Dana Incorporated (DAN) Earnings Call Transcript & Summary

Hi. Good afternoon. I'm Ryan Brinkman, the U.S. autos analyst at JPMorgan. Thanks for joining us for our 2021 JPMorgan Automotive Conference. Very happy to get going with our next presentation, which is Dana. And happy to have with us Jonathan Collins, Executive Vice President and Chief Financial Officer; as well as Craig Barber, Senior Director of Investor Relations and Strategic Planning. So Jonathan and Craig, thanks so much for being here. We really appreciate it.

Thanks for having us, Ryan. Looking forward to the discussion.

Absolutely. And I want to ask you on a bunch of different topics, but maybe one place to start. I mean you get a lot of questions these days on electrification. We're looking forward to Electrification Day on September 28. Looking to make our way out there. Is it in Maumee? Is that where it is? Or in Toledo?

That's right. Toledo World Headquarters.

How much of the electrification opportunity would you say is split between your various different end markets, light vehicles versus commercial vehicles versus off-highway, et cetera?

Yes. I mean, I think, we have to look at this over a couple of different time horizons. So I think in the longer run, we remain convicted that the vast majority of the global mobility fleet will be converted to clean energy. So it becomes a question of what the timing horizons is for each of the segments in which we operate. So you have to remember, principally, we are providing drive systems across all 3 mobility markets for heavier vehicles that are -- require high-torque and high-payload and high-towing capacity. So that means, in the light vehicle market, we're in full-frame trucks. In the commercial vehicle, we do everything from medium-duty all the way up to heavy-duty. And then in off-highway, there's a broad range of products that work for the construction, agriculture and mining segments. So it becomes an issue of timing in each of those segments. And for us, much of the early activity has happened within the medium-duty segment of commercial vehicle, and then in the construction and mining segments within the off-highway. So that's what's going quicker, if you will, or the higher adoption rates early on. So much of our early product developments and some of our early launches are concentrated in those segments, but we believe the heavy vehicle segments are coming. Early this year, we announced the first electric axle that we'll be producing for a Class 8 heavy truck that will come into production in 2024. And then, obviously, the full-frame truck market within light vehicle is starting to show signs that it's going to electrify, which gets closer to our core products in that segment. So a bit of a timing difference, but in the end, we believe that this is a macro trend that's going to affect all aspects of our business.

Okay. Great. Thanks. And I don't know if you're able to sort of review the content per vehicle opportunities by end market as they do electrify, including for some of the noncommercial truck off-highway as well. I'm just curious if there's a similar type step-up that you anticipate would be required to help facilitate electrification.

Yes. There certainly is, and this is an area that we plan to go into a bit more detail on next month at our Investor Day. We think we have a pretty creative way of breaking this down by each of the segments and sharing what the content uplift is going to be. But at a high level, what we've indicated so far is that the content in the system in electric axle will be at least twice as expensive as a traditional driveline. So that would be the axle and the driveshaft. However, of the proof points that we've posted so far, largely in our heavy vehicle markets, those segments that I just mentioned that are electrifying, the content uplifts have been higher than that. So we think we're due for a refresh there. We'll give some more detail. But keep in mind that what was traditionally a purely mechanical system that transferred torque from the center of the vehicle or from the north part of the powertrain out to the wheels is now a mechatronic system. So the electric traction motor that will ultimately turn the gears that turn the wheels, and the power electronics or the current inverter that will be controlling that electric motor are coming inside of the system. So we focused heavily on the last few years of acquiring those capabilities to make those electrodynamic components, the motors and the inverters, in-house and be able to integrate them into the axles that we produce. So what's really important for us is virtually every electric vehicle on the road today has an axle in it. And those electric axles are more expensive than their predecessor, mechanical axle. So that's that content opportunity that we're looking to capture as we move from internal combustion engine to electric vehicles. And we think we're really well positioned because of the motor and inverter capability we have in our TM4 entity.

Interesting. Thank you. A number of other companies we cover are involved in electrification of the light vehicle space and light vehicle driveline. Some of the companies we cover are involved in electrified commercial vehicles. And we do hear a lot about the potential for automaker insourcing. Certainly, in the light vehicle area, we don't hear as much about this when it comes to commercial trucks. I wanted to get your sense in terms of what the difference is, why there may be a difference in terms of automaker willingness to in-source versus outsourced to suppliers, electrified driveline components. And then when it comes to off-highway, and we've heard nothing, because I think that has not really -- apart from some mining stuff that we haven't really seen. But one day, when that does, is there any reason to think that, that would track more similar to light vehicles or more similar to commercial trucks? What do you think?

Yes. I mean, I think, for us, what we see in the traditional driveline, the mechanical systems that we've been producing for decades, we think is ultimately going to play out in the electric vehicle market as well, too. So just as a reminder, virtually all of our customers have in-house driveline capabilities. And when you add all that up across all of our end markets, a very large portion of the market is in-sourced today. However, companies like Dana have built $1 billion businesses by taking a portion of those volumes and producing them on the outside. And ultimately, we think that's going to happen with electric axles as well, too. I think some of the differences in end markets early on could be predicated on which platforms are getting electrified, what the volume expectations are supposed to be for a period of time. But in the end, we think that most of our customers across all of our end markets are going to make some e-Drive Units and e-Axles in-house. And then there are going to be situations that they outsource to suppliers. And their reasons for that may differ based on their strategy or their dynamics within the four walls of their business. But ultimately, we still think that the driveline content will be produced on the outside. That's going to be a meaningful part of the market. And that size of the market has the potential to be dramatically higher than today because those systems, as I mentioned just a moment ago, will cost significantly more, have much more content in them than the predecessor systems.

Okay. Thanks. And you have done some things on the light vehicle side when it comes to electrification, including there was that announcement about Ferrari at one point. What is your interest when it comes to electrification of light vehicles? And where do you see your wheelhouse being? Or what's your strategy there?

Yes. The way to think about our light vehicle business, as I mentioned a few moments ago, we're largely providing high-torque capabilities that are usually used for high payload and high towing. However, high torque is also an important characteristic in performance cars. So you'll note that in our European business, we not only do some work for vans or trucks, like you would see in North America, but we also do higher-performance vehicles. JLR is an important customer of ours. Ferrari is a customer, an important customer as well, too. So that electric axle, you see, was on the Ferrari Stradale SF90. That electric axle has very high toric output, as you would imagine, for a high-performance car. So there are some areas, where we're providing electric axles in light vehicle. In the performance side of the business, it's just that our core bread-and-butter market, if you will, of full-frame trucks is early in the electrification development. So a lot of work going on there behind the scenes by our teams, helping to demonstrate the capability of our technology and highlight how all of the great work that we've done in medium-duty to create these 3-in-1 solutions in commercial vehicle, is highly relatable to the full-frame truck segment for light vehicle customers.

Interesting. Thank you. And maybe switching gears a little bit, but still on electrification, and large part is Power Technologies. Power Technologies was, I think, once characterized as having the least strategic coherence amongst your various different reporting segments. I'm curious now, though, if maybe this segment could be evolving into something a little bit more critical given the growing need for temperature regulation to maximize the range and life of battery electric vehicles, and some of the recent success you've had with the advanced battery cooling plates. What's your latest thoughts on power technologies, where it fits into Dana and its growth characteristics going forward?

Yes. Our Power Technologies is an exceptional business. Our thermal capabilities and our sealing capabilities, deliver products that help our customers produce vehicles and solve meaningful problems in the powertrain. That said, the comments we've made in the past is that our 3 drive systems businesses have a tremendous amount of shared resources. So we're able to pool engineering, manufacturing, service and distribution for the aftermarket. All of those can be shared because the physics of these parts are very similar from full-frame trucks into commercial vehicle and into off-highway equipment. Power Technologies products are just different. They do serve all 3 of our end markets, even though it's a predominantly automotive or light vehicle business. But we are incredibly excited about the growth opportunity in the business. And we've highlighted some of the recent wins. Earlier this year, we talked about GM's Altium battery platform that's going to be cooled by our lone brand of ThermaTEK battery cold plates. So this is where we took the capability to cool fluids inside of an engine and a transmission and transfer that to electric vehicles to cool the batteries. And thermal management of batteries is going to be a very important factor to how efficient these vehicles are and being able to maximize the battery life and the range that can be achieved out of a single charge. So this is something that we're very excited about. We think it's a growth category and very encouraged there. And then the same is true on the sealing side. We're looking forward to the continued development of fuel cell technology, so our bipolar metallic plates that help to produce electricity inside of a fuel cell stack, our technology that was innovated or came out of our sealing capabilities, from fluids inside of an engine. So that's one that we're excited about, and we'll continue to have more to share on that in the future. But these are both great categories that have relevance in electric vehicles, but the products are just distinct and different than 85% of our business in the other 3 segments.

Interesting. Thanks. And could you talk about some of the various partnerships that you have in electrified commercial trucks, including with Hyliion and with Switch Mobility? Is there any comments you have or context within which investors ought to think about your not having been selected as standard position on some of Hyliion's CNG-powered vehicles? Or you're having been chosen to supply a number of electrified components for Ashok Leyland's Switch Mobility unit. Is there some aspect of your technology that caused it, do you think? In that case, you have been chosen over a rival supplier or, conversely, in the case of Hyliion?

Yes. I think, broadly speaking, for a lot of our customers, the timing of our product development and how it aligns with their road maps can often be a key decision in which technologies are applied. So in the case of Hyliion, when we initially invested a few years ago, the hybrid system or the through-the-road hybrid was the primary focus for Dana. We had a product that was going to be ready to meet that timing. And the ERX, or the Hypertruck, was early in development. And as that development time line played out, they identified the customer that they were going to start working with, already had an electric axle that they were going to use to build some of these early vehicles. So they've chosen to go with someone else on that system. But in that case, we see it as a great opportunity for us since we're not an exclusive partner in that case. We took that capital, and we're redeploying that to make the investment in Switch. And that's a great example where we have rigid axles for the light commercial vehicles that are a perfect fit that Switch is looking to produce, and we also have drive units for their bus applications that are going to be a great fit. So we're really excited about the opportunity to partner with Ashok Leyland and their subsidiary, Switch. It has got a lot of the great innovation that comes with a start-up, but they also have the backing of a global OEM that has tremendous experience in producing vehicles. So we're really excited about the partnership there, and we think we're going to be helpful for them in bringing these vehicles to market.

That's great. Thank you. And I know you're strongly levered to electrified commercial trucks, obviously. At the same time, what we're hearing on a lot more about autonomous trucks, including we have several autonomous trucking companies at the conference this year versus we haven't had any previously, including TuSimple, Embark Trucks, Plus, et cetera. Well, maybe this reflects another growing trend. Is there any implication for Dana from the perspective of autonomous trucks?

Yes. I mean, I think, there's not much of a direct impact or correlation. I think if you step back and think about the megatrends that are facing the industry, the electrification of the powertrain can be an accelerant for the adoption of autonomous features, moving from driver assist all the way to full autonomy. So I think the more that we do to help our customers electrify the powertrain can help accelerate that trend. But as far as our products are concerned, we're relatively or nearly agnostic from a propulsion standpoint, whether it's a self-guided or self-driven vehicle, or whether it's an operator that's sitting in the vehicle. So really, our focus continues to be on the rate of adoption of the actual electrification. And as that continues to accelerate through consumer preferences, regulation, continued investment, those things could all help to drive some of these other mega trends that's in the industry as well.

Interesting. Thank you. And I wanted to ask about Ford. You have a very strong relationship there, I think dating all the way back to the Model T, right? Can you maybe review your relationship with that customer? I thought to ask in part because you've launched with them on a lot of their new important products, ranges from the Ranger to the Bronco. And also, I saw in your most recent earnings call slide deck, some vehicles with sheets over them, right? But you couldn't name them now, but the battery cooling was said to be on a full-frame EV pickup launching in 2022. I only know of the F-150 Lightning launching that here. I think the Hummer's at the end of this year, Cybertruck, I think, might be 2022, but they were saying it was '21. And then also, there was another slide said a compact pickup beginning in 2022. Again, I really only know of the Maverick launching then. So that would make for a lot of -- a year ago -- a lot of these Ford vehicles, if those are indeed Ford's, but regardless of the identity of those individual products, maybe just talk about the relationship with Ford and the status of the Bronco launch, which is now is producing more and more. And how well positioned do you think you are to win future awards with that automaker?