Dana Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 9 speakers on the call.

Operator

Good morning and welcome to the Kiena Incorporated Second Quarter 2024 Financial Webcast and Conference Call. My name is Regina and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q 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.

Operator

At this time, I would like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations and Corporate Communications, Craig Barber. Please go ahead, Mr. Barber.

Speaker 1

Good morning. Thank you for joining us today for Dana's Q2 2024 Earnings Call. Today's presentation includes forward looking statements about our expectations for Dana's future performance. Actual results could differ from what we discuss here today. For more details about the factors that could affect future results, please refer to our Safe Harbor statement found in our public filings and our reports with the SEC.

Speaker 1

Before we proceed, I invite you to visit our investor website, where you'll find this morning's press release and presentation. As a reminder, 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. On the call this morning, we have Jim Kansouzkis, Dana Chairman and Chief Executive Officer and Timothy Krausz, Senior Vice President and Chief Financial Officer. Now to get started, I'll turn the call over to Jim.

Speaker 2

Good morning and thank you for joining us today. Please turn with me to Page 4, where I'll discuss the highlights for the Q2 of 2024. Starting on the left side, I'm pleased to report that Dana achieved sales of $2,700,000,000 in the 2nd quarter, which is just about in line with the Q2 of last year. Adjusted EBITDA for the quarter was $244,000,000 up over last year driven by the strength of Dana's core business and end to end execution by the global Dana team, who did an outstanding job implementing ongoing efficiency improvements across all aspects of the organization. Their collective efforts have helped to offset the margin impact of inflation and spending on development of EV products as well as the slower than expected demand in EV and other markets we serve.

Speaker 2

Next, free cash flow was a strong $104,000,000 down $30,000,000 from this time last year, the difference only due to the timing of payments between the two periods. Moving to the upper right of the slide, under the key highlights, consistent with the past several quarters, company wide efficiency improvements by the Dana team continue to drive incremental profit. As stated on the page, Dana achieved an extremely strong 73% conversion rate on traditional organic sales in the first half of the year. This performance is well above our historical conversion and positions the company on a trajectory to achieve our full year targets. Moving to the center right of the slide, we saw overall organic sales growth through the first half of the year as demand levels remain relatively stable across most of our end markets.

Speaker 2

As I mentioned, we are seeing some weakening demand in EVs as well as some in our traditional ICE product, some programs, particularly in our off highway end markets. Lastly, with ongoing efficiency improvements and our capital investment improvements, Dana's financial outlook remains on track for the rest of the year. While we're slightly adjusting our sales range, primarily due to the pullback in EV, we are maintaining our profit estimate while again raising our free cash flow outlook this quarter to approximately $100,000,000 at the midpoint of the range. This is a 33% increase over our prior guidance. Tim will walk you through this and other financial details and updates later in the presentation.

Speaker 2

Please turn with me to Page 5 for the outlook on the business environment for this year's year. As we stated last quarter, Dana's overall business environment continues to improve compared to last year driven by a few key factors, which I will provide greater detail. Beginning on the left side of the slide, we continue to see improved company wide efficiency supported by greater stability in customer production, which has resulted in lower production cost, improved productivity and greater efficiency across all areas of the enterprise. Moving next to the supply chain, net commodity are still expected to be a headwind to sales and profit for the remaining of the year, though steel prices are projected to be mostly flat compared with 2023. As input costs have declined, we see a reversal of commodity recoveries with customers driving a sales and margin headwind.

Speaker 2

Lastly, on the left hand side of the page, end market demand is showing some pockets of weakness, but Dana continues to benefit from numerous refreshed conquest and new business that is rolling on this year, which is a contributor to our profitable growth. We also continue to benefit from market share gains in our commercial vehicle group that are partially offsetting the softening demand for commercial EVs. Moving to the right of the page, let's take a look at our end market outlook where we are seeing agriculture down compared with last year. Demand for construction and mining equipment should continue trending somewhat flat compared to 2023, though we remain cautious on this market and we'll continue to monitor demand levels. We also see light vehicle full frame truck production volumes remaining relatively stable for key recently refreshed vehicle platforms.

Speaker 2

However, dealer inventory levels have risen over the quarter. After several years of growth, we are seeing the market for heavy vehicles lower compared with last year, which is expected and there may be a slight softening in production in the back half of the year. Moving to the bottom of the slide, the key takeaway takeaways that we are witnessing across our industry show that cost inflation is somewhat moderating despite labor cost increasing globally. OEM production schedules continue to stabilize, which provides a stable operating environment to achieve production efficiency improvements. Lastly, the light vehicle market overall is navigating a period of demand fluctuation for current EV programs.

Speaker 2

As we move through the Q2, we saw demand for commercial EVs temper due to the lower investments by fleets and operators as they work to integrate EV trucks into their vehicle portfolios. Given the continued investment in EV development by truck manufacturers and ongoing robust quoting activity for future models, we believe this is more of a balance in market demand. We anticipate these nascent technologies such as fully integrated e axles and hybrid systems will drive future adoption. Shifting gears on the next page, as I often do, I'll share some current examples with you of how balanced products and systems approach is enabling Dana to win new traditional, hybrid and EV business across all of the markets we serve. Slide 6 is a great visual representation that illustrates Dana's ability to deliver class leading solutions to a variety of applications for ICE, hybrid and electric vehicle manufacturers across all mobility markets.

Speaker 2

To compartmentalize this better, we've added 3 icons to the top of the page, 1 for ICE, 1 for hybrid and 1 for EV. Beginning on the left of the page, we start with an ICE vehicle. We're excited to share that the all new DAF ICE medium duty truck featuring Dana's front and rear axles is launching in Europe in the Q3 of this year. This is conquest business and will be one of our larger commercial vehicle programs in Europe. Our class leading Spicer axles are specifically designed for medium and heavy duty markets.

Speaker 2

They provide a lightweight solution that helps to reduce installation and life cycle cost while improving fuel cost, reliability and vehicle maneuverability. Moving to the center of the page, we are providing you with an example of a new hybrid vehicle application. Dana will be supplying our Spicer Electric Torque hubs and on engine generators for use on hybrid boom lifts for multiple major off highway OEMs. Today, scissor lifts and booms offer true hybrid operation to increase operating flexibility. Hybrid models employ a combination of 2 different power sources, a small diesel engine with a generator and a battery drive.

Speaker 2

These units significantly increase rental flexibility and boost machine utilization by offering the same productive operation as a diesel rough terrain unit with the added benefit of offering extended operating intervals indoors and under battery power. In addition, their cleaner and quieter performance creates new opportunities for use in work environments where noise and emissions must be restricted, such as some urban and residential spaces. The focus on cleaner, more efficient construction vehicles has become increasingly important for our customers. And our hybrid solutions portfolio is leading the way in accelerating de carbonization across the off highway industry. Completing the 3rd part of our balanced portfolio, on the far right of the page, we're excited to share a new pure electric vehicle that Dana will be supplying our Spicer ES9000re axle for the Bollinger V4 light duty truck.

Speaker 2

The Bollinger V4 is an all new, all electric truck going into production this year. While this vehicle may look similar to a larger heavy duty vehicle, this lighter duty truck has a gross vehicle weight rating of £15,500 which is comparable to a passenger van or heavy duty pickup. This vehicle will be unique in that it will be designed to be custom configured by fleets to fit their exact duty cycle needs, making the transition to electric as seamless as possible with minimal downtime. Our ES9000RE axle is based on our proven Spicer rear drive axle platforms engineered for medium duty truck and bus applications. We've engineered this e Propulsion solution with the exceptional flexibility so it can be incorporated into a wide spectrum of vehicles, reducing driveline complexity.

Speaker 2

In fact, we were the 1st to market with an original generation of the Z axle classification in North America more than 4 years ago. These three examples showcase the breadth of Dana's highly efficient propulsion and energy management solutions that are being used across all mobility markets around the world. It's not a stretch to say that our products can be found in nearly every type of vehicle that moves from light and medium trucks and SUVs to commercial vehicles, agricultural machinery, such as tractors, construction equipment, golf carts, and much more. Our full suite of ICE, hybrid and electric vehicle capabilities enables us to meet the propulsion needs of all of our customers regardless of demand fluctuations in any particular market. Turn with me to Slide 7, where I will update you regarding the drivers of our significant profit expansion so far this year.

Speaker 2

Beginning on the left side of the page, Dana's end to end execution is a direct result of the efforts of our talented world class team of associates. As 1 Dana, we are successfully driving sustained profit expansion despite flat year over year sales driven by currency impacts, lower commodity recoveries, as well as some pullback in demand for EV and other traditional markets we serve. Dana's core business priorities encompass sustained financial improvements and commercial effectiveness and growth, which are driven across the company through standardized processes and systems. Our operating priorities center on operational excellence and execution that is laser focused on cost reduction and disciplined asset management, which is achieved by leveraging cross company synergies through our global centers of excellence to ensure that we run the business as efficiently as possible. All of this is driving significant profit expansion as illustrated on the right side of the page.

Speaker 2

By way of example, as we finished up the first half of this year and you look back over the last few years and compare the first half of twenty twenty four to 20222023, you can see adjusted EBITDA has increased by $135,000,000 or 41%. This was only made possible because of the outstanding execution and collaboration of our global team. And finally, it's important to note that it goes beyond the outstanding execution taking place across the company. What truly sets Dana apart is our ability to provide customers, spanning home mobility markets with a balanced portfolio that is energy source agnostic. What I mean by that is, as we presented on the previous slide, we can deliver class leading solutions that support internal combustion, hybrid and EV manufacturers across all mobility markets.

Speaker 2

The result is our end to end business execution is successfully driving towards long term profit targets and a strong financial outlook. Thank you for your time today. Now I'd like to turn it over to Tim, who will walk you through the financials.

Speaker 3

Thank you, Jim, and good morning. Please turn with me now to Slide 9 for a review of our Q2 and year to date results for 2024. Beginning with the Q2, sales were $2,740,000,000 higher I'm sorry, just $2,740,000,000 slightly below last year's due to currency translation and lower commodity recoveries offsetting higher demand and backlog. Year to date sales were 5 point $470,000,000 an increase of $81,000,000 Adjusted EBITDA was $244,000,000 in the 2nd quarter for a profit margin of 8.9 percent, a 10 basis points improvement. Year to date adjusted EBITDA was $467,000,000 that is $20,000,000 higher than the previous year for a profit margin of 8.5%, twenty basis points better than last year.

Speaker 3

Profit improvement this year is primarily due to better efficiencies across the company aided by more stable customer order patterns. Net income attributable to Dana was $16,000,000 for the 2nd quarter, about $14,000,000 lower than last year primarily due to restructuring actions. Full year net income was $19,000,000 compared to net income of $58,000,000 last year. The difference is primarily due to the planned divestiture of our non core hydraulics business from within our Off Highway segment that we discussed last quarter. This business is classified as held for sale and a $29,000,000 loss was recognized in the Q1 to adjust the carrying value of the net assets to fair value less estimated selling costs.

Speaker 3

This transaction also triggered $7,000,000 tax valuation allowance in Europe. And finally, operating cash flow was $215,000,000 for the quarter $113,000,000 for the full year. Operating cash flow was $27,000,000 higher this year than the year prior in the year to date period for 2023. Please turn with me now to Slide 10 for the driver of the sales and profit change for the Q2 of 2024. Beginning on the left, traditional organic sales were $19,000,000 higher driven by increased demand for newly refreshed vehicle programs, market share gains in commercial vehicle, partly offset by lower demand in off highway end markets.

Speaker 3

Adjusted EBITDA on organic sales was $40,000,000 This very strong incremental margin was due to our improved cost efficiencies across the entire company, which generated 150 basis point margin improvement. EV organic sales growth was $11,000,000 driven primarily by an increase in sales of battery cooling and hybrid vehicle products offset by lower demand in our commercial vehicle and off highway segments. Adjusted EBITDA was $19,000,000 lower, an 80 basis point margin headwind. Continued engineering investment for EV programs drove the lower profit offsetting the positive contribution from higher sales. Foreign currency translation decreased sales by $22,000,000 primarily driven by the lower value of the euro and the Brazilian real compared to the U.

Speaker 3

S. Dollar. Profit was lower by $3,000,000 with no large margin impact. Finally, due to falling commodity prices, commodity cost recovery in the Q2 was $16,000,000 lower than last year. The profit benefit of the lower commodity prices was offset by the timing of cost mechanisms within the commodity recovery agreements with our customers, resulting in a profit being lower by $17,000,000 a 60 basis point decrement to margin.

Speaker 3

Next, I'll turn to Slide 11 for the details of our Q1 free cash flow. Free cash flow was $104,000,000 in the 2nd quarter, which was $30,000,000 lower than last year's Q2. Lower net interest due to timing of interest payments mostly offset higher tax is driven by payment timing and regional mix. Working capital requirements were $38,000,000 higher than last year, primarily due to the timing of various payments. Finally, capital spending to support new business backlog was $11,000,000 lower than last year, driven by a more normalized launch cadence this year and the timing of investment for future EV programs.

Speaker 3

Please turn with me now to Slide 12 for our upgraded guidance for 2024. We continue to expect all of our financial guidance measures to be improved compared to last year. However, there are a few updates to our outlook. First, we are trimming our sales outlook for this year due to lower end to the lower end of our previous range to about $10,700,000,000 at the midpoint of the updated range, primarily due to slower growth in demand for electric vehicles. 2nd, we are maintaining our profit guidance of $925,000,000 at the midpoint of the range.

Speaker 3

This is about $80,000,000 higher than last year. Our implied profit margin has increased by 10 basis points at the midpoint of the 8.3% to 8.8 percent range. This revised margin is a 60 basis points improvement over last year. 3rd, we are again this quarter increasing our guidance for full year free cash flow by $25,000,000 to $100,000,000 for the full year or $125,000,000 higher than last year. Our GAAP earnings per share guidance remains unchanged at $0.60 per share.

Speaker 3

And finally, we are reinstating our guidance for diluted adjusted EPS to provide a comparable measure to prior periods, primarily due to the strategic actions this year. We expect diluted adjusted EPS to be in the range of $0.80 to 1.30 dollars or $1.05 at the midpoint. Note that with this measure we are adjusting only one time items and amortization of intangible assets in line with our adjusted EBITDA measure. Please turn with me now to Slide 13, where I will highlight the drivers of the full year expected sales and profit changes compared to last year. Beginning with organic growth, for 2024, we now expect about $230,000,000 in additional sales from traditional products through new business, moderate market growth and market share gains.

Speaker 3

This is slightly lower than our previous outlook due to continued weakness in our heavy vehicle markets. Adjusted EBITDA increase on traditional organic sales expected to be approximately $145,000,000 The higher profit margin increase of about 120 basis points is a continuation of the company wide efficiencies and cost savings actions. As I mentioned, we are lowering our incremental sales expectation for EV products this year due to the industry wide slowdown in demand. We now expect about $65,000,000 in incremental EV sales. The EV business continues to contribute positive profit and we have reduced our engineering and other expenses and are maintaining our expected EV adjusted EBITDA to be about $20,000,000 headwind.

Speaker 3

The divestiture is expected to close in the second half of this year and will lower sales by $40,000,000 with no profit impact. Foreign currency translation on sales is expected to be slightly more modest headwind of approximately $45,000,000 with a profit impact of $5,000,000 Finally, our commodity outlook is expected to be a headwind to sales of about $65,000,000 recoveries driven by falling steel and other commodity prices. We expect a $40,000,000 profit headwind due to the true up of pricing governed by our 2 way commodity recovery mechanisms with our customers. Lastly, please turn with me to Slide 14 for our outlook on free cash flow for 2024. We anticipate full year free cash flow to now be about $100,000,000 at the midpoint of the guidance range.

Speaker 3

This is a $25,000,000 improvement over a prior outlook driven by lower capital spending. 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. Working capital is expected to be a use of about $50,000,000 or $35,000,000 better than last year and capital spending to support our sales growth and technology is expected to be about $425,000,000 this year, which is $75,000,000 lower than last year as we flex spending to match customer program timing. Thank you for joining us today.

Speaker 3

I will now turn the call back over to Regina and we will take your questions.

Operator

Our first question will come from the line of Colin Langan with Wells Fargo. Please go ahead.

Speaker 4

Great. Thanks for taking my questions. When I look at the lower sales guidance, it's $200,000,000 at the midpoint, almost all of it $175,000,000 I think is from EVs. 1, what are you seeing on EVs? But 2, the recent S and P forecast had some pretty big cuts in the second half of the year to some of your larger customers.

Speaker 4

Was that already baked into your outlook? Why kind of expected a little bit of a head from some of those reductions? Why hasn't that impacted you?

Speaker 3

Hey, Collin, this is Tim. Yes, so we had already been expecting some of that slowdown in the back half of the year and had already built that in to our original forecast. So that's already in there and then there is some mix change in there as well.

Speaker 4

And on the EV side, I mean, is this these programs getting pushed into next year? I mean, any color there on what

Speaker 3

yes, so I think we're seeing lower volumes across much of it. Obviously, a lot of it coming out of the CD space, a little bit elsewhere. But we do think that some of that will start to return. But in the EV space, it's not really program specific as much as it is customer specific. So as we see the customers start to rebalance to demand, I think we'll see some of that flatten out.

Speaker 4

Got it. And if I look at the sort of imply first half to second half based on the midpoint of your new guidance, it implies higher margins on it looks like lower sales first half to second half. What kind of gets the margins that usually had to sort it that way? So what gets margins higher in the second half even if sales aren't up?

Speaker 3

Yes. So if you just look at the high, we're down about $250,000,000 half to half and only losing about $10,000,000 of that in EBITDA. That would normally convert if you just think about it something around $50,000,000 That $40,000,000 difference, dollars 20,000,000 of it is really around the EV. So you'll see that if you look at the difference in EV. So we are flexing a lot of those costs from first half to second half on the EV.

Speaker 3

The balance is really additional improvement on the cost structure and the efficiencies across the company. So and if you think about you think about our last year's second half, we showed our ability to really drive efficiencies when we lost those sales and had something around $50,000,000 in the back half of last year that were really efficiency improvements. So, we feel good about being able to deliver continue to be able to deliver our commitment on the 925 even despite the lower sales.

Speaker 5

Got it. Thanks for the color.

Speaker 2

Yes.

Operator

Our next question comes from the line of Tom Narayan with RBC. Please go ahead.

Speaker 6

Hi. Thanks for taking the questions. One last week, there were 2 OEMs, Stellantis and Ford, with pretty elevated dealer inventory levels. 1 of them, Stellantis, actually called out explicitly how they're going to cut like 100,000 units of production, I think in H2 alone. I know you just mentioned that you had already been incorporating a lot of this in your guidance.

Speaker 6

But it seems like a moving target just as early as recently as last week, I was just curious like it seems like these OEM customers, I know both of them are customers of yours, are using production cuts as a way to deal with this inventory situation. To what extent are you concerned about this not just in H2 2024, but perhaps even prospectively into 2025?

Speaker 3

Yes. So I'm not going to give any color on 2025 as it's still quite a ways away. When we look at the back half of the year, right, we had some of this in there, as I mentioned before. We also have mix, obviously, between segments and even between programs. And then, obviously, we're very light truck focused and usually very and obviously very program focused on the vehicle side.

Speaker 3

We think where we have the forecast now is in line with what we're hearing from the customers. But obviously, as they continue to adjust, we'll make those changes as needed.

Speaker 2

Okay. And

Speaker 6

then if I could just squeeze in 1, your prepared comments that you mentioned share gains in commercial vehicle offsetting market declines. Just curious as to maybe where this is happening, the share gains in particular? Thanks.

Speaker 2

Good morning. Thanks for the question. Thanks for attending. This is Jim. Just there's no long winded answer to it.

Speaker 2

It's across the world. It's global. We're just continuing to execute, and cost quality delivery, you name it. And fortunately, we're appreciated that our customers are recognizing and supporting us. Okay.

Speaker 2

Thank you. Thank you.

Operator

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

Speaker 7

Hi, good morning. Thanks for taking the question. I want to start with a question on light vehicle. I think this is like the best margin that you put up in something like the last 3 years. And obviously, we see a pretty good EBITDA on sort of modest revenue increase.

Speaker 7

So maybe you can just give us a sense of the underlying dynamics in the LBD margins? How much of this is just inflation unwind? And then maybe you can give us a flavor for just what the trajectory is. This was once an 11%, 12% EBITDA margin business. I recognize maybe it doesn't go back up to that level given some of the inflation dynamics, but maybe you can give us a sense of sort of where this business is going forward because it still seems like even with these production adjustments, the core volumes on these platforms is still quite robust, Super Duty just added capacity.

Speaker 7

So maybe you can give us a sense of the trajectory there, please?

Speaker 3

Yes. So obviously, we're pleased with the where we're at in terms of the trajectory to move the light vehicle margins back to where they really need to be. I think, obviously, the customer running better helps with efficiency, but also the drive within the organization on across the board efficiencies. So whether it be direct material cost, conversion costs within the plants or really just the general cost structure from a fixed perspective in the business is really getting reflected. But those plants continue to run better and better day in and day out and we see that continuing.

Speaker 3

You mentioned inflation. Inflation is still with us, albeit it slowed down. So we sort of left less to have to offset or try to go get from the customers. So that's certainly a benefit versus what we had over the last few years. On your last question, yes, we need to get these margins and are push.

Speaker 3

But certainly, our view is this business can be and push. But certainly, our view is this business can be and will be a double digit profit generator and be able to return have the acceptable returns for the capital we've invested.

Speaker 7

Just on the inflation, is there can you contextualize how much maybe low hanging fruit is there that can still come out of the system? Or how much of the sort of production inefficiencies which dragged margins in the past, how much more improvement you could see on that front?

Speaker 3

Yes. No, I think there's I don't want to get into specifics of how we run the plants, but certainly we think there's additional amounts in both of those to be able to go get. And look, we the idea of taking cost out of the plants, that's part of the DNA and we're really just flexing that muscle that we have now that we've got better production scheduling and that's what you're seeing flow through.

Speaker 7

Great. Thank you.

Speaker 4

And a follow-up.

Speaker 7

Jim, I'm wondering if you could just give us an update on the EV strategy. And I know this is a question that's come up on past calls, but this is such a fluid environment and we're seeing automakers continuing to change plans, modify launch schedules, obviously, on the light vehicle side. But even on the commercial side as well, it seems like there are some shifts there. So maybe you can just give us a sense of how, if at all, the strategy on EV is being modified? Or is it still continuing to stay the path, continuing to maintain the investment?

Speaker 2

Dan, thanks for the question. That's a lot to unpack, but I'll do my best. I think we're all challenged with it, right, in terms of figuring that out, not the strategy so much about what's going on, but I guess to get some momentum around the answer would be, everyone is, I would say, pushing out and reducing down, in some form or fashion on EV for all the reasons we know infrastructure to whatever it might be. As it relates to us, the best thing I could do for you is to paint a visual. We've created a very unique strategy at Dana from the very beginning.

Speaker 2

We've been very rigid with it. And that is you take the example of the Bollinger win that we announced today and you look at the components that are in there, you have a rigid e beam, axle, you have a motor, you have an inverter, you have the software, you have the controls within that, you have the thermal management that supports it from our Power Technologies business, so on and so forth. That all of that at a minimum on a human capital level fungible, at a maximum, many times the capital assets themselves in the plants is fungible across business units, etcetera, etcetera. And so for us, our strategy doesn't need to change because that product those products, I should say, can go up and down the river, I like to call it in the off highway, in the commercial vehicle, the light vehicle at different diameters, at different torque, at different things. So we don't have to change our strategy because one market or whatever the case may be, may have more delay, more pullback, whatever it might be.

Speaker 2

So we're positioned. If it was different, if this pullback and change would have happened 4 years ago, 3 years ago, I mean, you'd have to think about an abrupt change. But there's I can't see a world, personally speaking, I can't see a world that customers that start with light vehicles, to take an example, that their people are going to consumers are going to go into dealerships and not expect to have the optionality around buying an EV, a hybrid or an internal combustion engine for any time in the near future. The same thing goes for commercial vehicle. If you think about the most important probably the most important end market relative to total cost of ownership, if you're an OEM and I'm not here to speak on behalf of them, they speak to me, I'm kind of relaying it.

Speaker 2

You don't give people the optionality and a total cost of ownership depending on the vehicle choice. Things good things happen or bad things happen to good people. So you're always going to have those type of scenarios. We're just using our capital, both human and equipment capital to support all of our customers. We'll get a good return on it.

Speaker 2

Capital is blind. It doesn't matter if it's EV capital, if it's ICE capital or hybrid. You just you deploy the capital, you make a return on investment, company grows, you continue to you continue to expand margin. I hope that's not too much of an answer, but that's how we're thinking about it.

Speaker 4

Great. Thank you.

Operator

Our next question comes from the line of Joe Spak with UBS. Please go ahead.

Speaker 8

Thanks. Good morning, everyone. I want to sort of get back to the guidance and maybe think about it a little bit differently. So if we look at the sales level on traditional organic, I mean, you did bring that down a little bit for the year and I know you sort of spoke to some tougher end markets. But if you look, it still assumes like over $135,000,000 of positive in the second half, which is like 60% of that total gain you're looking for.

Speaker 8

And we know some of those end markets are tougher and some of the key platforms look to be maybe down half over half. So can you just help us understand what's really driving that and maybe even some indication by segment if possible?

Speaker 3

Yes. I think the don't forget our second half last year especially in light vehicle was significantly impacted by the UAW strike. So we're going to get that volume back. And we can talk about sort of where the customers are on production plans. But our largest programs are all impacted significantly by that strike and that's back.

Speaker 3

We also had some launches last year that in the back half that should be at better run rate. So those are obviously all helping. We also have parts of the business that are outside of North America that from a mix perspective that continue to support the ICE sales growth. And then of course, we've got some headwinds starting to peak through on the off highway side. But that's generally why we still are able to see that growth from an ICE perspective in the back half of the year.

Speaker 8

Okay. And then I guess similarly just on the margin side or the cost side, I guess, right, like the 73% conversion on traditional growth in the first half, I mean, the guidance does imply that steps down to something in the mid-50s in the back half, but obviously still really strong. So but I'm just wondering, and I know you talked about sort of prudent investments, capital efficiency, but is there more that can be done do you think within the organization as we think beyond the back half? Like how should we like do we return to sort of more normal contribution margins, I guess, as beyond some of the comps that are impacting the figures this year?

Speaker 2

Hey, Joe. Good morning. This is Jim. Just let me kind of dive into that one a little bit. I think to try to get through all your question.

Speaker 2

Can more be done? Absolutely more can be done. Manufacturing, if you're worth your salt, is all about sustain and improve, sustain and improve, build processes and systems that give you a platform to build off of. And that's what we've been doing here. We've taken the kind of the long view to build just an incredible company.

Speaker 2

So first of all, what's you kind of what's within your controls, we fully expect to continue to improve on all of the drivers that we refer to as across company efficiencies. In addition to remind you in the overall profitability of the business too, the business you know it as well as I do relative to fixed contracts and this got every especially light vehicle, but all suppliers got hit with fixed contracts that you have to deal with etcetera, etcetera. As those continue to build out, we are still in many, many cases supplier of choice and we're going to continue to reap the benefit of getting new roll on programs. So in terms of the trajectory, that's the way you think about that's the way I think about it. It's just sustained and improved both on new growth, profitable growth, utilize the existing capital you have.

Speaker 2

We don't have to go build out a platform electrification capital like we would have had to over the years. Not say there's not some, but it's more of an ambient capital level like the companies ran for decades. And we just continue to gain margin off of that moving forward and more importantly cash flow.

Speaker 8

Okay. Maybe one quick one. Just can you confirm that you'd be able to support Super Duty production in Ontario?

Speaker 2

We will always support production for our customers

Speaker 3

for sure. And the answer is yes.

Speaker 8

Okay. Thank you.

Operator

Our 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. First, I was hoping you could give us an update on Hydro Quebec TM4 put, just some color on the timing and impact and what the cash payment to Hydro Quebec could be? Thank you.

Speaker 3

Sure. This is Tim. How are you doing, Jake? Sure. I mean, obviously, we're in the process today.

Speaker 3

The contract the shareholders agreement has a specific process that we're working through. In terms of timing, I think certainly

Speaker 2

it will continue

Speaker 3

to take some time. We'll update as we know more, but certainly it's going to be late this year or early next. In terms of our view, we've had the disclosure out there for some time in terms of what we believe our view of the value of the put is and that's currently in there. It's somewhere in the neighborhood of 200 which is what we currently have it on the books for and we haven't changed that view since we started down this process, although we are early in the process with Hydro Quebec.

Speaker 5

Great. Thanks, Tim. And then could you guys just give us an outlook on the off highway market? Ag especially appears to be material, they turn it over to the negative. So what's your assumption there?

Speaker 5

Thank you.

Speaker 3

Yes. So correct. We still see ag being down. Obviously, farm income is down. You can see you've heard the news coming out of John Deere, which is one of our larger customers, especially in ag.

Speaker 3

So yes, we continue to monitor that. Obviously, it's we have we don't play in every ag market, so they're all reacting a bit differently. But our current view, which is a down ag market, is built into the rest of your forecast.

Speaker 5

Thank you.

Speaker 2

Okay. Just some concluding comments. This is Jim again. First of all, as I always like to do, thank you very much for your time and attendance today and privilege of your time. Not a lot to include, I thought questions kind of surrounded it well today.

Speaker 2

But I would just say, personalizing it a little bit, this is my over 35 years in the business, almost 18 as a CEO. One thing that has never changed, that is there's no to win, there are no shortcuts for mobility suppliers. You have to execute on cost, quality delivery, technology and innovation, operational excellence and customer satisfaction. Never changes, right? No one would have imagined the destruction that would have occurred that occurred coming out of the COVID years and hyperinflation.

Speaker 2

And it's just a clock you can't speed up in terms of getting the company back to where it was. As you can see, obviously through a 73% conversion on incremental sales or the methodical incremental sales on various platforms across end markets, across propulsion systems, companies running at extremely high level and continuing to improve every day. In the long haul, the markets will definitely support the small caps. The money is going to come back our direction because we're just going to continue to form not just us, but the rest of supply base. Thanks again for your time and attention.

Speaker 2

We'll talk to you later.

Operator

Thank you all for joining today's call. You may now disconnect.

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Earnings Conference Call
Dana Q2 2024
00:00 / 00:00