Dana Incorporated (DAN) Earnings Call Transcript & Summary

All right. Good afternoon, everybody, and thank you so much for joining us for this session with Dana as part of Deutsche Bank's AutoTech Conference. My name is Emmanuel Rosner, and I'm the senior U.S. autos and auto technology analyst at Deutsche Bank. Dana is a leading supplier of axles, dry shafts with diversified exposure across light vehicle, commercial vehicle, and off-highway end markets. Dana also continues to demonstrate growing traction with electrification, within commercial vehicle solutions, in particular, but also increasingly in light truck solution as well. And this is certainly something that we would love to talk much more about today. So we're very pleased to be joined today by Christophe Dominiak, who is the CTO of the company; as well as Craig Barber, who is the Head of Investor Relations. The format for this session will be a short introduction by Craig, explaining to us where you guys actually are followed immediately by a fireside chat with questions from me as well as all of you on the call. [Operator Instructions] So with that, thank you so much again for being with us, and over to you.

Thank you, Emmanuel. Craig Barber, IR with Dana. As you mentioned, I'm with Christophe Dominiak, our Senior Vice President and Chief Technology Officer. And hopefully, we'll have a great conversation here. Emmanuel mentioned where we are today. So I asked our engineering group to shutdown one of our electric axle test cells. So we're actually inside of one of our test cells. Off to our right here is one of our light-duty truck axles like e-axles that's on test bench and ready to go. So once we get done with here, they will fire this back up and we'll continue the cycles. So that is there. We have electrified product, as Emmanuel mentioned, across all the end markets. So for us, it's important to remember that we're not just light trucks, not just light vehicle, but also commercial vehicle, medium-duty heavy trucks as well as off-highway products, construction products, agriculture and underground mining. So the complete gamut of product. Emmanuel, we're happy to go any direction you like with the conversation today and kick it back to you.

Beautiful. Yes, really appreciate the intro. And yes, I wouldn't want to hold up the line for too long. So we're going to make it certified with this the amount of demand on the electric vehicle side. So we're going to keep it to 35 minutes, but definitely appreciate it. Maybe just before we dive deeper into your own electrification. Maybe just quick questions around the most recent updates and how you're seeing the environment right now. How has the impact from the semiconductor shortage progress so far to the fourth quarter as it impacts production perhaps versus your ingoing expectation? Are you seeing any signs of improving visibility?

Yes. So we certainly saw a dramatic drop off in production going into the forth quarter, a little bit of a surprise as we came out at the end of the third quarter, really driven by the supply shortage for our customers. So we don't buy a lot of semis. It's not a direct impact for us, but our customers' production has been disrupted by that. We haven't seen dramatic improvement in the fourth quarter from where we initially thought it was going to be. It still is fairly choppy, again, across all of our end markets, primarily though in the light truck space, and then a bit more in the commercial vehicle space than we've seen previously in the year. Though we do hear what you're hearing, we hear that things are starting to improve. Several of our customers have brought some capacity back online, but it still remains a bit choppy, and we think it will for the rest of the year, or for the next couple of weeks. Going into next year, obviously, the next question, we certainly think that we will see some improvement. When it happens, will be the question. Likely it will be later in the year and that we're not necessarily the first quarter, but we certainly expect it to improve as our customers work through the issue.

Okay. Very clear. So I guess focusing on the -- your transition to electric vehicle. So I think you started investing most heavily towards commercial vehicle electrification, which has also been the focus for the majority of your -- some of the awards to date. Can you talk a little bit about how you see the EV transition timing deferred by end market? And what you're doing to support it in your various segments?

Yes. Sure. As you mentioned, commercial vehicle for our type of product. We see that probably happening first. We saw that begin by about 2 years ago where it really started to ramp up, primarily medium-duty trucks. So that has been underway. We have several programs that are in production now with PACCAR and several other customers. And we're just now starting to see our other markets really pick up momentum in terms of quoting activity and new product launches. So we mentioned a few of those. We can't name the names, but we mentioned a few that we're seeing in terms of quoting activity in the light truck space. And for us, again, it's the heavier type pickup trucks or our core market. And as we look forward going into next year, we likely will see that activity accelerate. That's kind of where the path has gone. We have several big announcements in the heavy truck space as well, a couple of our European customers in the electric motor space. So we'll look to see that really kind of ramp up over future. Christophe?

Yes. Well, we continue our pass even if we start with the commercial vehicle, don't forget also the off-highway. Off-highway is also an area where we have invested a lot, and we've got success right now. And the LV is coming in. Don't forget that the strategy of Dana was always to be not really on the pass car itself, but on a light-duty truck. So -- and we are right at the right moment now. So we -- with the synergies that we put in our engineering activities, we are ready now to go to the big ones and the big wins on the light vehicle areas. That's for sure.

And so your point being that the initial stages of light vehicle electrification, we're focused on passenger cars or crossovers where -- which has not historically been your area of focus. And now this is really transitioning towards traditional light trucks where you expect to get a meaningful share?

Correct. Correct.

Correct. And I will add that we were also in the sports car. So kind of niche, I can say, passenger car, but a special passenger car. You know that we are working with the -- in Europe with all the big ones, Lamborghini, Ferrari and Aston Martin and Maclaren, et cetera. So we are there.

Okay. And I guess to put then a final point on how you sort of expect things to progress for the rest -- for the next few years, so you have targets to reach $3 billion in EV revenues by 2030. Can you dimension the main drivers to get there by end markets? I guess, where -- once you get there, what will this look like by end market?

Well, certainly, the medium-duty space will continue to expand. Last mile delivery, intercity transport just makes sense for medium duty. So we expect that market to continue. We haven't yet seen the heavy-duty markets electrify. So that one will come on, we'll start to see that accelerate over the next several years as well. But really when it comes into the light truck space, that is probably the largest part of the addressable market. And we expect that to really ramp up and get some momentum here in the several years, you'll see more light trucks electrify. So that will be the real driver. And then, of course, as Christophe mentioned, the off-highway markets continue to electrify. You'll see a mixed fleet in off-highway where there will be some traditional diesel or ICE base as well as electric vehicles right next to each other for different purposes, but more and more of that fleet will electrify in the coming years. So overall, we see addressable market of almost $20 billion by 2023, and we definitely think we'll win our fair share of that.

And how does this content opportunity defer by end market? Is there more tendency towards some in-sourcing on the light vehicle side, maybe less on the other -- in the other markets?

Yes. When we look at in-sourcing, we believe that the customers will follow a similar model to what they do today, where they insource the high volume, relatively low complexity and fewer variants of a product will be insourced just like they do today. And the higher complexity with more variance, lower volume will likely get outsourced to the marketplace. And we're seeing some of that in the quoting activity. So we believe that thesis will play out. That's the light truck space. In the commercial side, medium duty, traditionally, it's been outsourced. And we've had a lot of success in the medium-duty space with the -- with our product line and being able to do full integrations . So the content wise, we're doing a lot of the engineering work and a lot of the upfront work for what has to happen in the light truck space. We're really playing off all of the good work that we've done already in the medium-truck space. So to my point earlier that we have this multi-market focus, a lot of the investments, a lot of the engineering and frankly, some of the customers across all of those different markets. So it should go fairly rapidly once we start to see the customers actually transition their product.

How has the bidding environment been so far? Where will you see you're gaining the most traction outside of electric commercial vehicle?

Well, again, CV is probably the most because that's where the most activity. Christophe, would you...

Well...

Without mentioning customers, yes.

No. Well, it's always difficult because we cannot mention for sure the customer names in here, but a lot of traction on the commercial vehicle, but also on all activities, the off-highways is ramping like hell right now on many different things because with all the green environment on the harbor, on cities, on the last kilometers, et cetera, it pushed a lot even in agriculture, even if it's a little bit different, but for sustainability activities, you know that Dana is very keen to go towards this past. Sustainability remains one of our key factors and agriculture is one of them. So tons of things coming on right now.

That's a really good point, too, Emmanuel. So the sustainability drive for us, again, we're primarily selling to users that are using these vehicles for work, they have their own sustainability goals. And our products are helping them achieve their goals. So that will be another driver of adoption going forward. And you don't necessarily see that as much in the passenger car world, but certainly in the light commercial vehicle and into the commercial and off-highway space, you definitely see that as a driver.

Understood. And then I wanted to come back a little bit to the topic of outsourcing versus in-sourcing. How do you view this as playing out over the next few years? Is this primarily a light vehicle, the phenomenon where [indiscernible] are going on at the same time? Do you think that the electric vehicle landscape will look similar to what it used to be on the combustion engine with a bit of a combination of those. And what gives you confidence that this -- your solution essentially will be something that will essentially win out a decent share of the market?

Sure. It's a good question. I guess to begin with, every electric vehicle will still have an axle of sub-source. So you still need to spin the wheels. And so all the power, if you will, all of the movements in the market is coming back towards our products. So what we're doing is we're electrifying our core product, which is the axle and the drive system. So that really plays -- everything plays towards us in that regard. As far as what it becomes in terms of in-sourcing or outsourcing, we do believe the model will remain as it has because it just makes sense. Our customers have always made drive systems for certain types of products or certain types of vehicles. They likely will still continue to do that. And they'll likely still continue to outsource a percentage of it because they just don't have the installed capacity and the engineering support to do that type of product, plus they have other uses for their capital, right. There's other draws on what they're trying to do. And that's primarily a story in the light vehicle space, where we see it today. Commercial vehicle has always more been an outsourced model and likely will continue to be that. You will see certain things that will be commonized insource things like batteries make sense because you get large economies of scale on batteries. We don't do batteries. So we'll see things like that, that likely the OEs will do. But in off-highway, it's been very fragmented over the years some customers that have in-sourced capability and some that don't. So there may be more subsystems and components in off-highway, but there will also be a large group of customers that don't have the drive system capability, and we'll look for a full system capability from the supply base. So it will be a blend. But on content basis, we've said that on average, 3x more content when we go electric, plus the overall market is going to expand just because there's going to be so many more vehicles coming out and everyone's going to be rushing to electrify their product line.

Okay. That's very clear. And obviously, making a great point, which is essentially the axle is still there, you're electrifying this, and then you have obviously additional content opportunity from other components. At the same time is the market for axles more competitive on the electric side than it used to be in the combustion engine side. I mean if I take Navistar making light trucks as an example, obviously, there weren't that many independent axle suppliers. But as you move into e-axles, obviously, powertrain guys are not sort of like making those, even though they weren't making the traditional axles and still aren't. So when you bid for this business, are you bidding against more competitors now? And if that's the case, what are your key advantages modes compared to the competitors?

Yes. I mean we've always had good competitors in each one of our end markets. We're not seeing a large number of new entrants. I guess when you look at the small passenger car side, it's much more competitive, I would say. There's a lot of players in that world. That's not the world that we've chosen to play in. We're playing the large product where you need to have heavier capability, more robust capability, and there's not that many competitors that can really play in that space. And there's also no competitors or very few competitors that can play in that space that have the full electrodynamic suite of products. So we can take it, and this is probably our biggest selling feature, Christophe, if you agree. And I'm sure you can see the axle off to our right here, the electrodynamic package that actually drives this axle takes that mechanical axle that was there before and electrifies it is all Dana products. So we have that capability in-house.

And I will add that the electrification is going to be a market where still the packaging, the volume to power will be a key element. And by having the sourcing of the inverter, the motors, the coolers, all the things around because when we say the axle is just not a motor and an axle is far more than that. And also it's bringing new issues like the NVH and NVH is not just having a good mechanical parts because the inventory is making noise. So you need to really fit the system and make a kind of compromise on all those systems. So if you do not have that, it's very difficult to integrate things together. And speaking about competition, that's nice to have good competitors because it pushes you to be even better. So that's correct. And this is what happens today.

Yes. And I love when I have the technology guy here because he use terms that everybody may not know, but NVH noise vibration and harshness. So really important thing.

Okay. Perfect. Focusing on the technology side then, can you walk us through the different electric powertrain configurations that you're positioned to support and some of the content opportunity with each. Where are you seeing the strongest customer interest so far?

Well, the -- first of all, thanks for the question because, in fact, there won't be one architecture. And I want to speak about no more products, more architecture and systems because on literature today, you can see and this is common language, P2, P2.5, P3, P4. And even now we see other peak coming. And that's kind of funny because it really depends of the global architecture, where on the light vehicle, it's much more like going to a kind of P4, P3, sometime and even there is activities today towards the all-wheel drive, the 4-wheel drive, et cetera. So telling you that there will be one architecture is wrong. There will be multiple architectures. And this is the reason we are working so hard today on multiple areas. And there will be still some kind of abertization where the IC will be still there and I'm speaking about sports car where the electrification would be there for the booster or for activities in terms of 4-wheel drive. There is also what we call a spin vector factories. So when you can have dual motors on the same kind of axles, taking care about the diversity between the right and the left. So I don't want to over -- to oversell the technical here. It will be just a compromise. So you cannot be investing in one architecture. You need to invest on all the multiple architecture today. And by the way, we're going to have a winter test soon in Sweden and Michigan like each year, where we're going to demonstrate all those varieties of different architectures of between P2, P3, P4, different dual motors, single motors. That would be fun.

And when you look at, say, in the commercial vehicle world where you can have a central motor configuration where there's one large electric motor and everything else remains the same, where you can have an axle, to Christophe's point, there's going to be a blend. There's applications for each. In the end state, when you get to the end, Christophe, I think the e-Axle will win out or just from an efficiency standpoint.

Yes, yes.

So that's where everyone will go eventually. But in the meantime, to Christophe's point, you're going to see all sorts of different architectures as well as hybrids and you'll still see ICE play a part, especially in the off-highway space, but it will become a little smaller and smaller part as we go forward.

Just to -- for the fun part of it, the last RFP we went for a big customer, we went through out of 1,200 configuration to find the best one for us, 1,200. So there is no 1 or 2 or 3.

Wow.

Yes, quite a few permutations there. One quick follow up from an investor and an earlier topic, and then I'll come back to technology. So when you look at your goals for EV business percentage over the next -- the rest of the decade. And you can quantify this for us on light vehicle versus commercial versus off-highway. Obviously, I assume it won't all be 25%. So how would you see this play out?

Yes. Again, we haven't broken it out by end market segment, yes, we will do that as we move forward. However, in the near term, it will be primarily commercial vehicles, as we've said. Unfortunately, our customers haven't announced some new programs yet in the light vehicle space. As soon as we have some more announcements out there, it will become more clear as to how this would play out. But as I mentioned before, the largest single part of our addressable market going forward through 2030 will be in the light truck space, that will play a significant part of it. But as we go forward here, I think you'll see more and more announcements on medium-duty truck. Buses will play a bigger part, especially school buses, transit buses and then as we get into the off-highway space, as Christophe mentioned earlier, it will just start snowballing with more and more pieces of equipment becoming electrified. So kind of hold that line. But I think that if you look at the materials we put out in terms of that $20 billion addressable market, a large portion is going to be in the light truck space, at some point as our customers move forward to their product plans.

Okay. Back to technology. How do you plan to leverage the power tech capabilities to capture content on some of the light vehicle -- the electrified light vehicles?

I know we only have 35 minutes. He can talk for hours, so...

Okay, wish I could do it. Yes, for sure. You know that [indiscernible] is coming from a word where their specialization was into thermal and join gas kits, et cetera. So they know how to make very thin materials and make them -- making them function. So since now here, they use these technologies that we acquired since years and years to go to what we call cold plates or management of thermal battery. So a lot of our activities today is towards a thermal management of batteries with fluids and [indiscernible] and the electronics associated with that. So we make a complete package. Even though we are not in the battery activities, our products is used as the thermal management system. It's not just a cooling system, by the way. So nice. There is also other things that we are using is the implementation with the hard torque and speed or now motors, trying to find new coolant and new -- also thermal management of our motors and inverters because the frequencies, et cetera, you know all the technology of silicon carbide and gallium et cetera, request a lot of energies and harvesting of these synergies and transform also it. And it's not just a cool, it's also some time to pre-heat for some other reasons due to the oil. And third and probably not the last one, don't forget that when we are speaking about electrification, we are speaking about also hydrogens, which is probably not yet there, but it's coming, it's more if than when wind -- sorry, it's not -- it's more when than if. And we recently also made a lot of good market approach, good development on those what we call [indiscernible]. So the exchange between hydrogen and oxygen, which are the fundamental elements to be able to build a stack for what we call fuel cells system, electrolyzers, et cetera. So Power Tech, thanks God, we do them, and it is one of the key elements, one of our key diamonds into this electrification journey, for sure.

And the other thing, too, Emmanuel is to, when you look at some of the programs that we ordinarily wouldn't have driveline content on, so some of the passenger car programs, we have Power Tech content on. So we talked about the GM Altium battery system Ordinarily, we wouldn't have driveline content on some of the small passenger cars, but we're on every Altium battery with the thermal management. So it really does expand our reach into that world without us having to be in the driveline, which as we talked about, will likely be something that the OEs will be managing and owning.

Understood. How much commonality is there between your electronic components and solution in your various end markets. And to what extent that generates synergies?

Interesting. So the control systems.

Yes, the control system, the inverters. In fact, we built -- you know that, well, it's public. We acquired different companies over the world in Italy, in Germany, in U.S., Canada, and put them together. So the first thing was to make sure that we were doing the kind of -- I would not standardization, but kind of standards. So that's why all our technical centers on electrification are CMMI Level 2 or ASFI. So it helps us to have a clear process on that. Second, we developed a lot of software-based activities, and we've got -- develop some of our controllers that are just plug and play somehow and just dimensions, and we can put any kind of software inside. And for those who doesn't know, I encourage you to go to our web page of what we call OpenECU. This is a typical product that we have developed in -- next from here in Novi, in our tech center for controllers. Each time we receive an RFQ or RFI, we take the blocks. And we take the diagram on those blocks and architecture and see what is the most suitable and what is the existing. And we find out that there is a lot of common parts like the inverters that I've got next to me, which is a 3-phase inverters that are common parts that we can size dimensions, integrate on our depending because sometimes it's [indiscernible] done, sometimes it should be integrated. So there is a lot of commonalities here. The only thing which is a little bit still different is between the high voltage, for sure and the low voltage because we've got the capacity of both, low voltage and high voltage.

Yes, that is key. As we talked about before, across all the end markets, there's different requirements, but there's a lot of similarities, even though the technology may be different when it comes to software and control all the smarts, if you will, of the system are moving back to the axle. And that's really what's driving a lot of the change, if you will, in the industry is that these mechanical systems are getting smart.

Understood. So that's maybe the last few minutes, switch gears towards some of your recent awards and some of your discussions currently. So you definitely appear to be gaining traction in the light vehicle space. I think you were announcing some wins on the Rivian R1T on the Lightning F-150 certainly in OTM, how do you see this opportunity expanding in the coming years? But first, can you just remind us what you have announced on the light vehicle space.

Yes. So light vehicle, again, is just beginning for us. So light truck is our core market, and there are very few light trucks that have been announced that are true trucks that play -- are used for work, which is really where our core market is. We did announce that we have received RFQs in this space, and we put a sheet together in our last Analyst Day that kind of laid out a large list. Unfortunately, we weren't able to give customer names yet or product needs but there are several out there that are in the quoting phase. So those will be coming forward. We believe we'll win our fair share. And Christophe, I'll let you speak to how busy you guys are on the engineering side.

Well, well, today, there is a ton of RFQs that we are working on, and they are quite big because remember that some years ago, probably 10 or 15 years ago, when we were receiving an RFQ, it was like 2 or 3 pages, now it's 500 to 600 pages. So the requirements are there, and we've got quite a busy work right now on the trucks and CV and off-highway also.

Yes. Sure, sure, sure. And I think the difference for me and I've been here a while, and I've seen this transition is that the whole company has transitioned or transformed into an electrified supplier. I mean just the fact that we're in this room today and that I had to fight for these guys to shutdown this room for 30 minutes so we could talk. And it's not something that we just built, right? This has been here we've been working. It's -- this is real stuff and there's real sales and real customers behind it. So this -- that's what is an exciting part about it. I'd love to be able to give you names and a whole bunch of things going up, but you got to just give me a little time. Our customers wouldn't be happy if we jump the gun. But that's in the light vehicle side. And everyone really do like to talk about light trucks because that's the next thing coming. But when we talk about what we've announced to date, a lot of things happening on the commercial side, which has gone sooner. And the only reason it's -- we're talking more about it is because it happens sooner. But we've talked PACCAR and DAF and now the second generation of those programs, the large European customer that's going to use our product in their heavy trucks, which will be one of the first heavy trucks out in the marketplace. That was a big announcement for us. Buses, a lot of buses are going electric. We announced with Navistar, where we'll be doing their electric school buses. We announced with Navistar their mainline medium-duty truck program, the MV program, which is a really cool truck. You may not even realize it's an electric truck, but it drives by, but you'll start to see more and more of these on the road in that medium-duty intercity package delivery kind of environment. So that's where a lot of the wins are happening and what's really driving that growth we're talking about in the near term. But watch this space, you'll be seeing the light trucks here very soon.

Yes. And I guess just -- on the powertrain side, maybe ignoring just the power technology portfolio. But as you're bidding on some of these light trucks, is it for complete systems? Is it for components like those work trucks, which seems to be our primary area of focus? Do these customers want to work with you for specific components? Or would they also source complete systems there?

Well, I don't want to [ forget ] the answer, but it's very rare currently on the RFQ where we've got a single component. Let me answer like this. It's more a broader system, not a full car for sure, but a broader system, which always we call it the 3 in 1 or kind of things like that. So a full subsystem, I would say, rather than anything else. Yes, we can have some time dedicated products for certain things, but it's very niche.

And one of the real drivers there is we can do that complete system. So that's the -- what it gets you in the door and has that conversation versus just selling components. There's much more content in the systems as well as engineering capability and service after sale, all of that really makes a difference when it comes into that. And if you look at across the markets, there will likely, as you go forward, commercial vehicle off-highway will likely be more systems-based. And when I say systems, I'm talking about multiple pieces of the thing, so not just the 3 and 1 e-Axle that Christophe mentioned, which is a system in itself but other components like power cradle and possibly even we do battery stack, we can create the battery stacks and battery management and things of that nature. When you get into the light truck space, yes, I think e-Axles, as I mentioned before, is where we'll go. So that kind of combined system into an e-Axle and delivering one power package will probably where you see most of the activity.

Understood. And then you mentioned the content on the GMC Hummer EV. And I think you actually said that before, but are you going to be in every [ Allison ] vehicle or at least next...

So I think -- just get me correct, the Lyric is next for them. So that will be a great little that little of Cadillac. So that'll be fantastic.

Okay. And the content per vehicle on those have you disclosed that?

We have not specifically, but we have said that when we look across all of our platforms at 3x content, we'll likely hold up for power tech group as well as we get further down into the vehicle. But really, the content compared to some of the previous products. If you just look at the size of these battery modules, the product that we're supplying, which is the cold plates of the thermal management for it compared to the traditional product that we would make for an ICE engine, it's just much, much larger. So there's much more content just comparing those thermal management products, very small product in an ICE versus something that's the size of the vehicle when we get into the electrified world. So we're really excited about the opportunities, the battery cooling.

And then just maybe to conclude. So I think your message on the light truck side was, look, a lot of it hasn't been awarded yet sort of like stay tuned. Would you -- timing-wise, would you expect 2022 to be a big year for work truck awards?

Well, I guess we can't get in front of our customers. You're not going to bust me on that one. But certainly, as Christophe said, he's busier than he's ever been in almost 100% on EVs. So there's a lot happening out there. And then certainly, we have a couple of wins that we've not been able to list the customer, but there's some that have gone. But if we're talking about mainline trucks, I mean, that's still to come. But as I said, stay tuned. It will be an exciting time here over the next little bit.

Okay. Perfect. Well, thank you so much, Christophe, Craig, I really appreciate your time and the insight. You absolutely win the price for the best background [indiscernible] throughout this entire conference so far. So kudos for that as well.

Next time, promise, we will put the minus 40 degrees C in the...

They didn't tell me that they can change the temperature in here and make it snow. So let's -- hopefully we're going to do that. So -- but yes, I appreciate it. Thank you very much.

Thank you.

Thank you. And thanks, everyone, for tuning in and for sending your questions. This concludes our session with Dana. Thanks.

All right. Thank you.

Thanks. Bye.