Dana Incorporated (DAN) Earnings Call Transcript & Summary

Thank you. Pleased in this 10 a.m. slot to welcome Dana, Inc. We're joined by Jim Kamsickas, Chairman and CEO; Jonathan Collins, EVP and CFO, and Craig Barber, Treasurer and Investor Relations.

I want to kick it off and just with the end markets, of course, you had your Capital Markets Day and then you updated your outlook on earnings. The -- I guess the question a lot of description around light vehicle, but maybe want to drill into kind of the commercial vehicle off-highway and the impact of the chip shortage is there and then how that could track going into next year?

Good morning, Brian and to the audience. Thanks very much for having us, having Dana, it's an honor for us to do so. The chip shortage, I think everybody is well aware of how disruptive it's been and the worst part about it is the unknown inconsistency by various customers across the board, because the integrated supply chain is so challenging to kind of keep our fingers on all of us. So it's been a challenge. To your specific question, it was certainly more disruptive in the back half of the year on commercial vehicle than it was in the first half of the year for various reasons. So we're still working our way through that. Sometimes it seems like it's getting better, sometimes it feels like it's getting worse. Why is that? Because obviously, commercial vehicles are built around the world. It could be a geographical thing or it could be multiple other reasons. Off-highway has been significantly less impacted than the other markets, but that's not to say that there hasn't been some challenges with that. In particular, we've seen a little bit more on the construction side than the ag side, et cetera. But big picture, as you kind of alluded to, craziness in light vehicle -- now craziness more so in the back half on CV commercial vehicle and maybe -- and I don't think it's going to get significantly worse, but certainly some issues in off-highway.

And do you have a sense of when that kind of starts improving in those 3 end markets?

Yes. The best voice on that is the voice of the customer. They're closer to the direct buy. We certainly buy semiconductor products, too, but not like they would. And I've yet to find anyone that I've spoken to that said that we should expect it to be cleared up until the end of next year. So it's going to be a bumpy road, we think.

And beyond chips, what are some of the other supply chain maybe unknowns or known unknowns that you think either you're worried about or you think your customers are to worry about? We certainly have that brief magnesium scare. There's issues around China steel, another supplier flag this morning, just the availability. But kind of how are you thinking about the rest of the supply chain and the -- both the supply risk and then we'll get to the inflation risks.

Yes. Thanks for the question again. I think the 2 -- I can go on and on. I think we all can go on and on in today's craziness of the 1 in every 100-year pandemic. But the 2 that probably keep me up at night the most would be labor and labor, not just per se close to home, although there's challenges even close to home here in the United States. But we're all aware of what's going on in Europe. If you want to talk about like in Austria and multiple other countries that are tightening it down. Is that going to then carry over into industrial manufacturing stuff? Maybe not, because we basically got to the point that most all of the goods we manufacture are essential products, but it's still going to be a challenge for this. The human psyche and other things that come along with that. So labor across the world, I don't think we can just look the other way, that could still be a challenge, and we see some of that out there. The other one is energy, right? There's -- I think most people are aware of the challenges as it relates to this, pick China in terms of the shutdowns that they've had in those regions and what could be out there. Again, I mean, we all get paid to navigate through these up downs and arounds, but those are 2 that maybe get less exposure, but are real.

Well, let's talk about that. So if I think about the impact of rising costs, I want to divide it between raw materials and commodities where they've been volatile for years, there's largely indexing mechanisms in place. I remember the challenge that John Devine dealt with was kind of getting the light vehicle contracts largely indexed. That seems well established. And then there's kind of everything that else that goes into bill of materials and cost of goods sold. So maybe start with that. The first bucket because it's better understood. Any sense of when the commodity pressures could ease or when your pricing mechanisms fully catch up with what's already happened?

Yes. As you mentioned, Brian, the light vehicle customers and the commercial vehicle and off-highway customers for quite some time have had established raw material indexing. Certainly, it's built for and the lags are set up for modest moves that bounce around. Obviously, what we've seen in the last 12 months is unprecedented. So we've even worked on some refining in those areas with customers to get things trued up and aligned. But the other conversations that we're starting to have that are unique due to the recent inflation would be freight, as an example. So obviously, logistics have been very challenging. We've been talking about it for over a year, but the rapid inflation in that sector is a conversation that we're having with customers across all end markets. We're not in a position to be able to subsidize the rising cost in all of those areas. So that's been a topic of conversation. Jim mentioned energy, obviously, we're moving into a period where there's high volatility in the input cost to convert a lot of our raw material into finished goods. So energy is a conversation. Labor inflation, Jim talked about the shortages that we're concerned about, that's leading to rates of increase that are far beyond what we've seen as normal. So the conversation is broader. We are in an environment where we're having to talk about things that we typically have not, and we'll continue to work through those in the coming months and to position us better for 2022.

I guess, kind of a bigger question that gets to, and I've been asking the suppliers this. The whole model of suppliers in the last 30 years has been 1% to 4% annual price downs offset by pass-throughs for volatile indexable commodities, but general assumption that in a deflationary environment, combining with rolling out lean manufacturing, again, into data pursuit kind of under the prior leadership. You could meet the -- as far as in general could be the OEM price down demands. How does that change if we move kind of back to the future, and we're in a 70s style inflationary regime that frankly, in my view, is someone who has rounded the space, it seems like the supplier contracts are really not set up to handle.

Yes. I think where you're going, I mean, everything comes down to basically balancing the T account, if you want to. Yes, you're right. Like you said, Brian, the world is very much programmed and it should be, right, for productivity agreements, which are basically aligned where suppliers such as Dana and everybody else should be able to take out waste and work towards a reasonable number on balance if you outperform it to improve some margin. If you don't, you may lose a little bit of margin, but it's usually can get there if you have the right operating system, right team, et cetera. This is a different world. So now in terms of trying to get the T account balanced, we'll have different long-term agreements. Some people call them productivity agreements. A lot of that stuff is going to come off the table if that's how a customer determines that they want to collectively solve the problem or it's going to be other recoveries and you keep them in place. So it's going to be a case-by-case basis by each customer, and we don't care either way. But at the end of the day, as I've said on numerous calls that you've been out in the past, the customer supply relationships are different than they were 25 years ago from the standpoint of the OEMs clearly understand without a viable supply base. Bad things happen to good people, and it's going to be -- they're going to have a bigger problem than supply base well. So their customers are working great with everybody out there trying to figure it out. They're getting hit with the fire hose. I'm sure we're getting hit with the fire hose of course. And -- but we'll figure it out. If there's going to be balancing off on typical productivity agreements or straight recoveries every case by -- everyone is a case-by-case basis, but we'll get there.

Okay. So let's go on to kind of more strategic topics. Diving into electrification, want to step through some of the key end markets. Can you talk about some of the content you have on the major light-duty pickups, whether it's from the Power Tech division or some of the other electrification things you're doing?

Yes. And the light vehicle, what we call light vehicle group since you put the nail up, I'll go with that one there for a minute. Most people may be aware where we announced at the Investor Day that we will be on the Ford Lightning and the volume on that program. I think everybody is pretty bullish on how exciting a vehicle that's going to be and how we're going to be able to perform on that. So we're putting our plans, launch plans, et cetera, there. We're on multiple other platforms. You're aware that we're on the large platform with General Motors. So certainly, as those programs pull through first, we were there at the tip of the spear to be able to capture those. As it relates on the power more on the driveline side of the base piece, I'm not going to recover some of the awards we announced just 1.5 months ago, because we'll be providing more updates coming into next year. But I would be just suffice it to say, there is a massive -- not to overuse the word today, firehose of activity coming at us in terms of how we're going to be able to navigate through that to support our customers. No customer that I know of believes that they can be everything to everybody across the board, just like they haven't over the last x number of years, 100 years of mobility business. So Dana will continue to pick. It's being a good spot to create value for them, and we'll give you more updates starting next year.

Okay. And on the, I guess, the sort of heavy -- the sort of bridge between light vehicle and commercial vehicle, the F-150 Lightning now is a 0.5 ton -- some of the other programs you mentioned are also kind of more 0.5 ton. Where do you see electrification going in the very important 3/4-ton truck pickup market? And are there going to be -- even if the OEMs have in-sourced e-drives on the light-duty pickups -- for the heavy-duty pickup truck market, are there going to be e-axle or e-motor opportunities?

To answer your last question first, absolutely, yes. There's no question about it. And let me just kind of substantiate the easy answers just to say, yes. Let me substantiate the, why. The why is that, why have customers very selectively chosen to work with somebody such as Dana for 117 years, right. Is that it's not by accident that we had together with our customers understand the voice of the customer, the torque, the power requirements, really what the consumer needs to be successful. They're running a construction company, if they're an off-road enthusiast, and the list is long, right? So that collective partnership, we will be partnering with customers, just like we have. And think about how strong the truck SUV market has gone up. We've been part of it. They're not forgetting that we were part of that success story over the last couple of decades, and we're going to continue to be there. So you'll see we're going to keep moving down that road.

And before we leave light vehicle side, another part that you are very dominant in apart from 3/4 pickups is the rugged off-road vehicles like the Wrangler and the Bronco. How will that business evolve with full electrification? And in particular, some of the pure plays there, we'll talk about software-defined torque control, software-defined ride control, which are very tough problems that you solved with the Spicer axles over the year, but their argument would be now it's shifting to software as opposed to mechanically defined torque and suspension control system. How could Dana play there? Or how is Dana playing there?

Yes. Good question, Brian. Thank you very much. The reality to the world is all the -- we cannot underestimate still the importance of the mechanical engineering. You really can't. I mean, yes, we're full-blown e-propulsion, motor inverter, converter charger, vehicle control unit, we've got the full suite of it, not to mention all the thermal that goes around it. We got all that. But at the end of the day, for the segment you're just talking about, it still comes back to the mechanicals and we're going to be there. And -- so that you expect -- this is my opinion. It's an opinion only is I don't think you're going to find any class of vehicle that's not going to be an electric -- you're not going to provide electric options in some. It may be different. It may not be full electric. There may be obviously, the full ICE. Because there's just going to be markets where people won't have the electrical infrastructure to do it. A few in the light vehicle side, more in the off-highway side. But I think every vehicle class is going to have some form of electrification in it.

Okay. Let's move on to commercial vehicle. You've had a number of boards here, PACCAR Medium-Duty, Navistar Medium-Duty, Navistar school bus, several heavy duty. Can you highlight your win rates, how the awards differ in terms of content product? And then are you providing for them, how many are you providing fully graded e-axles of power electronics? And where do you kind of more get parts of their electrification solution?

Yes. Let me ask -- let me -- because it's just -- it's a great question, but it's a very broad question from that standpoint. So it would be hard for me -- it will take up the whole day if I answered it on a case-by-case basis. So I would say that the easy answer is a larger proportion of our win is in commercial vehicle, off-highway and even light vehicle for that matter, are going to be more of the 3-in-1, more of the more integrated system. But like we've always said, we don't try to tell the customer how to run their business. So there are certainly isolated situations where we're going to do just the components if it's a motor, it's inverter, it's the other components and electrodynamics. So we're very flexible. And the last time I checked, it's not a very good idea to tell the customer how to run their business. We just make sure that we create value and fortunately, our portfolio now gives them the opportunity to work with us in different ways. But the synergy really is the 3-in-1, right, as you can imagine.

Okay. And you're working with a number of start-ups, Hyliion, [ Line Electric ], Nikola, all of them are at our conference. How does the quoting landscape and credit landscape differ in pursuing some of the CV startups? And how do you support them versus how you might support your legacy customers?

Well, there's -- that's kind of a broad question as well, so I'll do my best to try and get through it. From the standpoint is, this is something I kind of stand on top of the mountain with all CEOs, all have their mission and they'll have their approach and I try to go with this. We have no small customer. We have no large customer. I don't define them as that, because if you do, then you get confused on what real customer centricity and customer satisfaction is. So we certainly are making sure that we support all. But our legacy customers, the customers we've been with almost all of our customers, we think about and have been with for anywhere from 80 to 117 years. We -- a large lion's share of our activity is certainly with them. But it's not to say that we don't support some of the start-ups, like Brian, as you're well aware, we're in the Rivian vehicle that's on the road now doing the full battery cooling for them. It makes sense, right? But we too are not going to try to be everything to everyone. We're going to selectively choose partner customers that chose us and work with us and ensure that we have collective success. And they get our best people to get our best products, and we keep moving forward.

Okay. and how do you think that commercial vehicle landscape shorts out between some of the new entrants and some of your customers? Or are you sort of taking a view no matter who wins, Dana is going to be there on the drivelines?

Yes.

Okay. A question comes up the competitive dynamics in commercial vehicle, especially medium duty, heavy duty. Meritor has had some stress in the axles as well from [indiscernible]. But the questions we get is what about the companies who also are in the commercial vehicle propulsion business now, specifically Allison, Cummins, and sort of a worry or opportunity is are those companies going to be coming into the 3-in-1 product? Are you seeing them? Are they late to it and you're going to be kind of in a pole position to essentially pull in and you've argued in the past, engine and transmission content into that 3-in-1 axle product?

I'll just say this, we never underestimate any competition. And for any names you provided me today, if you're -- unless you're asleep at the wheel as a CEO, you could expect there's going to be 3 other names that you're not even thinking about. We don't run the business following other competitors or potential customers around -- competitors around, excuse me. All we do is we put the best suite of people in front of our customers, the best suite of products in front of them and differentiate in all the cost, quality, delivery and execution and the rest will be -- it will be what it will be. And I feel really, really good about everything we've talked about already today, not to mention the long-standing relationships we have with our customers and global footprint that supports them. You don't get to fall out of bed and just supply somebody if you're not in the area you don't know how to work and speak their language. We certainly have that.

So moving to off-highway. There's obviously so many niches in off-highway. But which end-markets are moving first, what's your kind of success or adoption rate in those markets? And then how should we think about kind of volume in CPV?

I'll take the first one, just to spare around Jonathan, the questions. So he can tell you, he's not going to give you CPV in a second. No, just kidding. But in all seriousness, I think everyone is aware, if you think about the pull-through. I always like to use the example here in America, it's a Home Depot or Lowe's, all the kind of -- the Scissor lifts and so forth, that's already electrified. We're participating doing, our thing there that's been there for a while. Underground mining has been there, a lower volume, higher price. If you want to call it that. After that, construction is getting more traction than agriculture. But again, coming back to a comment I made a few minutes back, you can expect that there's going to be a full green and electrification movement across all segments in my view.

Yes. I mean we highlighted some really attractive wins at our Investor Day, small construction equipment, a mini excavator with JCB. We obviously highlighted the Sandvik underground mining, as Jim mentioned, as more underground mines are opened up. It's more attractive economically not to put the exhaust system in and invest in the electrified product. And then also in material handling, as Jim highlighted, material handling has had the highest penetration rate historically for a lot of indoor applications that's moving to outdoor applications. We highlighted wins with Montini, Baoli, JLG on the scissor lift recently. So these are all areas where we're starting to see some tractions and customers are investing in full electrified powertrains, because the duty cycles and the economics associated with those vehicles are making those conversions pretty attractive.

And maybe remind us of how Oerlikon kind of added to your off-highway electrification strengths?

Yes. They brought us incredible capabilities in wheel end, what we would call planetary hub drives, which historically were driven by hydraulic motors, but those are easily converted into electric motor-driven end drive. So e-hub is what we referred to them at the Investor Day. So they brought us great capabilities on parallel gear technology, high-precision machining, design, engineering and manufacturing, for those components, very important in parallel drives, but also in certain electric axle applications. So both the Graziano and the Fairfield legacy suite of products gave us really good mechanical capabilities in that area to build off of, and then you combine that with the acquisitions we made for high-voltage motors with TM4 and low voltage motors with SME. And we have a really broad range of products, not only for e-Hubs, but for the E-axles in these segments as well.

And I want to encourage people, there's a link there. Just click it, you can send me an e-mail question also. bjohnson487 on Bloomberg, so I am looking sideways, I was looking at my Bloomberg chat. You can send questions in there. Can you talk about the synergies between the light vehicle, commercial vehicle and off-highway end markets in electrification? And whether it's on the Power Tech side or whether it's on the 3-in-1 drive side, where are the real synergies?

Well, the one that people don't think about, but it's actually the most important synergy is people synergy. I really have to say, that's why we kind of pushed the chips into the middle of the table starting in '16 -- 2016 and forward. All the institutional learnings we have on motors, inverters, all the stuff that we're doing. Those are all transferable. So now we have a new program pull-through. Let's pick new customer Turo on that. So we're working on standup motors on the Turo. If we -- figure of speech, if we don't think that the activities that we've done with, I don't know, Ferrari or whatever it might be, are going to pull through to be able to do that, then we're kidding ourselves. It's very good. It's very important. It's very similar in nature to our driveline businesses in the past, where the same thing would be on axles or propshafts or whatever, but now it's on the full electrodynamic components. That's the biggest thing, Brian, that I would say is to pull through the rest of it is pretty obvious, right? Your capital is going to be similar. You may have motors, let's just pick motors for a minute that can be very transferable even down to the size with some variance giving customers some exclusivity or not on certain things, motor that's in light vehicle that goes into CV, commercial vehicle or into off-highway, not completely the same, but very much the same. And then just so I don't miss the second part of your question in terms of correlating into our power technologies, our battery cooling, our electronics cooling, our fuel cell will be -- cell and talk about hydrogen fuel cell capabilities is that starting to get more and more traction, not off the change, but certainly more and more traction, all of it's interchangeable. The same person that, as you know, we're in a relationship with Bosch, and we're going to sell it in Nikola and some other customers, the same conversations there. We carry those learnings through the people into our other customers as they're talking to us about hydrogen fuel cell activities.

And kind of related question, your segments are organized by end market, CV, LVD, but also technology, power tech. But given what you just said about synergies, things like e-propulsion, how are you managing organizationally that sharing between the divisions? And is there kind of a more functional e-engineering function that is shared across LVD and CVOH?

Yes, there absolutely is for the reasons you just alluded to, right, which is, we don't report it publicly because it would be like us reporting our forging group or our casting group. I mean we'd be reporting from destination for hell if we tried to do that. But we -- all those people, we have in electrification group, which includes our core software, cybersecurity, certifications and validation. The list is long. I could go on and on and on, not to mention motors and inverters and all the other product-specific stuff. So all of the business units get to tap into that is a shared resource. And then -- and it is cost of word. It's not just like, okay, dial 1800, give me product and systems, we're going to customer meetings together, whatever else is required to make sure that we not only go win the business, but we execute and launch the business.

And kind of related to that, would you ever envision moving to having an electrification segment, EG, the electrification for Power Tech and CVOH and LVD in a new unit that investors could focus on the top line revenue growth called electrification?

Yes. I mean I think the spirit of that is really important in that we are enhancing our conversation around the financials on electrification. So at our Investor Day, we highlighted where we are on sales. This year, we expect to surpass $350 million of EV sales when just 4 years ago for Dana, that number was 0. In 2 years, we expect that to double to $700 million. And then obviously, to quadruple again for that long-term target we set out of more than $3 billion by the end of the decade. As it relates to running the business on a day-to-day basis, to Jim's point, there are certain areas where it makes a lot of sense to have shared resources and best practices across the businesses, but we will continue to go to market by our different customers in these segments. And the application of the core technology is different by segment. So you really can't homogenize everything within the electrification business. There has to be specialization in each of these areas, and we've got the right application, engineering resources, meeting these customer needs. But were there opportunities for us to leverage, design, engineering, manufacturing footprint and some of those things more on the back end, we'll absolutely continue to do that. But at the same time, draw attention to this attractive growing business that's going to create really nice financial returns for us in the long run.

And we typically talk a lot about the technologies of e-propulsion. But if we kind of think about the manufacturing footprint, how does or will be the manufacturing footprint for electrification differ from your -- like your historical business, both in terms of financial metrics like capital efficiency, ROIC, but also in terms of conversion. Can you repurpose driveline facilities for electromechanical? Do you have to write down equipment or buy new equipment or can you convert it, something cutting gears for ICE motor, can it then take years for an e-motor. But how do you think about that part, the really the manufacturing part of being in the EV business?

The answer is yes to all. And it's not just, well, that's easy, because that's the easy answer. It's true is if you take on balance, if you think about the examples you use. Can a manufacturing plant with an operating team with quality materials, launch management, the plant manager, the finance team, certainly all energy. That's pretty obvious, but maybe some people think that it's not. As it relates to the process, you still use robotics as an example. You still use assembly lines, you still use ergonomic lift assist. You still do all the other stuff that we do in the axle business, no matter what the axle business is or if it's motors and inverters think about motors. A lot of times, that's -- those are heavier and more difficult to transition through a plant than even a large axle system can be. So I could go through each one of the tick list of all those things, but we're -- I don't know, man, I think we said it in the Investor Day. I don't know we already have 10 to 15 plants already transitioning out of the ICE into electric. And by the way, sure, you don't have to just say it has to be night and day. Now you do have for clean room purposes, meaning we're keeping certain products, especially like inverters away from anything that might be more mechanical with oils and other things in the air. You have to manage that. But besides that, the operating team, the operating fundamentals, the operating system, they're all relatively the same and then make sure that we just bring in and we have real experts as it relates to electrodynamics and electrical engineering capabilities.

Okay. And I guess one question often comes up. What about ceiling? I mean thermal within Power Tech, thermal management seems to have a great bridge into the EV future. Some of the ceiling products are right there in the kind of very ICE specific applications. So are there opportunities to migrate those ceiling skills to EVs, things like battery cooling or is that potentially similar suppliers like Ford with its divestiture program that you might consider finding a better natural owner for?

I'll take the first part of the synergy piece of it, and I'll let Jonathan take the -- we are always open for optionality and things, well, he does a better job than I do on most things a little on that. But anyway, punchline is that you just take -- those of you that have the picture in front of you, that may look like -- and I'm talking about on the -- I guess, on the right-hand side, which is a fuel cell stack, right? If you think about that, people may think that's only about metal stamping and precision stamping and all that other stuff. The reality is technology on that is more slanted towards ceiling than it is even our thermal business. So you need both of the skill sets to do it. We've been doing it for 20 to 25 years, but the capabilities associated with being successful in that is even more so. And then obviously, since you brought it up, the other side of our Power Technologies group is thermal. I only -- it doesn't take a genius to figure out that everything in electric vehicle is all about thermal management capabilities. You can do everything else right, but you don't get thermal right, forget about it. So we get a ton of synergies on that, and I think that's why our customers are so interested in working with us. Jonathan?

Yes, given that fuel cell plate technology, which helps to keep the fluids where they need to be in a fuel cell stack to create the electricity was born out of the ceiling business, tremendous amount of shared engineering resources, procurement resources and even the manufacturing equipment has tremendous amount of relevance to these new products. So this is a business that we see as having a very attractive shift. The content per vehicle increase here is significant, even when you take into account the fact that it's going to be a small amount of the total electric vehicles over time that are likely going to have a fuel cell as the source of generating electricity. We still see this as a very attractive growth opportunity. That, combined with the transition on the thermal side represents a 3x increase in CPV for our Power Technologies segment. So scenario we want to invest in and very linked in the technology, and we're excited to see even applications like an engine gasket, which isn't going to have a future in an electric vehicle that, that core technology can be used to create electricity in a vehicle via the fuel cell stack.

So as long as we're with you, Jonathan, just a few questions to close out around just the margins and the cost structure and capital allocation. So maybe start, how would we -- should we think about incremental margins on a rebound, particularly the raw material headwinds, the engineering upticks, but then offsetting measures you're planning?

Yes. I mean, maybe we'll take them by segments and a couple of key themes. So I think broadly on the off-highway side, we are really excited about the upswing in off-highway. So it's been a few years since we've seen both the construction and the mining markets really move up, and we haven't seen that business at or near peak of the cycle post acquisition of both Oerlikon and Brevini. We overperformed cost synergies in both of those categories. So there's some great opportunity for us to deliver some very attractive incremental margins. In the off-highway space, it's moving in the right direction. So that's very encouraging. They're managing a lot of the things that we've talked about before as well too on inflation, whether it's raw materials labor, energy, so that will be a modest headwind, but we're really encouraged by the opportunity there. I think as you look at our other heavy vehicle segment, Commercial Vehicle, it's a bit of a different story. Even as that market moves and improves, Class 8 is a good proxy for what that market is likely to do. We think that's going to be better next year. However, we are doubling down on our investments in electrification. So we highlighted at the Investor Day that we expect electrification to be a 100 basis point headwind to our profit margins over the next couple of years, and the majority of that is going to be concentrated in our CV business. So even though sales may go up and we're going to get some contribution on the existing products, we're certainly going to continue to accelerate the investment in the core technology, the mechatronic integration of the motors, the power electronics and the mechanical systems that are going to be usable across all 3 of these segments, as Jim highlighted. And then within our light vehicle business, obviously, the schedule volatility within that segment has been very painful in the second half of this year. Puts a lot of constraints on our operating efficiencies. That combined with very high material costs and logistics, we're going to have to work through, as Jim highlighted at the onset of our conversation. Those commercial discussions with some of our key customers and addressing some of those issues. But really, it's going to be schedule stability and access to chips that are going to drive improved contribution margins there and getting that business closer to more normal. And then obviously, we've shared this publicly, we talked about it a few weeks ago. We just don't see a scenario where many of the input costs that we have remain at these levels on a long-term basis. So abating of those costs to more reasonable levels in the next year or 2 is going to be a key component to us continuing to get back to a more attractive margin profile and that's going to affect those incremental margins that you highlight.

And kind of final question. What are the steps back to get to your longer-term 5% free cash flow margin?

Yes, it's the continued market recovery and the continued abating of inflation. Those things are going to drive margins, approaching that 12% target that we highlighted. Once we're at that higher sales level, we've made a lot of that working capital investment. So that starts to subside and that margin converts to cash flow at a much higher rate than it has in the past. We still think we're going to be able to deliver all of this growth with the CapEx in the 4% to 4.5% range that we've continued to highlight. So when you kind of put that equation together, we see cash flow gravitating to that 5% mark over the next few years, and we think that bodes for a really bright future for Dana.

Okay. So on that note of the bright future. I want to thank the Dana team, Jim, Jonathan and Craig. And look forward to keeping the dialogue going. Thank you.

Thanks, Brian.

Thank you.