Dana Incorporated (DAN) on Q1 2023 Results - Earnings Call Transcript

Operator: Good morning and welcome to Dana Incorporated’s First Quarter 2023 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. For those participants who would like to access the call from the webcast, please reference the URL on our website and sign in as guests. There will be a question-and-answer period after the speakers’ remarks, and we will take question 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 Strategic Planning, Craig Barber. Please go ahead, Mr. Barber. Craig Barber: Thank you, Regina and good morning everyone on the call. Thanks for joining us today for our first quarter earnings call. You will find this morning’s press release and presentation now have been posted on our investor website. 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. Allow me to remind you that our presentation includes forward-looking statements about our expectations for Dana’s future performance. Actual results could differ from those suggested by our comments here today. Additional information about the factors that could affect future results are summarized in our Safe Harbor statement found in our public filings, including our reports with the SEC. On the call this morning are Jim Kamsickas, Chairman and Chief Executive Officer, and Timothy Kraus, Senior Vice President and Chief Financial Officer. I will now turn the call over to Jim. Jim? Jim Kamsickas: Good morning, and thank you for joining us today. Please turn with me to Page 4, where I'll discuss our highlights for the first quarter of 2023. Starting on the left side, Dana achieved record first quarter sales of $2.6 billion, a $164 million increase over the first quarter of last year, driven by continued steady customer demand, roll on of our new business backlog across all of our end markets and our ongoing cost recovery efforts. Adjusted EBITDA for the quarter was $204 million, up $34 million, a 20% improvement over the first quarter of last year. If you recall, it is normal for us to use cash in the first quarter. This quarter, free cash flow was a use of $290 million, $53 million more than last year, driven by working capital required to support our aggressive new business launch cadence and revenue growth this year. Lastly, for our results, adjusted earnings per share for the year were $0.25, an improvement of $0.09 per share. Moving to the right of the page, I will highlight four of the key items this quarter. First, I'll provide you with an update on the current operating environment and outlook. The company continues to overcome the ongoing challenges that are impacting the entire mobility industry including inflationary pressures, customer demand volatility, supply chain disruptions and currency fluctuations. As all of these unprecedented headwinds took their toll on the mobility supply companies between 2020 and 2022, Dana never wavered from our commitment to establish complete in-house 4-in-1 e-Propulsion product and system capabilities across all mobility markets. We successfully accomplished what we set out to achieve that is ensuring that we secure the right product technologies and capabilities as well as talent and infrastructure to serve our customers and sizably increase our content per vehicle potential in all of our business units. There are truly no words I can say to capture the appreciation I have for the Dana's team, personal sacrifice made to completely transform the business, while simultaneously navigating the generational challenges of the past three years. Their efforts helped Dana evolve from a purely mechanical company to the only supplier capable of delivering all elements of a complete in-house, fully integrated electrified system across all mobility markets. While we established our electrification product portfolio from scratch, we dramatically strengthened our operations and customer relationships, which of course is the foundation for driving sustained value creation in any manufacturing company. As the industrial chaos is starting to calm, Dana is on a very good trajectory moving forward. I will also provide you an update on some extremely complex and high-volume new business launches that are currently taking place and share how they will impact us through the remainder of the year. Next, I'll communicate some examples of how we are leading in sustainability. Dana has independently been recognized by numerous leading organizations for our extraordinary commitment to sustainability. In fact, you may have noticed on the cover page of our presentation today that Dana was named one of the world's most ethical companies by Ethisphere for 2023. Ethisphere evaluates performance in five major categories, of which environmental and societal impact carry the most weight. Again, I'll come back to this important topic and share some additional updates, in just a few minutes. Lastly, having provided you with the fairly heavy dose of new business growth via an annual sales backlog update in February, this quarter we'll be taking opportunity to share a more isolated example of how we are intentionally leveraging, some of the most advanced EV innovation in this case from our sports car and super sports car, EV portfolio products across numerous applications, in each of the other mobility markets. Dana's significant revenue growth over the past six years has not come by accident. Instead,it's come through our deliberate focus on outstanding customer satisfaction, operational excellence and technology leadership. Please turn with me to Page 5, where I'll walk you through an update on our operating environment. As we shared with you last quarter, we anticipated an overall improved operating environment in 2023. And while it's still early in the year, so far things are shaping up mostly, as we had expected. Beginning with commodity costs and currency on the left side of the slide, we expect to continue the recovery of prior period commodity cost increases through the first half of the year. As commodity costs moderate through the year, our recoveries will also step down with about a one quarter lag. We are monitoring the index prices for certain grades of steel, which have shown some recent increases, but we still expect commodities to be a profit tailwind this year. The relative strength of the US dollar compared with a number of foreign currencies, in which we transact have been more volatile recently, but is likely to remain a headwind to sales and profit for the remainder of the year. As we move to the middle of the page, strong operational execution for this quarter has partially offset the ongoing customer production volatility. We are experiencing inflated operational costs for things like energy and labor. However, pricing and cost recovery actions should continue to mute most of the impact resulting, in a slight profit headwind from inflation. Moving to the right of the page. Demand across all end markets remains strong, as vehicle manufacturers are working to meet current demand and restock inventory. Unfortunately, customer order patterns continue to cause inefficiencies in our operations, but we remain focused on implementing changes in our operations to soften the impact. We do anticipate some improvement in demand patterns in the second half of the year. As I mentioned in February, because of our extraordinary operating performance, we continue to realize market share gains and above-market growth in our commercial vehicle business. We are very thankful to our customers for entrusting Dana, to support them, so they can in turn support their dealer and fleet customers around the globe. And finally, age programs as we refer to them that have been battered by inflation throughout 2020 through 2022, crisis are starting to build out of serial production lineups in our - of our programs. This year, we are rolling out over several of our largest volume programs and these programs are rolling on with improved economics. As these programs launch and hit run rate later this year, we will see the benefit of this refresh. Let's turn to Page 6, for some of these key launch highlights. If you recall, last quarter we provided you with an in-depth look at the record number of program launches, that Dana currently has taking place in 2023, approximately 120 active launches. This includes new vehicles and models spanning our light vehicle, commercial vehicle and off-highway markets globally and is balanced across ICE and EV including e-Propulsion, e-Thermal, products -- and e-Thermal products integrated within our e-Propulsion systems. As you can imagine, this cadence requires extensive collaboration and our program launch team members are doing a tremendous job managing these important programs, and leveraging our capabilities across all our businesses and functions, as we simultaneously navigate through arguably the most difficult operating environment, we have experienced across the mobility and industrial industries. To support these launches, we have invested significant capital to ensure the success of these programs. As much as we'd like to we can't speed up the clock though and it takes time for our customers to ramp up to full capacity and provide the expected returns. The four programs I'll highlight today are within our light vehicle end market including two of our highest volume longest tenured multiyear programs. Starting at the top left of the slide, the Ford Super Duty is a significant program in both our Light Vehicle Driveline and Power Technologies Group. Dana content included on this family of vehicles include front and rear axles, driveshafts, as well as both thermal and sealing products. This refreshed vehicle program commenced launch acceleration earlier this quarter and this and is steadily ramping up. We anticipate seeing a positive impact from it in the second quarter and beyond. Moving to the right. The top right is the highly anticipated and newly redesigned Jeep Wrangler. This family of vehicles will feature Dana's most robust and award-winning driveline systems, which delivered unparalleled performance allowing Jeep enthusiasts to handle some of the most extreme off-road conditions. We are beginning early-stage preproduction activities in the second quarter and we will be working through the launch cycle involving some higher cost and lower weight efficiency for the next few quarters. Continuing along the bottom right, our production for the all-electric Ford Lightning will scale up in the third quarter. This high demand EV pickup has become America's best-selling electric truck. It features Dana's award-winning custom-design cooling systems including our extensive range -- range for battery cooling products, which helped to stabilize the battery temperature and enable faster charging. Moving to the bottom left. In addition to the Jeep Wrangler, the next-generation Jeep Gladiator will feature Dana's drivelines and be in launch mode later in the fourth quarter. This program, combined with the Wrangler, equates to one of Dana's largest volume programs. Again these roll-on programs are just a sampling of the significant launch cadence we have this year, but they do showcase the scope of our ability to provide class-leading innovation to both traditional and EV platforms of some of the world's most popular and in-demand vehicles. They also reinforce why over the past several years we have elevated operational excellence in the organization that is to ensure that we are well-prepared for this extreme launch cadence. We are off to a great start and I'm confident that we will continue to exceed our customers' expectations. Please turn to slide seven where I will provide you with an update on our sustainability initiatives. It's been some time since we provided you with an update on the commitment we have to be a leader in sustainability. And this slide tells you the story of how Dana is leading by example through data-driven actions that are moving us towards zero emission future. Moving to the right side and creating a better future for generations that fall is a major reason why we committed to being a leader in electrification more than seven years ago when we first introduced our strategy to completely transform the company. Since then, we've successfully taken a number of steps to ensure that we are a leader in the journey towards zero emission future. This includes our recent announcement to accelerate reduction of Scope 1 and Scope 2 greenhouse gas emissions with plans to achieve a 75% decrease by 2030 and be net zero by 2040. Additionally, we are targeting a 25% reduction in Scope 3 greenhouse gas emissions by 2030. We have also committed to achieving targets using science-based approach. After the science-based target initiative validated our 2022 climate commitments, we initiated a revised SBTi validation process for our 2040 net zero targets along with other climate actions. We are very proud to partner with SBTi's member organizations to drive sustainable best practices and lead the way to a zero carbon economy. The bottom course on the slide highlights the actions we are taking to achieve these aggressive targets. Moving left to right we have positioned ourselves as a first mover in electrification. At last count, 65% of our new business backlog is coming from net generation clean energy technologies. We are also currently offsetting 100% of our emissions from purchased electricity in the United States and Canada. From 2025, we will offset 100% of emissions from purchased electricity in Europe as well. Additionally, 100% of Dana's major manufacturing sites are ISO 14001 certified and we are pursuing ISO 50001 Energy management certification globally. We are driving accountability through our supply chain through data-driven global commodity strategies and engaging with our suppliers through collaboration and training. A vital area of our focus for us has been protecting water resources. Currently, we have more than 1,000 global efficiency projects across Dana that include water reduction and reuse programs and rainwater harvesting. These initiatives require a commitment to invest in sustainability, which is what we have done through a variety of means including completely transforming our product portfolio towards zero emissions innovation, a green bond offering, entering a renewable energy agreements to offset emissions, sourcing renewable energy from on-site solar arrays around the world and countless other initiatives and actions that are taking place at every Dana facility around the world to do things better and cleaner. Dana has built a culture that understands sustainability and social responsibility, which is why our global team is at the forefront of the innovation and forward thinking needed to make this a better world. To learn more about our sustainability and social responsibility efforts, please visit dana.com to download our 2022 sustainability report Better World. Now, shifting gears, literally, please turn with me to slide eight, where I will talk about a portion of our capabilities that perhaps has not drawn the attention that it should. And that is Dana's e-Transmissions for high-performance sport and super sport applications. Dana is usually thought of as being a truck, SUV; commercial and off-highway markets. What those applications have in common is they require the most robust and capable drive systems available. As I mentioned in my first slide, Dana technologies are now driving some of the world's most notable and advanced high-performance vehicles, such as Aston Martin, Audi. Ferrari, Lamborghini and McLaren, just to name drop a few. In addition to supplying premium driveline products for both conventional and hybrid applications for these supercars, Dana is also providing technically advanced e-Transmission solutions. Today, we're excited to share the highly anticipated all-new Lamborghini Revuelto will feature Dana's new electric hybrid 8-speed dual-clutch gearbox, which we developed in collaboration with Lamborghini. It is mounted behind the engine, which together, with three electric motors has a total power output of 1,015 horsepower. In addition to the Lamborghini Revuelto, Dana e-Transmissions also power a number of McLaren models and the Ferrari SF90 Stradale features Dana's front twin electric drive unit with a propriety electromagnetic system for the connection and disconnection actuation. Dana also supplies conventional drive systems for the Audi R8 and the full lineup of Aston Martins and will supply a new hybrid 8-speed dual-clutch gearbox to the future Valhalla. This is yet another illustration of how Dana's superior engineering and technical expertise in EV and hybrid transmissions and gearboxes provide us with the inherent capability of leveraging our proven expertise across all markets that we serve. The modular approach to the transmission design, allows us for a single or dual motor design, as well as an option power takeoff, depending on the specific vehicle requirements. For example, this leading -- this class-leading power ship technology is translating to our off-highway market, we are already leveraging it across a number of vehicle types, including wheel loaders and rough terrain cranes in construction, large lift trucks and empty container handlers reach stackers and terminal tractors in material handling, load hauling dumpers in underground mining and forwarders in the forestry segment. We also shared with you in prior calls, how electric yard trucks and refuge vehicles are currently using these capabilities in commercial vehicle market as well. As the markets continue to evolve, we are in pole position to provide tailor-made solutions for our customers' unique needs, whether it's in the light vehicle, off-highway and industrial or commercial vehicle applications. And speaking of commercial vehicles. Please turn with me to Slide 9. I want to share a sneak peek of some of the exciting things that will take place next week at the commercial vehicle-focused Advanced Clean Transportation Expo, known as ACT Expo. Dana is excited to be participating in the 12th edition of the ACT Expo, North America's largest advanced transportation and clean fleet event, featuring the world's leading innovation from more than 275 of the top suppliers for all vehicle weight classes and fleet applications. In fact, I'm honored to be one of the keynote speakers, discussing challenges and opportunities facing the commercial vehicle market, as it moves towards adopting low and zero-emission solutions. While I can't provide you the full details today of what we have in store for the show, I can share that we will be announcing the expansion of the electrification capabilities that we talked about today, but now for the medium-duty electric vehicle application. So stay tuned for the exciting news next week. Thank you for your time today. Now I'd like to turn it over to Tim, who will walk you through the financials. Timothy Kraus: Thank you, Jim. Good morning. Please turn to Slide 11 for a review of our first quarter 2023 results. Sales were a record high for the first quarter at $2.6 billion. The $164 million increase over last year was primarily driven by strong demand in our Heavy Vehicle and Power Technologies businesses and recoveries of cost inflation through pricing actions. Adjusted EBITDA was $204 million for a profit margin of 7.7%, which was an 80 basis points increase over last year, driven by operational execution and timing of EV investment spending, partially offset by continuing customer-driven production and supply chain inefficiencies. Net income attributable to Dana was $28 million, compared with $17 million last year. Diluted adjusted earnings per share was $0.25, a $0.09 improvement over the first quarter of 2022. And finally, free cash flow was a use of $290 million for the quarter. Recall that it is normal for our business to use cash in the first quarter. Please turn with me now to Slide 12 for a closer look at the drivers of sales and profit change for the first quarter of 2023. Results for the first quarter were a significant improvement over last year even in the face of continuing inflation and inconsistent customer production supply patterns or production patterns and supply chain issues. First, traditional organic sales growth of $203 million was driven by higher demand, improved pricing, beneficial product mix and cost recoveries from customers. Adjusted EBITDA on higher sales was $27 million, which improved margin by 50 basis points. Cost inflation was offset by customer recoveries and improved operational execution somewhat muted other cost headwinds including inefficiencies, driven by volatile customer production and elevated launch costs to support our new and renewing programs. Next, throughout the execution of our EV strategy, we have been highlighting that the electrification business we are building has profitable contribution and is scalable but requires investment to achieve that scale. This is why when we highlight our EV sales and adjusted EBITDA in our quarterly walks, there is usually negative profit and margin. We have also said that investment will be variable over time. We see that effect this quarter as our investment in EV was lower than it was in the first quarter of last year along for positive profit contribution of $6 million to peak through on higher sales of $31 million. However, as you will see when we review our full year guidance, it is just due to timing of investment and recoveries. We still foresee true breakeven in our EV business in 2025. Third, foreign currency translation headwinds reduced sales by about $75 million, as the dollar increased in value against several foreign currencies. This lowered profit by $12 million and had a margin impact of 30 basis points. Finally, the recovery of prior period commodity cost increases added $5 million in sales and a net profit benefit of $13 million, driven by lower commodity costs. This resulted in 50 basis points of margin benefit. Next, I will turn to 13 – Slide 13 for a closer look at the drivers of profit and profit change for the first quarter. Free cash flow was a use of $290 million in the first quarter. As I mentioned, it is normal in our business to see a use of cash early in the year. One-time costs were slightly lower while cash interest was $8 million higher due to the timing of interest payments related to our 2032 notes that were issued in late 2021. Cash taxes were $2 million lower due to changing mix of tax jurisdictions and the timing of payments. Working capital requirements were $80 million higher in this year's first quarter, primarily driven by increased inventory to support our large number of launches and the ramp-up of sales in our heavy vehicle markets, as well as higher accounts receivable due to the mix of sales between segments. And finally, capital spending was $4 million lower than last year, but we are on track to execute our capital investment plan this year. Please turn with me now to slide 14, for our 2023 outlook. Our 2023 outlook remains unchanged from our initial guidance in February. We expect sales to be approximately $10.6 billion at the midpoint of our guidance range. This is an increase of about $445 million from 2022. Adjusted EBITDA is expected to be around $800 million at the midpoint of our guidance range, which is up approximately $100 million from last year. Profit margin is expected to be approximately 7.2% to 7.8%, a 60 basis points improvement at the midpoint of the range. Free cash flow is expected to be approximately $25 million at the midpoint of the range, which is a decrease compared to last year as working capital is aligned with sales growth and capital spending increases to support program launches and our backlog. Diluted adjusted EPS is expected to be $0.50 per share at the midpoint of the range. Our EPS guide includes a higher than usual tax rate, primarily due to the valuation allowance on US tax assets recorded in 2022. Please turn with me now to slide 15. I will highlight the drivers of full year expected sales and profit changes from last year. While our full year guidance remains the same, we are updating the drivers of our year-over-year change in sales and profit. Beginning with organic growth, compared to last year, we now expect an additional $430 million in sales from traditional products through a combination of new business, market growth, market share gains and customer recoveries. This revised estimate is about $30 million lower than our previous outlook due to expected lower gross inflation and related recoveries. And the adjusted EBITDA increase on traditional organic sales growth is now expected to be about $80 million. That's about $15 million higher than our previous estimate due to better sales mix and operating efficiencies. We are still estimating inflation will total about $50 million net of recoveries. Also included in the organic column, are lingering customer-driven operational inefficiencies and program launch costs, which will continue to impact profit and margin. Our outlook for EV organic sales remains unchanged. We expect about $150 million in incremental EV product sales this year, and we are making further investments for development and commercialization of this new technology, which will offset the profit benefit from higher sales. Adjusted EBITDA on these incremental sales will be a loss of about $35 million, reflecting these investments. Foreign currency translation on sales is now expected to be less of a headwind at approximately $90 million due to movements in a few Latin American currencies. However, due to the mix of currencies and our business the profit impact will remain about $15 million. Finally, our current commodity outlook is taking into account some elevated prices for certain grades of steel as the year progresses versus our prior guidance and will have us recovering about $35 million less than last year due to the timing and recoveries in our customer agreements. Input prices this year are still expected to be lower than last year and will result in a net profit tailwind of about $70 million and about 70 basis points of margin improvement. Please turn with me to slide 16 for an outlook on our free cash flow for 2023. Our free cash flow outlook also remains unchanged. We anticipate full year free cash flow to be breakeven to about $50 million or $25 million at the midpoint. We expect about $100 million of higher free cash flow from increased profits on higher sales and lower input costs. More than offsetting the profit increase is a return to working capital levels that are aligned with growth, resulting in about $190 million less in free cash flow generation than last year. Higher capital spending to support our sales growth and technology transformation will result in about $70 million of lower free cash flow compared to 2022. Thank you for listening. I will now turn the call back over to Regina to open it up for questions. Operator: [Operator Instructions] Our first question comes from the line of Colin Langan with Wells Fargo. Please go ahead. Operator: Your next question comes from the line of Tom Narayan with RBC. Please go ahead. Operator: Your next question comes from the line of Noah Kaye with Oppenheimer. Please go ahead. Operator: Your next question comes from the line of James Picariello with BNP Paribas. Please go ahead. Operator: Your next question comes from the line of Ryan Brinkman with J.P. Morgan. Please go ahead. Operator: Your next question comes from the line of Rod Lache with Wolfe Research. Please go ahead. Operator: Your next question comes from the line of Dan Levy with Barclays. Please go ahead. Jim Kamsickas: You’re welcome. Okay. With that, just I guess a quick recap. Thank you, everyone for your time and attention today. We definitely appreciate it. From the Dana perspective, as a company we recognized much earlier I would say back in 2016, that the mobility space would be disrupted. And in particular the OEMs and powertrain suppliers would be disrupted, by far the most. So in our case instead of being reactive and allowing the electrification make a trend to disrupt Dana, we definitely disrupted ourselves. So we've completely transformed the business. And of course, amongst the most courageous and aggressive actions we took, were the two most transformational actions which was: one, leverage the core we talked about, a little bit earlier today, which was to go scale, drive best practices, lesson learned, people management across engineering, across operations, across technology, across everything. And it was a dramatic and courageous thing to do, but it's -- you can see the benefits coming through what we call One Dana. One Dana not disparate Dana, One Dana driving the business. And the second, was to make sure that we achieve that first mover position to ensure that we are energy-source agnostic, whenever electrification rubber started to hit the road. So we couldn't speed up the clock through 2020 through 2023, and we were certainly not going to back off from our commitment and have a schizophrenic strategy, that we didn't live to. We stayed the course, painful, challenging. But as you can see through our growth, as you can see through our operational excellence leading to growth, our new technology, our product portfolio and again coming back to being truly energy-source agnostic, the plans coming together. And we appreciate everybody's time and attention again today. We look forward to providing you an update, next quarter. Thanks. Operator: That will conclude today's meeting. Thank you all for joining. You may now disconnect.
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