DANA Inc Q4 FY2023 Earnings Call

Good morning and welcome to Dana Incorporated’s Fourth Quarter and Full Year 2023 Financial Webcast and Conference Call. My name is Regina, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers’ remarks and the 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 a guest. There will be a question-and-answer period after the speakers’ remarks, and we will take questions from the telephone only.

Thanks, Regina, and good morning, everyone on the call. Thanks for joining us today for our fourth quarter and full year 2023 earnings 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, our Chairman and Chief Executive Officer; and Timothy Kraus, Senior Vice President and Chief Financial Officer. It's now my pleasure to turn the call over to Jim.

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 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 internal combustion engine, 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. 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 $10.6 billion, an increase of nearly $400 million over last year, driven by strong customer demand, the rollout of our new business backlog across all end markets, including traditional internal combustion engine and electrified 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 million, up $145 million, driven by efficient execution across the company. This is a significant accomplishment considering the headwinds the light vehicle market faced in the fourth quarter due to the UAW strike, which you are aware, Dana was disproportionately impacted given the vehicles involved. 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 data plants immediately reacted and shut down all or substantial portions of their manufacturing, which supply these respective vehicle programs. As challenging as the shutdowns were, the restart was an 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. 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 center 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 internal combustion engine and electric vehicles across all end markets. Additionally, we continued to strengthen our capabilities across the company to improve our process technology and manufacturing capabilities. Simultaneously, we organically completed the build-out of our balanced product portfolio, including our complete in-house electrification capabilities that solidified Dana as an energy source agnostic supplier, providing class-leading products and systems to support internal combustion engine, hybrid, and electric vehicle manufacturers. Our results to date are a direct reflection of the actions taken by our cohesive and integrated partnership. 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 an improved operating environment as supply chains and customer production schedules return to more normal conditions. 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 million over the next three years. This is a $50 million improvement over the prior three-year backlog. This steady and measured sales growth is balanced across internal combustion engine and clean energy programs and 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 internal combustion engine and electric vehicle products, mobility and markets, geographies, and customers. 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 refreshed 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 levels and are expected to be modestly flat compared with 2023 with lower volatility as we see the reversal of commodity recoveries with customers. Finally, for this section, foreign currencies, 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, while labor costs have increased globally. With recent global events, we are monitoring ocean freight conditions and we'll navigate alternative logistics as needed. And, of course, we are continuing our efforts to improve cost and price to mute the impact of inflation. 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 costs. 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 third-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. The arrow on 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% and 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 vehicles, 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 with last year. We will continue to monitor these end markets as demand can move quickly. At the bottom of the page, you can see that 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 million. 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. 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 electric vehicle applications across all markets globally. This effort requires a significant investment of people and capital resources to launch our extremely large and complex programs that together represented more than $2.5 billion in 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 year in 2023. 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, for successfully industrializing the new programs to ensure that our customers were, in turn, successful in their respective vehicle launches. Please turn to slide 8 where I look at some examples of new vehicles we will be equipping with our award-winning systems as part of our record three-year new business sales backlog. For the seventh consecutive year, Dana has increased our three-year sales backlog. As a reminder, we calculate our backlog on a net basis, which includes only new sales, net of any lost business, and we rebased the starting year and pushed out the ending year of that three-year period. This methodically helps to provide a clear view of the actual and above-market growth. This slide shows just a representative repeat of programs as our record three-year backlog is made up of numerous new business wins for both electric vehicle and internal combustion engine powered vehicles. To that end, Dana has amassed $950 million of sales backlog through 2026, another record for the company. That is $50 million more than our prior three-year backlog. As you can see in the upper part of the slide, this includes $350 million of incremental new sales coming online in 2024. Included in this year's $350 million incremental new business is a strong balance of new internal combustion engine and electric vehicle programs across all markets and regions. We expect to see an additional $300 million increase over the prior backlog for 2025, which will total $650 million 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 million 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 million backlog is coming from electric vehicle platforms. 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 internal combustion engine, hybrid, and electric vehicle 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 billion. Our next few slides will provide a sampling of new business awards across our end markets. Please turn to Slide 9 for a 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 forklift, Hyster-Yale, a three-wheel electric forklift truck going into production next year. The newly designed forklift will feature a super compact electric limit 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 it 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, creating exciting growth opportunities for the future. Please turn with me to Slide 10, where I will share an update on a new multi-market electric vehicle 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 an unspecified major European OEM. Today, we can provide you with some details on this important new business win. We are excited to share that Dana is supplying electric motors for Volvo's commercial vehicle business for their heavy-duty and vocational trucks, while also supplying this technology for Volvo'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 electrodynamic components and systems across multiple mobility markets. Internally, this is possible because we leverage internal purchasing, product systems, engineering, and manufacturing, while, of course, benefiting from many other institutional synergies across the company. This is nothing new for Dana, as we have scaled our traditional internal combustion engine 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. 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 2023, 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. 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 the electrification partner to supply our integrated complete e-Propulsion systems for multiple all-new electric vehicle programs for a major well-known light vehicle OEM. We are still not permitted to share the specifics at this time, but I can tell you that we have recently expanded on the significant multiyear relationship with 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-1 independent drive system, which includes 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-1 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 or full-frame programs we have been awarded in our light vehicle segment. Consistent with our commercial vehicle and off-highway 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 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 zero emissions. 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 in 2024. Beginning on the top left, as we have seen less volatility in customer bill patterns, thus we have been able to accelerate actions to improve the overall efficiency of the business, driving increased profitability. For example, we have 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. Third, 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 costs and improve profit. Now, if you look to the right of the slide, our EBITDA increased by $145 million or greater than 20% from 2022 to 2023 landing on $845 million 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 million or nearly another 10% from 2023 to 2024, with the company expecting to realize around $925 million in earnings in 2024. We are on a solid trajectory in 2024 to achieve approximately a 32% improvement or $225 million of additional profit over a two-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 billion of adjusted EBITDA in 2025. Thank you for your time today. I'd now like to turn it over to Tim, who will walk you through the financials.

Thank you, Jim, and good morning. Please turn to slide 15 for a review of our fourth quarter and full year results for 2023. Beginning with the fourth quarter, sales were $2.5 billion, $61 million lower than last year, driven by the impact of the UAW strike at several of our key customers. For the full year, sales were $10.6 billion, an increase of nearly $400 million. Higher sales were primarily driven by improved demand in all of our end markets and recovery of cost inflation, primarily offset by lower volume due to the UAW strike. Adjusted EBITDA was $156 million in the fourth quarter for a profit margin of 6.3%. Full year adjusted EBITDA was $845 million, that is $145 million 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 million for the fourth quarter of 2023, due primarily to the impact of the UAW strike, lower earnings from equity method affiliates, and the devaluation of the Argentine peso. The net loss of $179 million in the fourth quarter of 2022 was mainly driven by the recording of non-cash tax valuation allowances. Full year net income was $38 million compared to a net loss of $242 million last year. The net loss in 2022 was primarily driven by a one-time non-cash goodwill impairment charge and the recording of non-cash tax valuation allowances. And finally, free cash flow was $136 million for the quarter and a use of $25 million for the full year, $234 million lower than 2022. The decreasing 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 fourth quarter of 2023. Beginning on the left, traditional organic sales were $132 million lower, driven by the impact of the UAW strike at several of our light vehicle customers. 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 million lower than the fourth quarter 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. Electric vehicle organic sales were $34 million higher than 2022, and adjusted EBITDA was $14 million lower, a 60 basis point margin headwind. Higher engineering investment for electric vehicle programs drove the lower profit, offsetting the positive contribution from the higher sales. Foreign currency translation increased sales by $45 million and profit by $3 million 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 fourth quarter was $8 million 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 million, a 10 basis point decrement to margin. Next, I will turn to Slide 17 for the drivers of the sales and profit change for the full year 2023. First, is traditional organic sales growth of $228 million, 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 million, representing a 44% incremental margin and an 80 basis points benefit to overall margin. This increase was due to the cost saving actions, improved efficiencies across the entire company, and customer recoveries that offset nearly all cost inflation in 2023. Second, electric vehicle product sales grew by $182 million over 2022. Total electric vehicle sales in 2023 were $760 million across all of our end markets. The adjusted EBITDA on the incremental sales was $8 million as the benefit of higher sales slightly more than offset the investment in engineering and commercialization costs needed to bring new electric vehicle technologies to market. Third, foreign currency translation reduced sales by $9 million as the dollar increased in value against a basket of currencies. Profit was lower by $12 million due to the mix of currencies involved. Finally, the lower recovery of commodity costs reduced sales by $2 million as prices for materials moderated throughout the year. 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 mechanism began to reverse in the fourth quarter as customer pricing normalized to account for the lower input costs. Please turn with me to slide 18 for details of our 2023 free cash flow. Free cash flow was a use of $25 million in 2023. Higher profit was offset by increased working capital requirements that were $289 million higher than the previous year. This was primarily driven by three 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. Second, the timing of the UAW strike drove lower sales in the early part of the fourth quarter, which led to lower cash collections later in the quarter. And lastly, as we mentioned on our third quarter call, we continue to render support to distressed suppliers. Capital spending was $61 million 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 you now to slide 19 for an update of our guidance for 2024. We expect 2024 sales to be approximately $10.9 billion at the midpoint of our guidance range, an increase of about $345 million over 2023. Adjusted EBITDA is expected to be about $925 million at the midpoint of our guidance range, which is up approximately $80 million from last year. 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 million at the midpoint of the range, which is a $75 million 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. 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 million 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 million. 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. We expect about $245 million in incremental electric vehicle product sales this year. This will bring our expected total electric vehicle sales to more than $1 billion in 2024. As I mentioned a few moments ago, the electric vehicle business contributes positive profit. However, we expect electric vehicle adjusted EBITDA to be a headwind of about $20 million this year due to continued spending on engineering and associated costs for new electric vehicle programs. Foreign currency translation on sales is expected to be a headwind of approximately $70 million with a profit impact of about $10 million. Finally, our commodity outlook is expected to be a headwind to sales of about $70 million due to lower recoveries, driven by falling steel and other commodity prices. We expect a $25 million profit headwind due to the true-up in pricing governed by our two-way commodity recovery agreements 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 million at the midpoint of the guidance range. We expect about $80 million of higher free cash flow from increased profits on higher sales. Net interest will be about $35 million higher due to higher interest rates and payment timing due to refinancing that occurred in 2023. And capital spending to support our sales growth in technologies is expected to be about $450 million this year, which is $50 million 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.

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

Thanks. Good morning. I appreciate you taking the questions. First one, just start out with a question around cadence in the outlook. Are we back to a more normalized cadence for the company with Q1, Q4 being lighter and Q2, Q3 being the heaviest? Is there anything that would impact seasonality this year that we should be aware of?

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

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

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

I had to try. Let me ask a little bit about the backlog in a way that maybe hasn't really been asked before. To consider the mix of components versus systems, which may be an arbitrary distinction, but when I hear about some of your wins and some of them are for components like motors, while others are more integrated units. Can you discuss how that is trending? Whether you can quantify it or discuss it qualitatively, I think it will help us understand how much of this new business, particularly on the electric vehicle side, involves really integrated systems or subsets.

Hi, Noah. Good morning. This is Jim. I'll address your question. The answer is that there is no one-size-fits-all solution; it varies by end market, vehicle type, region, and customer. Our various customers have changed their strategies two or three times over the past three to four years, and that will continue. For instance, in some regions, a particular customer may prefer a component-based approach with Dana, while in other areas, it may be more suitable for us to provide a full system. There are many factors that differentiate our technology from others. We will never reach a straightforward, uniform solution that applies to everyone. It's always influenced by these factors. What benefits us is our ability to adapt across different end markets and regions, allowing us to meet our customers' needs, whether at the component level or as a full system.

Thanks very much. I’ll turn it back.

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

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 billion EBITDA, and can you share just some 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.

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

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

Yes. To the extent you were seeing a delay or a trade-off between internal combustion engine and electric vehicle, that's a good assumption. It really does depend on what the program is and whether we're on the internal combustion engine version because we're both winning conquest business and traditional business with customers that we historically supplied internal combustion engines on.

Very helpful. Thank you.

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

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

Yes. So I mean, we're continuing to see inflation from 2023 into 2024. 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 cost 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.

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

Hey, Colin, 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 the significant shift on, I'll call it, somewhat of a pullback and push out on electric vehicles for all the reasons we all understand at this point. But if you go back in buckets of time over the last year, two years, three years, the cadence of electrification sourcing in that window of time was really heavily influenced or pivoted towards electric vehicles. So now from a balance sheet 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 going to predict what that's going to be exactly. But again, it's important what was sourced, 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. 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 internal combustion engine, because that's all staying in line, maybe even slightly better because those are often more often to be a replacement win in our backlog. So it doesn't add to the pile.

Got it. Lastly, how should we view the off-highway segment? That area typically has the highest margins, but it seems those markets are starting to decline a bit. Should we expect that segment to decrease next year and consider it a potential overall drag? Thanks.

Just briefly, Tim may 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, et cetera, to be relatively neutral to prior year.

Okay. All right. Thanks for taking my question.

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

Hi, this is Trevor Young from Barclays. I appreciate the opportunity to ask some questions. First, I would like to get your guidance on free cash flow. Are there options to reduce capital expenditures if customer plans slow down? Also, will there be a significant reduction in working capital due to the impact of the non-repeated UAW strike you previously mentioned? Lastly, more generally about free cash flow, when can we anticipate a stronger conversion?

Yeah. 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 electric vehicles, but in internal combustion engines as well. And then, yeah, 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, and I think it's converting at about 20-ish percent. So a little bit, some efficiency there that we can probably still go get. 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, 2026, I think you'll continue to see that cadence grow throughout that period.

Great. Thank you for that. Then on the guide to the $20 million electric vehicle 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 electric vehicle breakeven overall?

Regarding the amounts that were postponed from last year, I don't have a specific figure, but there are certainly millions of dollars that continue to shift depending on customer program timelines. This will also change this year. I have no doubt it will fluctuate based on where we are in the product cycles and what new business we acquire. As for breakeven, our perspective hasn't changed. We still anticipate sales growth, and as I've mentioned in previous calls, we are becoming more efficient in managing the costs needed to commercialize these technologies and programs. We believe this trend will persist, so there is no change in our outlook for when we will reach breakeven on our electric vehicle business.

Great. Thank you.

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

Thanks, good morning. Maybe to start on the traditional organic in the guidance for 2024, just 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?

I'm not going to go into a whole bunch of detail, but if you really look back to 2021 and look at the decrementals that were impacting us when we had a lot of the supply chain and customer order pattern issues, you know, those are starting, obviously starting 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 internal combustion engine traditional conversion rate.

Okay. On the $225 million higher electric vehicle sales, if I look in 2023 and 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?

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

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?

Yeah, there's some of that. I think when you think about some of the places where the growth is coming from, yeah, we continue to see it in, we continue to see growth in the commercial vehicle 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 commercial vehicle this year, if you're trying to weight it. Some of that's due to some of the production lost in the light vehicle business last year from the UAW strike.

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

No, we don't break out the CapEx between internal combustion engine and electric vehicle.

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 scenario every day as a company that's trying to survive product portfolio disruption as well as a three to four year COVID/UAW-driven industrial crisis. But I would offer that Dana has more than survived these two once-in-a-lifetime generational challenges. In fact, I think we are used to it, and the events have significantly strengthened the company. I would argue it's terminology: I’d like to call it a 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. So thank you very much for your continued support and interest in Dana, and we'll talk to you all soon.

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