Dana Incorporated (DAN) Earnings Call Transcript & Summary

Good morning, and welcome to Dana Incorporated's Business Update 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] 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.

Thank you, Regina. Good morning, everyone. Thank you for joining us today for Dana Incorporating this January business update call. As a reminder, we will be hosting our 2024 Q4 and full year earnings call on February 20. We wish you a release with the date and time and detail shortly. Today's presentation includes forward-looking statements about our expectation for Dana's future performance. Actual results could differ from what we discuss 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 reports with the SEC. Before we proceed, I'll remind you to visit our investor website where you will find this morning's press release and presentation. As always, today's call is being recorded, and the supporting materials are the property may not be recorded, copied or rebroadcast without a written consent. On the call this morning is Bruce McDonald, Dana Chairman and Chief Executive officer; and Timothy Kraus, Senior Vice President and Chief Financial Officer. Now let's get started, and I'll turn the call over to Bruce.

Okay. Thank you, Craig, and good morning, everyone, and thanks for joining us here on our business update call. In November, we announced the -- that we were going to proceed with the sale of our Off-Highway business. And we also announced a major cost reduction initiative, with the intent of having new Dana margin fee in line with where Dana is today for 2026. So that was kind of our original goal. I'm going to really spend most of my time today with Tim and I talk about the cost reduction side of things, but I will spend just a brief minute here on what's happening in terms of Off-Highway. And obviously, we're well into a process, and so I can't really get into a lot of specifics. But we do have a very robust process going on right now. We have several strategic buyers going through management presentation, site visits, plant tours, things like that. We feel really good in terms of where we're at. We're encouraged with the values that we've seen so far. And we remain hopeful that we'll be able to come out with an announcement on a transaction around the time of our Q1 earnings. With regards to the cost reduction initiatives, I'm really pleased with the progress that the team has made, and in particular, the speed at which we're going to start to see the numbers flow through our P&L. You'll even see we had some benefits in the fourth quarter here, and Tim will kind of get into the run rate and phasing and things like that. I think before I get into the details of the cost side of things here. I think it's kind of -- it would be worthwhile to go through the strategic context and what's changed from a year ago. So if you think about -- we're in -- by the way, we're on Slide 4. If you think about the -- where we were a year ago, obviously, we're focusing on 3 businesses, Off-Highway as well as Commercial and Light Vehicle, those 3 markets. Right now, we've got to reassess that and focus on 2 end markets, the Commercial and Light Vehicle. In terms of electrification, we had a an extremely robust outlook and growth aspirations for that business. Just stepping back, I would say that Dana with the full support of our Board position itself to be electrification in the leader in all of our markets. And if you sort of were to size the opportunity that we have in front of us this time last year, it was looking at like a $4 billion, $5 billion growth opportunity over the next 5 years. Obviously, things have changed since then. Over the last 6 months, we've seen significant deterioration in the timing and the volume projections and with the new administration here in the United States, it's likely we'll see further deterioration in the end markets. And this requires us to reassess our strategy as it relates to EV. And I think I'll just do a little double click on that. So what it means for us is -- and I'll be very granular here is, first of all, our battery cooling business, we're fully committed to that. This is a business that is profitable today and is capable of delivering accretive double-digit EBITDA margins. So we're going to invest and grow that business. Where we currently have ICE business, we're committed to being our partner to our customers, and we want to be technology agnostic. So we will invest in EV electrification, alongside of our customers to make sure we are their partner of choice. For all other currently awarded programs, we are in active rotations regarding pricing, engineering and CapEx recoveries. And for all programs that we are pursuing, we've adopted a much more stringent approach to going after this incremental business opportunities where we're no longer willing to risk our capital and ER&D upfront. So we're looking basically on opportunistic new business that we fully funded by our customers. So the bottom line on this one is it generates significant ER&D savings, they're in our numbers here, and also make us less capital-intensive effective immediately. Third, we have an infrastructure in place to support our growth aspiration business profile. And with the sale of our Off-Highway business, we now need to focus on rightsizing our corporate structure. You'll see in our announcement here, we're talking about we're going to take our Power Technologies segment and split that into 2 pieces. We'll put the aftermarket part of that business into Commercial Vehicle. And that way, we can run all of our aftermarket operations under the leadership of Brian Pour in that business. And secondly, the rest of Power Technology will fold into our Light Vehicle Business under Byron Foster. Turning to Slide 5, I just want to talk more about new Dana financial commitments. You'll see here, we're upping our cost reduction targets from $200 million to $300 million. Tim will walk you through the details in his later slides, and I don't want to steal a lot of his thunder here on that one. But what I would just remind people is we're talking about $300 million of run rate savings that will be in our 2026 number, so 12 months or I guess 11 months from now. That's the run rate savings that we're focusing on. In terms of margins, we've previously talked about margins in the 8.5% range for 2026, basically showing you a range share of 2025 new data margins of 8.1% to 8.6%, and we see 2026 with the impact of our cost reduction actions, our margins for new Dana being in the 9.5% to 10.5% range. You also see you make a comment here in terms of stranded costs associated with the sale of the Off-Highway business. Obviously, the natural question is, can we take some of these costs out. In the guidance that we've provided here today, we're assuming no, which I'd say would be a conservative assumption. We just really can't go after that cost bucket, and so we have a little bit more clarity on who the buyer of the business is, what TSA support requirements are going to need and when the sale is going to happen? So stay tuned on that one. I would expect us to chip away at that in future updates. And then lastly, just in terms of the balance sheet, the sale of our Off-Highway business is a once-in-a-lifetime opportunity for us to transform our financial profile and strengthen our balance sheet as well as return significant capital to our shareholders. We expect to have new Dana with a net leverage ratio of about 1x and a free cash flow as a percent of sales of about 4% through the cycle. So obviously, in good years, we'll do better than that in down years, we'll do worse. It's just before turning it over to Tim, I just want to make sure everybody understands how excited I am with the progress that our team has made, and I really have to thank the team here at Dana in helping us to get to this point. So Tim, with that, I'll turn it over to you.

Thanks, Bruce. Just turn to Slide 7, give you an overview here for the results for 2024. Looking at the left side of the page, over -- so about $10.3 billion in revenue, which is in line with the guidance that we provided at the end of the third quarter. Adjusted EBITDA came in at about $885 million. Again, that's at the high end of the range. And as we'll see here in a page or 2, it's reflective of the cost savings actions that we'd already had underway though in the quarter. A margin at 8.6%, again, higher than where we were expecting, again, reflective of the better earnings. Cash flow at $70 million, a little bit below guidance. There, we -- given some of the softness in our end markets, we did have a bit higher working capital in the business than we were anticipating. So we have some work to do there as we move through '25 to continue the drive to get more efficient relative to our working capital. If you turn to the next page, I'll take you through the walk here. Sales for the full year, obviously, will be lower, really due to Off-Highway volumes and weakness from an EV perspective. And those were offset by additional revenue in both LV and PT. Again -- and then we had some FX and commodity headwinds as we continue to see and provide some pricing back to customers related to the commodity programs that we have. On the profit side, really good conversion on lower sales. So again, this has been a story most of the year as we continue to drive efficiencies throughout the organization and especially on the plant floor and as our customers continue to improve the run rate and mix changes that we had -- that had really plagued us over the last few years. And then we've added a new column here, cost savings. So you can see about $10 million of the cost saving actions flowing through in the quarter. I'll talk a little bit more about that here as we get into the 2025 guidance. And then the balance of it is really around a bit currency and then the commodity headwinds. So really good operating performance for the business as we had a difficult top line here. So if you turn to Page 9, we're looking at 2025 sales of about $9.8 billion, $9,775 million on the page. That's down $0.5 billion. We'll walk through the components of that on the next page. Adjusted EBITDA is going to be up nearly $100 million at $975 million. And again, really reflective of the cost-saving actions that we're going to see flowing through. That gives you an implied profit margin in the range of somewhere between 9.5% -- or I'm sorry, 9.7% to 10.2%, and free cash flow, obviously, here, we're going to see above $200 million given the strength in both EBITDA and the actions we're taking around CapEx and improved working capital. Turn to Page 10, I'll take you through the walk. So our $0.5 billion sales drop, about half of that is related to volume and mix, the other half is really driven by currencies and commodities. So we're seeing a much, much more impact than we did this year from commodity. Specifically, the euro, the Brazilian real, Indian rupee and the Canadian dollar. And again, this reflects the entirety of Dana, so this includes Off-Highway. If you -- on the previous page, we did give a breakout, which I'll cover here in a minute between the segments. On a full year adjusted EBITDA basis, about $40 million lower contribution on those lower sales. And then you could see $175 million flow through on the cost saving actions. So, as Bruce mentioned, we've taken our target up from the $200 million that we were talking about in November to $300 million, and it's really reflective of the amount of progress that we've been able to make, and you can see this reflected here. When we get through to the end of 2025, between the $10 million from last year and what's here, we already have $185 million that will be reflected in the numbers. And well over $100 million of this $175 million has already been actioned. So if you -- in the third quarter, we took a charge related to some of the actions we're taking. We'll see an additional charge taken in the fourth quarter here for some of the additional actions. So then if we go to the last page on the cash flow so you can see the walk from the $975 million in adjusted EBITDA. Really, it's about a $150 million increase in cash flow, really driven by the higher earnings, lower taxes and lower capital spending, and that's really offsetting higher onetime costs, again related to both the transaction and the cost savings initiatives that we're taking and then slightly higher interest just due to timing on some of the payments. So with that, I'll turn the call back over to Regina and open it up for questions.

[Operator Instructions] And our first question today comes from the line of Joe Spak with UBS.

I guess just to start on the cost savings update, not to be sort of too semantic, but when you sort of say $300 million run rate, does that mean if we add the total cost savings from '24 million to '26 million, we'll get to a $300 million total, or at some point in '26, if we annualize that savings in that quarter, we get to $300 million? And then also on the cost savings, can you like help us understand how much of that is just a true sort of reduction of some of the spending, which it sounds like it was pretty high on EV in the past versus restructuring actions you've taken?

Yes, why don't you start, Tim?

Yes, Tim. So the buckets, you've got head count, you can think about engineering, overall EV spending and then in general overhead, those are probably the 4 big buckets. I would characterize that it's a balance between the 2, I mean, even this year alone, I think the EV portion of the cost save is in excess of $50 million. So obviously, pretty significant reduction from our side in terms of what we had been spending on a run rate basis around EV. So that's not just engineering, but that includes all the program management and all the other infrastructure that we have around that business. And then the balance is really getting the cost structure and the overhead to where we think it needs to be and what we need to run the business. And so that's really the head count. And a lot of those actions have already been taken and we have some more to take throughout this year. But like I said, more than $100 million of this has already been actioned and will start flowing through quite considerably in the first quarter.

Yes. And maybe just more on the EV side there, Joe, is in addition to sort of the savings associated with the quoting disciplines that I talked about in my comments, I'd also remind folks, if you think about our commercial vehicle EV portfolio, it's more of a catalog of products and the 95% of the spend is done. So we -- it just finished because we've developed the products. We would still have applications engineering for new business, but the core engineering to develop our suite of products is behind us. So that falls out there, too.

And then, Joe, on your question on the $300 million, yes, essentially, the way to think about this is the $10 million to $75 million and then we'll have an incremental to get to $300 million in 2026. Now you have to back off the $40 million of stranded costs that we would expect to -- at least we're forecasting to have still. Again, as Bruce mentioned, we're going to go after those costs. We just have to sort of sort through where we end up on the transaction. And how long we need to provide some of the transitional services and how we rework the business. But it's really -- if you think about it without the stranded cost, it's $300 million. You can just add the numbers up through the years and that will be a full run rate in all of '26, less the $40 million. So you can think of $260 million. So I think the incremental in 2026 is $75-ish million, if I'm doing the math right now.

So yes, so you'll get to that total...

And it's mainly annualization.

Yes. Most of the stuff coming in, right, will be the rest of the annualized because obviously, we're taking actions in the back half of '25 that will then actualize for the full year.

Right.

Okay. That's helpful. And then just maybe 1 on '25. I know you gave some color on Off-Highway expectations for '25 and then the combined [ RemanCo ]. But can you give us any just color on what you're seeing and expecting in the Light Vehicle and Commercial Vehicle markets and maybe the shape of the year given it seems like some of your Light Vehicle customers have some maybe challenges in the beginning of the year, and then obviously, there's some commercial vehicle end market dynamics to deal with.

Yes, I think the way to think about this is we think the first half of the year is going to be weaker than the back. We do -- we are -- we do expect recovery coming in especially when you get into the latter parts of the third quarter and into the fourth quarter. But we do see continued weakness in the first quarter. And when we report the full results in February, we're going to -- we'll give a lot more color around the calendarization and some first quarter specifics so that it's a little bit easier for you guys to understand because it won't follow probably what we would typically see.

Yes. I mean, the way to think about it is, if you think about light vehicle, last Q1, you had sort of the recoveries associated with the strike in GM the year before. And in this Q4 of this year, we had lower volumes as Stellantis took some production out to rebalance inventory. So just looking at Light Vehicle overall, we got a negative comp in Q1 and a positive in Q4. If you look at CV, I would say the market is soft, which is -- which we reflected in our guidance. And then if you think about Off-Highway, its volumes were declining throughout the year. So as we look into Q1, it's well down in -- versus prior year. So again, like Tim said, we know there's a lot of moving parts here so we're going to be more inclusive in terms of our guidance, and we will give Q1 guidance and we will show things new Dana and Off-Highway going forward.

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

First, I know you're going through the process now on the sale process for Off-Highway, but maybe you could just give us a sense of perhaps the types of buyers you're in discussion with, what's the tone and tenor of the discussions? Is this much more sort of demand driven versus you pushing this out? How are they looking at the business? And maybe just a comment on how the softer Off-Highway market in '25 factors into the valuation?

Okay. So let me -- I'll just have a few comments, and then I'll let Tim take it because Tim was over in Europe last week and has had more face time with them. But what I would tell you is strong strategic interest, I would tell you that we've been surprised at some of the people -- some of the strategic people on the list. And I think what we sort of hear is, is there are people out there that have growth challenges in their current markets and they're looking at new adjacencies as a way to deploy -- to boost their growth. And that's the part, I'd say, in terms of the buyer that we've been surprised with. But we're talking about -- obviously, certainly can't get into any names, but brand name large, well-capitalized buyers. And Tim, why you can give a bit more color maybe on the discussions and things like that.

Yes, I think the -- to echo Bruce's comment. We -- after the announcement, the level of increased interest was -- we expected it and very high-quality interest in the business. So super happy with kind of where we're at. All of the buyers that are engaged in the process are really heavily engaged. I mean we have -- unfortunately, for the team, right, they're trying to run the business and obviously deal with the transaction, but highly engaged, really need -- really want to understand the business and how it works and what the drivers are. So very, very happy. I mean we're a little -- I'm on the phone almost daily with some combination of the buyers that are in the process. In terms of your question on weakness, that's not really like a huge concern from -- at least from the buyers that we've been discussing. They understand the market and where it's at in the cycle. So I think most of the buyers are looking at this in a very long-term view. And we still expect to be able to have the valuation on the business that we're expecting, and we know that the intrinsic value is for it.

And your comment on plans or hopes to announce something around the 1Q call. I recognize there's a lot of moving pieces there, but based on where you are, you see maybe a line of sight that's in place? Or is that more just an aspiration?

We have a timetable that we're working towards with. Because we have a competitive process, we're able to have maybe more influence on the time line than if it was just one buyer. So we have a time line where it's been in place for several months, and we're right on schedule.

And look, when we spoke or had the calls last November, I mean one of the things we made -- the comment we made is we were well down the path already. So it's not like we started fresh in November. The process had been ongoing for a number of months. And so we were in a really good situation to be able to really push the process along. So I don't -- I wouldn't call it aspirational. I think we'll be in good shape in early Q2 to be able to announce them.

Great. As a follow-up, I wanted to ask about free cash flow of [ RemanCo ]. And I recognize a big part of that is the underlying EBITDA will improve, so that helps, but maybe you can talk about some of the other pieces within free cash flow? In the past, if you looked at CapEx of Commercial Vehicle and especially Light Vehicle, it was a disproportionate piece of your total CapEx profile. Other items that had also weighed down your free cash flow as well, working capital, et cetera. Maybe you could just double-click on the opportunity to improve the free cash flow profile of [ RemanCo ] outside of the EBITDA?

Sure. Yes. I mean I think there's a couple of buckets. So your point on CapEx is correct, right? We -- the higher CapEx businesses are really LV at the end of the day, not so much on the CV. CV has been higher, but mostly because we've been really moving to improve and restructure that business. But the big buckets, right, so we should see better working capital or lower working capital intensity. We are selling the business that has the highest working capital intensity. And then the other 2 real good -- really big buckets, so first will be cash interest, right? So as we drastically improve the balance sheet and the leverage profile, we'll obviously have a lot less -- much lower claim on the EBITDA from debt service. And then the other is on cash taxes. So a disproportionate amount of the cash taxes related to the Off-Highway business. And so those taxes will be lower by more than just the percentage loss in terms of the top line. So those are the big buckets. Plus, as we continue to change the -- how we're thinking about and what we're doing around EV and that business, we'll have -- we should have better or lower CapEx than we may have otherwise been thinking about in the light vehicle business.

The CapEx in light vehicle... Yes?

Dan, I think we've got to be respectful of the other guys on the call. We can follow up with you.

Yes, we'll follow up. That's not a problem.

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

Just a couple of kind of clarifications on some of the answers you've already given. So on the discussions you're already having with potential buyers, I think you mentioned that the Off-Highway weakness is not a huge concern. They're looking past the cycle, does that mean that you're already at the point where you're discussing the kind of valuation like the actual purchase price? That's my first question.

Yes.

Okay.