Dana Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 20, 2024

There are 9 speakers on the call.

Operator

Good morning, and welcome to Dana Incorporated's 4th Quarter and Full Year 2023 Financial Webcast and Conference Call.

Operator

My name is Regina, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q and 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 a guest. There will be a question and answer period after the speakers' remarks, and we will take questions from the telephone only. To ensure that everyone has an opportunity to participate in today's Q and A, we ask that callers limit themselves to one question at a time.

Operator

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, Strategic Planning and Corporate Communications, Craig Barber. Please go ahead, Mr. Barber.

Speaker 1

Thanks, Regina, and good morning, everyone on the call. Thanks for joining us today for our Q4 full year 2023 earnings call. You'll find this morning's release and presentation are now posted on our investor website. Today's call is being recorded and the supporting materials of Property of Dana Incorporated. They may not be recorded, copied or rebroadcast without our written consent.

Speaker 1

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 Kamziskis, our Chairman and Chief Executive Officer and Timothy Krause, Senior Vice President and Chief Financial Officer. Now my pleasure to turn the call over to Jim.

Speaker 2

Good morning and thank you for joining us today. Before I begin, I want to acknowledge that Dana is celebrating 120 years serving as a leading innovator across all mobility markets. We've been serving our customers every step of the way, beginning with inventing the encased universal joint, which enabled the transition from chain driven vehicles to modern propulsion systems. Today, Dana develops fully integrated propulsion systems for the most advanced ICE, hybrid and electrified powertrains. It's an honor and privilege for the 42,000 Dana associates today to represent the collective Dana family over the decades.

Speaker 2

Please turn with me to Page 4, where I will discuss the highlights from last year and our outlook for 2024. Starting on the left side, I'm pleased to report that Dana achieved strong sales in 2023 of $10,600,000,000 and nearly $400,000,000 increase over last year driven by strong customer demand, the roll on of our new business backlog across all end markets, including traditional ICE and ED programs, market share gains and cost inflation recoveries. Our continuous year over year sales growth demonstrates the confidence and trust our customers have in Dana. Adjusted EBITDA for the year was $845,000,000 up $145,000,000 driven by efficient execution across the company. This is a significant accomplishment considering the headwinds the light vehicle market faced in the 4th quarter due to UAW strike, which you are aware, Dana was disproportionately impacted given the vehicles involved.

Speaker 2

As you know, some of Dana's largest vehicle platforms include the Jeep Wrangler and Gladiator, Ford Bronco and Ranger, and the Ford Super Duty, all of which stopped vehicle production due to the UAW stand up strike last fall. Accordingly, numerous Dana plants immediately reacted and shut down all or substantial portions of their manufacturing, which supplied these respective vehicle programs. As challenging as the shutdowns were, the restart was even more daunting task, ensuring that labor, component supply, logistics and so forth were in place and coordinated for a successful operational restart. It was very difficult to execute, but the entire Dana team pulled together resulting in a near flawless shutdown and restart across the company. A huge thank you to our Dana associates for their collaboration, commitment and teamwork to ensure our customers were successfully supported.

Speaker 2

Next, free cash flow came in about where we expected for the year, which is reflective of the higher capital expenditures and working capital requirements to support our aggressive launch schedule this past year and new business growth, as well as some impact from the UAW strike. Moving to the centers of the slide, a few key highlights of the year include our sales improved by 4% over the prior year, more than an 80% increase since 2016. Profit growth was up 20% year over year, leveraging organic incrementals of more than 40% driven by the roll on of new and replacement programs, improved efficiencies across the company as customer order volatility continued to decrease. In 2023, we made significant investments to support the growth of our business, including executing a record 100 plus launches spanning both ICE and EV vehicles across all end markets. Additionally, we continue to strengthen our capabilities across the company to improve our process technology and manufacturing capabilities.

Speaker 2

Simultaneously, we organically complete the build out of our balanced product portfolio, including our complete in house electrification capabilities that solidify Dana as an energy source agnostic supplier providing class leading products and systems to support ICE, hybrid and EV manufacturers. Our results to date are a direct reflection of the actions taken by our cohesive and integrated organization. Our efforts continue to strengthen our foundation, which is driving strong momentum going into 2024. Moving to the right side of the slide, we will provide details about our outlook for 2024. A key point this year is that we expect higher sales, profits and free cash flow driven by improved operating environment as supply chains and customer production schedules return to more normal conditions.

Speaker 2

We are continuing to drive synergies across the business resulting in robust efficiency improvements. Not only did this positively impact our financial performance, but these actions also allowed us to differentiate in customer satisfaction, leading to a record sales backlog of $950,000,000 over the next 3 years. This is a $50,000,000 improvement over the prior 3 year backlog. This steady and measured sales growth is balanced across ICE and clean energy programs aligns with our respective OEM partners' product development plans, which span their full suite of vehicle portfolios. The strength of Dana is that we are balanced by ICE and EV products, mobility end markets, geographies and customers.

Speaker 2

By driving natural synergies across our company, Dana is more capable than ever to continue to deliver profitable growth. Please turn with me to Page 5 for the outlook on the operating environment for this year. As we look to 2024, we anticipate Dana's overall operating environment to improve due to the refresh programs, our record new business backlog and ongoing company wide efficiency improvements driving profitable growth. Being on the left side of the slide, we expect commodities to be a slight headwind to sales and profit in 2024. This is true even though steel prices have declined from peak and are expected to be modestly flat compared with 2023 with lower volatility as we see the reversal of commodity recoveries with customers.

Speaker 2

Finally, for this section, foreign currencies are as translated to the United States dollars will continue to be a slight headwind due to the relative strength of the dollar. Moving to the center of the slide, cost inflation continues to moderate. The labor costs have increased globally. With recent global events, we are monitoring ocean freight conditions and will navigate alternative logistics as needed. And of course, we are continuing our efforts to improve cost and price to mute the impact of inflation.

Speaker 2

Finally, on the right of the page, as customer production stability continues to improve, it enables us to avoid numerous inefficiencies, eliminate waste and acutely leverage cost synergies across the company. This coupled with the return to a more normalized number of new program launches after our record year in 2023 will enable us to lower launch cost. Let's turn to Slide 6, where I'll provide perspective on the global end market trends we are seeing across light vehicle, commercial vehicle and off highway markets. I want to remind you that our market outlook is based on input from 3rd party forecasters, as well as our customers and our own experience. The arrows for the markets and the regions indicate the change expected for this year compared with the prior year for production volumes in these key markets.

Speaker 2

The arrow at the right under the diamond is the net sales impact for Dana from market volume, pricing and market share changes. Beginning at the left of the page, we anticipate the light vehicle full frame production volumes to be up 2% 5% as customer demand remains resilient for key platforms and returns to normal production after the UAW strike last year. Moving to the center of the page, the market for heavy vehicles will be lower compared to last year after several years of growth. As we will share with you a little later, Dana is gaining market share in commercial vehicle, which will help offset lower production levels in this market. Moving to Off Highway, with improvement in equipment inventory levels last year, we expect agriculture to be down, while construction and mining demand should both trend somewhat flat compared to with last year.

Speaker 2

We will continue to monitor these end markets as demand can move quickly. At the bottom of the page, you can see on a regional basis, it's a bit of a mixed bag with North America and Asia seeing growth somewhat offset by Europe and South America. The net result for Dana will be a market growth of $135,000,000 This above market growth is driven by share gains and a beneficial market mix. Please turn to Slide 7. I will provide a brief update on our very substantial new vehicle program launch performance last year.

Speaker 2

As we shared with you in prior calls, Dana completed a record number of launches in 2023 with over 100 programs encompassing traditional, hybrid and EV applications across all markets globally. This effort requires significant investment of people and capital resources to launch our extremely large and complex programs that together represented more than $2,500,000,000 in an annual sales. The bottom line is that if a company gets launches wrong, it often requires years to recover. If you get them right, the programs often serve as a foundation for future company success. There is no question we had a remarkable launch here in 2023.

Speaker 2

Customer satisfaction was outstanding as our program management, product engineering and operating teams performed at an exceptionally high level. A big thank you to the Global Dana team for their tremendous efforts and of course successfully industrializing the new programs to ensure that our customers were in turn successful in their respective vehicle launches. Please turn to Slide 8 for a look at some examples of new vehicles we will be equipping with our award winning systems as part of our record 3 year new business sales backlog. For the 7th consecutive year, Dana has increased our 3 year sales backlog. As a reminder, we calculate our backlog on a net basis, which includes only new sales, net of any loss business, and we rebased the starting year and push out the ending year of that 3 year period.

Speaker 2

This methodical methodically helps to provide a clear view of the actual above market growth. This slide shows just a representative representative programs as our record 3 year backlog is made up of numerous new business wins for both EV and ICE powered vehicles. To that end, Dana has amassed $950,000,000 of sales backlog through 2026, another record for the company. That is $50,000,000 more than our prior 3 year backlog. And as you can see in the upper part of the slide, includes $350,000,000 of incremental new sales coming online in 2024.

Speaker 2

Included in this year's $350,000,000 incremental new business is a strong balance of new ICE and EV programs across all markets and regions. We expect to see an additional $300,000,000 increase over the prior backlog for 2025, which will total $650,000,000 in incremental sales with several important programs coming online from JLR, Global and Mitsubishi Caterpillar to name a few. Through 2026, sales backlog increases an additional $300,000,000 with the major global light vehicle program that I touched on earlier in the presentation, along with key programs in both commercial vehicle and off highway customers such as Navistar and Kramer. Turning your attention to the upper right hand side of the slide, you can see that our sales backlog is well balanced across end markets and regions. As you move to the bottom right corner of this page, you will notice that EVs and ICE chart shows that 74% of the total $950,000,000 backlog is coming from electric vehicle platforms.

Speaker 2

Our consistent and sustained revenue growth continues to serve as evidence that our energy source agnostic propulsion strategy is highly valued by our customers. By possessing complete ICE, hybrid and EV in house capabilities, we create value for our customers, which leads to content per vehicle and overall revenue growth for Dana. Dana is well positioned to build on the strong momentum as we expect to further expand sales, which puts us firmly on track to achieve our long term sales target in 2025 of more than $11,000,000,000 Our next few slides will provide a sampling of new business awards across our end markets. Please turn to Slide 9 for unique off highway new business win, which happens to also be a new market for Dana. We are excited to share with you today that Dana is providing our class leading electric vertical motor drive unit for an all new Hyster Yale 3 wheel electric forklift truck going into production next year.

Speaker 2

The newly designed forklift will feature a super compact electric drive unit with a high efficiency Dana motor that offers both superior traction and steering benefits as well as enhanced productivity and cost of ownership. This is not only new business for Dana, but is also a new market for us as well. Further proof that our early push towards electrification has allowed us to expand in previously untapped markets, which is creating new and exciting growth opportunities for the future. Please turn with me to Slide 10, where I will share an update on a new multi market EV program in Europe. The next update had previously been shared with you during our last Investor Day when we communicated that Dana had been awarded a multi market motor application for unspecified major European OEM.

Speaker 2

Today, we can provide you with some details on this important new business win. We're excited to share that Dana is supplying electric motors for Vogtle's commercial vehicle business for their heavy duty and vocational trucks, while also supplying this technology for Vogtle's construction equipment business on their new EC230 electric excavator off highway application. We have been supplying this technology for Volvo's latest medium duty truck in Europe since the second half of last year and the electric excavator will launch later this spring. Thus far, the launches and products have been a great success. As you can see on this page, we continue to successfully scale our electrodynamics components and systems across multiple mobility markets.

Speaker 2

Internally, this is possible because we leverage internal purchasing, product systems and engineering, manufacturing and so forth, while of course benefiting from many other institutional synergies across the company. This is nothing new for Dana as we have scaled our traditional ICE products across multiple end user markets with customers such as Volvo for decades. Stay tuned as we'll be making additional announcements about other vehicle applications that will also leverage this new technology in the future. Let's move to Slide 11, where I'll talk about how we are further penetrating the North America commercial vehicle market. Operationally, taking on significant market share on short notice in a stable market is difficult to accomplish.

Speaker 2

Now consider doing so in the middle of the most challenging operating environment in decades And in Dana's specific case, launching more than 100 complex high volume programs at the same time. Through our extraordinary efforts in 20 23, Dana has methodically gained commercial vehicle market share under some of the most extreme and compressed industrialization timing and conditions. As highlighted on Slide 11, I'm excited to report that through these gains we are achieving a more balanced customer distribution with multiple OEMs, including PACCAR, TRATON Navistar and Volvo. In fact, in 2023, we achieved our highest revenue in this segment since 2011 and increased our market share by more than 70% since 2016. We are also expecting increased sales in 2024.

Speaker 2

Our collaborative approach and operational execution are appreciated by our customers, which I believe will continue to drive growth now and in the future. Please turn to Slide 12, where I will share some exciting news about expanding new business with our light vehicle customers. Slide 12 is another example of our ability to leverage our mechanical, electric and thermal management capabilities across multiple vehicle platforms. If you recall, we announced during a prior earnings call that Dana was selected as electrification partner to supply our integrated complete e Propulsion systems for multiple all new EV programs for a major well known light vehicle OEM. We are still not permitted to share the specifics at this time.

Speaker 2

What I can tell you that we have recently expanded on the significant multi year relationship within the addition of an all new electric SUV to the lineup. As you can see in the picture of the e drive unit itself, our 4 in-one independent drive system, including the DANA motor, inverter, e transmission and pictured in blue is an example of our e thermal components. As a reminder, the Dana 4 in-one independent e drive uses similar technology and many of the same components as our rigid E Beam system, which we have talked about previously for use in heavier applications for full frame programs we have been awarded in our light vehicle segment. Consistent with our commercial vehicle and off highways customers, our light vehicle customers recognize and are benefiting from Dana's complete in house e Propulsion capability. While electrification adoption is accelerating at different rates when you compare heavy vehicle to off highway to light vehicle, the truth of the matter is we are scaling volumes across markets and are prepared for whatever our customers' needs may be regardless of where they are in their journey towards 0 admissions.

Speaker 2

Please move to Slide 13, where I'll discuss drivers of profit improvement. This slide illustrates the drivers of Dana's profit growth in 2023 as well as 2024. Beginning on the top left, as we have seen less volatility in customer build patterns, thus we have been able to accelerate actions to improve the overall efficiency of the business, driving increased profitability. For example, we've been able to achieve fixed cost savings, increased asset utilization by ensuring that we are leveraging our resources in the most efficient way possible. Moving down to the center box, the two most relevant factors in improving profitability have been the roll on of new and replacement programs at stronger margins and our ability to drive greater efficiencies across the entire organization.

Speaker 2

3rd, in the bottom left corner, ongoing inflation recoveries from customers as well as more efficient supply chain management and product engineering have helped us lower our cost and improve profit. Now, if you look to the right of the slide, our EBITDA increased by $145,000,000 or greater than 20% from 20 22 to 2023, landing on $845,000,000 of EBITDA for the year. As Tim will walk you through in greater detail in a few minutes, we're guiding increased earnings again by another $80,000,000 or nearly another 10% from 20 23 to 2024, with the company expecting to realize around $925,000,000 in earnings in 2024. We are on a solid trajectory in 2024 to achieve approximately a 32% improvement or $225,000,000 of additional profit over a 2 year period. I'm very proud of the collective Dana team's efforts in leveraging our core, meaning implementing synergies across the organization to drive earnings expansion and strongly positioning us towards our long term sales and profit targets of over $1,000,000,000 of adjusted EBITDA in 2025.

Speaker 2

Thank you for your time today. I'd now like to turn it over to Tim, who will walk you through the financials.

Speaker 3

Thank you, Jim, and good morning. Please turn to Slide 15 for a view of our Q4 and full year results for 2023. Beginning with the Q4, sales were $2,500,000,000 $61,000,000 lower than last year driven by the impact of the UAW strikes at several of our key customers. For the full year, sales were $10,600,000,000 an increase of nearly $400,000,000 Higher sales were primarily driven by improved demand

Speaker 2

end

Speaker 3

4th quarter for a profit margin of 6.3%. Full year adjusted EBITDA was $845,000,000 that is $145,000,000 higher than the previous year, primarily due to improved efficiencies aided by more stable customer order patterns and cost improvements across the company. The net loss attributable to Dana was $39,000,000 for the Q4 of 2023 due primarily to the impacts of the UAW strike, lower earnings from equity method affiliates and the devaluation of the Argentine peso. The net loss of $179,000,000 in the Q4 of 2022 was mainly driven by the recording of non cash tax valuation allowances. Full year net income was $38,000,000 compared to a net loss of $242,000,000 last year.

Speaker 3

The net loss in 2022 was primarily driven by one time non cash goodwill impairment charge and the recording of non cash tax valuation allowances. And finally, free cash flow was $136,000,000 for the quarter and a use of $25,000,000 for the full year, $235,000,000 excuse me, dollars 234,000,000 lower than 2022. The decrease in key free cash flow for the full year was driven by higher working capital requirements and higher capital spending. Please turn with me now to Slide 16 for the drivers of the sales and profit change for the Q4 of 2023. Beginning on the left, traditional mechanic sales were $132,000,000 lower driven by the impact of the UAW strike at several of our light vehicle customers.

Speaker 3

As mentioned previously, Dana was disproportionately impacted by the mix of customers and programs targeted by the strike. And while the restart of production occurred in an orderly fashion, the ramp up in unit volume was a bit slower than expected. Adjusted EBITDA on organic sales was $7,000,000 lower than the Q4 of last year. This very low decremental margin was due to our improved cost efficiencies across the entire company and nearly offset the profit impact of the lower volume due to the strike. Our excellent performance yielded a 10 basis points benefit to margin.

Speaker 3

EV organic sales were $34,000,000 higher than 2022 and adjusted EBITDA was $14,000,000 lower, a 60 basis point margin headwind. Higher engineering investment for EV programs drove the lower profit offsetting the positive contribution from the higher sales. Foreign currency translation increased sales by $45,000,000 and profit by $3,000,000 with no margin impact as the dollar weakened in value against several currencies, but primarily the euro. Finally, due to falling commodity prices, commodity cost recovery in the Q4 was $8,000,000 lower than last year. The profit benefit of the lower commodity prices was offset by the timing of cost true up mechanisms within the commodity recovery agreements we have with our customers, resulting in profit being lower by $2,000,000 a 10 basis point decrement to margin.

Speaker 3

Next, I'll turn to slide 17 for the drivers of the sales and profit change for the full year 2023. 1st is traditional organic sales growth of $228,000,000 driven by cost recoveries and higher demand across our segments, except for light vehicle, which was down slightly due to last year's impact of the UAW strike. Adjusted EBITDA on the increased traditional organic sales increased by $100,000,000 representing a 44% incremental margin and an 80 basis points of benefit to overall margin. This increase was due to cost saving actions, improved efficiencies across the entire company and customer recoveries that offset nearly all cost inflation in 2023. 2nd, EV product sales grew by $182,000,000 over 2022.

Speaker 3

Total EV sales in 2023 were 7 $60,000,000 across all of our end markets. The adjusted EBITDA on the incremental sales was $8,000,000 as a benefit of higher sales slightly more than offset the investment in engineering and commercialization costs needed to bring new EV technologies to market. 3rd, foreign currency translation reduced sales by $9,000,000 as the dollar increased in value against the basket of currencies. Profit was lower by $12,000,000 due to the mix of currencies involved. Finally, the lower recovery of commodity costs reduced sales by $2,000,000 as prices for materials moderated throughout the year.

Speaker 3

Due to the inherent lag in our recovery mechanisms, profit benefited from the falling commodity prices for the majority of the year. However, as we showed in the previous slide, the recovery mechanisms began to reverse in the 4th quarter as customer pricing normalized to account for the lower input costs. Margin benefited by 50 basis points driven by lower sales recover and higher profits due to the lower commodity costs. Please turn with me to Slide 18 for details of our 2023 free cash flow. Free cash flow was a use of $25,000,000 in 20.20 3.

Speaker 3

Higher profit was offset by increased working capital requirements that were $289,000,000 higher than the previous year. This was primarily driven by 3 factors. First, the higher inventory required to support increased sales and the large volume of program launches. We also ended with higher inventory late in the year due to the UAW strike. 2nd, the timing of the UAW strike drove lower sales in the early part of Q4, which drove lower cash collections later in the quarter.

Speaker 3

And lastly, as we mentioned on our Q3 call, we continue to render support to distressed supplier. Capital spending was $61,000,000 higher than last year to support our backlog of new business as well as the capacity and capability improvements that have allowed us to capture market share gains. Please turn with me now to Slide 19 for an update of our guidance for 2024. We expect 2024 sales to be approximately $10,900,000,000 at the midpoint of our guidance range, an increase of about $345,000,000 over 2023. Adjusted EBITDA is expected to be about $925,000,000 at the midpoint of our guidance range, which is up approximately $80,000,000 from last year.

Speaker 3

Profit margin is expected to be approximately 8.2% to 8.7%, a 50 basis points improvement at the midpoint of that range. Free cash flow is expected to be approximately $50,000,000 at the midpoint of the range, which is a $75,000,000 increase compared to last year, primarily driven by higher profit and lower capital spending. We are introducing a new guidance item this year, GAAP diluted EPS. This metric will replace our prior non GAAP diluted adjusted EPS metric. For 2024, we expect diluted EPS to be approximately $0.60 at the midpoint of the range, which is a $0.34 per share increase compared to last year's result.

Speaker 3

To support this new EPS guidance, we've added a few outlook assumptions at the bottom of page 19. Please turn with me now to slide 20, where I'll highlight the drivers of the full year expected sales and profit changes from 2023. Beginning with organic growth, for 2024, we expect about $240,000,000 in additional sales from our traditional products through new business, market growth and market share gains. The adjusted EBITDA increase on traditional organic sales growth is expected to be approximately $135,000,000 The higher profit and margin increase of about 110 basis points is a continuation of the improved efficiency and cost saving actions that we began in 2023. Our more efficient operations will allow us to capitalize on a more stable and predictable customer order patterns that we expect to see throughout 2024.

Speaker 3

We expect about $245,000,000 in incremental EV product sales this year. This will bring our expected total EV sales to more than $1,000,000,000 in 2024. As I mentioned a few moments ago, the EV business contributes positive profit. However, we expect EV adjusted EBITDA to be a headwind of about $20,000,000 this year due to continued spending on engineering and associated costs for new EV programs. Foreign currency translation on sales is expected to be a headwind of approximately $70,000,000 with a profit impact of about $10,000,000 Finally, our commodity outlook is expected to be a headwind to sales of about $70,000,000 as due to lower recoveries driven by falling steel and other commodity prices.

Speaker 3

We expect a $25,000,000 headwind due to the true up in pricing governed by our two way commodity recovery mechanisms that we have with our customers. Lastly, please turn with me to slide 21 for an outlook on our free cash flow for 2024. We anticipate full year 2024 free cash flow to be about $50,000,000 at the midpoint of the guidance range. We expect about $80,000,000 of higher free cash flow from increased profits on higher sales. Net interest will be about $35,000,000 higher due to higher interest rates and payment timing due to the refinancing that occurred in 2023.

Speaker 3

And capital spending to support our sales growth and technology is expected to be about $450,000,000 this year, which is $50,000,000 lower than last year as we continue to flex spending to match customer program timing. Thank you for joining us today. I will now turn the call back over to Regina and we'll take questions.

Operator

Our first question comes from the line of Noah Kaye with Oppenheimer. Please go ahead.

Speaker 4

First, I wanted to start out with a question around cadence in the outlook. Are we kind of back to a more normalized cadence for the company with sort of what we're in Q4 being lighter, 2Q, 3Q being the heaviest? Is there anything that would kind of impact seasonality this year that we should be aware of?

Speaker 3

Hi Noah, it's Tammy. No, I would I think that's accurate. We see our profit pattern cadence returning to more normalized, right, and you have it right.

Speaker 4

Okay, great. And then actually just picking up on your comments around the EV profile. So your sales will be at more than $1,000,000,000 and you're getting pretty significant growth year over year here. Is it possible to kind of dimension out the level of engineering spend step up? I think it will help folks understand kind of what the profit actually looks like on an underlying basis for these programs.

Speaker 3

Yes. We're not going to give any real specifics. Obviously, as we continue to move through the development cycle, it's pretty fluid given what's going on with many of the end markets and the customers. But as we've been saying, the profit margin in terms of the contribution is positive. The other issue with sort of dimensioning that is it's a competitive issue for us.

Speaker 3

We don't like to give too much away to the competition.

Speaker 4

Yes, I had to try. Let me ask a little bit about the backlog in a way that maybe hasn't really been asked or at least we haven't asked before. Let's just think about kind of the mix of components versus systems. Now that may be an arbitrary distinction, but when I hear about some of your wins, some of them are components like motors, some of them are more integrated units. Can you just talk a little bit about how that is trending?

Speaker 4

Whether you can put it into numbers or just talk about it qualitatively, I think it will help us get the sense of how much of this new business and particularly on the EV side is really integrated systems or subsystem?

Speaker 2

Hey, Noah. Good morning. This is Jim. I'll take a shot at it. The answer to the question is there is no one shoe fits all in terms of that.

Speaker 2

It is different by end market, vehicle within end market, by region, by customer across the board. And our various customers have changed strategies 2 or 3 different times over the course of the last 3 to 4 years, and that's going to continue to be that way. And if I just spoke like an example forms, right, there may be some regions where they a particular customer just wants to go with a component type of strategy with Dana. Conversely, just take an example, perhaps we have footprint, menu footprint and capability, etcetera, in a region where maybe they don't, that it's more appropriate for us to do a full system, whatever the case may be. And there's multiple other things as it relates to differentiating between the technology that we have versus other people have versus whatever.

Speaker 2

So we will never get to this is a black and white cut and dry one shoe fits all for everybody. It's always going to be based on those type of factors. The thing that works for us, just to remind you though, is that because we're able to scale across not only the across the end markets, but to be able to scale across the regions, to scale across multiple other factors, it puts us in a good position for whatever our customers want us to adapt to. We just find a way to adapt with them either on a component level or a full system level.

Speaker 4

Thanks very much. I'll turn it back.

Operator

Your next question comes from the line of James Picariello with BNP Paribas. Please go ahead.

Speaker 5

Hey guys, this is Jake on for James. So in the slide deck, you made a comment that you're on track to hit the 2025 sales target. So do you also still expect to exceed the $1,000,000,000 EBITDA? And can you share just sort of the puts and takes on how you're thinking about cash flow? Because obviously, there's still a pretty big bridge to hit that 3% of sales?

Speaker 3

Yes. Hey, James, it's Tim. Yes. So absolutely, we're still on track for both sales and EBITDA. I think the when you think about cash flow, it remains a little bit more fluid given timing on programs and whatnot.

Speaker 3

But as you saw what we put out for next year, we do continue to see improvement in the cash flow conversion over the next few years as we continue to grow the business and move through the investment timeline for the end markets and the products.

Speaker 5

Thank you. And then, how should we think about the overall alignment of your EV and your ICE programs? So if EV launches are pushed out or come on at lower volumes, should we expect to see some of those ICE programs extended and kind of fill in that revenue gap? Thank you.

Speaker 3

Yes. To the extent you were seeing a delay or a trade off between ICE and EV, that's a good assumption. It really does depend on what the program is and whether we're on the ICE version, because we're both winning conquest business and as well as traditional business with customers that we've historically supplied ICE on.

Speaker 5

Very helpful. Thank you.

Operator

Your next question comes from the line of Colin Langan with Wells Fargo. Please go ahead.

Speaker 6

Great. Thanks for taking my questions. Your commentary indicates that you're expecting cost recoveries to offset inflation. Any parameters on inflation? Other suppliers have kind of highlighted continued labor inflation and other costs into this year.

Speaker 6

Just trying to gauge how much of recoveries you're going to be needing?

Speaker 3

Yes. So I mean, we're continuing to see inflation from 'twenty three into 'twenty four. I think what we're certainly starting to see is the customers reverting back to their traditional way of looking at recoveries where we need to go and get recovery around inflation and other costs through added productivity improvements within our own structure and that's really what we're concentrating on. We continue to address the recovery question as we go through and have new roll on programs. But I think from our perspective, we're starting to see a movement back to the environment in which the OEMs really across all the end markets operated in prior to COVID.

Speaker 6

Got it. And the backlog rose, but not only did it rise, but your mix of EV increased, which is it's a bit surprising because all we've seen are headlines about EV programs getting pushed out. I mean, what is driving the higher EV growth in the backlog despite some of the cuts to programs that have been going on?

Speaker 2

Hey, Collin. This is Jim. Good morning. What I would offer to you is maybe think about it in buckets of time. If you kind of go back, I mean, we've all seen this the significant shift on, I'll call it somewhat of a pull out pull back and push out, on electric vehicles for all the reasons we all understand at this point.

Speaker 2

But if you go back in buckets of time of the last year, 2 years, 3 years, I mean the cadence of electrification sourcing in that window of time was really heavily influenced or pivoted towards electric vehicles. So now from a balancing standpoint, I think you'll start to see maybe that kind of blend back to more of an average, more of a middle of the road average. I'm not to predict what that's going to be exactly. But again, it's important what was sourced or what was pursued and what was sourced over the last couple of years is what's going to be reflective that we're putting into the backlog. So that's the best way I would do it.

Speaker 2

It's just buckets of time would be the most important thing to think about. And I guess I'd also add that it doesn't include wins for the current business in ICE, our ICE business because that's all staying in line, maybe even slightly better because those are often or more often to be a replacement win in our backlog. So it doesn't add to the pile.

Speaker 6

Got it. And just lastly, how should we think about off highway that's obviously the highest margin segment? Is that a and those markets seem to be rolling over a bit. Is that going to be down next year? Is that a drag overall that we should be considering?

Speaker 6

Thanks.

Speaker 2

Just briefly, Tim, may I have some additional color on that, Jim, again. Just I tried to mention in my prepared remarks that we see agriculture down a little bit this year. We see the other end markets, underground mining or material handling, etcetera, to be relatively neutral to prior year.

Speaker 6

Okay. All right. Thanks for taking my questions.

Operator

Your next question comes from the line of Dan Levy with Barclays. Please go ahead.

Speaker 7

Hi, Trevor Young on for Dan Levy today. Thanks for taking the questions. So I guess first, I just wanted to ask for the guide on free cash flow, are there any ways for you to manage down CapEx spending if customer plans slow? And is there also is there not a meaningful unwind of working capital coming from the non repeat of the UAW strike impacts you mentioned? And then I guess more broadly on free cash flow, when can we expect to start to see a stronger conversion?

Speaker 3

Yes, I'll take those in pieces. So your first one, absolutely, as we move through the development cycle and programs are pushed off, then absolutely we're able to flex capital. Don't forget, some of the largest wins that we've announced are not in the backlog. So we wouldn't be spending an enormous amount of CapEx in the near term on those programs. So you're not seeing some of that necessarily affecting CapEx spend, but absolutely we continue to flex capital, not just in ED, but in ICE as well.

Speaker 3

And then, yes, we'll continue to see an unwind in some of the working capital that is the result of the UAW strike. But the sales growth will also come with some additional capital and then we continue to work with customers around terms changes and things like that. So I think there's still some opportunity in free cash flow as we move through. But I think when you look at the sales growth, I think it's converting at about 20 ish percent. So we so a little bit some efficiency there that we can probably still go get.

Speaker 3

And then I think we'll continue to your longer term question on sort of the free cash flow conversion. As we continue to see the replacement programs come on and the margin increase that free cash flow conversion, that growth that you've seen from last year to 2024 and then 2024, 2025, 2025, 2025, 2020 6, I think you'll continue to see that cadence grow throughout that period.

Speaker 7

Great. Thank you for that. And then on the EV on the guide to the $20,000,000 EV headwind in 2024, can you quantify the portion of that that relates to spending that was delayed from 2023? And then I guess on top of that, do you have any updates and sorry if I missed it, but do you have any updates on the timing for reaching EV breakeven overall?

Speaker 3

So on the amount that was delayed from last year, I don't have a number, but there's obviously 1,000,000 of dollars that continues to get pushed around depending on program timing by customers. So it will move this year as well, I have no doubt. It will go up, go down, just depending on where we're at in the product cycles and what new quite frankly, what new business we win. So and then, in terms of breakeven, our view on breakeven hasn't changed. We continue to see both the sales growth and then as I've mentioned on a number of the calls, we continue to get more efficient in terms of deploying the cost that we need to commercialize these technologies and these programs and we think that will continue.

Speaker 3

So, no change on our view on when we'll hit breakeven on our EV business.

Speaker 7

Great. Thank you.

Operator

Your next question will come from the line of Joseph Spak with UBS. Please go ahead.

Speaker 8

Thanks. Good morning. Maybe to start on the traditional organic in the guidance for 24, traditional organic 56% conversion. I know you sort of provided some of those factors on Slide 12. Is there any way you could sort of help us with order of magnitude or even a little bit more detail there to sort of get comfortable with the conversion on the higher sales?

Speaker 3

I'm not going to go into a whole bunch of detail, but if you really look back to 'twenty one and look at the decrementals that were impacting us when we had a lot of the supply chain and customer order pattern issues. Those are starting obviously started to reverse last year. We'll continue to see those benefits coming into 2024 and that's part of what's reflected in that positive conversion rate that you're seeing. I think the other thing there is we continue to drive efficiency across the business. So whether it be plant related on conversion costs or with our fixed cost structure, and those are all being reflected primarily in that ICE traditional conversion rate.

Speaker 4

Okay.

Speaker 8

On the 225,000,000 dollars higher EV sales, if I look in 2023 in your appendix, it actually looks like it was pretty evenly split between the different segments. Is that what we should expect to continue in 2024 or is any of that growth targeted more towards one segment versus another?

Speaker 3

I think the growth continues to be relatively balanced. I mean, I think that we continue to see a lot of and takes even throughout the years relative to where we're seeing growth or demand. And I think that that probably continues, but I don't think there's one segment that's over weighted.

Speaker 8

But is it still the case just broadly, right, where you sort of first started with this technology in the commercial vehicle segment where that's sort of still the largest, I guess, profit contributor and then you need to sort of continue to scale in the other segments as that growth comes through?

Speaker 3

Yes. There's some of that. I think when you think about some of the places where the growth is coming from, yes, we continue to see it in we continue to see growth in the CD market. But I think the other thing you should think about is as I sort of rethink through that, right. I think we will see a little bit more growth in the light vehicle segment than we will in off highway or CV this year.

Speaker 6

We're

Speaker 3

trying to wait it. Some of that's due to some of the production lost in the LV section LV business last year from the UAW strike.

Speaker 8

Okay. And last one, sorry if I missed this, but did you say how much of the $450,000,000 in CapEx is for electrification?

Speaker 3

No, we don't break out the CapEx between ICE and

Speaker 6

EV. Okay. Thank you.

Speaker 2

Okay. With that, thank you very much for joining the call. As always, we appreciate the privilege of your time. Just to recap from my standpoint, from a business perspective, collectively, it's been a life and death. Life and death collided every day as a company that's trying to survive product portfolio disruption as well as a 3 to 4 year COVID slash UAW driven industrial crisis.

Speaker 2

But I would offer that Dana has more than survived these 2 once in a lifetime generational challenges. In fact, I think we used it as the events to significantly strengthen the company. Arguably, it's terminology I like to use called the crisis is a terrible thing to waste. By doing that, we focused on the processes, we focused on the business, we focused on the customers. And as you can see, as it relates to creating long term shareholder value, we believe you're starting to see it come through in the numbers and you'll continue to see it come through the numbers.

Speaker 2

So thank you very much for your continued support and interest in Dana and we'll talk to you all soon.

Operator

That does conclude today's conference. We thank you all for joining and you may now disconnect.

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Key Takeaways

  • In 2023 Dana delivered $10.6 billion in sales (up 4% y/y) and $845 million of adjusted EBITDA (up 20%), despite a disproportionate impact from the UAW strike in Q4.
  • The company completed over 100 new vehicle program launches across ICE, hybrid and electric applications in 2023, requiring significant investments but earning record customer satisfaction.
  • Dana’s record three-year sales backlog reached $950 million through 2026 (up $50 million), with a balanced mix across ICE and EV platforms and 74% derived from electric vehicle programs.
  • For 2024 the outlook calls for $10.9 billion in sales (up ~3% y/y), $925 million of adjusted EBITDA (up ~10%), margin expansion to ~8.5%, and $50 million of free cash flow, as supply chains normalize and synergies take effect.
  • The EV business is set to exceed $1 billion of sales in 2024, though continued engineering and commercialization costs are expected to produce a modest $20 million EBITDA headwind this year.
A.I. generated. May contain errors.
Earnings Conference Call
Dana Q4 2023
00:00 / 00:00