Dana Incorporated (DAN) Earnings Call Transcript & Summary

Okay, great. Looks like the webcast has started. So once again, I'm Ryan Brinkman, the U.S. Automotive Equity Research analyst at JPMorgan. Very happy to have here with us Timothy Kraus, Senior Vice President and Chief Financial Officer of Dana Inc. Tim, thanks for making up to the conference.

No problem. Ryan, glad to be here.

Great. I'm going to -- I've been asking the suppliers at the conference, start with a few standard questions like to sort of collate the responses and they'll be interested in the different responses we get. The first one is about these changing expectations for battery electric vehicles that we've seen really since the start of last year, but it seemed like for a long time that the pace of EV adoption could only surprise the upside. More recently, though, there's been a reversal of this trend. S&P Global Mobility started the year expecting global BEV production to rise 32%. Their mid-July forecast calls for just a 10%. So what, in your view, do you think accounts for this significant reset of expectations and has the slower near-term growth cost do you think any differently about the medium or long-term trajectory? And what are the implications you think for Dana?

Good question. I think like most things that are new or disruptive a lot of times, forecasts and expectations can get ahead of some of the practicalities. And I think that's what we're seeing here. I think the view of adoption versus sort of where infrastructure and the price point is for a lot of these vehicles is starting to find a middle ground and you're going to see the growth a bit more tempered. I think that doesn't really change our view from a long-term perspective. I think long-term electric vehicles or hybrid vehicles as the case may be are going to eventually become a significant portion of both the light vehicle as well as the commercial vehicle space. And so that really hasn't changed our view. Now in the short term, most of what the pullback has been, at least from an auto perspective has been in pass cars. We don't produce an enormous amount of parts from a powertrain perspective, for passenger car. Most of the driveline business that we have in Light Vehicle is light truck. So you just think of the Super Duty, the Ranger, Bronco and Wrangler. Those are big programs. Those were going to be slower to adopt. And at the end, it was always how we thought about adoption. So in that respect, from an automotive perspective, it's been less impactful in the short term. We think still from a long-term perspective, those programs will electrify. I think for us on the pass car side where we've seen it is we have a significant thermal management business. And so we do battery cooling and battery management from a thermal perspective. So we have seen that -- those expectations tempered. But we -- the way we've designed and been able to put capital in the ground and design these is very modular. So as it slows down, we'll just spend less now and spread out that capital and make sure we're exercising that needed restraint and making sure that we utilize that capital as it comes on. So long term, mid- to long term, I think we're still very much bullish. We've always said we're energy-source agnostic. So if the automaker or the truck maker wants to build an ICE, we have a product for them if they want to build a hybrid or BEV we have products for them as well for that, that can meet all of their needs.

Great. And another question I've been asking all the suppliers coming on another big theme in the industry is the strong rise of the domestic Chinese automakers. I understand 4% of your revenue, I think, from China, probably less even on the light side. But they were quick to embrace electrification. The quality and design have improved significantly. BYD has come out of nowhere, 13th to largest in just 4 years. These automakers has gone from around 1/3 to closing in on 60% really of the market over there. And with big ambitions to expand outside of China to maybe some relevance rumors of a BYD Shark pickup truck being made in Mexico, for example. Curious if you see any opportunity to partner with these companies. I just got back from trip to China in June, American Axle mentioned, they didn't do any business for Chery a few years ago. Now it's our largest customer. 80% of the Gator is all-wheel drive. I've been surprised to see some SUV growth in China. Just curious if you're looking at increasing your exposure in any way to these companies?

Sure. I mean, I think we look at the opportunities to sell to all the -- any customer really anywhere on the planet as an opportunity. We have a business in China. It's relatively modest from a light vehicle, mostly because our bread and butter is in light trucks, and that's just not a particularly large market. But you mentioned Chery. Chery is obviously a customer. We have those products over there. We do see it on the all-wheel drive and the small SUV market where we do have quite a few products, and so we'll continue to seek out those opportunities and supply them as need be. I think that a lot of our product offerings are scalable from either a relatively midsize or smaller SUV all the way up to the largest trucks. And I think we have that ability inside of China to be able to scale across not just the light vehicle space, but in the light commercial vehicle, last mile delivery and then all the way up and into the large over-the-road commercial trucks as that market continues to develop. So whether that's in China or U.S. or Europe or elsewhere, we think of the markets as being the same.

Great. And third question relates to the outlook to suppliers from the expected interplay of new vehicle prices and the quantity of volume of sales or production. It was during the pandemic that automakers can do just fine, they can do great in a low volume, high price environment because while automakers are hurt by lower volume, they are helped by the higher price, whereas suppliers are hurt by the lower volume, not levered to the higher price. And with vehicle sales in the U.S. still 8% lower than where they were before the pandemic, production is still lower. I think has been hurt by the prices of vehicles which have risen more than for other consumer categories. Automakers say they're going to remain disciplined. They're going to hold on to those relative pricing gains. But others say that maybe we'll see a return to historical discounting, inventory replenishment, et cetera. With inventories back to pre-chip shortage levels, but not pre-pandemic levels and prices barely having come off the record. What do you think is next for sales or production in your North America market impacting light vehicle driveline -- and do you think that maybe we're looking at a structurally lower level of sales or production versus prior?

It's a good question. I think if you look where end market vehicle pricing is today, it's high relative to, especially to what it's been historically and based on what the consumer earns or might be able to afford. So I do think that at some point, there's got to be some level of adjustment in that pricing. In terms of production, I think I'll I guess we'll see what the automakers will do if they'll remain restrained in terms of building production and building inventories. I do think the pricing dynamic that they've had over the last few years where the consumer couldn't get the vehicles that they wanted probably leads to a bit lower pricing ultimately and -- from our perspective, obviously, ours is based on our ability to sell based on production, not on end market sales, although obviously, they're connected. So we'd like to see the customer run consistently at a level that if they ran consistently at a level that they're at today that wouldn't be the worst thing. The really hard part for us through the pandemic was their inability to produce what they said they wanted to produce, when they wanted to produce it and the constant changeover and inefficiencies in the plant. We're starting to get through a lot of that. There's still a bit more to go. And you can see that in the second quarter and year-to-date earnings. We're starting to really start to find and get those efficiencies back into the plant. So our view is if they can run at this level or even higher and get some stability around what they're building, that would be great for us.

But you had a pretty solid 2Q earnings report the other day, fit into a minority of suppliers BorgWarner kind of fit the pattern where you see softer sales for the full year, but a similar level of earnings and implied higher margins in a little bit lower capital spending. And maybe talk about the trends that might have contributed to that, the ability for softer EV sales to maybe not really flow through to the EBIT line. I don't know if you're able to find some efficiencies there relative to -- do not need to spend as much in product development or -- and then your free cash flow actually went up, right, because you're able to lower the capital spending. So maybe talk about the impact that these softer EV sales have been having on your guidance for the year, not wholly negative impact.

Yes. No. I mean, obviously, we're experiencing much of what the industry is seeing in terms of the pullback in the growth. It's certainly not a falling EV story, but it's certainly a slower growth. So along with that and sort of lower for longer, I think as the growth curves flatten out, our ability to flex both the investment on the capital side as well as the development and other infrastructure costs that we have to put in. We're able to do that. I think as we saw in the guidance, we took quite a bit of sales out from the EV line, but we're also making the appropriate adjustments to the investments we need to make. And then I think the other thing is we ramped up pretty quickly like many did in order to meet the growing demand on the EV side. We are getting more and more efficient at how we both employ the capital but also the human capital and the other operating and development costs. So we get better every day on that. And so you're seeing some of that certainly flow through as we're able to take down the top line and not see all the contribution margin falling directly through the EBIT or EBITDA line.

And while you're taking down the outlook for EV sales for the year, I mean they're still growing year-over-year, right, like in the second quarter -- and yet the EBITDA contribution from EV sales was negative as the sales were higher. And I think you took some time to explain that you are generating a positive contribution like the existing product, but then there's the development expense for the future products. So maybe I don't know if you can delineate those 2 items. And then if you could, what I'm trying to get at is, is there a different contribution margin on the EV-related product versus the ICE product that would help from a modeling perspective when we do take that EV revenue out?

Yes. I think we would expect over the longer term, the contribution margins to be relatively the same. I mean I don't think they're -- we're going to see significantly higher contribution margins in either of the businesses. I think in the short term, it certainly depends on the product, the customer and what we're selling. But contribution margins are similar In some cases, a little bit lower in the near term than where we're at on the ICE business. But again, it really depends on a lot of mix in there, depending on how long the product has been bid in production, whether it's which end market it's serving. So -- but it's a mixed bag, but I think the key here is we've done a really nice job of being able to flex the cost we were intending to take on to build out and continue to develop the products. And as those products have either been pushed out or that development time lengthened because -- if you go back 24 months, most of our customers were like, "I need it tomorrow, go-go-go go. And now it's like, hey, it's a little bit more I think, thoughtful in a progression through that development cycle, which has helped us be able to reduce the additional cost we were planning to bring on, and that has helped us offset the loss of the contribution margin on those expected higher sales.

That's helpful. You mentioned earlier that most of the reset and expectations was in the pass car, EV side. Can you talk a little bit about what's been happening with the trend in current production and also the expectations for production for the electric light commercial vehicles or the buses or the last mile delivery, et cetera.

Sure. I mean, I think the phenomenon you're seeing on the light vehicle side, you're also seeing to an extent on the light commercial, last-mile delivery even on a school bus. I mean those are when we started down this path on electrification 8 or 9 years ago, last mile delivery, buses, municipal buses, school buses, those were the use cases that we felt were the most applicable to electrification, just think about last-mile delivery, right? So starts and end at the same point, has a known duty cycle, like the range anxieties not there because you know where the vehicle is going to go, how much mass is on the vehicle every day. So it makes planning relatively I won't say easy, but certainly more predictable in terms of being able to use that vehicle. I think -- what we're also seeing, though, is that infrastructure, well, a lot of talk about public charging infrastructure. That infrastructure still has to go into a municipal bus depot or to a school district or a distribution center. And I think what you're seeing is a little bit slower adoption and the ability to ramp that infrastructure, which has slowed down some of the growth or the expectation of the penetration on those, but I don't think it means in any way that, that growth isn't going to be there and that those vehicles aren't going to convert. If you just think about a school bus at this point, I mean, it runs a known duty cycle. It drives around neighborhoods, kids stand out in front of it, going to a zero-emission vehicle makes the most sense from a health perspective and from an environmental perspective, but also from a total cost of ownership perspective. Long term -- over the long term, the electric bus just is -- should be a lower cost of ownership for the municipality or the school district.

You mentioned earlier that most of the expectations we set was on the pass car. I don't know if by pass car you meant as a commercial vehicle company, maybe you might think of as light vehicles overall is being pass cars not sure as opposed to cargo or something. But I think within light vehicle, you have seen pass cars, but also some of these battery electric pickup trucks, we've seen some reset there. I think one of the interesting parts of your portfolio was these battery cooling trays. And I like -- it didn't matter if it was Rivian or Lightning or Silverado that won the EV pickup truck rates because you were on them all, right? But now it kind of seems like Lightning capacity is coming back down, the GM has delayed twice the capacity expansion of Orion to the Silverado. I'm just curious what you're seeing on the pickup truck side, if this is a bit of an air pocket. I mean, Ford still going forward with that plant in BlueOval City to significantly ramp capacity for these types of vehicles. But kind of appetite there might be or conversations with your customers around these electric pickups and remind us the battery cooling technologies that you do there.

Yes. So if you think about it for -- and I'll pick GM, right? So we do the battery cooling for all the Ultium platform. So all of GM's electrified vehicles have our battery management from a thermal perspective on the vehicle. That has been a much lower and slower launch or a ramp -- I shouldn't say launch, but ramp than what we had originally planned for. And I mentioned this earlier, like the helpful part there is that's a very modular production. So we're putting lines in and ordering CapEx as we see and get that volume to come through. And when doesn't, we either delay the capital or we're in talking about stranded costs with the customer. I think the key here is that we didn't go out and build plants for the volume that the customer, whether it's GM or Ford or anyone else told us they were going to have. We treat it like we do most things. If we don't have to build out capacity all at once, we don't, we never have. That's true in our mechanical business, and it's true in the EV business. So we've been very thoughtful and methodical about how much capital we needed to spend and when. And as we -- as it's ramped slower, we've just slowed down the process to add that capacity. When it comes on, we'll add it and we'll be able to continue to push through. But the design is the same. I mean if you've seen GM's vehicles, it's can be a Hummer to a small vehicle. And the really interesting and unique part of the structure of the battery cooling is that the plates and the trays that we produce are modular, so they can put many of them together to put in a larger vehicle or use less of them in a smaller. So it allows for the lines to be pretty much the same line just used over and over again.

And can you remind us the percentage of your sales or your backlog that relates to electrification-related products? And have you broken out before or can you break out for us how much of that is attributable to, say, these battery cooling trays we're talking about versus electronic driven versus maybe e-beam-axles or electrified axles.

So our backlog is about 75% EV. We don't break out battery cooling versus the other electrical products per se. If you look at the growth that's in, and you can see the second quarter, if you look at the growth in Power Tech Group, which is where battery cooling sits, we actually had negative quarter-to-quarter growth in ICE, but the -- a large growth in EV that is, for the most part, battery cooling and electronics cooling. So we also do power electronics cooling for EVs as well in that. So that's principally -- if you just look at that, you can see that, that growth continues to be there for us, albeit off of a relatively low base.

Maybe you don't break it out exactly, if we could drill down into one of those categories, which is the electronic drive unit, integrated drive module, e-machine, various different names for it. Most people call them 3-in-1 systems. You've got the electric motor, the power electronics, such as the inverter and the gearbox. Now if [ Craig ] was here and his flight was canceled -- but he invented the term 4-in-1 [indiscernible] on top of that. There are 4 companies who are doing this right now. I mean you've got American Axle partners with Inovance. You've got Magna that partners with LG Electronics. You guys partner with TM4. And then you got Borg, which does it all in-house. And you and Axle and Magna, all say you're not harmed in any way by partnering and yet Borg says that they benefit from having an entirely vertically integrated projects, the one -- it's 3 against 1. On the other hand, they do have the most awards. So just wanted to check in with you on the sort of go-to-market strategy and the relationship with TM4. I think you've increased your stake there a couple of times and how you're thinking about operating with them going forward.

Yes. So I mean, I would make one comment. So we would argue we're vertically integrated. So TM4, we own 55% of the joint venture with Hydro-Quebec. We've publicly disclosed that they had a put option, so they have exercised the put. So it will be eventually 100% owned by Dana. But it's not a partnership, we run the JV. We manage it. We decide, obviously, with their input, but how we're going to integrate it. And it's not run as a separate joint venture. I mean, it is a separate joint venture, but it's actually rolled up inside of our BUs, and so make no mistakes, we are completely vertically integrated on our drive systems, whether it's an e-Axle or an EDU, an electric drive unit. So that goes without saying. So I'm in the camp, I think we benefit greatly from having all those in-house capabilities. When you're designing a system, and this goes actually for our foreign one, we think that the ability to design from the ground up how the integrated drive unit or the e-axle operates and how efficiently it operates. It's critical that the engineering teams, both the mechanical, the electrical and the thermal dynamics are all sitting in the same room, so to speak, but working together and that there aren't these handoffs. And so I do think it drives a much, much better end product and a much more efficient end product. At the end of the day, right, the efficiency of that drive unit determines in large part what the range of that vehicle will be and given range anxiety and the cost per kilowatt to put on the vehicle, the more efficient those drive systems can be, the better it is and the better the economics are for both the automaker or the OEM and the end consumer.

Last question on the light vehicle OE side of the businesses. I think that your expertise in commercial truck, powerful, heavy, high-torque applications, found some applicability to where there are very high torque needs in like Ferrari, don't you do something there. And yet, I think there was a slide deck maybe it was at Investor Day where you showed a vehicle with like a [indiscernible] draped over it, so we couldn't see what it was. But at the shape of a passenger car, a shape of a clearly light vehicle, more of the sort that we would associate with maybe BorgWarner on this e-powertrain side. I just wanted to gauge your appetite for competing in that more mass market category, which obviously has a lot of large addressable market.

Yes. I think to the extent the -- one of our multi-end market strategy really is one that is driven off of the leverage and the scale and it's probably no more important than in the EV, especially now that the total volumes are likely to be lower than people have expected. Our ability to design and develop motors and inverters that can be used from a large passenger car or fit into an electric drive unit on a pass car or a small SUV and slide those and scale those up all the way through to light commercial vehicle into commercial vehicles is exactly what we want to be able to do. Now there are limits, right? I mean, very small motors versus the larger motors in terms of their power output, makes it very difficult and makes it very difficult to package the exact same motor. So we really try to think about it in terms of sort of that light commercial vehicle and the heavy light vehicle market. Those motors tend to be able to be scaled relatively easily. But the key is being able to package all of this and really make it work efficiently. So if our customers are looking at the systems and understand the benefits that a ground-up designed, highly efficient system brings and they can use that technology. We're going to try to sell it to them. We think we have some of the best products on the planet, and we're going to continue to penetrate the markets that will continue to give us scale and we can do it profitably.

And maybe moving on to the other half of the business, really in commercial truck and off-highway, your takedown for full year revenue was very modest and really attributed to the EV side. It seems like some of the other companies at the conference like maybe Phinia and Garrett made some cautious comments about the commercial truck and off-highway markets. Just curious what you're seeing in those end markets.

Yes. So commercial truck remains relatively buoyant. I mean, again, we play in different parts of each of those end markets. Vocational -- North American vocation continues to be a real bright spot. I think when you look at medium-duty and even heavy duty from our side, while we're starting to see some reduction in volumes. On the flip side, we're continuing to pick up market share in those markets. So much of what's being offset or what's being lost from a total volume perspective in the market, we're actually picking up that volume in market share. The other piece is we have a sizable commercial vehicle business in South America. That's been relatively weak for quite some time. We're seeing that market start to get some legs under it and have decent year-over-year gains. And so that's also that rolls up in the commercial vehicle showing some of the gains that we continue to see. So it's a bit of a mixed bag. But yes, it's a little bit lighter, but between market share gains and just some of the regions we work in, we're still seeing positive year-over-year performance.

That explains it. And sort of might answer my next question, which was have you seen any change in your business stemming from Cummins acquisition of Meritor. I mean if you're seeing higher marks, I don't know if that was specific for commercial on highway or whatnot, but what have you seen what impact from there changed go-to-market strategy and the synergies that they feel that they have.

I mean we haven't seen much. I mean, we competed with Meritor for a long, long time. I mean I think we've said in the past, it's a new name on the door, but obviously, still a very good company. Obviously, part of Cummins, which is obviously an extremely well-run company. But look, we'll continue to do what we do best, which is make sure we serve the needs of the customer. And we believe that whether it's the OEM or the end market customer for the truck, if they're satisfied and they want the demand for our product, we think we can deliver. We spend a lot less time worrying about what our competitors are doing and really staying focused on what the customer really wants and making sure we can deliver it at a price point that he can make money on his own business.

Wanted to ask about the trend in commercial settlements. And I think the message from you and from others has been that the automaker is not really in the mood to review the list of premium costs from years past. And whatever [ hole ] there is in the margin as a result of that is going to have to be made up by other means. But the degree to which you are still receiving commercial [ settlements ] for premium costs. And then great, even if you're not, that there may still be margin uplift from the fact that even if they're not opening up contracts and amending them that these contracts are going to be rolling off the books, right? So I mean contracts that you entered into in the first part of 2020 or 2019 before inflation was transient. Those are going to get repriced at the new market reality in the next year or 2? And could there be a margin benefit from that also?

I mean let's be honest, right? Our customers never want to hand out money. So commercial recoveries are always difficult. But yes, I think that we continue to work where we can to recover the costs we incur. But I think, yes, to make up for kind of where we're at, many of the contracts will continue to go through, kind of, call it, roll and roll off. As they continue to roll off and we reprice, we'll get economics at current rates and investments at current rates. I can tell you, we're really focused on is, while margin is certainly important, we're really focused on the returns for the invested capital that we have and making sure that we continue to work the business, whether it's from lowering the investment level or increasing margin to make sure that the returns we're earning on the capital that our shareholders in trust to us is above what that cost of capital is. So that's what we're laser-focused on that. And we know over time that we'll continue to work the margins to where we need them to be. And I think you've seen through the first half of this year, we're seeing that start to happen, and we'll continue to work to get it back to where it needs to be.

Okay. And we've discussed before that it might not be a totally fair comparison to talk about when you can get back to pre-COVID margin because pre-COVID margin was before you had -- I mean even if you had 100% recoveries on the higher raw materials and whatnot, you have $10 billion, you got $1 billion of revenue and $1 billion of cost. You've got the same EBIT, but your margin is lower. So I don't know if maybe you think that we need to reset the expectations a little bit. But in terms of getting where you want to be or at the equivalent level, what has to happen from a macro or industry or company-specific execution? And how do you see the margin progressing? And what do you think maybe at the new normal of prices, the new normal of margin for Dana might be?

I think we certainly -- I mean, we think the businesses should be able to get back to a double-digit margin as we continue to work through both the repricing of new programs and then, obviously, the continued drive for efficiency. We're not going to be satisfied until we can drive those margins and therefore, the returns in the business to where we think is sustainable and necessary for -- from a returns perspective. I think when does that happen? Obviously, we have to continue to get the customers to run well that is definitely moving in the right direction. And then we just need to continue to work the playbook that we've been executing on here over the last 18 months or so and really get that to flow through to the bottom line.

Great. Thanks, Tim. I've got 1 or 2 more, but let's see if there's 1 in the audience right here, please. Over here.

So when you look across the portfolio of all the business cases that show up in front of you every year for investments. There's usually somebody who's making an implied return forecast down the road. How many of those do you actually hit in the end? Or is it fairly a mixed bag, I guess, if you have some sense of that?

I think if you -- it's obviously different across each of the end markets. But generally speaking, take the last few years out because it's sort of unprecedented. But if you just look at the business historically, I would tell you that most of our business cases end up on a return a relative return basis is about where we thought it would be. We tend not to get there the same way we thought we were going to. It's a mixed bag of efficiency, capital differences and whatnot. But I think that's why we want the team really focused on the actual returns that we're gaining from the business we're taking and less on sort of thinking about it in terms of a specific amount of margin, right? Because you may end up with the same margin, but you invested 3x more, and the returns won't be there.

If I could just add on, because I want to be clear on this issue of efficiency. There's 2 parts of inefficiency, either the demand is not there. So we're just lower on production than we thought we would be or we just can't process enough through at the demand that we forecasted. So do you have a sense of which one it is more.

For us right now? It's really even when the plants were running with -- through, say, post COVID, but with a lot of the shortages, the issue was partly throughput, so they were just making less parts, right, less vehicles. But the biggest problem for us is the variability in the mix from the automaker. So I'll deal with the light vehicle part of the business. It's probably the most acute. I mean we don't -- we tend to be on programs that have -- so I'll pick on Super Duty, and I pick on, I love the Super Duty. It's a great program, love Ford. But we don't make a Super Duty axle. We do the 250, 350, 450, right? And inside of there, there is multiple versions. There's a Duly, there's 4-wheel drive, there's 2-wheel and so when they mix and match that quite abruptly, the changeover in the plant, it eats you alive in terms of the efficiency in the plant, right? Whereas historically, they would run in batch. I used to make the comment that the automakers over the last few years, they didn't -- they were just trying to -- it was -- they make what they could, not what they wanted to make. That's really what we're seeing that's giving us the ability to really get the plants back to where they need to be. With that stability, a lot of the additional improvements that we want to make inside the 4 walls of the plant, we can do, right? So we can then become even more efficient because we're not just running around doing changeovers.

Question up here in the front please?

Just a follow-up on that. Productivity in a volume flat environment. And that's not true for every one of your different business lines, light vehicle, off-highway commercial. But generally speaking, on a 3-year view, kind of a midterm view. Are you looking at volume across your business lines as relatively stable, which is good. You can drive efficiencies through maybe headcount reduction. So some rightsizing or am I too conservative? No, we do have 2% volume growth on a 3-year view. And I don't know if you can make that claim given your different business lines.

Yes. I mean it's very different for all the end markets. But if you -- if we just sit there and say, "Hey, let's think about a relatively volume flat environment or fluctuate. We have the ability and the processes to drive year-over-year improvements in the plant for -- under that environment.

And that translates into 1% to 2% productivity improvement?

Well, I won't put a number on it, but it's the reduction in the conversion cost in the product.

And then the follow-up on that would be then with respect to your customers, in terms of carryover product, pricing is flat and the days of giving them price downs are gone or in fact, no, half your business still does kind of build in productivity sharing and price downs?

Yes. We -- it depends on the end market and the customer and where it is. But generally speaking, many of our customers still -- we still expect yearly productivity that has to be offset.

And so just kind of putting that all together then, you do expect to have some opportunity on the margin from efficiency improving a little bit or...

Yes, we should. Absolutely, that's what you like if you looked at the second quarter, right, like the you mean...

Yes, I'm trying to think big term 3 years from now.

But 3 years in, yes we should continue to -- we have a stable production environment. That's our best -- that's the best case we have for increasing productivity in terms of reduction in conversion across the plant. Obviously, the metal cost with the metal cost.

And I know it depends by region, and you export a lot out of Europe, but when I think about off-highway and commercial vehicle, that end market sensitivity. How are you thinking about 2025 in terms of the macro?

Because we haven't given '25 guidance yet, but I think we are -- and we mentioned this last week on the call, we're starting to see, especially in the off-highway markets. We're starting to see some softness come through. So Ag is probably the one that's most prevalent right now. You read John Deere, AGCO, right? Those are 2 big customers are seeing decreases in volume on Ag now. Even within Ag, we don't make parts for large combines and also it depends on even the products within there. But yes, those -- we're likely to continue to see that, especially if farm payrolls remain our farm products cost commodities remain low. If we get help from an interest rate environment and crop prices increase, then that could turn around pretty quickly given the way the farm industry and the farmer...

I'll take the last question on capital allocation. Obviously, not a ton of free cash flow this year. You have raised it a couple of times, though and normalized is higher. How are you thinking about the opportunities there? I mean portfolio is we're pretty complete from an electrification perspective, you've rounded out the commercial vehicle portfolio. And previously, you used to talk about driving toward investment-grade metrics. So I like all the way there. But now with the shares at $11, not $22. I don't know if you feel differently about that and how we should think about potential return of capital and what the right leverage might be in the context of the current equity valuation?

Yes. I think I remain convinced that, in my view, is that we need to bring leverage down, and we're driving the sort of 1 to 1.5x. I'd love to see us on a net basis, down around 1 to 1.5x. . So any free cash flow we're generating in the short term, despite the weakness, I mean I think the stocks are screaming buy. But I do think it's important given the end markets we operate in and what we need to do that getting -- continuing to use free cash flow, at least in the short term to pay -- to get leverage -- the leverage down is the best use of that. I think that will translate into better metrics for the equity side. And then if we end up having some extra free cash flow, then I think buying back stock at that time once we get the leverage ratio down would be something we would consider.

Very clear. Thank you. Please join me in thanking Tim for the great color and insight.