Dana Incorporated (NYSE:DAN) Q4 2022 Earnings Call Transcript

Dana Incorporated (NYSE:DAN) Q4 2022 Earnings Call Transcript February 21, 2023

Operator: Good morning and welcome to Dana Incorporated’s fourth quarter and full year 2022 financial webcast and conference call. My name is Rob 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 Rob and good morning to everyone on the call. You will find this morning’s press release and presentation are now 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 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 Jim Kamsickas, Chairman and Chief Executive Officer, and Timothy Kraus, Senior Vice President and Chief Financial Officer. It’s my pleasure now to turn the call over to Jim.

James Kamsickas: Good morning and thank you for joining us today. Please turn with me to Page 4, where I will discuss our business highlights for the last year and outlook for 2023. Starting on the left side, Dana achieved record sales of $10.2 billion last year, a $1.2 billion increase over the previous year driven by often erratic but solid customer demand, new business backlog in all of our end markets, and successful cost recovery efforts. While our top line has grown stronger, input costs continue to increase at a rapid pace due the global inflation and fluctuating industry demand. Adjusted EBITDA for the year was $700 million, down from 2021 as external cost pressures held back profit throughout the year. Despite the choppy operating environment and extreme inflation, I cannot be prouder of how our team managed working capital to generate free cash flow of $209 million, an increase of more than $420 million over the prior period.

Lastly for our results, adjusted earnings per share for the year were $0.37. Moving to the middle of the page, you can see some of the key themes for 2022 that drove our industry. For the past year, we’ve been discussing the challenging operating environment that our industry has faced. This turbulence included generationally high inflation, customer demand volatility, supply chain disruptions and currency fluctuations that have created significant external headwinds to navigate and overcome. These challenges have led to persistent negotiations with all our customers as we work to recover these higher input costs. While we have been successful in our efforts to recoup a large portion of them, we were not able to recover all of the inflation and customer-driven inefficiencies, or offset the margin impact.

Although our cost recovery actions fell a bit short of our expectations last year, I could not be more proud of the entire Dana team for their relentless perseverance and efforts throughout the year. As we all navigated through the unrelenting operating environment, our program launch team members remain focused and dedicated themselves to prepare for the largest volume of new business launches in the company’s history. We refer to these programs as roll-on business, replacing predecessor roll-off H programs that will no longer be in serial production. Our customer selected Dana for significant growth because, candidly, we create value with them. We can create value in many ways, but one significant way is because we’ve made the decision early to be at the forefront of power train electrification resulting in complete company transformation.

We were very intentional in doing what we refer to as leveraging the core. Over the past several years, we have accelerated change across all aspects of the business by leveraging synergies through our people, customer relations, operations and technology more than Dana had in its 120-year history. Today we leverage the capabilities across all our businesses and functions to win in all end markets. There are endless examples of this, but I’ll mention only a few. After our commercial vehicle group led our electrification movement on the first adopting buses and last mile delivery vehicles a few years ago, our light vehicle and off-highway team members benefited from these in-house capabilities to establish the same in-house four-in-one system capabilities.

Another example includes our power technology sealing and IC thermal team reinventing itself to not only position the company to lead in vehicle battery and electronics cooling technology, but they are also deeply integrated in Dana’s motor and inverter product lines, serving as one of the four critical elements in a four-in-one e-axle and e-transmission systems across all mobility markets. As a final example, historically Dana’s manufacturing plants were relatively isolated by business unit, but for the good of our company, customers and shareholders through the implementation of one common operating system, we leverage each of our 80-some major operating facilities to create value by driving synergies across all our factories. This has been especially important as we transition many facilities from pure ICE products to electrification products.

Later in today’s update, I will connect the dots, so to speak, of how Dana’s company-wide transformation has led to customer satisfaction and technology leadership position, which of course also leads to both ICE and electrification revenue growth. Moving to the right side of the page, we have highlighted our outlook for 2023. Beginning with the operating environment, fundamentals are somewhat improving throughout the mobility industry. The OEMs and supply base are addressing gaps, such as tiered supply disruptions, labor shortages, logistics constraints and so forth. While we do not anticipate an immediate return to historical operating stability levels, we are optimistic that demand volatility will ease throughout the year. In today’s presentation, I’ll also provide you a sense of the magnitude of the number of launches and roll-on business Dana has throughout 2023, and I will share details on the record sales backlog of $900 million over the next three years, which is $100 million improvement over the prior backlog.

We exceeded all expectations in overall sales growth and penetration into electric vehicle programs. This year, we’re expecting above-market growth driven by high volumes, improved pricing achieved last year, and market share gains in key segments. Lastly, we will walk you through some examples of exciting new EV program wins in each of the end markets that illustrate the significant sales growth. Our strategy is working to lead in electric propulsion from high voltage to low voltage applications in the markets we selectively operate. Let’s turn to Page 5, where I will highlight some of the major customer and industry recognition across all our end markets that Dana received over the course of 2022. Slide 5 shows a sampling of the numerous customer and industry recognitions that Dana received throughout 2022.

As you can see on the left-hand side of the page, Dana received no shortage of recognition from our customer base across all end markets and geographical regions. We are honored that they selected Dana as a supplier that exceeded their expectations, which undoubtedly plays an important role when new business sourcing decisions are made by the OEMs. This is certainly evidenced through Dana’s ability to grow the business by nearly 75% over the past six years. On the right-hand side of the page, you can see that we received numerous industry recognitions and certifications that reinforce our view that we’re running the business the right way. To that end, in 2022 Dana moved up to be the highest ranked among core competitors on the prestigious Drucker Institute List of Best Managed Companies.

In addition, we were recognized as a top employer around the world and recognized with numerous sustainability, diversity, equity and inclusion honors, including being named by Newsweek as one of America’s Most Responsible Companies and Greatest Workplaces for Diversity. We believe that corporate leaders must make a difference and Dana is making a difference. Let’s turn to Page 6 to where I would walk you through the key launches taking place in 2023. Our customers have choices, and they continue to entrust Dana with many of their most important, iconic and technologically advanced vehicles. This is a great honor and responsibility, and it’s something we do not take lightly. Over the last several years, we have been preparing to execute an extremely high cadence of launches in 2023, and we’ve done it in what was perhaps the most difficult operating environment in the history of the mobility industry all while transforming Dana to be an energy source-agnostic company.

Shown on this slide, Dana is launching products and systems on this representative sample of vehicles in 2023. These launches are balanced across ICE and electric vehicles, e-propulsion and e-thermal products, mobility end markets, and geographical end markets. In total, we have approximately 120 active launches, including new vehicles, new models, and significant vehicle capacity uplifts that require extensive collaboration across all functions throughout the organization. As such, Dana has invested significant capital to ensure the successful launch of these programs in addition to restoring appropriate pricing to achieve the proper returns. While I won’t walk through each one of them, I will draw your attention to a few key programs and highlight several exciting electrification programs later in the presentation.

Please note that we’ve denoted EV products with a battery symbol. Starting at the top of the slide, an all-new electric bike program for Zero Motorcycle that we supply a high efficiency 900 amp inverter for this application. This is their first e-adventure bike and one of several models that we supply for this customer in the future. Transitioning to the right, we are currently launching the traditional complete drive lines for Ford Ranger and VW Amarok in South Africa. The remaining global Ranger programs will launch in Argentina and the United States later this year. Moving to the right and down, we’re in the process of launching one of Dana’s largest programs, the Ford Super Duty. For this program, we supply several key products and systems, including not only front and rear axles and drive shafts but also numerous thermal and sealing products.

The Super Duty program will steadily ramp up throughout the first half of the year. With significant Dana content on this vehicle, there is an added cost associated with the launch. We likely will see a positive impact for this program in the second quarter and beyond. Another key launch is the GM, or General Motors Ultium program, which serves as the foundation of GM’s electrical architecture that will impact numerous vehicles in GM’s future EV portfolio such as the Silverado, the Lyriq, the Equinox, and BrightDrop. You can also see several programs in our off-highway segment, including JLG, JCB, and the Conquest business on the Fendt 700 Series tractor. In the bottom right corner, I would be remiss not to point out several of our commercial vehicle wins.

While not a traditional launch like you would have in light vehicles, we have been preparing for market share gains with key customers, such as Paccar, Volvo and tradesman. We are incredibly appreciative of these opportunities and the decades-long partnership we have had with these customers. Continuing along the bottom is the launch of the highly anticipated, newly redesigned Jeep Wrangler and later in the year Jeep Gladiator, which combined is one of Dana’s largest programs. To the left of the slide, we’ll be launching what we refer to as uplift volumes on the Ford Lightning later this year. As we get to the end of the year, we’ll be in production on bipolar metallic cooling plates on the Nikola Iveco Tre fuel cell electric vehicle, and rounding out the year is the launch of the EV yard truck for Hyster-Yale and Toyota’s new Tacoma program.

Turning to Slide 7, we will talk about growth as I walk you through our three-year new business backlog. Before we jump into the details of Dana’s 2025 sales backlog, allow me to remind you that Dana calculates backlog on a net basis, meaning it includes net sales net of any losses, and we re-base the starting year and push out the ending year of each three-year period. This methodology provides a clear view of the actual above-market growth. As you will recall, I purposely highlighted the numerous industry and customer awards earlier in the presentation to articulate the often forgotten parallel between providing exceptional customer satisfaction and running the business the right way to winning new business. To this end, Dana has amassed $900 million of sales backlog through 2025, a record for the company that is $100 million more than our prior three-year backlog, and as you can see in the upper part of the slide includes $300 million of incremental new sales coming online in 2023.

This is the sixth consecutive year that Dana has increased our three-year backlog. Included in this year’s $300 million incremental new business backlog is a number of new programs across all markets. We expect to see an additional $150 million increase over the prior backlog for 2024, which will total $350 million in incremental sales with several important programs coming online for Stellantis, DAP, and Mitsubishi Caterpillar, to name a few. Turning your attention to the upper right-hand of the slide, you can see that our sales backlog is well balanced across end markets and regions, and if you’ll move to the bottom right corner of the page, you will notice the EV versus ICE chart shows that 65% of our total $900 million backlog is coming from electric vehicle programs.

This 30% increase from last year’s total is evidence that our in-house electrification and e-thermal management capabilities across all mobility markets are a differentiator that continues to position Dana for success as the world evolves to electrification. The velocity and momentum of our new business wins should continue for the foreseeable future. Turn with me to Slide 8 for an update on the market outlook. As I’ve stated in my opening slide, we do expect some improvement in production across all our end markets as we progress through the year. Vehicle inventories have improved but remain below historical levels across all our end markets, while at the same time end customer demand for key vehicle platforms remains resilient. OEM fulfillment of this pent-up demand should continue to drive production.

A quick reminder of how to read the chart on Page 8. Our market outlook is based on input from third party forecasters as well as our customers and our own experience. The arrows for the markets and regions indicate the change expected for the year compared with 2022. For production volumes in these key markets, the arrow at the right under the diamond is the net sales impact for Dana for market volume, pricing, and market share changes. Beginning on the left-hand side of the page, in the full frame market where Dana has a strong presence, third party forecast services are expecting production levels to remain relatively consistent with where we ended last year. Moving to the center of the page, the market for heavy vehicles remains resilient and consistent with last year’s as OEMs continue to report strong order books.

Remember that even with disruption impacting production last year, it was still a very good volume year at over 300,000 Class A truck builds and, as I mentioned earlier, we are gaining market share in Class A trucks which will drive above-market growth in commercial vehicles. Moving to off-highway, as inventory levels continue to rebound for construction and agriculture equipment, we expect agriculture to be flat while construction and mining demand should both somewhat increase. At the bottom of the page, you can see on a regional basis North American and Asia Pacific production is expected to accelerate some in 2023 while Europe and South America remain flat. Overall, we anticipate above-market growth due to somewhat higher volumes, market share gains, and improved pricing resulting in $300 million in higher sales this year.

Please turn with me to Slide 9, where I’ll share the details of some exciting new programs we are working on. Building on our longstanding relationship with Jaguar Land Rover, I’m pleased to share with you today that Dana will be supplying our thermal tech battery cold plates and batter electronics module cooling for JLR’s three next-generation global electric vehicle platforms. Under its re-imagined strategy to realize a sustainably driven future for modern luxury, JLR’s ambition is to achieve net zero carbon emissions across the supply chain, products and operations by 2039. Dana has a long association with Jaguar Land Rover, having supplied components to some of its most iconic vehicles for more than a decade. We are looking forward to helping them continue their journey by providing thermal management products for some of their most advanced and now sustainable vehicles in the world.

Please turn with me to Slide 10. The Dana Graziano brand is known worldwide for its technically advanced transmission solutions for higher performance vehicles. OEMs such as McLaren, Ferrari, Lamborghini, Audi and Aston Martin, to name a few, rely on Dana to supply premium drive line products for both conventional and electrified applications. Today, we’re excited to share with you that we will be partnering with a global OEM for their next generation of electric sport vehicles for both North America and Europe. Dana will be providing our two-speed electric drive module for several models of their electric sports cars. Our fully integrated electric drive module will help to ensure these electric sport vehicles maintain leading power density and full system efficiency that sets them apart in the marketplace while also helping to further reduce emissions.

Moving to Slide 11, I would like to shift gears and talk about several new programs for delivery vehicles. BrightDrop is a subsidiary of General Motors that is reimagining commercial vehicle delivery and logistics for an all-electric future. General Motors formed BrightDrop in 2021 as a business focused on providing emissions-free products for delivery companies and they are moving at warp speed, going from concept to commercialization in less than two years. Dana has supported General Motors over a century – that is why we’re excited to continue the relationship by supplying the patented rear axle for all-wheel drive version of the Zevo 600 delivery vehicle, while we’ll also provide the rear axle for the Zevo 400 all-wheel drive launching later this year as well as the front-wheel drive version of both the Zevo 400 and 600 scheduled to launch next year.

Please move to Slide 12 where I’ll share details about an important new program featuring Dana’s four-in-one e-power train system. Blue Arc is part of the Shyft Group, formerly Spartan Motors, in their all-new medium duty electric delivery truck that’s designed for high frequency last mile delivery fleets. The BAV features Dana’s electric rigid beam axle 800-volt inverter that is designed to meet today’s demanding and complex commercial applications providing features such as weight reduction, additional payload, greater battery capacity, and increased range and cost savings. Our compact and robust four-in-one system is capable of handling a wide range of both on and off-road vehicles. BAVs work well for last mile delivery services since they avoid vehicle idle laws in certain cities and make use of stop-and-go city driving to recharge through regenerative braking.

Please go to Slide 13 now, where I will highlight a recently announced multi-year program for our off-highway segment. As demand for electrified compact construction equipment continues to rise, we are pleased to share that Dana was recently selected by Wacker Neuson Group, a leading manufacturer of construction equipment, to provide the e-propulsion system for its compact construction vehicle line-up in Europe, including an electric wheel loader and electric telehandler. The multi-year program is expected to begin production later this year. It will feature complete vehicle integration of electro-dynamic systems, including a Dana traction and work function motor, an inverter, e-transmission and drive line controller that through our in-house software development capabilities manages the energy source powering vehicle traction and multiple operating functions, such as hydraulics, AC, vehicle lights and accessories for Weidemann and Kramer brands.

We are excited about the opportunity to continue our more than 20-year collaboration with Wacker Neuson as we work together to bring this complete e-propulsion system to market, helping to meet the rising demand for sustainability solutions. Thank you for your time. I’ll now hand it over to Tim, who will walk you through the financials.

Timothy Kraus: Thank you Jim, and good morning. Please turn to Slide 15 for a review of our fourth quarter and full year results for 2022. Beginning with the fourth quarter, sales were $2.6 billion, a $282 million increase over last year, and for full year 2022, sales were a record high $10.2 billion, an increase of $1.2 billion. Higher sales were primarily driven by improved demand in all of our end markets and recovery of commodity and other cost inflation through pricing actions. Fourth quarter adjusted EBITDA was $176 million for a profit margin of 6.9%, which was 170 basis point increase over last year driven by better operating performance and customer recoveries, partially offset by higher input costs. Full year adjusted EBITDA was $700 million, $95 million lower than the previous year mainly due to cost inflation and customer and supplier-driven production inefficiencies.

I will cover sales and adjusted EBITDA in more detail in a moment. The loss attributable to Dana was $179 million for the fourth quarter of 2022, compared with income of $27 million for the same period of 2021. The loss was mainly driven by a one-time non-cash adjustment of a valuation allowance on U.S. tax assets of $155 million. Full year net loss was $242 million compared to income of $197 million last year. The primary drivers of the loss were a one-time non-cash goodwill impairment charge of $191 million in the third quarter due to increasing interest rates and lower market capitalization and $157 million of tax valuation allowances. Finally, free cash flow was $202 million for the quarter and $209 million for the full year – that’s a $420 million improvement over full year 2021 driven by our efforts to effectively manage working capital.

Please turn with me now to Slide 16 for a closer look at the drivers of sales and profit change for the fourth quarter of 2022. The results for the fourth quarter were significantly above 2021 despite several headwinds that were stronger than we expected. Let’s begin with traditional organic sales growth of $319 million, which was driven by higher demand in each of our segments and cost recoveries from customers. Adjusted EBITDA on the higher sales increased $82 million, a margin benefit of 260 basis points including net cost inflation headwind of approximately $25 million. Other cost wins in the quarter included volatile customer production schedules caused by continued supply chain disruptions that drove inefficiencies in our operations. We also experienced elevated levels of launch costs to support our high volume of new programs and in preparation for increased production to support market share gains in our commercial vehicle business.

While these upfront costs lowered profit in the fourth quarter, the payback of roll-on new business and share gains will benefit us this year and for several years to come. Second, EV product sales increased $43 million over last year’s fourth quarter. We continue to see profitable contribution from new EV sales but, as Jim mentioned earlier, we are in a rapid expansion of our EV product offerings and our investment in EV engineering to support new business has accelerated and is the primary driver of the 40 basis point margin headwind from our organic EV business. Third, foreign currency translation headwinds continued during the quarter and reduced sales by $128 million as the dollar increased in value against a basket of foreign currency.

This lowered profit by $15 million and had a margin impact of about 30 basis points. Finally, the recovery of prior period commodity costs added $48 million in sales, but we did not see the net profit benefit we expected due to commodity costs remaining elevated longer into the fourth quarter than expected, resulting in a 20 basis point margin headwind. Next, I will turn to Slide 17 for a closer look at the drivers of sales and profit change for the full year 2022. The first driver is traditional organic sales growth of $942 million driven by higher demand in each of our segments and significant cost recoveries. Adjusted EBITDA on the increased organic sales decreased by $27 million, a margin headwind of 110 basis points. This decline was primarily due to net cost inflation of approximately $117 million.

Throughout the year, we worked through volatility in our customers’ production schedules resulting from disruptions and delays throughout the supply chain that hindered our operating efficiency. Second, EV product sales grew $243 million over 2021. Our new EV sales generate significant contribution margin; however, you will notice that EBITDA was reduced by $21 million on this growth. The 40 basis point margin headwind is primarily driven by our intentional investment in engineering and commercialization to bring new EV technologies to market. This higher investment is directly linked to the growth in our EV sales backlog. Third, foreign currency translation reduced sales by $420 million as the U.S. dollar increased in value against a basket of foreign currencies, notably the euro, baht and rupee.

This lowered profit by $46 million, a modest margin impact. Finally, the recovery of commodity costs added $446 million in sales with minimal profit impact primarily driven by higher steel prices. We recovered a significant amount of the material cost increases last year, however we expected to see material prices fall at faster rates in the fourth quarter than they actually did, and we did not see the anticipated profit benefit from commodities. Please turn with me to Slide 18 for detail on our 2022 free cash flow. Free cash flow was $209 million in 2022 compared to a use of $211 million in 2021. This significant improvement was due to our focused management of working capital throughout the year, overcoming lower adjusted EBITDA, higher taxes, and higher capital spending.

Lower one-time costs more than offset higher net interest. Cash taxes were $33 million higher due to the mix of higher profits in jurisdictions with higher tax rates, as well as the timing of cash payments. Working capital was a source of $204 million of free cash flow, which is a $610 million improvement over 2021 as we have made significant efficiency improvements in working capital by aligning commercial terms with the current environment. Finally, capital spending was $71 million higher than in 2021 as we continue to invest in our capabilities and capacity to support market share gains as well as our new business backlog, including electrification programs. Please turn with me now to Slide 19 for our 2023 outlook. The market outlook for 2023 is shaping up to be a better environment than we experienced last year.

First on the left of the slide, we expect to continue to recover prior period commodity cost increases through the first half of the year. As commodity costs moderate throughout the year, our recoveries will also step down with about a one quarter lag to falling input prices, causing commodities to be a net tailwind to profit this year. The relative strength of the U.S. dollar compared to the basket of foreign currencies in which we transact is likely to continue to be a headwind to sales and profit in 2023, given last year’s average rate for many of our most significant currencies. As we move to the middle of the page, net cost inflation is expected to be neutral to a slight profit headwind. While we are anticipating increased operational costs for things like energy, labor and logistics, pricing and cost recovery actions should mute most of the impact.

Moving to the right of the page, demand for key vehicle platforms remains strong and vehicle manufacturers are working to restock dealer and inventory levels are beginning to rebound in certain markets. Fulfillment of pent-up demand will likely take most of the year as OEMs’ operations begin to normalize. We expect that customer order patterns will become more stable and production inefficiencies will begin to abate late this year. Please turn to Slide 20 for our 2023 full year financial guidance. We expect 2023 sales to be approximately $10.6 billion at the midpoint of our guidance range, an increase of about $445 million from 2022. Adjusted EBITDA is expected to be about $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 point 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 growth and capital spending increases to support our backlog and market gains. 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 U.S. tax assets recorded in 2022. Please turn with me now to Slide 21, where I will highlight the drivers of full year expected sales and profit changes from last year. Beginning with organic growth, compared to last year we expect an additional $450 million in sales from traditional products through a combination of new business, market growth, market share gains, and customer recoveries.

Adjusted EBITDA increase on total organic sales is expected to be about $60 million. Included in that is the impact of inflationary costs which we are estimating will total approximately $50 million net of recovery. While gross inflation will continue to be elevated, we are expecting recoveries to offset most of the increase but will continue to be a hindrance to margins. Also included in the organic column are lingering customer-driven operational inefficiencies and program launch costs, which will contribute to below normal profit conversion. We expect about $150 million incremental EV product sales this year. This will bring our expected total EV sales, including currency headwinds, to more than $700 million in total for this year. As Jim highlighted, our backlog of EV business continues to grow and we will be making further investments for development and commercialization of these new technologies which will offset the profit benefit from higher sales.

Our expected change in EV adjusted EBITDA will be a decrease of about $30 million. Foreign currency translation on sales is expected to be a headwind of approximately $140 million with a profit impact of about $15 million. Finally, our commodity outlook has us recovering about $15 million less than last year due to falling prices for steel and other commodities. Lower input prices in the lag in recoveries will result in a net profit tailwind of about $85 million. Please turn with me to Slide 22 for an outlook on our free cash flow for 2023. 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 material costs.

More than offsetting the profit increase is a moderation of our growth and our working capital efficiency. Working capital continues to be a slight source of free cash flow despite the investment required from increasing sales, 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 last year. Finally, please turn with me to Slide 24 for a look at our midterm financial outlook and capital structure. As we focus forward, I would like to outline our targets for 2025. Earlier, Jim highlighted our sales backlog of $900 million. This strong growth combined with market share gains and higher content on EV products has us targeting sales between $11 billion and $12 billion with adjusted EBITDA in excess of $1 billion, driven by conversion on higher sales and improved profitability in our EV business.

We expect free cash flow to be around 3% of sales, which includes suitable capital expenditures to support our future growth. Our midterm leverage target is approximately two times. We believe this is an achievable target and we expect our profit to increase while we actively manage our balance sheet and utilize our excess free cash flow for debt reduction. Longer term, we believe our net leverage should be in the range of 1 to 1.5 times. Moving to the right-hand of the slide for a look at our capital structure, we had strong liquidity totaling $1.5 billion at the end of December. Our debt capital remains stable with our nearest maturity being in 2025. Together, our solid liquidity position and profitable and growing core business will continue to fund our transformation for the future.

Thank you for your time today, and I will now turn the call back over to Rob to begin the Q&A.

Q&A Session

Operator: Your first question comes from the line of Noah Kaye from Oppenheimer. Your line is open.

Noah Kaye: Good morning and thanks for taking the questions. Maybe you can start by helping us understand some of the margin puts and takes for ’23. Maybe quantify what you’re assuming as a tailwind on the commodity front and then how you think about the incremental headwind from material cost inflation or otherwise.

Timothy Kraus: Sure, I can take this one. On commodities, it will be about an $85 million tailwind on the EBITDA line, and then if you think about inflation, inflation should be about a $50 million net headwind to profitability.

Noah Kaye: Great, thanks. Then you called out the net investment spend on EV as a $30 million headwind year-over-year, I believe. Can you just refresh for us now relative to the target you put out at capital markets day, when you now think the EV business should be breaking even?

Timothy Kraus: When you think about our EV business and where we see it becoming breakeven, it’s certainly within the nearer term, so within the 23 to 25 time horizon. A lot of what’s changed is as we think about where we were a couple of years ago to where we are today, we really did believe that there would be a lot more of the sales growth would be coming from the adoption of current EV programs, so think of direct drive in commercial vehicle. What we’ve seen happen much more quickly is a pivot to full three-in-one and four-in-one systems throughout the markets we serve, and that’s really caused the requirement for additional EV investment in the near term. We also continue to invest into programs that today really won’t come on and won’t see any major sales growth until outside of the backlog period.

Noah Kaye: That’s very helpful. If I could just sneak in one more, and this is sort of a housekeeping item, do you think that the capex would sort of stay in the $500 million range for at least next year, based off of what you said, and maybe you could expand a bit on the tax rate as well, what you think about as a normalized tax rate as we maybe move past this year and into ’24.

Timothy Kraus: Yes, so I’ll take the tax rate first. I think the tax rate stays significantly elevated over the near to midterm, really based on having the valuation allowance up in the U.S. Then on capex, the capex we have currently in the plan supports what we have in the forecast and in the backlog for EV sales. To the extent we were to win significant additional business, that could change over the longer term, but pretty comfortable with the nearer term capex levels that we’re seeing in ’23.

Noah Kaye: Okay, thanks so much. I’ll turn it back.

Operator: Your next question comes from the line of Dan Levy from Barclays. Your line is open.

Dan Levy: Hi, good morning. Thank you. Just wanted to follow up on that prior question, and I think you’ve sort of alluded to it already. The $500 million-plus of capex, that isn’t the highest annual amount you’ve ever done, so–and is all of this just really if near term and longer term programs that are requiring a significant step-up, and is there any catch-up in this capex, because I think the key question here is just on the path to free cash and a lot of that is based on the capex.

Timothy Kraus: There’s a very small amount that you’d think of as catch-up, maybe coming out of some of what we’ve seen, but most of it is being spent to support both the growth in the EV business but also the market share gains that we have in the business overall. If you just think about it, the EV business alone didn’t exist five years ago and now we’re seeing EV spend that is an exceedingly large percentage of our total capex spend.

Dan Levy: Got it, thank you. Then my follow-up is on light vehicle, and maybe you can just help us unpack what’s going on there. Obviously ’22 was quite hard, just given all the stop-start and the impact, and that’s why your contribution margin was quite weak, but what is your visibility of these trends reversing, what is the path to getting back to a double-digit margin that you used to have? Then maybe you could also just talk to specifically from a program side, you’re losing Colorado Canyon but you have the Super Duty launch, where it looks like you have incremental content, so what’s the net of those launches? Thank you.

James Kamsickas: Good morning, thanks for the question – this is Jim. A couple things. Let me work maybe from the back forward on that. If you look at the offsets on that, hopefully it was picked up on, but Colorado Canyon did roll off. We refilled that plant with an electric that I didn’t announce, by the way, an electric program going in, so concrete for concrete, it’s net-net. Also, if you think about GM as an aside to that, I mentioned the launch that’s launching right now, so all that sort of offsets. That’s comment one. Relative to the balance of it, how to think about light vehicle, you’re right – there was turbulence like you can’t imagine, turbulence in terms of schedule volatility and start-stop and mix change and trapped labor.

It is what it is – you all understand it by now. It’s still chunky out there – there’s no doubt about it, but I will tell you it feels like, at least it seems like customers are being very, very intentional about working through the debugging of a lot of that stuff with their own supply chain and other challenges that are out there, so as I mentioned in my prepared remarks upfront, we see that subsiding on the back half of the year if the trend goes in that direction. Hopefully that answers your question, but certainly no one’s out of the woods for that, at least for the next few months in my view.

Dan Levy: I’ll just add a follow-up on that. Are there any other levers that you can pull in light vehicle to help mitigate this, and I don’t know if there’s maybe applying learnings from off-highway, where you’ve done pretty well, but anything you can do to help to mitigate some of these pressures?

James Kamsickas: Yes, the most important thing we can do – I’m not going to ask you to do it right now, but go back to our–when you get a chance, go back to the launch slide, it just kind of reinforces the way the light vehicle business works. It’s different than off-highway. It’s different–they’re all a little bit different in their own way, as they should be. If you go back and you think about our book of business of, whatever – plus or minus $4 billion in that light vehicle segment, and then you think about the size of Super Duty which is launching this year, if you think about the Jeep Wrangler/Gladiator that’s launching this year, if you think about the size of the Ranger platform in Argentina, America and South Africa launching this year, I mean, it’s kind of a reset.

It’s got the growing pains of launch costs that go with it, but that’s how you readjust and re-correct after somebody’s gone through the black swan events that our business has gone through, and hyper inflation and supply chain disruption and all that stuff. The Dana team has done a remarkable job preparing for these launches, and South Africa is going well and we’ll get it done, but you can’t speed up the clock to get through 2023. You have to let the programs roll themselves in.

Dan Levy: Great, thank you.

Operator: Your next question comes from the line of Emmanuel Rosner from Deutsche Bank. Your line is open.

Emmanuel Rosner: Thank you very much, good morning. My first question is on the 2025 targets, which are extremely helpful, but then I’m trying to put them into context – you know, it still suggests probably only 9% EBITDA margins or so on these high revenues. I was just curious if you could just compare and contrast with your historical midterm target, which was looking for 12% at that $10 billion revenue range. What has fundamentally gotten worse? I understand that there is choppiness now and volatility, but this is a 2025 target, so I guess what is different and what would it take to essentially get you back into these higher margin targets?

Timothy Kraus: Yes, hi Emmanuel, this is Tim. I think when you think about the targets that were put out, there was no thought or even consideration for the rapid amount of inflation that has come through and then the sales that have been generated off of those recoveries, which come not only with no margin but obviously come with a margin headwind. I think to get the business back to double-digit margins, all of those margin headwinds are going to have to be wrung out of the business, which is going to take some time as we continue to turn over programs across all of the end markets. Light vehicle is the one we think about currently, but certainly this is a–it’s impactful for margins across the entire business. I think that’s the first one to think about when you think about the prior targets, and we’re talking about billions of dollars in–or hundreds and hundreds of millions of dollars worth of sales that are not coming with any margin.

Emmanuel Rosner: Okay, that’s helpful. Then I was hoping you can help us–give us a little bit more color around the profitability of your EV business and, more importantly, the trajectory ahead. It’s helpful to know that you’re still targeting breakeven within sort of the midterm horizon. When I’m looking at the amount of information that you’re giving us, so I think $700 million in sales in 2023, up about $150 million or so, and then it results in a negative $30 million swing in EBITDA, are your EV sales currently at target gross margin and it’s really just R&D that is essentially putting it into negative territory, and are you able to quantify the EV R&D for us?

Timothy Kraus: Yes, so yes, we are–those sales do convert at what we would consider to be good margins. It’s really the investments that we’re making in engineering, but also really building an entire EV business and infrastructure, from program management to sales to engineering, right – all of that has to be put in place, and that has really ramped much, much more quickly than we had originally anticipated. When you think about just the number of quotes that the teams are working on and the amount of the backlog that’s now coming on that’s now EV, while we still have a full ICE business that we’re servicing, it’s an immense amount of investment that has to be made. But we’re–the business is converting well, it’s just that the amount that we’re investing in the infrastructure to bring those and all of the new programs to market is outpacing that.

Emmanuel Rosner: Are you able to quantify for us the EV R&D or engineering, either as a percentage of the total or in dollar terms, and whether it’s at the right place as a percentage of revenues or if you would expect it to increase more over the next few years?

Timothy Kraus: We would expect it to start to moderate. I won’t comment on the total dollar amounts or percentages, but obviously it’s higher today than we have historically had as a percentage of sales, only because we’re spending a lot of upfront dollars on new programs that haven’t started to generate sales.

Emmanuel Rosner: Okay, thank you.

Operator: Your next question comes from the line of Colin Langan from Wells Fargo. Your line is open.

Colin Langan: Great, thanks for taking my questions. Just to follow up on the prior midterm targets versus where you are now, I’m just trying to understand because the target used to be $10 billion in sales at 12% margin, which is like $1.2 billion, and now you’re at 11.5 at the midpoint for ’25 and just over a billion, so it does seem like something else structurally has gotten worse, more than just the inflation diluting the percent margin. Is there some other headwinds that are kind of baked into 2025 at the midpoint?

Timothy Kraus: Well Colin, I think there’s two things. One, I can’t explain enough without going into an immense amount of detail the impactfulness of both inflation and the commodities on margin percentage. I think the other is that as our EV business continues to grow, and while we’ll get to breakeven, that pull ahead of EV investment and the growth in that business and not converting on a net basis at the same place as the mature ICE business is both impacting margins.

Colin Langan: Okay, got it. Then the prior target was 5% free cash flow conversion versus now you’re talking about 3%. The difference is capex and just a lower margin assumption. Anything else that would be baked in there?

Timothy Kraus: Yes, it’s a couple of things. One is obviously elevated levels of capex, but we also would anticipate with rising interest rates and other costs, that those would also be impactful as well, as well as from a tax perspective.

Colin Langan: When I look at light vehicle and commercial vehicles, sequentially sales were fairly flat, down a bit, but margins were a lot worse. Any color on what’s happened in the quarter sequentially there that made the margins so much worse?

Timothy Kraus: I’m sorry, on LV and–?

Colin Langan: The light vehicle and commercial, yes.

Timothy Kraus: Yes, so light vehicle, I think on both of those we were incurring higher than anticipated launch costs. We’ve got very large launches that we’re preparing for on the light vehicle side this year, right – we’ve got Super Duty and the re-launch of the Wrangler coming in, as well as current launches going on around the world for global Ranger. Then on CV, we continue to–and of course, all of them are still impacted by customer and supply chain issues. But I think the other thing on the commercial vehicle side is the teams are really preparing for market share growth and new business in the commercial vehicle side that we hadn’t originally anticipated were going to come in 2023.

Colin Langan: Got it, and just one last one – when I look at Slide 21, I would have thought that some of your growth would reflect recoveries for some of the net inflationary costs, but if I look at traditional and/or EV growth, that $600 million, and I think your slide before said it was 300 market, 300 new business, so where would the benefit of price recoveries for inflationary costs fall in the sales walk?

Timothy Kraus: Well, in the sales walk, it would primarily fall on traditional versus EV, because a lot of the EV is new business so those would already be currently priced. I think if you think about the profit conversion, if you just think about the impacts of inflation, the $60 million on 450 converts at, what, 12% or 13%. If you just add the $50 million which is primarily on the traditional organic side, we’d be getting a conversion that’s more like 25%, so, which would be much more what we–would be much more in line with where we would see the business convert at. But bear in mind, right, the inflation is still a net headwind both in terms of profit and in terms of margin, because what the implied inflation–what the $50 million inflation implies is that we’ve not recovered dollar-for-dollar cost.

Colin Langan: Got it, but just if I add those two, so that when you talk earlier in the slides about $300 million of market, that also includes–is that where the expected recoveries are baked into, that $300 million piece of it?

Timothy Kraus: It would be.

Colin Langan: Okay, all right. Thanks for taking my questions.

Operator: Your next question comes from the line of James Picariello from BNP Paribas. Your line is open.

James Picariello: Hi, good morning guys. Just a follow-on to the last question, to Colin’s question, can you confirm what was Dana’s net pricing this past year and what is embedded from a net pricing perspective in the guidance for this year?

Timothy Kraus: Yes, we don’t generally break out pricing. Obviously it’s a subject that is always a difficult one to have with the customer, and so we don’t generally break out pricing discussions or amounts in the walk.

James Picariello: Okay. Then just for the cadence for the year, it sounds as though it will be back half weighted here from a margin improvement standpoint. Just curious if you could put a finer point on how the first quarter is trending, how you’re thinking about maybe the first half or second half split. Any color there would be helpful. Thank you.

James Kamsickas: This is Jim. Thanks for the question. Like you said, just because it’s kind of out of our control, where the volumes are, launch acceleration cadence, all the other things associated with some supply chain stuff going out there, exactly what you just said right there. But the positive, I would tell you for sure, is that the pent-up demand, because we’ve been very intentional of which markets we participate in, as you know, so we’re not, for example, in the pass car business for good reason and we’re in obviously truck, SUV and above – plenty of pent-up demand there. We’re ready for the launches, we just can’t speed up the clock, per se.

James Picariello: Thanks.

Operator: Your final question comes from the line of Rod Lache with Wolfe Research. Your line is open.

Rod Lache: Good morning everybody. I was hoping just to get a little bit more color on the bridge to your mid-decade target. You’re talking about $200 million of additional EBITDA from 2023 to 2025 on a billion of additional revenue. When I look at the backlog over the next two years, it looks like maybe $400 million of that billion dollar growth comes from EV business over those two years, and you did mention that that business is expected to get to breakeven and presumably it’s a $50 million loss right now, but maybe you can give us a little bit of color on whether this turnaround for the EV business, or overcoming the initial launch costs is a significant part of that $200 million of additional EBITDA that you’re targeting for mid-decade.

Timothy Kraus: Yes Rod, good question. Yes, I think it’s a combination of a couple things. As you mentioned, right, the EV business gets larger and gets to breakeven over that period, so that’s obviously no longer a drag on overall profitability. I think the other is you’ve got additional roll-on programs, so we’ve got a lot of programs that are rolling on this year, they’ll obviously go through launch, we’ve got 120 launches, we start to see an abatement in the costs we’re spending there, and the obviously the new programs end up at full run rates post-’23, so into ’24 and then later, so those will help margins. The other is as the customers work out their issues and we get much more normalized production patterns into ’24 and ’25, one, the costs associated with that start to come out, and then also on the flipside, we’re able to be more efficient and drive cost savings in the plants from an operational perspective that we continue to have difficulty with as the customers run poorly.

Then the last one would be we see inflation continuing to moderate throughout that period, which should be less of a headwind or perhaps–I wouldn’t call it a tailwind, but certainly no longer a headwind. I think the combination of all those is how you can bridge from sort of the $800 million in ’23 to the target of greater than a billion in ’25.

Rod Lache: Thank you. Just secondly, I think you’re pretty clear on what the differences were between the old targets and the new targets. You absorbed $117 million of inflation last year net of recoveries, and $50 million is expected this year, so that’s crystal clear to me. What I was hoping you might just clarify, it sounds like you need to work through the roll-offs and roll-ons of backlog to offset a lot of that over time, but a lot of the backlog that you’re getting in 2023, 2024, these were things that were awarded a few years ago. Will that backlog reflect the current cost of doing business, or is it kind of things that you’re winning now that will come on in three years, that that gives you the opportunity to kind of get over the inflationary costs?

James Kamsickas: Hey Rod, thank you for the question – this is Jim. That’s a right on mark question, and the answer is yes. They’ve been reset, I would call it for, per se, current economics. It may not be exactly the same margin benefit we had before, but on total dollars, return on investment, and all of the critical characteristics of any program and hurdle rates, that’s how we’ve set up the business. Again, we just can’t speed up the clock, we just have to let them do it, doing it the right way, and at the same time, the same customers, we’re very thankful that they’re choosing us as their electrification partner moving forward. Yes, that’s all I can say, that the business is set up, it’s just a trough of the time of–if you look at Dana’s light vehicle business, obviously a lot of those programs were long in the tooth.

They launched in 2015, they launched in 2016. When you think about how the world has changed – I mean, it’s out of our control, but we’re going to move forward and obviously we’ve positioned the company for great success in the future.

Rod Lache: Great, thank you.

James Kamsickas: Okay, I’m just going to summarize real quick. Actually as a quick little change-up for you, I’m going ask a favor and that is to ask you to turn to Page 24 for just a second and just kind of recap. We kind of have to ground ourselves here a little bit. When you think about it, Dana manufactures all of–designs, engineers and manufactures all of the products that are on that picture, so you can see the full battery cooling, what you can’t see is thermal management cooling and a bunch of electronics cooling because they’re smaller in substance and size, but the full e-axle upfront, the full e-axle in the back, the motors, inverters, e-controllers, etc. We do all that today. Four years ago, we didn’t do any of that, right?

In 2016, we had a vision and believability that electrification would in fact happen, then all of a sudden, of course, we had these, I’ll call them anyway black swan events of COVID, supply chain disruption and generational inflation that nobody could have seen, but on that same path we stayed the course and we positioned ourselves to make sure that not only are we going to sustain but we’re going to grow, and by now I think everybody gets the content per vehicle opportunity that we’ve been landing the plane on. A great example of it, of course, is we’re doing the thermal management on the motors and inverters, of course, but we’re also doing the battery cooling. Think about a gasket of the past of full battery cooling of the future – it could have gotten lost in the discussion today, the proud moment for me to say today is an example that we’re essentially doing all of the General Motors Ultium platform battery cooling when we didn’t know what it was six years ago, or we’re doing the Lightning or we’re doing the Rivian, or today’s announcement that we’re doing all of the global JLR programs.

It takes money, it takes time, but I’d much rather be in a position that we put ourselves in the position of leading in disruption, the OEMs have to go through it and the power train suppliers have to go through it. I’d much be in a position of leading rather than following, and as the slide shows, it gets done by leading in customer satisfaction on your performance and it leads by having the right technologies. Yes, there’s a hockey stick of some costs that come with it, but as we have the traditional ICE programs roll on, they’re going to pay for it and we’re going to continue to move forward as a company. Thank you very much for your time and attention today. Look forward to talking to you very soon.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.