Dana Incorporated (DAN) Earnings Call Transcript & Summary

Good morning, and welcome to Dana Inc. Second Quarter 2024 Financial Webcast and Conference Call. My name is Regina, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session will be recorded for replay purposes. [Operator Instructions] There will be a question-and-answer period after the speakers' remarks, and we will take questions from the telephone only. To ensure that everyone has an opportunity to participate in today's Q&A., we ask that callers limit themselves to one question at a time. If you would like to ask an additional question, please return to the queue. At this time, I would like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations and Corporate Communications, Craig Barber. Please go ahead, Mr. Barber.

Good morning. Thank you for joining us today for Dana's Second Quarter 2024 Earnings Call. Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from what we discuss here today. For more details about the factors that could affect future results, please refer to our safe harbor statement found in our public filings and our reports with the SEC. Before we proceed, I invite you to visit our investor website, where you'll find this morning's press release and presentation. As a reminder, today's call is being recorded, and the supporting materials are the property of Dana Incorporated. They may not be recorded, copied or rebroadcast without our written consent. On the call this morning, we have Jim Kamsickas, Dana's Chairman and Chief Executive Officer; and Timothy Kraus, Senior Vice President and Chief Financial Officer. Now to get started, I'll turn the call over to Jim.

Good morning, and thank you for joining us today. Please turn with me to Page 4, where I'll discuss the highlights for the second quarter of 2024. Starting on the left side, I'm pleased to report that Dana achieved sales of $2.7 billion in the second quarter, which is just about in line with the second quarter of last year. Adjusted EBITDA for the quarter was $244 million, up over last year driven by the strength of Dana's core business and end-to-end execution by the Global Dana team who did an outstanding job implementing ongoing efficiency improvements across all aspects of the organization. Their collective efforts have helped to offset the margin impact of inflation and spending on development of EV products, as well as the slower-than-expected demand in EV and other markets we serve. Next, free cash flow was a strong $104 million, down $30 million from this time last year, the difference only due to the timing of payments between the 2 periods. Moving to the upper right on this slide, under the key highlights, consistent with the past several quarters, a company-wide efficiency improvements by the Dana team continue to drive incremental profit. As stated on the page, Dana achieved an extremely strong 73% conversion rate on traditional organic sales in the first half of the year. This performance is well above our historical conversion and positions the company on a trajectory to achieve our full year targets. Moving to the center right of the slide, we saw overall organic sales growth through the first half of the year as demand levels remain relatively stable across most of our end markets. As I mentioned, we are seeing some weakening demand in EVs as well as some in our traditional ICE product and programs, particularly in our off-highway end markets. Lastly, ongoing efficiency improvements and our capital investment improvements, Dana's financial outlook remains on track for the rest of the year. While we're slightly adjusting our sales range, primarily due to the pullback in EV, we are maintaining our profit estimate while again, raising our full free cash flow outlook this quarter to approximately $100 million at the midpoint of the range. This is a 33% increase over our prior guidance. Tim will walk you through this and other financial details and updates later in the presentation. Please turn with me to Page 5 for the outlook on the business environment for this year. As we stated last quarter, Dana's overall business environment continues to improve compared to last year driven by a few key factors, which I will provide greater detail. Beginning on the left side of the slide, we continue to see improved company-wide efficiencies supported by greater stability in customer production, which has resulted in lower production cost, improved productivity and greater efficiency across all areas of the enterprise. Moving next to the supply chain, net commodity are still expected to be a headwind to sales and profit for the remaining of the year, though steel prices are projected to be mostly flat compared with 2023. As input costs have declined, we see a reversal of commodity recoveries with customers driving a sales and margin headwind. Lastly, on the left-hand side of the page, end market demand is showing some pockets of weakness. But Dana continues to benefit from numerous refreshed, conquest and new business that is rolling on this year, which is a contributor to our profitable growth. We also continue to benefit from market share gains in our commercial vehicle group that are partially offsetting the softening demand for commercial EVs. Moving to the right of the page. Let's take a look at our end market outlook, where we are seeing agriculture down compared with last year. Demand for construction and mining equipment should continue trending somewhat flat compared to 2023. Though we remain cautious on this market, and we'll continue to monitor demand levels. We also see light vehicle full-frame truck production volumes remaining relatively stable for key recently refreshed vehicle platforms. However, dealer inventory levels have risen over the quarter. After several years of growth, we are seeing the market for heavy vehicles lower compared with last year, which is expected, and there may be a slight softening in production in the back half of the year. Moving to the bottom of the slide, the key takeaway is that we are witnessing across our industry show that cost inflation is somewhat moderating despite labor cost increasing globally. OEM production schedules continue to stabilize, which provides a stable operating environment to achieve production efficiency improvements. Lastly, the light vehicle market overall is navigating a period of demand fluctuation for current EV programs. As we move through the second quarter, we saw demand for commercial EVs temper due to the lower investments by fleets and operators as they work to integrate EV trucks into their vehicle portfolios. Given the continued investment in EV development by truck manufacturers and ongoing robust quoting activity for future models, we believe this is more of a balance in market demand. We anticipate these nascent technologies such as fully integrated e-Axles and hybrid systems will drive future adoption. Shifting gears on the next page as I often do, I'll share some current examples with you of how balanced products and systems approach is enabling Dana to win new traditional, hybrid and EV business across all of the markets we serve. Slide 6 is a great visual representation that illustrates Dana's ability to deliver class-leading solutions to a variety of applications for ICE, hybrid and electric vehicle manufacturers across all mobility markets. To compartmentalize this better, we've added 3 icons to the top of the page, one for ICE, one for hybrid and one for EV. Beginning on the left of the page, we start with an ICE vehicle. We're excited to share that the all-new DAF ICE medium-duty truck, featuring Dana's front and rear axles is launching in Europe in the third quarter of this year. This is conquest business and will be one of our larger commercial vehicle programs in Europe. Our class leading Spicer axles are specifically designed for medium and heavy-duty markets. They provide a lightweight solution that helps to reduce installation and lifecycle cost while improving fuel cost, reliability and vehicle maneuverability. Moving to the center of the page, we are providing you with an example of a new hybrid vehicle application. Dana will be supplying our Spicer Electric Torque Hubs and On-Engine generators for use on hybrid boom-lifts for multiple major off-highway OEMs. Today, scissor lifts and booms offer true hybrid operation to increase operating flexibility. Hybrid models employ a combination of 2 different power sources, a small diesel engine with a generator and a battery drive. These units significantly increase rental flexibility and boost machine utilization by offering the same productive operation as a diesel rough terrain unit with the added benefit of offering extended operating intervals, indoors and under battery power. In addition, their cleaner inquirer performance creates new opportunities for use in work environments where noise and emissions must be restricted such as some urban and residential spaces. The focus on cleaner, more efficient construction vehicles has become increasingly important for our customers. And our hybrid solutions portfolio is leading the way in accelerating decarbonization across the off-highway industry. Completing the third part of our balanced portfolio, on the far right of the page, we're excited to share a new pure electric vehicle that Dana will be supplying our Spicer eS9000r e-Axle for the Bollinger B4 light-duty truck. The Bollinger B4 is an all-new all-electric truck going into production this year. While this vehicle may look similar to a larger heavy-duty vehicle, this lighter duty truck has a gross vehicle weight rating of 15,500 pounds, which is comparable to a passenger van or heavy-duty pickup. This vehicle will be unique and that it will be designed to be custom configured by fleets to fit their exact duty cycle needs, making the transition to electric as seamless as possible with minimal downtime. Our eS9000r e-Axle is based on our proven Spicer rear drive axle platforms engineered for medium-duty truck and bus applications. We've engineered this ePropulsion solution with the exceptional flexibility so it can be incorporated into a wide spectrum of vehicles, reducing driveline complexity. In fact, we were the first to market with an original generation of the Z axle classification in North America more than 4 years ago. These 3 examples showcase the breadth of Dana's highly efficient propulsion and energy management solutions that are being used across all mobility markets around the world. It's not a stretch to say that our products can be found in nearly every type of vehicle that moves from light and medium trucks and SUVs to commercial vehicles, agricultural machinery, such as tractors, construction equipment, golf carts and much more, our full suite of ICE, hybrid and electric vehicle capabilities enables us to meet the propulsion needs of all of our customers regardless of demand fluctuations in any particular market. Turn with me to Slide 7, where I will update you regarding the drivers of our significant profit expansion so far this year. Beginning on the left side of the page, Dana's end-to-end execution is a direct result of the efforts of our talented, world-class team of associates. As one Dana, we are successfully driving sustained profit expansion despite flat year-over-year sales driven by currency impacts, lower commodity recoveries, as well as some pullback in demand for EV and other traditional markets we serve. Dana's core business priorities encompass sustained financial improvements and commercial effectiveness and growth, which are driven across the company through standardized processes and systems. Our operating priorities center on operational excellence and execution that is laser-focused on cost reduction and disciplined asset management, which is achieved by leveraging cross-company synergies through our global centers of excellence to ensure that we run the business as efficiently as possible. All of this is driving significant profit expansion as illustrated on the right side of the page. By way of example, as we finished up the first half of this year and you look back over the last few years and compare the first half of 2024 to 2022 and 2023, you can see adjusted EBITDA has increased by $135 million or 41%. This was only made possible because of the outstanding execution and collaboration of our global team. And finally, it's important to note that it goes beyond the outstanding execution taking place across the company. What truly sustained apart is our ability to provide customers spanning all mobility markets with a balanced portfolio that is energy source agnostic. What I mean by that is, as we presented on the previous slide, we can deliver class-leading solutions that support internal combustion, hybrid and EV manufacturers across all mobility markets. The result is our end-to-end business execution is successfully driving towards long-term profit targets and a strong financial outlook. Thank you for your time today. Now I'd like to turn it over to Tim, who will walk you through the financials.

Thank you, Jim, and good morning. Please turn with me now to Slide 9 for a review of our second quarter and year-to-date results for 2024. Beginning with the second quarter, sales were $2.74 billion higher -- or I'm sorry, just $2.74 billion, slightly below last year's due to currency translation and lower commodity recoveries offsetting higher demand and backlog. Year-to-date, sales were $5.47 billion, an increase of $81 million. Adjusted EBITDA was $244 million in the second quarter for a profit margin of 8.9%, a 10 basis points improvement. Year-to-date adjusted EBITDA was $467 million that is $20 million higher than the previous year for a profit margin of 8.5%, 20 basis points better than last year. Profit improvement this year is primarily due to better efficiencies across the company, aided by more stable customer order patterns. Net income attributable to Dana was $16 million for the second quarter, about $14 million lower than last year, primarily due to restructuring actions. Full year net income was $19 million compared to net income of $58 million last year. The difference is primarily due to the planned divestiture of our noncore hydraulics business from within our off-highway segment that we discussed last quarter. This business is classified as held for sale and a $29 million loss was recognized in the first quarter to adjust the carrying value of the net assets to fair value less estimated selling costs. This transaction also triggered a $7 million tax valuation allowance in Europe. And finally, operating cash flow was $215 million for the quarter and $113 million for the full year. Operating cash flow was $27 million higher this year than the year prior in the year-to-date period for 2023. Please turn with me now to Slide 10 for the driver of the sales and profit change for the second quarter of 2024. Beginning on the left, traditional organic sales were $19 million higher driven by increased demand for newly refreshed vehicle programs, market share gains in commercial vehicle, partly offset by lower demand in off-highway end markets. Adjusted EBITDA on our organic sales was $40 million. This very strong incremental margin was due to our improved cost efficiencies across the entire company, which generated a 150 basis point margin improvement. EV organic sales growth was $11 million, driven primarily by an increase in sales of battery cooling and hybrid vehicle products, offset by lower demand in our commercial vehicle and off-highway segments. Adjusted EBITDA was $19 million lower and 80 basis point margin headwind. Continued engineering investment for EV programs drove the lower profit, offsetting the positive contribution from higher sales. Foreign currency translation decreased sales by $22 million, primarily driven by the lower value of the euro and the Brazilian real compared to the U.S. dollar. Profit was lower by $3 million with no margin impact. Finally, due to falling commodity prices, commodity cost recovery in the second quarter was $16 million lower than last year. The profit benefit of the lower commodity prices was offset by the timing of cost mechanisms within the commodity recovery agreements with our customers, resulting in a profit being lower by $17 million, a 60 basis point decrement to margin. Next, I'll turn to Slide 11 for the details of our first quarter free cash flow. Free cash flow was $104 million in the second quarter, which was $30 million lower than last year's second quarter. Lower net interest due to timing of interest payments, mostly offset higher taxes driven by payment timing and regional mix. Working capital requirements were $38 million higher than last year, primarily due to the timing of various payments. Finally, capital spending to support new business backlog was $11 million lower than last year, driven by a more normalized launch cadence this year and the timing of investment for future EV programs. Please turn with me now to Slide 12 for our upgraded guidance for 2024. We continue to expect all of our financial guidance measures to be improved compared to last year. However, there are a few updates to our outlook. First, we are trimming our sales outlook for this year to the lower end of our previous range to about 7 -- or $10.7 billion at the midpoint of the updated range primarily due to slower growth in demand for electric vehicles. Second, we are maintaining our profit guidance of $925 million at the midpoint of the range. This is about $80 million higher than last year. Our implied profit margin has increased by 10 basis points at the midpoint of the 8.3% to 8.8% range. This revised margin is a 60 basis points improvement over last year. Third, we are again this quarter, increasing our guidance for full year free cash flow by $25 million to $100 million for the full year for $125 million higher than last year. Our GAAP earnings per share guidance remains unchanged at $0.60 per share. And finally, we are reinstating our guidance for diluted adjusted EPS to provide a comparable measure to prior periods, primarily due to the strategic actions this year. We expect diluted adjusted EPS to be in the range of $0.80 to $1.30 or $1.05 at the midpoint. Note that with this measure, we are adjusting only onetime items and amortization of intangible assets, in line with our adjusted EBITDA measure. Please turn with me now to Slide 13, where I will highlight the drivers of the full year expected sales and profit changes compared to last year. Beginning with organic growth. For 2024, we now expect about $230 million in additional sales from traditional products through new business, moderate market growth and market share gains. This is slightly lower than our previous outlook due to continued weakness in our heavy vehicle markets. Adjusted EBITDA increase on traditional organic sales expected to be approximately $145 million. The higher profit and margin increase of about 120 basis points is a continuation of the company-wide efficiencies and cost savings actions. As I mentioned, we are lowering our incremental sales expectation for EV products this year due to the industry-wide slowdown in demand. We now expect about $65 million in incremental EV sales. The EV business continues to contribute positive profit, and we have reduced our engineering and other expenses and are maintaining our expected EV adjusted EBITDA to be about a $20 million headwind. The divestiture is expected to close in the second half of this year and were lower sales by $40 million with no profit impact. Foreign currency translation on sales is expected to be slightly more modest headwind of approximately $45 million, with a profit impact of $5 million. Finally, our commodity outlook is expected to be a headwind to sales of about $65 million due to lower recoveries driven by falling steel and other commodity prices. We expect a $40 million profit headwind due to the true-up of pricing governed by our 2-way commodity recovery mechanisms with our customers. Lastly, please turn with me to Slide 14 for our outlook on free cash flow for 2024. We anticipate full year free cash flow to now be about $100 million at the midpoint of the guidance range. This is a $25 million improvement over our prior outlook, driven by lower capital spending. We expect about $80 million of higher free cash flow from increased profits on higher sales. Net interest will be about $35 million higher due to higher interest rates and payment timing due to the refinancing that occurred in 2023. Working capital is expected to be a use of about $50 million or $35 million better than last year, and capital spending to support our sales growth and technology is expected to be about $425 million this year, which is $75 million lower than last year as we flex spending to match customer program timing. Thank you for joining us today. I will now turn the call back over to Regina, and we will take your questions.

[Operator Instructions] Our first question will come from the line of Colin Langan with Wells Fargo.

When I look at the lower sales guidance, it's $200 million at the midpoint, almost all of it, $175 million, I think, is from EVs. One, what are you seeing on EVs? But two, the recent S&P forecasts had some pretty big cuts in the second half of the year to some of your larger customers. Was that already baked into your outlook? Why kind of expected a little bit of a hit from some of those reductions? Why hasn't that impacted you?

Colin, this is Tim. Yes, so we had already been expecting some of that slowdown in the back half of the year and had already built that in to our original forecast. So that's already in there. And then there is some mix change in there as well.

And on the EV side, I mean, is this program getting pushed into next year? I mean, any color there on what...

So -- yes. So I think we're seeing lower volumes across much of it. Obviously, a lot of it coming out of the CD space, a little bit elsewhere. But we do think that some of that will start to return. But in the EV space, it's not really program specific as much as it is customer specific. So as we see the customers start to rebalance to demand, I think we'll see some of that flatten out.

Got it. And if I look at the sort of implied first half to second half based on the midpoint of your new guidance, it implies higher margins on -- looks like lower sales first half to second half. What kind of gets the margins that usually have to sort that way. So what gets margins higher in the second half even if sales aren't up?

Yes. So if you just look at the high -- we're down about $250 million half to half and only losing about $10 million of that in EBITDA. That would normally convert if you just think about it, it's something around 50%. That 40% difference, 20% of it is really around the EV. So you'll see that if you look at the difference in EV. So we are flexing a lot of those costs from first half to second half on the EV. The balance is really additional improvement on the cost structure and the efficiencies across the company. So -- and if you think about our last year's second half, we showed our ability to really drive efficiencies when we lost those sales and had something around $50 million in the back half of last year that were really efficiency improvement. So we feel good about being able to deliver -- continue to be able to deliver our commitment on the 925 even despite the lower sales.

Our next question comes from the line of Tom Narayan with RBC.

Last week, there were 2 OEMs Stellantis and Ford with pretty elevated dealer inventory levels. One of them, Stellantis actually called out explicitly how they're going to cut like 100,000 units of production, I think, in H2 alone. I know you just mentioned that you had already been incorporating a lot of this in your guidance. But it seems like a moving target just as recently as last week, I was just curious like -- it seems like these OEM customers, I know both of them are customers of yours are using production cuts as a way to deal with this inventory situation. To what extent are you concerned about this, not just in H2 '24, but perhaps even prospectively into 2025.

Yes. So I'm not going to give any color on '25 as it's still quite a ways away. When we look at the back half of the year, right? We had some of this in there, as I mentioned before. We also have mix, obviously, between segments and even between programs. And then obviously, we're very light truck focused and usually very -- and obviously, very program focused on the EV side. So we think where we have the forecast now is in line with what we're hearing from the customers. But obviously, as they continue to adjust, we'll make those changes as needed.

Okay. And then if I could just squeeze in one, your prepared comments, I think you mentioned share gains in commercial vehicle offsetting market declines. Just curious as to maybe where this is happening, the share gains in particular.

Thanks for the question. Thanks for attending. This is Jim. Just there's no long-winded answer to it. It's across the world. It's global. We're just continuing to execute and cost, quality whatever you name it. And fortunately, we're appreciated that our customers are recognizing and supporting us.

Our next question comes from the line of Dan Levy with Barclays.

I wanted to start with a question on light vehicle. I think this is like the best margin that you put up in something like the last 3 years. And obviously, we see a pretty good EBITDA on sort of modest revenue increase. So maybe you can just give us a sense of the underlying dynamics in the LVD margins. How much of this is just inflation unwind? And then maybe you can give us a flavor for just what the trajectory is. This was once an 11%, 12% EBITDA margin business. I recognize maybe it doesn't go back up to that level given some of the inflation dynamics. But maybe you can give us a sense of sort of where this business is going forward because it still seems like even with these production adjustments, the core volumes on these platforms is still quite robust, Super Duty just added capacity. So maybe you can give us a sense of the trajectory there, please?

Yes. So obviously, we're pleased with the -- where we're at in terms of the trajectory to move the light vehicle margins back to where they really need to be. I think, obviously, the customer running better helps with efficiency, but also the drive within the organization on across-the-board efficiencies. So whether it be direct material, cost conversion costs within the plants or really just the general cost structure from a fixed perspective in the business is really getting reflected. But that -- those plants continue to run better and better day in and day out, and we see that continuing. You mentioned inflation. Inflation is still with us, albeit it's slowed down. So we have less to have to offset or try to go get from the customer. So that's certainly a benefit versus what we had over the last few years. On your last question, yes, we need to get these margins and are working to get these margins back closer to where they are. I mean, will they be back there, we'll have to continue to push. But certainly, our view is this business can be and will be a double-digit profit generator and be able to return -- have the susceptible returns for the capital we've invested.