Dana Incorporated (DAN) Earnings Call Transcript & Summary

Okay. It looks like we're getting going with the next webcast. So once again, I'm Ryan Brinkman. Thanks for coming to the 2022 JPMorgan Automotive Conference. Very excited to get going with the next presentation, which is Dana, and we have the Senior Vice President and Chief Financial Officer, Tim Kraus. Tim, thanks so much for coming. We really appreciate it.

Nope, happy to be here, Ryan. All right. Ready?

Yes, please.

All right. Let's do it. All right. So just a little bit of background for everybody. So Dana, old-line company, really, I think, paving the future in vehicles, founded in 1904, about 40,000 employees, 140 major facilities in 31 countries. So very diversified both in terms of customers and locations. Last year, we did about $9 billion in revenue. So a little overview of the business. We operate in 3 distinct end markets. So light vehicle, heavy vehicle and off-highway. Off-highway comprises construction, mining, agricultural, forestry segments. Light Vehicle Driveline systems, Off-Highway Drive and Motion. So that includes not only components that drive the vehicles, but components that actually actuate and move the work circuits on those vehicles. Commercial Vehicle Drive and Motion and then our Power Technologies group. We sell pretty distinct technologies. So historically, it's been drive technologies. Those are axles, e-Axles, drive shafts and differentials. On the motion side, think of winches, slew drives, gearboxes and hydraulic components. Electrodynamics, so as the industry and the end markets transition into an electrified future, we have a full suite of electrodynamic components. So that includes traction motors, inverters, power electronics. Our thermal business, which historically, from an ICE perspective, was oil coolers and transmission coolers, now it includes that as well as battery, motor and electronics cooling capabilities. On the sealing side, again, historically, think of gaskets. Going forward, it includes battery and inverter housing gaskets, cam covers as well as various transmission components. And then lastly, digital, so where we used to make very mechanical-oriented products, all of the new products are software-enabled, driving a lot of digital impacts for the business. So that diverse end markets and segments really does translate into a very large market reach and application. You can see from some of the pictures here. Everything from the Jeep Wrangler, which we produced since World War II, with the drive systems for World War II, to a Zamboni to a reach stacker or electrified lawn care equipment. So I think it's not just our market reach that really makes us unique, but Dana is the only supplier with the ability to produce a 4-in-1 system for e-Propulsion. So this includes e-motors, mechanicals. So think of gearboxes, gears, converters, power electronics. So high-voltage and low-voltage inverter as well as software and controls. And then the fourth is thermal management. So we have a complete suite of battery cooling, battery electronics -- or electronics cooling as well as motor cooling. This really does provide the only in-house e-Propulsion systems' capability in the supply base and really does give us a unique bottoms-up approach to designing the most efficient e-Propulsion systems for the industries. And this really comes across today, you can see here, battery management across all types of vehicles. So the silhouettes of bus, Class 8 truck, car, but also in controls, battery management, thermal management and our traditional axles. So what does this translate it into? For us, we announced this in April, but it really shows -- we've announced our first light-vehicle electrification win. It's with a major global OEM. I can't say who it is yet, but it is a Dana vertically integrated, complete e-Propulsion system. And it represents about a 3x the content of a traditional driveline system that we would produce for this OEM. And it really does show that the work that the company has done over the past 5 years to transition and be ready for electrification and the capabilities we have really are delivering results with our customers. So what we do have, though, is still a very, very broad and robust internal combustion engine business. So up here is our key program launches. This year, we're launching 22 programs across 16 facilities. Our $800 million in backlog for the next 3 years has quite a bit of ICE. And these programs are going to generate the capital needed to continue to push and fund our development into the EV world. But you can see some of the biggest light-vehicle truck platforms with major OEMs. So the Ranger both globally. So we produce that product in Thailand, South Africa, Argentina and here in the U.S. Ford Super Duty and Range Rover and Range Rover Sport for JLR in Europe. So talk a little bit about the current markets. So commodity costs continue to be a significant headwind for the company. Certainly, through the first half of the year, we saw dramatic increases in steel and other inputs into the products. We're starting to see a little bit of the commodity costs starting to recover. We think that will happen late in the year. And you can see here the prior forecast for scrap steel, and then the green bar being where we're kind of seeing it. So it's down about 30%, again, seeing that in the back half of the year. Unfortunately, we're not seeing the same positive trend for other cost inflation, which for us is principally it's energy, labor, transportation fuel, really all the other inputs that go into the product. Those continue to rise at a fairly rapid rate. Those -- the net inflation cost impacts about 20% higher currently than we thought just 3 months ago. And we're working, obviously, with our customers to recover those costs, and those talks continue, and we're making progress. We're also able to get improved commercial terms, aiding working capital as we sort of work through this with our customers. And again, the strong U.S. dollar is translating into a headwind for both sales and profitability for the company. On the market demand side, overall, end-market demand remains extremely robust across all of them. So off-highway, commercial vehicle and our light vehicle. Unfortunately, the OEM supply constraints supply chain issues continue to create significant volatility in the build patterns in most of our customers, which does create quite a bit of headwinds for us in terms of our ability to convert. And then, of course, we did experience the impacts of China shutdown earlier this year. We anticipate that to hopefully not repeat, but to have only a small impact on the business. So what does this all mean? So what it means is our 2022 guidance of about $10.1 billion in sales. Of that, we're now showing about $600 million in electric-vehicle product sales. That's up $230 million from 2021. Adjusted EBITDA of $720 million, and a free cash flow of $200 million, that's a $410 million increase over 2021. And then we ended the second quarter with liquidity of about $1.3 billion. So the company is well positioned to weather where we're at in the current market environment and have the ability to continue to deliver for our customers as we go forward. With that, I'll just leave you to this, changing our world through e-Propulsion. Obviously, as we go through, we deal with climate change, we are lockstep with our customers in really providing the products that they need to deliver an electrified future and a future that is more ecologically sound for all of us. So with that, I'll give you.

Great, Tim. I'll start up with some questions, including -- I wanted to get your thoughts on normalized demand for light vehicles in the United States. Of course, we ran at 17 million for so many years prior to the pandemic. We're only at 13.7 million now, with the most -- often suggested reason as to why because all of the supply constraints. And yes, also the vehicles cost so much more, too. Maybe the vehicles cost so much more in part because of the supply constraints. But nevertheless, they also cost more because of inflation and whatnot. So just curious, given this, if you think that we're likely to return to pre-pandemic levels of industry volumes and over what time frame, or if it's not the case, if we are in some sort of protracted period of higher price and lower volume, how the supplier industry and Dana, in particular, may be positioned for that?

No, it's a good question. I think -- will we ever get back to 17 million? I don't know. I don't have a crystal ball. I do think that the industry where it's operating today is underserved in terms of market demand being -- at least in light vehicle certainly under -- there's not enough production being provided into the market. So I do think that production will ultimately rise once the supply chain and other issues work their way out. Inflation obviously is concern. The affordability of vehicles, obviously, is a -- or could become a concern. I think we'll just have to sort of sort through it, but I do believe that there is quite a bit of pent-up demand on the light-vehicle side. We primarily serve the light truck space. And certainly, if you think about our largest program, which is the Super Duty, that's really geared to work-related applications. So think of your trades, right? So construction workers, plumbers, those sorts of things. Those individuals need the vehicles to actually perform their work. And as that fleet ages, it needs to be replaced. So I don't think that inflation will be as impactful in some of the markets that we do serve.

Okay. I wanted to get your latest thoughts, too, on the pace and progress of customer discussions to recover a lot of the premium costs that you've incurred over the past year, including for diesel, freight, logistics, electricity, natural gas, et cetera...

Anything else you want to add there...

Labor. I mean, historically, that wasn't the responsibility of the automakers to compensate. That was your own problem. But historically, ocean shipping wasn't up 350%, right? It was up 10% or something. So maybe talk about your kind of ability to reopen contracts and get better pricing on existing programs. But then also, as you negotiate new contracts going forward, just like how you index the price of steel, does it make sense to index the price of natural gas and electricity, I can't imagine labor. But any sort of increased protection or flexibility that you might gain going forward like you did after [ '03 through '07?]

No, it's an interesting question. So I think to your first question, we're in talking with all of our customers across all the end markets. So principally talking about light vehicle here. But obviously, we serve the commercial vehicle OEMs as well as a very, very diverse off-highway set of customers. They're all a little bit different. We're in talking to all of them and continue to work the process. I think -- so those are progressing. I think we're continuing to address it, and the customers are -- I wouldn't say they're happy about it, but they understand that they need a supply base, which is strong, especially as they start to transition from ICE to EV. So I think we'll see where we end up. But obviously, it's not where we want it to be, but we're continuing to work it. Your point on contracts, I think the OEMs are reluctant to change the basic structure of the contracts like they did for commodities, in large part because they still believe it's -- this is temporal and that it's going to revert back to a more normalized low rate of inflation where typically we were expected to cover that through productivity increases within the business, which historically we did. So I think it's going to be a tough ask we're asking, of course. So -- but I think there'll be a lot of resistance across the board to actually building it into the contracts, at least now. I mean, if we go through a more prolonged process, then I think that -- maybe that changes or at least changes temporarily, but I don't see that -- I don't see the major global OEMs making that change across the board because they do it for one, they'll have to do it across the entire supply base.

I wanted to follow up on one of the slides that you showed with the vehicle under wraps, under the blue Dana color. And it looks like a pickup truck, looks like a full-size pickup truck for a 3-in-1 application with 3x the content per vehicle. It just seems a little bit different message. I think you've only been showing that for a couple of quarters now. Prior to that, we've been sort of hearing from you that commercial vehicle seems more attractive when it comes to these electronic drive units or integrated drive modules or e-Propulsion systems, however you want to term that because of less vertical integration, maybe less competition. And that to the extent that you did participate in the light vehicle, e-Propulsion market via integrated solutions, you'd focus on niche, high-torque applications. And when I think high-torque, like Ferrari, for example, which I think you are on, right?

Yes.

But I suppose these full-size pickup trucks, they do have a lot of torque, don't they? So just talk about the extent to which you are intending to throw your hat into the ring on some of these high-volume light vehicle, like drive unit opportunities. Because that is a huge addressable market, right? Do you see yourselves as a niche player there? Or do you see yourselves as a bigger player there than maybe the market [ surmised ] even a year ago?

Yes. So I think we've always seen ourselves as a competitor in the light-vehicle space. I think -- when you think about when this journey began back in '16, we really started to think about what the future across all the end markets look like. Light vehicle was always front and center. Our view was always that it was likely to be a laggard in adoption, not because light-vehicle OEMs weren't interested, but because, historically, we haven't played in the pass car market. So ours is always -- as you saw from the launch, right, we're talking about Super Duty, Wrangler, Ranger, these are all very large, high-torque applications, generally with rigid or fixed beam axles. And we knew that, that would probably be the last 2 to convert, right? And that's played out, right? The first places where our markets converted were -- or we saw a lot of growth was in the bus market, so commercial vehicle, last-mile delivery. And now in off-highway, we're seeing it in material handling, port equipment, right, places where the duty cycle is pretty controlled. So a lot of the RFQs are just now coming out for the larger pickup trucks. So the picture you saw wasn't necessarily representative. It was just supposed to be provoking. So it doesn't necessarily suggest one thing or the other. What I can say is that one of the core tenets of our strategy is that we leverage the core, right? We use our scale across all of our end markets to really drive cost synergies and benefits into our products. And light vehicle offers a very, very large amount of volume. That will drive the cost of motors and inverters and power electronics to a scale where the cost becomes really, really competitive across all of our end markets. So for us, being in the light vehicle market is extremely important to be able to get the scale to offer the very competitive products that we need, not only for light vehicle, but for commercial vehicle and for off-highway.