Dana Incorporated (DAN) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to Dana Incorporated's First Quarter 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. There will be a question-and-answer period after the speakers' remarks and we'll take questions from the telephone only. . Craig Barber: Thank you, Regina, and good morning everyone. Thank you for joining us today for Dana's first quarter 2021 earnings call. You will find this morning's press release and presentation are now posted on our investor Web site. 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 today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from those suggested by our comments 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 Jims Kamsickas, Chairman and Chief Executive Officer; and Jonathan Collins, Executive Vice President and Chief Financial Officer. Jim, please start us off this morning. James Kamsickas: Good morning and thank you for joining us today. During the first quarter our customers continued to accelerate production to meet strong demand across all of our end markets driving sales for quarter to nearly 2.3 billion compared with last year, representing a $337 million improvement. Adjusted EBITDA in the quarter was 234 million compared with 205 million for the same period in 2020. As is normal with the first quarter of our business, adjusted free cash flow was a use of 26 million, but this compares favorably to the use of 114 million in the first quarter of 2020, which saw the onset of the global pandemic shutdowns. Diluted adjusted earnings per share were $0.66 in the first quarter of 2021, compared with $0.47 in the same period of the prior year due to higher earnings this year. Moving to the key highlights on the upper right-hand side of the page, we're able to meet stronger demand in key markets and continue to execute our strong sales backlog to drive sales higher for the quarter. We also continue to manage higher cost related supply chain disruptions, logistics and labor constraints that are challenging the industry as end market recovery, quickly recovers from last year's production shutdowns. I will provide more detail around this in a moment. I'll also update you on the efforts to expand our electrification capabilities to meet the growing EV sales and our backlog. Finally, we'll discuss the progress we're making on our ESG goals, which is illustrated in our recently published sustainability and social responsibility report. Jonathan Collins: Thank you, Jim. Good morning, everyone. Slide 10 provides an overview of our first quarter results of 2021 compared to the prior year. In the first quarter of this year, sales approached 2.3 billion, delivering growth of 17% and exceeding the expectations we outlined in February, as heavy vehicle demand accelerated and light vehicle demand was negligibly impacted by the chip shortage. Adjusted EBITDA was 234 million for a profit margin of 10.3%, which fell just short of last year and our expectations as commodity costs rose sharply, and we incurred premium costs as the result of the supply chain challenges that Jim outlined a few moments ago. Adjusted free cash flow this quarter was a use of 26 million and improvement of 88 million over the first quarter of last year on higher profit and lower working capital requirements. Net income attributed to Dana was 71 million in this year's first quarter compared to 58 million last year. The difference was primarily higher earnings this year and lower impairment charges partially offset by changes in the valuation of marketable securities, and higher income tax expense compared to the first quarter of 2020. Operator: At this time we would like to begin the Q&A session. Our first question will come from the line of Colin Langan with Wells Fargo. Colin Langan: Great, thanks for taking my question. Last quarter, you had indicated sort of Q2, Q3 would be the higher margin. I didn't - I noticed that side wasn't in here. Any color on the cadence? It does seem like some of the key platforms are going to be a bit weaker in Q2. So is that now a much weaker quarter? How should we think about sort of the progression through the rest of the year? Jonathan Collins: Sure. Well, good morning, Collin, just want to start by welcoming you back to Dana. Thanks for joining this morning. Yeah, just a little color on the margin color, the second quarter, we think will have the opportunity to be modestly improved from Q1 primarily because of commodity recovery. So the lag effect should start to catch up in Q2. We are going to continue to see some premium costs. So that original curve we indicated where margins get better in the middle of the year will likely continue. As for the second half of the year, essentially our outlook is relatively unchanged from what we showed you just a couple of months ago. We'll continue to see how all of these factors shape up in the next 60 days. And then we'll have a little better sense on the second half of the year when we're together in July. Colin Langan: Great, that's helpful. And just maybe one quick follow up. There's a lot of headlines around the infrastructure bill. I know a lot of your off-highway business is in Europe. Any sort of color on what kind of tailwind if that goes through, we could be expecting? How much of your business could be benefiting from something like that? Jonathan Collins: Yeah, a lot of the benefit that we're seeing in off-highway right now is from the ag market. So there's still quite a bit of room for construction to improve. As you noted, even though we do a lot of our production in Europe, that's for equipment that's used around the world, so certainly any of these stimulus catalysts that could help to increase demand could benefit our business. And that could be a real margin benefit for the off-highway segment as well as Dana, because construction and mining are more profitable segments within that business. So yeah, we're certainly encouraged by that. Colin Langan: Great, thanks for taking my questions. James Kamsickas: Sure. Thanks Colin. Operator: Your next question comes from the line of Emmanuel Rosner with Deutsche Bank. Emmanuel Rosner: Hi, good morning. Apologies if I missed that. Could you quantify the impact from the supply chain inefficiencies in the in the first quarter and maybe how to think about it in the second quarter or over the rest of the year? Jonathan Collins: Sure in Q1, it was significant for us. While we didn't put a specific number on it, just to give you a sense, it had a meaningful impact on our margins in the form of a couple areas. Number one, we still continue to see quite a bit of expedited freight. We have suppliers that have gotten behind. And then with the slowdowns in the global logistics chain that Jim talked about just a few moments ago, we ended up having to continue to incur some premium freight at a rate that's well above what we normally would. Secondly, our operations are less efficient when they're sitting around waiting for parts. So you can imagine running over time and other factors that drive that as well, too. So in terms of how we see that progressing, unfortunately, we do see it continuing into the second quarter, we are seeing improvement in some areas. So we're cautious that we may see a little bit of a tailwind there in Q2. But we certainly expect later in the year that we would start to gravitate more towards normal levels. And we'll have more to share on that we were together again in just a few months. Emmanuel Rosner: Okay, that's helpful. And then just a point of clarification on some earlier comments, so I think you indicated the increase from the prior guidance at the top line is mostly reflective of the strength in the first half of the year, but you remain cautious in the second half. Just to be clear, are you seeing any sort of risk factors specifically in the second half? Or are you saying that this is too early not to get more positive on the second half as well? Jonathan Collins: Yeah, I really think it's more of the latter Emmanuel. It's that we have pretty good line of sight into the next few months from customer releases. We can see the downtime that they're expecting to have due to the chip shortage. We're starting to see continued encouraging signs in our heavy vehicle segments as those orders go up. But we're in a position where with all the uncertainty in the supply chain and in particular with the chip shortage we're just reluctant to call the second half of the year up yet. So I would characterize it as more of the latter. We just want to get through a few more months before we have greater confidence in the higher demand sustaining through the balance of the year. Emmanuel Rosner: Okay, and just one quick follow up on this one. So your contribution from market factors up to the top line, I think increased by about $350 million for the year, anyway to split that between your nearest end markets? Jonathan Collins: It's pretty evenly spread. So in the first quarter, as an example, we had contemplated more downtime due to the chip shortage than actually occurred. Jim touched on the fact that we saw our customers diverting chips towards the key truck platforms that we produce, so even light vehicle was a bit better for us in the first quarter than we thought. But also, we saw encouraging signs or higher demand in the heavy vehicle markets. Ag really picked up in the off-highway segment. And we saw both heavy and medium-duty vehicles and commercial vehicle do a bit better than we had anticipated. So it was pretty evenly distributed across the board. As we move to the second quarter, we see that continued strong demand in heavy vehicle with just a little bit of a headwind on the light vehicle side due to the chip shortage. So broadly speaking, it's pretty well distributed across all three of our end markets. Emmanuel Rosner: Great, thank you. Operator: Your next question will come from the line of Brian Johnson with Barclays. Brian Johnson: I just want to start - I know, we don't - you don't discuss the segment except in the appendix. So if I look at commercial vehicle and drive motion systems typically a low margin segment, but in particular it was negative incremental on that 50 million. Can you talk a little bit more about that segment? Is that where some of these supply chain pressures are most concentrated? And then I've got a follow up around kind of the longer term. Jonathan Collins: Yeah, so on - I'll take the first part. On the CV margins, you nailed it. It is the supply chain was more acutely impacted in CV. That is a longer supply chain. And some of the challenges we ran into affected them incurring more premium freight. That was the biggest driver, why we didn't see incremental profit on those incremental sales. The other undertone is that's the business where we're seeing most of our growth in electrification early on. So when I highlighted that higher EV spending compared to 2019, as an example, CV is one of those areas where you're really starting to see it. So they've made some progress on the supply chain, we see line of sight into that improving, but that was the biggest driver in Q1. Brian Johnson: Second question and it's not going to be around electrification. It's just around mid-term, if we are moving globally into a more of an inflationary environment, at least in north - at least in the US. And it's not just commodities where as you pointed out you do have contractual recovery mechanisms, but kind of everything, labor, electricity cost, freight costs and so forth. To what extent as you think about either your formal recovery mechanisms, or the pace at which you can re-price the business contractually, shorter cycles, say versus light vehicle programs that might have pricing locked in for multi-years, how do you feel about an inflationary scenario and its impact on Dana and the ability to pass on a broad range of input cost increases? James Kamsickas: Hey, good morning, Brian, this is Jim, really good question. You already said it. But I'm going to reiterate the point, yes, there's hard structured programs much more so on the commodity side of it, okay. So we place hold that one for a minute. The second one would certainly be out of the box. But I will start with - from unfortunately, somebody that was running a company in the middle of the crisis in '08 and '09 that our customers are a different customer base, in my opinion than they were, say, 10 to 20 years ago. And they need a healthy supply base, so they'd be the first one to tell you that they need a healthy supply base, especially a supplier like Dana that put so much focus and commitment and money into electrification and providing solution for the future and where things are at. So the discussions would have to be had, but I think they'd be a different level of black and white. This is what the contract says this isn't what the contract says, in the event that what you said holds true is related to inflationary pressures around the world. I'm not there yet. I know what you're saying. I'm not there yet that the inflationary pressures are going to be as extreme as maybe others are. But at the end of the day, again, I think between a combination of our ability to take out cost, the ability to have a global supply chain where necessary, as well as much more reasonable and understanding customers of the health of the supply base being critical. I think we'll get there and if there's no better evidence than that, I mean, just think about the challenges the OEMs are having right now as it relates to supply. They're going to want to make sure that they have sophisticated capable global suppliers such as Dana to be there for them to continue to create value for their customers. Brian Johnson: Right and they're benefiting from price inflation in the ATPs. Just a quick follow up and the first vehicle drive because that's fleet selected, is the pricing there a bit more flexible? Is it on an annual basis? Or is it similar to light vehicle procurement contracts where there's kind of a six glide path for pricing? Jonathan Collins: Yeah, there's some similarities and differences. So I would say it's a mixed bag. But in principle, there are some opportunities over time to address that. But there's certainly some structure as well, but I think you characterized it right. It's a bit more flexible than LV. Brian Johnson: Okay. Thank you. Thanks. Operator: Your next question will come from the line of Noah Kaye with Oppenheimer. Unidentified Analyst: Hey, guys, this is Brendan Steven on for Noah Kaye. Appreciate the color on the supply chain. Can you just talk a little bit about any strategic initiatives you're pursuing to better track suppliers and their inventory levels? And what you're doing to diversify the supply base? Jonathan Collins: Good question. And we welcome to the call. I appreciate that. I mean, there's a - we don't have enough time on the day right now to go through every initiative that we're doing to be able to kind of work through that. But there are many. There are those like you said, we've done anything from multi-dual sourcing, to re-engineering products to be able to produce them closer to home country. And I don't mean just for American manufacturing, but around the world. And the list is long. One thing is fortunately for us, it's not a journey that we just said, oh my goodness, we're in the middle of a pandemic, let's do that. That's something that we've been working on for at least three to four years, in terms of having flexibility in supply. And I'll even speak with an example. We're not a believer that everything has to be vertically supplied for sake of vertical supply. But instead making sure that we have balance in terms of what we do for a living. So I'll give - getting back to an example form, back three or four years ago, many of you may recall that we bought the - or acquired the largest independent forging company in Brazil, to give us more flexibility out of country, et cetera. So again, I could go on and on and on. But though all those are in place, we'll continue to see continuous improvement as we go through it on the supply chain, in my view. Because why one, everything I just talked about, and two as we came back from that V shape recovery, some may argue it was U, but whatever the case as you go through that you're certainly going to have to do it takes time to get some things in place. And many of those things are in fact in place now. Unidentified Analyst: Great, thanks. And then just a follow up on Modine acquisition, can you give us any update in terms of integration planning and incremental thoughts that fit into the portfolio? I know you said it got delayed, but just any thoughts there? Jonathan Collins: Yeah, the PMI work is progressed as normal. We're in a good position to be able to integrate that business. Just the regulatory process has taken a bit longer. And we should have a better update for you when we're together again in a few months. Unidentified Analyst: Great, thanks so much. Jonathan Collins: You're welcome. Operator: Your next question will come from the line of Aileen Smith with Bank of America. Aileen Smith: Good morning, everyone. And thanks for taking the questions. First one, when aggravating each of your segments is it possible for you to quantify how we should think about content per vehicle across regions? And where I'm getting with this question is when we look at the semiconductor shortages and supply chain disruptions, North America appears to be one of the more impacted regions, which I would assume is one that has higher content per vehicle for you guys. So is this a fair characterization? And would you expect to see any regional mix headwind on revenue growth in future quarters? Or is it going to be offset by the fact that mix within regions generally continues to improve? Jonathan Collins: Yeah, it's a very fair point. Certainly our highest CPV in the light vehicle segment would be in North America, so some of those foundational programs for us the Ford Super Duty, the Jeep Wrangler carry very high content, so you're right about that and that is some of the downtime when we think about North America that we've reflected in our second quarter. So we think that you're right, it's going to start affecting Q2. That's true in the light vehicle businesses. Maybe the exception to that is we do have pretty comparable content across the power technology segment in most regions. So you won't see much of a difference there from a content regionally in power tech, which largely serves the light vehicle market. On the off-highway and commercial vehicle side, I think there's a bit more parity in the content across the region. So largely what we're producing is for a global market and is pretty comparable, but I do - light vehicle drive systems is certainly a bit more skewed to North America. That's fair. Aileen Smith: Great, that's helpful. And then second question, when we look at the commentary around conversion on organic revenue, which I think excludes the impact from raw mat. Is it possible for you to bridge for us how you get from 15% conversion in 1Q to 26% for the full year, and a backdrop where you've talked about supply chain disruptions that may linger through the course of the year? Is it just a function of lapping easier year-over-year comps, particularly in the second quarter? Or is there something from an operational perspective that you think is going to be resolved on a relative basis in the back half of the year? Jonathan Collins: Yeah, it's two things. You hit one of them. It's the comp in Q2. So Q2 of last year obviously was just approaching breakeven on a dramatic sales decline. But you also touched on the second one, which is in the second half of the year we've indicated we do see some of these premium costs abating. And in the second half of last year, we saw a pretty significant impact to those parts of the business, for premium cost really across all of them. And then the other factor that really is outside of the organic conversion, but helps the overall margin profile is the catch up in raw material costs from a recovery standpoint, but just isolated to organic, it's those two items. Aileen Smith: Fantastic. That's very helpful. Thanks for taking the question. Jonathan Collins: Yeah. Thanks Aileen. Operator: Your next question comes from a line of Joseph Spak - RBC Capital Markets. Joseph Spak: Thanks. Good morning, everyone. You talked a couple times about LVD and the mix and the light trucks sort of holding up better this quarter. I'm wondering if also you guys - and maybe this is difficult to quantify, but do you think there's been any benefit, at least from a sort of compare versus some of the production forecast for those vehicles for your sales, because a lot of these automakers sort of employed this strategy to make as much of the vehicle as they can. So you might especially be sort of compare your results versus what was actually - what was reported as produced maybe screened a little bit better or is that is that difficult to comprehend? Jonathan Collins: Yeah, I think if it is it's on the margin because the inventories for those vehicles haven't risen. So they're still relatively low from a historical perspective. Demand remains really strong. So I don't think there's much of a dislocation there. And I would expect in Q2 that what you're going to see in our sales is likely going to be more comparable with our OE customers, as well as other Tier 1s that are supplying these programs. Joseph Spak: Okay, thank you for that. And then I noticed also in the slides, you talked about the EV investment growing by 20 basis points. I know you raised your sales guidance. So maybe you could just start talking about it more in dollar terms like is that also what was expected previously in your guidance? Or are you also taking the opportunity with maybe sales coming out better fits into stuff that up a little bit? Jonathan Collins: Yeah, it's pretty close to what we thought a couple of months ago. So that 20 BP headwind or that more than $20 million increase compared to 2019 was the reference that I was giving is pretty close to what we thought. We'll continue to watch that carefully. There's a tremendous amount of advanced sales and advanced engineering work that continues to happen with key customers across all of our end markets. So we do continue to highlight that. When it's - there's attractive opportunities to smarter customers with this core technology, we're going to take advantage of that. But no, that's not been a meaningful change from the original guide to this current guide. Joseph Spak: Okay, maybe just one last quick one. I'm sorry, if I missed this, but anything in particular behind the strong conversion in power technologies this quarter. Jonathan Collins: Just those markets continuing to perform us getting past some of the launches that we saw. And obviously, most of the commodity inflation we've seen has been on the steel side, so they're having less of an impact. So really that's markets getting better and the business performing well. So we're really encouraged about the recovery we've seen in that business over the last couple of years. Joseph Spak: Thank you. Jonathan Collins: Yeah. Craig Barber: Regina we'll take the next question. Alright, we're just going to pause for just a minute here while we reconnect the line with our operator and we'll continue our Q&A in just a moment. Operator: Your next question comes from the line of James Picariello with KeyBanc Capital Markets. James Picariello: Hey, good morning, guys. Craig Barber: Thanks for your patience James. Go ahead. James Picariello: No problem. Just back to the cadence for the year, it sounds as though you have decent visibility for the second quarter. So if we just think back to your prior guidance, right, which had a pretty even first half per second half split for both revenue and EBITDA. Can you provide any color on how we should be thinking about that first half second half breakout now within your current framework? Jonathan Collins: Yeah, I mean, I think the upside would follow - any potential upside we had in the second half would follow a comparable phasing where we're going to see typically based on workdays, higher sales towards the middle of the year, the second and the third quarter, which yields a better margin. Seasonally, Q4 is usually a little bit lighter on sales and on profits. So that's kind of how we're thinking about it. And obviously, once we get through the next couple of months and have greater clarity on the chip shortage, we'll be in a better position to give a better out what for the second half of the year. James Picariello: Okay. And then can you provide - I mean, is there any update on EV programs, maybe the EV program pipeline? And then you just remind us, based on what you've already communicated, what programs, what EV awards are starting to ship this year, the timeframe. And then Dana's EV related spend, is that unchanged for the year? I know that there's the 20 basis point impact is called out new guys is that, that a new number or is that - Jonathan Collins: So that - great point. That one remains consistent, so not a meaningful change there. What we were just highlighting is the impact that that's having on margins compared to just a couple of years ago. And we did want to accentuate that. Typically, we would look for cost efficiencies in other areas to help offset that. But right now, with everything that's happening in the supply chain, there's limited ability to do that. As it relates to backlog, really excited about the PACCAR medium-duty programs, where we're producing vehicles today for them. As a reminder, that's the complete electrified power train, not only the e-propulsion system or the electric drive line, but also the e-power system and the full embedded software and vehicle controls on that, so really encouraged about that. We highlighted some of the off-highway programs just on our last call. We have the scissor lift with JLG that's coming online, the Devinci we're excited about that. So those are a couple of the key programs there on the electrification front. As it relates to new programs, I tried to highlight just a moment ago. There is a tremendous amount of work with all of our customers across all of our end markets on the new business. So our advanced sales and advanced engineering teams are absolutely swamped right now getting pricing and technical timing to customers for a lot of these electrified products. We're really excited about more electrification business to talk about in the near future. But what we wanted to focus on today is all of the infrastructure work that we're doing to make sure that we can support those new programs. James Picariello: And then, if I just asked one more on the off-highway markets, I think in the - in your 10-K where you talked about industry global volumes for construction mining, ag anywhere in a range of flat two plus 5%. And it seems as though those markets are collectively recovering more rapidly. So is that a major component of the raised market outlook of 350 million? I think you said it's fairly evenly split across the segments, but just wondering on off-highway, because it just seems that the indicators are turning green fast. Jonathan Collins: Yeah, you're absolutely right, more so in ag than the other two. So ag has done quite a bit better than we anticipated that caught us off guard. And that's been very encouraging. But we are seeing, particularly in construction, there are some signs that that could do better as well too in the second quarter. Part of what affected our guidance is the fact that on the light vehicle side, or why it's a little bit more evenly split is in Q1 we thought we were going to see a bit more chip shortage impacting Q1 than we actually did so. But you're right, from a pure demand standpoint, really encouraged by what we see there and really hopeful that construction starts to pick up with some of this infrastructure spending that's planned because that's great contribution margin business for the off-highway segment as well as Dana overall. James Picariello: Thanks. Jonathan Collins: Yeah. Operator: Your next question comes from the line of Rod Lache with Wolfe Research. Rod Lache: Good morning, everybody. I wanted to ask about electrification, a number of light vehicle OEMs, even the ones that are in sourcing electric drive lines, like the GMs and Fords of the worlds seem to be aligning themselves with certain power electronics suppliers. And I'm wondering if you could just maybe talk a little bit about whether that has any longer-term implications for Dana or whether you think there's going to ultimately be multiple power electronics suppliers that would be separate from other aspects of their drive line procurement strategy? Jonathan Collins: Yeah, I think it's an interesting observation Rod. We're certainly seeing a broad range of sourcing models in electrification from component sourcing at customers to full system sourcing. We've been engaged in conversations across all of our end markets in the ability to supply certain components or a complete system. We think it's going to continue to create content upside. So we now have offerings in the electrodynamic or in power electronics and electric motors that we didn't have just a couple of years ago. So that's a growth opportunity for us. But clearly, a lot of our early wins that are in our backlog are for the full system. But the market you highlight, light vehicle is the one that's moving the slowest for our three, because they focused on the smaller and lighter vehicles. But we're encouraged by the engagement that we have with our customers across all end markets and are looking forward to this unfolding in the next year or two. Rod Lache: Okay. And maybe if you could just clarify for us the degree of confidence that you have, or visibility that you have on the decline in premium costs, and improving incrementals in the back half. Can you size up what sort of the delta might be and whether you think that has any implications as we think about the bridges into 2022 as that recovers? James Kamsickas: Sure, Rod, good morning. I'll let Jonathan touch on the backside of that question if he can, without going too far into the details or weeds. But in the big picture and a competence, I want to reiterate, part of it, besides going into supply chain piece of it is just the recoveries. I don't think in my 30 plus years of being in supply manufacturing that I've seen anything like it in terms of a run up. We've seen run ups, but not like this one. So I mean it is what it is. As it relates to supply chain, it is starting to - the world is starting to come back together a little bit. So I don't know that I can give you a direct answer. But those of you that are out there that maybe don't follow it as closely as certainly, you need to if you're leading a manufacturing company, is when you talk about sea container delays, when everybody talked about the ship, they get stuck in port that was small potatoes compared to all of the other sea container delays that were at port in Los Angeles or Norfolk, et cetera, et cetera. And so that jam which ultimately turned into a delay of returning of containers and vessels back to other countries of origin was a massive issue that's starting to sort itself out. So to quantify it exactly Rod, that's very, very difficult. There is a million moving parts out there between - obviously, it's the labor supply issues that any one of your calls you're going to have this quarter, you're going to hear about that from the Tier 1s, Tier 2s, Tier 3s to the supply of sea containers and vessels to so and so forth, very difficult to quantify. I will only say to you and you know this. Now this isn't per se my first rodeo on being an operations guy first and something else second, I don't know what is that we're - I Feel comfortable that it's getting better on a day-to-day basis. But for sure, this is not something that's going to be fixed in a day or a week. It's going to take its time. Jonathan Collins: Yeah, and just in terms of the margin profile Rod, we're indicating - we think Q2 is going to be better than Q1. But we wouldn't expect it to be such that the first half of the year would be at 11%. So we're certainly expecting most of the improvement in the cost to happen in the second half of the year. As Jim indicated, we've still got months, not days or weeks to work through some of these issues. But we are expecting an improvement this year to get us to that 11% margin. Rod Lache: Great. Okay, thank you. Jonathan Collins: Yeah. Operator: Your next question comes from the line of Dan Levy with Credit Suisse. Dan Levy: Thanks for taking the questions. First, I just want to - and I think you sort of addressed this in the questions. But the dynamics in light vehicle, particularly where you obviously had very good revenue contribution, your core platforms, I think were quite good, but the contribution margin only 16%. Is that - that's just purely a function of having this outside North America exposure. And that's where the supply chain issues were much more magnified. That's what underscores that lower contribution margin by vehicle, despite good core programs. Jonathan Collins: You got it. Yeah. It's these premium costs that we're incurring, not only on the logistics side, but also the operating implications in our factories due to not getting deliveries when they're needed. So you're right. And then obviously, LVs overall margin was affected by commodities in the first quarter as well too, but just on the organic conversion you hit the key items. Dan Levy: Okay. And then sort of a just a quick follow up on that, when your customers are seeing the same sets of pressures what is the - how did the tone or tenor of the commercial discussions with them shape up? Because they're seeing the same pressures as well and they're trying to do what they can to mitigate the pressures on their margin side, so how does that shape the commercial discussion? James Kamsickas: A good question a little bit will be redundant to my answer, so I apologize, but - or somebody else's question earlier, which is, I think you need to dimension into two different buckets. First of all, to talk about commodity costs, those are generally formulaic. And if they're not formulaic, there's precedents that everybody - both us and our customers are pretty familiar with. And we just roll down that path and we collectively work together. As it relates to the other associated costs on it, I would say it hasn't reached a pinnacle that it's become a pressure point or that, but I would say that they're - they do have the ability, I would call it this, not saying it's easy, but they do have the ability to move price on vehicle sales. And so in some - to some degree and some fashion, they're going to have a recognition that the supplier, the Tier 1 supplier can't be the ham and the sandwich. And I think you can visualize the visual I'm trying to paint there, and they'll work with us on that, and so on and so forth. And I would even say it all depending on market there's already some flexibility for extraordinary costs. And I'll just be more blunt about it on the off-highway side of the business for a multiple different reasons that I won't get into. But we're doing some I'll call it extraordinary things beyond extraordinary things to ensure that our customers are protected. And they've been very fair with us. Let's put it that way. Dan Levy: Great and then second question. I wanted to follow up on the EV sourcing question and specifically on the commercial vehicle side. We just saw some news of Volvo Trucks investing in a company that's doing some work on batteries and mobile charging technology. So maybe we can just revisit the interesting questions specifically on the EV side, because I know in the past that's where you had different dynamic versus light vehicle where there's maybe more in sourcing efforts, commercial vehicle, maybe there's more of a reliance working on suppliers. Is that evolving at all? Are you seeing that shift at all in terms of how your customers on the commercial vehicle side are looking at their sourcing decision? Jonathan Collins: Yeah. Dan, well, that's a fair characterization. Our experience is that it's been pretty consistent over the past 12 to 18 months. So on the CV side, some of these early vehicles that are coming to market, they are looking for very broad system solutions. And we've been in a great position to help provide those. But as that matures, we think that it's going to take on a lot of different forms as volumes, increase of some total system, some subsystems and even some component level sourcing. So lots of opportunity out there and we're engaged with our customers in all of those different models within the commercial vehicle space. James Kamsickas: I'd only add a little bit of color to it as it relates to the customers interest and their sourcing models and stuff like that and we always have to be a little careful not to turn every earnings call into a backlog discussion, because there's so many other things that happen in the world, in our business, et cetera. But just to reiterate, if garbled leave is lost in my overall upfront of commentary, it's not at all lost on our customer base that we have over a million and I said million, over a million miles travelled on our motors and inverters as we've been in this business for well over a decade. Okay, you could argue as it was acquired, but it's the same people, some of the same capital, it's the same knowledge base, some of the same warranty and field issue, learnings and all the other things associated with this. So our customers are very bullish on our - basically, we're not we don't fake it. It's one thing to go sell our program. It's another one to actually put it on the road to make sure that the total cost of ownership, as well as reliability is where it needs to be. And so our customers are really bullish on it. So I think we're going to continue to be in a position of strength as our markets pull through as they pull through. Dan Levy: Great, thank you. Jonathan Collins: Thanks, Dan. Operator: Your next question comes from the line of Ryan Brinkman with JP Morgan. Ryan Brinkman: Great, thanks for taking my question. There's been a lot of discussion regarding the Biden administration support for light vehicle electrification, including more funding for consumer tax credit, support for charging stations, et cetera. And I think a lot of the details have yet to be fleshed out. Maybe we'll hear more tonight, but just curious if you're seeing, hearing or expecting any incremental support or subsidy for electrification on the commercial side of the business, where maybe the math on cost benefit of subsidies might even be greater given high amount of miles driven per vehicle et cetera. Jonathan Collins: Good question. I don't want to speak on behalf of the government or the administration or anything like that, because who am I to know number one, number two? If I did, I'd be kind of crazy for saying anything. But number two is I don't think they're going to isolate light vehicle to commercial vehicle and anything else. I think it's more of a green solution, emission sustainability and the focus on overall, where's our world tomorrow? Not today. So I don't, - although it may seem like it in the big bold print that it's more in light vehicle for obvious reasons. I don't think that that's going to be the case moving forward. I think you're going to make sure you're going to hear a lot more about end markets across the board. Ryan Brinkman: Okay, great. Thanks. And then just finally, maybe on the flip side of the higher raw material input cost that you're seeing, which have been discussed at length. I'm just curious what might be happening on the ag or mining sides of the off-highway market? What sort of - what demand might look like there or how you think it might track going forward, just in light of the increase in revenue for the farmers and the miners around the world? James Kamsickas: Yeah, we certainly think that that's been one of the demand catalysts in ag performing so strong in the early part of this year. And it could be a great leading indicator of better performance in the mining segment as well too. So that's a catalyst that we're keeping a careful eye on. And part of the reason we think there's continued opportunity for the markets to strengthen throughout the year. Ryan Brinkman: Okay, and then just final follow up there, you did mention that Brazilian commercial truck might have been a little bit softer. And I know that sometimes the commercial truck down there can sort of benefit second derivative from mining and ag as they transport it around the country. Just curious, I don't know if that's due to some of the headlines around COVID down there, or what you're seeing with the Brazilian commercial truck market, and how that might track going forward. Jonathan Collins: Yeah, it's a good point. The demand - the underlying demand fundamentals are strong. So we should see a better performance there. The best indication we get from our local team and from our customers is you're right, the pandemic containment measures have affected that country and have had a bit of a cap on the output. So we're hopeful that as they work through that and people are more safe, one of the other benefits will be a better demand for our products and services later in the year. Ryan Brinkman: Very helpful, thank you. James Kamsickas: Thanks Ryan. James Kamsickas: Okay, well, thanks everyone for joining the call today. As always, I guess I put a quick stamp or summary on this one that I'm super encouraged. The business is growing. Profits are returning to normal levels. I'd almost put it into the phrase of this is what we've been waiting for. This is what we've been preparing for. And I think the team has done a remarkable job. We're a bit of a - a bit of the tip of the spear here in earning season as many of you obviously are aware of. So I feel like we're might be explaining this the unexplainable to a degree. This is a bit of - also falls into the umbrella of a once in every 100 year global pandemic and all the moving parts to go along with it. So besides the fact I hope we gave the audience some clarity on the craziness that are out there in whatever you got is dealing with. I just take this opportunity to thank our customers for working with us as we go through things. Thank our employees for everything they're doing to navigate through the challenges of what they're doing to protect their people as well as support our customers and the list goes on and on. It is nothing like any of us have ever saw before. I will tell you this it is dramatically tougher in my view anyway than anything we dealt with back in '08 and '09. So thank you everybody for your support. We look forward to giving you an update next quarter. Operator: This concludes today's conference call. Thanks for participating. You may now disconnect.DAN Ratings Summary
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