GM and Ford to get an EV pickup out in the market. So are these -- is it fair to look at some of these electric pickups as perhaps more niche and lower volume for now, whereas the segment that Dana operates in and that ICE body-on-frame pickup still remaining combustion at least from a major or high volume side of things?

Yes. It's a great point. We're very excited about the electrification of the sport truck segment, as you've described. It's really exciting to see consumer demand for some of these new products that are great. In certain cases, we're participating on the thermal side, so we shared the example of the battery cooling that we're providing to General Motors for the new Ultium battery platform. So that's an exciting way for us to participate in this segment. But for the most part, these vehicles are unibody construction, the sport truck segment. And when you start to get to a category where you're going to need higher torque to ground, higher payloads, higher towing capabilities, the full frame truck segment really comes into play. So from an electric propulsion or a electric driveline perspective, that's largely where you're going to see us participate. We're working diligently with many of our customers to help support activities for all categories, and we're excited about that continuing to move up the gross vehicle weight spectrum and get it more into our sweet spot in the coming years.

I think the last estimation or disclosure that you guys had provided on the content opportunity front in the shift from ICE to EV was for full frame light trucks was something like more than 2x, medium and heavy-duty trucks also more than 2x, and off-highway equipment about comparable. Has this estimation changed, if at all, as electrification adoption has accelerated or perhaps as you've been active on the M&A front to commercialize some of the newer EV technologies like the Ultium battery thermal system?

Yes. That's a content target that we put out a couple of years ago. A lot's changed in the last couple of years, namely, we've won quite a bit of business. So we are seeing content uplifts that are a bit higher than that across most of our categories. If I go back to some of the programs that we highlighted in our last earnings call, Daimler's FCCC MT50e platform is a great example of a Spicer Electrified Axle that's about 4x the content that we had on the comparable vehicle on an internal combustion engine architecture. Another example is the all-new DaVinci electrified JLG scissor lift program, which is about double the content that we would have seen previously. We also debuted an unnamed customer that will be providing a heavy-duty axle for in the future that's going to deliver content closer to 4x. So it's a great observation. While we originally thought we were probably going to see the opportunity to double our content, we're seeing some double, but also plenty of tripling and quadrupling of the content as we move from the ICE to the EV architecture. And we think it bodes really well for the value that we're providing to our customers by having this mechatronic 3-in-1 system that we're delivering.

Given the -- you bring a really good point. Given the quadrupling of content wins on some of the recent programs that you brought through, is it fair to say that, that 2x may ultimately -- that target that had been established years ago ultimately be a bit conservative? Or is there something specific around these recent program wins that you would say 4x is probably an asymtotic limit and maybe a little bit more unique than what would be your standard content increase on some of these newer EV programs coming to market?

It's early. I certainly hope so, but I think we're going to -- we're in the early innings of this, and we're going to continue to watch this play out. And what's important for us is that we have the right technology ready for our customers. But remember, our customers are going to be making many of these systems on their own. In certain cases, they may come to us for a part or multiple parts of a system, but do some of the design, engineering and assembly in-house. So there's going to be a variety of ways that we support our customers as they electrify. What's really relevant for us is that the technology that we've brought into the Dana portfolio and the systems that we're demonstrating to them are meeting their needs, and they're demonstrating that support for our technology by awarding us these new platforms.

I'd love to kind of expand on that just a little bit. Across each of your end markets, how -- what do you see as the in-sourcing versus outsourcing opportunity developing for electrification components and systems? Do you think it's going to look substantially different than the standard ICE supply chain?

No. Not necessarily. We continue to believe -- and what we hear from our customers is just like axles today, they're going to make some of them. They are going to buy some from the suppliers, and each customer is going to have different reasons for that. But broadly speaking, all of our customers are working very diligently to compete in their vehicles across a number of categories, whether it's participating in shared mobility, driving further automation and, ultimately, completely automating, driving the digitalization of vehicles, all of these are areas that are key competitive differentiators for our customers and require a lot of capital. So it's clear that many of them are looking to us to help to invest and bring new technology to market. And we think the technology we've pulled together is going to be very relevant for years to come to support them as they drive the electrification of their fleets.

Great. To take it in a little bit different of a direction and specifically looking at the number of newer entrants that have come to market recently, would you assess or look at the newer EV automakers as a massive opportunity or a risk for Dana? And specifically, what content opportunity do you have for some of the skateboard architectures that have been referenced by differentiating factors for many of these players?

Yes. I mean we think new entrants to the market are great. It does create multiple commercial channels for us, which is always a positive, so we're looking to support many of them. The skateboard design that you referenced is largely something you're going to see in a unibody construction. So we're typically seeing most of the major customers that are providing something that has to carry more weight defer to the body-on-frame, which is going to come with a rigid electrified beam axle, most likely in these categories. So we're helping customers in a number of different ways. We'll continue to share some of those as the market continues to evolve, but we see them as a great catalyst for demand, helping to drive the overall -- drive down the overall cost curve of electric vehicles to make them more affordable. And we'll continue to support our existing and new customers with our technology.

You bring up a really interesting point that I've certainly received questions on more so recently. So a number of the Tier 2 plus suppliers that have been working with these newer EV entrants have unveiled architectures where the electric motor is integrated directly into the 4 wheels, which would eliminate the need for axles and drive fast content, like you described. Do you see this technology as something that can be democratized more broadly? Or rather, is it very specific to that unibody architecture and where you see applicability for your products is more so on larger vehicles that will still require axles and drive fast content?

Yes. It's interesting. Within the off-highway space, mounting the motor at the wheel end is very common. So for example, the JLG scissor lift we highlighted puts the motor right out at the wheel end. That is a low-speed application. But certainly, that technology over time could migrate in the broader markets or the on-highway markets. Our general view is that, that could be quite a ways out. There are a number of issues that are going to have to be addressed. But in principle, that is still a mechatronic system. There's a combination of power electronics, traction motors as well as reduction gearing, in many cases, to operate that system. So it's something interesting, something we've invested in, in the off-highway market, and we'll continue to keep an eye on for a number of years. But our general sense is that's quite a ways out for a broader adoption of that technology.

Got it. And a few more questions on the kind of strategy and electrification element. Can you talk a little bit about how the competitive landscape has changed for ICE powertrain and driveline versus EV, powertrain and driveline? And specifically, what is Dana's competitive advantage in the quoting process as you go up against a competitive set that's probably been expanded to include engine and transmission suppliers as well as your standard kind of axles and driveshaft peers?

Yes. We're competing in our systems on a number of dimensions. We have packaging. It's got to fit right for the customer. It has to be an efficient system and minimize how much current is being drawn from the batteries. It has to be in a position that it's power dense, and it also has to perform very well. So there are a number of attributes that we're focusing on to deliver a technologically superior product. In addition to that, it has to be at a fair cost. We have to maximize that as well, too. So when you put all that together, where we're winning is when we have the capability to take the knowledge we have in the electronics as well as the mechanical and bring a better system offering. And the fact that we are vertically integrated on all 3 major components has been a big help for us. So a lot of confidence from our TM4 motors and SME motors and Ashwoods motors that have been on the road or off-road, if you will, for quite some time, being integrated with Spicer driveline systems. So that's where we're really seeing success is when we hit on all those dimensions and offer that at a really attractive price for our customers.

Fantastic. And it appears that some of the incumbent suppliers are looking to expand the breadth of their product portfolio across EVs and potentially go further, I guess, up in the value chain to battery cell and pack, and I'm going to use BorgWarner's recent acquisition of AKASOL as an example of this. Are there any technology areas for EVs where Dana could become more acquisitive and, let's say, where you think you have a right to play given the technology and the manufacturing expertise that you have on driveline, powertrain and thermal products across a variety of different end markets?

It's an interesting concept, and we've invested in this area already when we acquired the Nordresa business that we bought. It's headquartered in Laval, Québec. They brought the capability for embedded software for vehicles, battery management systems, and that was a big catalyst in the PACCAR medium-duty programs that we're launching for that important customer of ours right now, the Peterbilt 220 and the Kenworth 270. So that's an example where the customer had a need. We brought those capabilities in-house to deliver that. In the longer run, we're very focused on the 3-in-1 electric drive systems in the axles. Anything we can do to help augment those capabilities. Pi Innovo is a perfect acquisition. We just picked up the software business located in Southeastern Michigan that has capabilities around controllers. Their open ECU architecture, we think, is going to be a great solution for a number of our customers. So you'll see us look to do things like that. But certainly, differentiating our product with our software capabilities is something that we're continuing to look to do, and we see a lot of opportunity for that in the market in the next few years.

Great. That's all extremely helpful. I think switching gears a bit because we're certainly getting some questions in from the audience on this side on some of the near-term market dynamics. If you could comment on how is the ongoing chip shortage and what appears to be growing supply chain disruption for the value chain, whether it's seat foam or the Suez Canal impacting your expectations for production in the first half of the year. And are you seeing similar pressure in the commercial vehicle market as light vehicle? Or are there any other end markets that are starting to be more impactive than others?

Yes. So on the light vehicle impact of the chip shortage, we're getting to the end of the quarter, and the impact for us was a bit less than we thought. So we were a bit cautious a few months ago when we weren't quite sure how things were going to play out. But for all intents and purposes, the impact to our operations in that market has been relatively limited. We've seen small impact in commercial vehicle. But again, nothing meaningful yet. As we look into the second quarter, we'll probably continue to be a bit cautious. The indication we're getting from experts and from our customers is this is going to take a little bit of time to work through. So we're watching it carefully. But I would say, particularly in the first quarter, the impact was a bit less than what we had accommodated for.

I do want to clarify that a little bit. Relative to your own, I guess, internal conservatism or cautiousness on production expectations, one of the dynamics that I think is important to mention is that semiconductors are relatively fungible across models. And as such, automakers have responded to some of the shortages by allocating chips towards higher-mix and higher-priced vehicles in an effort to preserve margin. Given Dana's overexposure to those higher-margin vehicles, light trucks and SUVs, has that dynamic perversely supported your volumes relative to the broader industry, meaning if you stack up customer releases and production schedules versus maybe what you see in IHS, you're outperforming a little bit just given your end market mix?

Yes. We can reference some of the public comments that some of our larger customers have made to intend to preserve some of the truck volumes, particularly in North America, so I think we are a beneficiary of that. A couple of months ago, we weren't quite sure how it was going to play out, but I think your point is a fair one that we had accommodated for a little bit of a headwind in this area, and it hasn't turned out to be much in Q1. Unsure what's going to happen in the coming months. We're in a position to make sure we're ready to deliver for our customers for as many of these trucks as they're going to be able to produce. But we'll continue to watch it as we move through the second quarter. But I think you're right. It's possible that our impact has been a bit less than others due to the mix that we have skewed towards full-frame trucks.

As we think about the second half of the year, maybe being on the other side of this, perhaps not just given some of the indications, would you expect that mix shift to continue or even potentially reverse in the second half of the year? I mean at some point, automakers are going to have to start rebuilding inventory in their lower mix segments. So are you seeing that in terms of customer releases at all? Or is it still automakers can't make enough cars, trucks and SUVs and it's -- crossovers, trucks and SUVs, excuse me, and they're going whole hog down that effort, and there is no signs of stopping?

Yes. Based on the build schedules and patterns that our customers share beyond the near-term releases, I get the sense that the latter is likely true, that there's going to continue to be a very strong demand for our core segment of full-frame trucks and SUV for quite some time. So we'll continue to watch and make sure that the raw material is going to be there to meet that demand, but the demand fundamentals seem pretty good for our core segment and light vehicle.

And the last kind of question I'll ask around the supply chain disruptions, whether it's the semiconductors or disruptions in Mexico or foam shortages coming out of the Texas market. Has that influenced your strategy for inventory orders at all? And do you have plans to increase inventory or perhaps stockpile to reduce potential negative impact of supply chain disruptions going forward?

Yes. I think we're being very thoughtful about the level of inventory that we are carrying. I certainly think that our working capital efficiency will be held back a bit because we want to make sure that when we can run production, given their parts of our supply chain around the world that are still battling through the pandemic and all these things, we're making sure that we keep orders at an appropriate level. So we may have a little bit of higher inventory in the near term to make sure that we meet that demand, but we'll continue to watch that as we move into the second half of the year to consider where we'll end up by the end of the year.

Great. And another kind of near-term dynamic that is certainly top of mind for folks, raw material prices have inflated materially over the past year. Can you remind us of your major commodity inputs as well as your economic exposure versus your customers in terms of what is being passed through, index or escalators and other programs?

Yes. So for us, it's primarily steel and specialty steels, like special bar quality steel that's used for a lot of our gearing applications. In our Power Technologies business, it's a bit more of aluminum, but the biggest impact for us is going to be on the steel side. We indicated in our original guidance that we expected to have about $50 million of increases in raw material costs. Most of that was steel. While we recover most of that, we're certainly seeing that as a headwind for us. Steel prices have continued to rise in the last 6 to 8 weeks since we were out with this information. So we have a situation where we'll recover a strong majority of it. We'll continue to work with our customers on that, but it does put a little bit of margin pressure on us. And also that margin pressure is amplified in the short term as there's a little bit of a lag from when we recover and when we pay to suppliers. So a little bit of a margin headwind for us on steel for the full year, and that has intensified a bit here in the last month or 2.

Great. And how do you think about your ability to pass on that raw material pressure to your automaker customers versus perhaps push it down to your suppliers?

Yes. There's certainly an incentive on our part because we don't recover all of it to manage that as effectively as we can with the supply base, but we largely have recovery mechanisms that are established with our customers that are quite formulaic. Lags last anywhere from a couple of months to more than that. But on average, we're getting most of that recovered within a few months.

Great. In the 10 minutes or so that we have remaining, I do want to touch upon some financial questions, and I won't tie you guys to the -- commenting on the 2021 outlook, specifically. But I would like to talk a little bit about that quarterly progression that you outlined at 4Q reporting for 2021. Has that shifted more towards the second half as you look at some of the production disruptions in the front half of the year? Or would you expect kind of normal seasonality still holds?

Yes. It's a little bit early. I think from Q1, obviously, we're at the end of the quarter, and the top line is we've had some wind in our sales on the top line. Demand for agriculture has been really strong. Commercial vehicle has done a bit better, as I mentioned. The chip shortage has had less of an impact on us in the first quarter than we expected. So we expect to have a first quarter that's a bit better than what we originally anticipated. From a margin standpoint, we're probably still going to be comparable because, even though we're going to have some incremental contribution margin on slightly higher sales, the raw material cost increases that we just talked about and some of the supply chain challenges that we've been discussing are going to drive some higher cost. As we look to the second quarter, I think we'll continue to be a bit cautious on light vehicle and the impact that the chip and chemical shortages could have on that market, but we do anticipate some continued strength in our heavy vehicle markets as they seem to be ramping up. So hopefully, we'll give a little more color on that in a few weeks, but we certainly think we're off to a bit of a better start in Q1 based on a little stronger end market demand.

And as you think about the visibility that you guys have on production releases, whether it's kind of 8 to 12 weeks out or beyond the next month, since you guys provided your 2021 outlook at 4Q -- excuse me, reporting back in February, would you say that your visibility over those customer releases has improved or deteriorated as the chip shortage has developed?

Yes. I think, obviously, we have a few months of actual sales and a few months of releases. I think there's just a bit of questioning about how it's all -- it's going to play out. So we do have really good releases from our customers across most end markets on what they want to build, but that is subject to them being able to get the parts they need. So you'll probably see us continue to be a bit cautious in the coming months as we try to work our way through this challenge across the industry.

Great. And switching gears just a little bit. At 4Q reporting, you cited specifically some accelerated investment in electrification, which you described as being primarily attributable to commercialization of the products as start of production has been somewhat accelerated. As 2021 probably just marks the beginning of the EV push across the industry, would you expect this investment to only ramp further? Or was there some outlier element in terms of industrialization that caused 4Q spending to be higher?

As a general trend, we continue to see very high demand for our solutions, which requires a lot of application work. We are going to continue -- we're not going to be pennywise and pound foolish here. We're going to make the right investments on top of the $400 million that we've already put into this area over the past few years. But we did note that this could be a little bit lumpy based on the cadence of program launches, so it's not necessarily going to be consistent across every quarter. So we'll continue to try to give an indication of how that will affect the margin profile of the business. But as a general trend, we're very encouraged by the quoting activity, the new program awards that are leading to production, and we're going to make the investments we need to not only deliver the right technology for our customers' applications, but to stay ahead of the technology curve in the electrodynamics and motors and inverters as well as the overall 3-in-1 systems.

And as a follow-up point to that, the $400 million that you mentioned, to get that, that significant backlog to come through, when you think about accelerated investments in electrification, it's fair to say that the significant investment has already been incurred on the technology and product development side, correct?

Certainly. Yes. So when we acquired TM4 and SME and Ashwoods, it brought a very attractive technology portfolio, and we paid for that in the acquisition, but there is still a meaningful investment in the product technology to continue to improve. A lot of those dimensions I referenced earlier, the performance of the systems, the power density, the efficiency, so we'll continue to invest to stay ahead of the technology curve in that core technology, alongside of bringing it to applications for our customers' vehicles.

Fantastic. And I think in the 5 or so minutes that we have remaining, I do want to focus on the 2023 targets that you guys have laid out there for the midterm. Your $10 billion revenue target for 2023, based on my calculations, implies a revenue CAGR of about 10% from 2021 to 2023. That's on underlying production volume growth, potentially in the low to mid-single-digit range depending on what your assumptions are, which implies growth above market in the mid- to high single-digit range. Do you think that, that's a good benchmark to think about in terms of sustainable growth above market for Dana over the kind of intermediate to longer term?

Yes. I think it's tough to project beyond 2023 discretely, but I'll just point to a couple of trends that provide the higher growth rate in the next few years. The first is that does include pretty substantial backlog. So winning more than our fair share of new vehicles coming to market. The Bronco is a perfect example of a traditional architecture that's driving a meaningful piece of our backlog. The second area is there is some inorganic activity in there. The Modine acquisition is a piece of that, $1.7 million growth that we're projecting over the next few years. So we'll continue to be thoughtful about opportunities to create value for shareholders. We think, and we've said before, Modine is a very accretive acquisition, a business we paid very little for that we think has a $30 million of adjusted EBITDA after we get it integrated. So great opportunity to create value. Those types of things are going to drive slightly above-market growth. I think the one thing I'd indicate beyond 2023, at that point, we're saying that electric vehicle components sales are only going to be about 5%. We're running ahead of that target. But beyond that, we would expect that to continue to accelerate. So as we see these wins come in with content multiples of above the 2x we talked about at 3 and 4x, there's certainly continued opportunity for us to outpace the market as it shifts from combustion engine to electrically propelled vehicles.

Great. And to pick upon one of the other targets that have been established for you guys for 2023, that 5% of the cash flow as a percent of sales, that's been a long established target by you guys that's proven a bit out of reach for the past several years as you've accelerated investment in acquisitions. What gives you confidence that this is achievable by 2023, specifically as investment for EVs and newer technologies continues to ramp up?

Yes. Certainly, the pandemic set us back a little bit from achieving that, but that's something that's been experienced across the broader industry. As you noted, the meaningful acquisition we did of Oerlikon in 2019 held that back about 100 basis points as well, too. So as we get past the acquisitions, as the market recovers, our profit continues to move well above $1 billion, as the working capital investment subsides, as we get to those sales level, CapEx stabilizes in the 4% to 4.5% range, those 5% free cash flow margins, we believe, are very achievable. And we think there's going to be a pretty even and linear upward trends from where we are now up to that number over the next few years.

And as we think about that free cash flow in terms of capital allocation, debt repayment, at least for the next year plus has been outlined by you guys as a priority. I guess, first question, can you talk about the parts of your capital structure that you'd be looking to pay down first? And then as a follow-on to that, is there a certain leverage threshold above, which you would likely refrain from M&A, meaning you're trying to get to a leverage threshold that you can then turn the tap back on for acquisitions of technology and things that you can commercialize?

Yes. Even where we sit today, we feel comfortable that we still have the flexibility required to build out the portfolio, so no concerns there. We aspire to the one turn of leverage because we think that, that quality of balance sheet, it's a great signal to our customers that selecting us as a partner for electrification in the long run is a very stable decision, and that we're going to be here to invest through the cycle in the future. Specifically, to your point, on the capital structure, we've got a term loan that can be prepaid with no penalties. We'll have bonds that will become callable at par here very soon. So we've set up the debt stack in such a way that we can take those down in the next few years to get us right in line with where we want to be on that long-term leverage target. At the same time, we'll be investing over $1 billion of CapEx. We'll be -- we've reinstated our quarterly $0.10 a share dividend. And in addition to that, we would expect to buy back some level of stock at an ambient level to offset the dilutive impact of stock comp.

That's some really good color. I think the question that we'll close with, particularly because it's been very relevant over the past 5 years is the inorganic growth strategy. So over the longer term, do you expect more opportunities around M&A will be vertical acquisitions of technology and, let's say, smaller Tier 2 plus suppliers in the value chain? Or rather, do you think that the industry could or should go -- undergo more horizontal M&A and consolidation to create larger, global, more diversified suppliers?

I think, on your latter point, we're very happy with the breadth of our market exposure. So we deliver comparable products to all 3 major mobility markets, so we think we're in a great position there. We've also highlighted that we have all the core components of the technology that we need to be competitive and to lead in this area. So I think we're just going to be very opportunistic in the coming years. We're going to be very focused on meeting the customers' needs with these systems, and we'll continue to keep an eye out for anything that could help accelerate that trend.

Fantastic. I think at this point, we are now at the mark on time. I do want to thank Jonathan. Thank you very much for your time today, Craig, as well, and for the continued support of our summit year after year. I'm hoping this is the last year that we'll do this in virtual, and maybe we'll get back to in-person someday. I'd also like to thank everybody on the call for taking the time to listen.

It's great speaking with you. Thanks for having us, Aileen.

Thanks, guys.

Thanks.