who joined us today. Very pleased to have Dana with us, who's been a great partner, I think, for 10+ years, really from the beginning of this conference. I want to just make sure people know that we- without these companies taking the time out of their schedules to come to this event, we couldn't make, you know, the conference possible. So I really wanted to thank the management team. I'm Doug Karson, BofA's automotive analyst. With us today from Dana, we have John Geddes, the Vice President and Treasurer, as well as Craig Barber, Senior Director of IR. Both very helpful to the investor community within the fixed income world. Dana, as you may know, is a leader in power, conveyance, and energy management solutions across light vehicles, commercial vehicles, and off-highway.
Some of the key products everyone knows are axles and drive shafts, but also they're doing a lot of work in BEVs, in various, you know, e-solutions, and I think we'll talk about that today as well. We're gonna take the next about 28, 29 minutes and do a kind of an open, fluid, fireside chat. I'm gonna ask the audience if they have any questions, but I've got a couple topics to run through. Without further ado, I think we'll kick off the chat.
Sounds good.
So I thought maybe we'd start out with something kind of strategic. You've got a big picture. The market is watching this EV transition. And you guys invested a lot in it, and you're experts in ICE. Just give us a little flavor of how the company's thinking about the EV transition.
Okay, so, first of all, you have to think of the markets that we are a part of. So we are a part of, break it into a few segments: light vehicle, which, think of, you know, heavy-duty pickups, Ford Super Duty, Jeep Wrangler, Ford Ranger, things like that. Commercial vehicle, which is your medium-duty trucks, your Class 8 vehicles, and then off-highway. And so each market's moving at a different speed for us. On what I, when I mentioned the light vehicle, that hasn't really electrified yet. Those are farther down the road. You've seen the electrification come in the passenger cars, but you really haven't seen it in the heavy-duty trucks. Those RFQs are out there. They're coming. We've announced a few wins in that space.
Haven't been able to announce the product or get out ahead of the customer. So but that's coming. So where you're seeing a lot of the EV investment and adoption on our side is on the commercial vehicle and the off-highway side. So think of your, you know, beer trucks, your delivery trucks, something that has a known duty cycle, will do its, you know, run its route during the day and will come back to the warehouse at night, plug in, ready to go the next morning, okay? So you're seeing the EV adoption there. You're seeing it in buses, and then you're, you'll see it in the off-highway market as well, you know, like I said, buses, the mining equipment.
You're kind of seeing different adoption, different adoption rates, but you're seeing, like I said, most of the investment right now is going into the EV and the off-highway side.
In my notes, I'm just reviewing the recent quarter. If I'm right, it looks like Adjusted EBITDA was up, you know, somewhere in the mid-26% a rea from right there. What was the expansion of A, margins, and B, EBITDA for the quarter? Is it just kind of coming out of, you know, chip shortages or COVID, or what kind of drove it?
I would say it's, you know, we look at it in buckets. So you have our traditional, well, I'll say our traditional organic business. You had some sales growth there, which is just general sales volume increases, a little bit of mix, and a little bit of price recoveries from the customers. But then it translated into a nice EBITDA pickup. I think for the quarter, our EBITDA margin was up 150 basis points. About 130 of it came from the traditional organic business. And this came from our, you know, some of the investments we've been doing, some of the improved operating efficiencies that we're seeing, a little bit of a price mix, and then a little bit less customer order volatility.
So those three together, like I said, about 130 basis points. You got about a 20 basis point pickup in what we'll say is the EV business. You know, we're growing that business. I think, off the top of my head, it's probably, like, up $80 million in sales, give or take a little bit. And it came with about, twenty basis contribution to margin, and that's, you know, just general pickup in volume. And it was a deferral of a little bit of some investments in that, in that area. And then you have commodities and currency, which offset each other.
Yeah, that's very helpful. So the EV is a pretty significant component of the revenue growth.
Yes.
Just kind of quick bookkeeping. The UAW had a kind of prolonged strike. It ended, which is great. How long will it take you to have your operations kind of running smoothly following that?
I think, I guess, the better way to answer it is we are supplying the customer with what they need.
Yep.
Okay, and so we're meeting their demand. As you ramp back up, there will be some inefficiencies. You've probably saw that, like, after COVID, there's some inefficiencies as you ramp back up. You'll see, you'll see some of it as we ramp back up to a much lesser degree. But just, you know, remember, I'll go back to the segments that we operate in, the UAW strike affected our, like, vehicle business, not our off-highway or our CV business. So like I said, you'll see some ramp inefficiencies, but, you know, we're supplying the customer, well, with their needs.
Can we maybe get to production? I mean, IHS has put out, you know, reasonably steady increase in production schedules in North America for the next 12 months, but there's been kinda starts and stops and some volatility. Has that become a little smoother lately on the production side?
Production has gotten better. It's still not where it was pre-COVID-
Right.
but it has gotten better sequentially over the last year. So, you know, Q3 was better than Q2, better than Q1, prior to, prior to the strike. So that is, like I said, that's getting better, and then you combine that with, with, the fact that we're operating more efficiently, and that's what you're seeing flow through, flow through to the bottom line.
I think most investors, you know, think more about, you know, cars and light trucks, and you've got such a big business in commercial and off-highway. If we were to kind of break those two kind of apart, so you got your light vehicles on this side and commercial and off-highway on the other side, tell me about, like, the thoughts around the commercial and off-highway, like, where we are in the cycle. How does that sector usually perform if we go into a slowdown? And then maybe just talk about some of the profitability metrics on that side.
O kay, so let's—like I said—putting light vehicle off to the side, on the commercial vehicle side of things, so like I said, medium-duty trucks, Class 8 trucks.
Yeah.
So this year, better than last year, probably better than people expected, better than the prior year. So, you know, it's been up in the cycle. Will that continue? You know, we'll see with the market. But, you know, we've been able to, you know, we've been getting share, so our share of that, I guess, our share of that market has been growing.
Right.
So, you know, like I said, it's performed well over the last couple of years. So if you get to the off-highway side of things, you know, you've got global infrastructure spending, you know, you've got the infrastructure bills in the U.S., so that's supporting the construction side of our business. The agriculture side has been, you know, hurt with decreasing commodity prices, so agriculture is down a little bit, and it's probably, you know, a headwind going forward. And then mining has been relatively steady-
Okay
A s we go.
That's helpful. I think in Q3, you announced 70% of the 120 program launches for this year have already been completed. How have those program launches been going? Have they been smooth?
Yeah, they've been, they've been going very well, and if you look at the magnitude of those launches and the breadth of those launches, it, it kind of, kind of shows what we're capable of. So we have relaunched or launched our four largest programs, accounting for about $2 billion in sales: Ford Super Duty, Jeep Wrangler, Ford Ranger, and the Toyota Tacoma. So you think about those on the, you know, light vehicle side, on the traditional ICE side.
Right.
But we're also launching several products on the electrification side, so for GM, JCB, Oshkosh, and whatnot. So it's shown that we have the ability to launch not only a large number of products, but products across various product lines and platforms. And I think it should give our customers confidence as we move forward, that we can handle the transition to the electric vehicles as we go forward.
Yeah, I noticed a little bit of a change in tone from OEMs about the rate that they think the EVs are gonna grow. It really just felt very different in Q3 from listening to a few of the calls. I think there was maybe people a little overhyped on that. Were you seeing any of that in your kind of launches or production schedules?
Not really. So remember, you know, where we play and where you're seeing some of the pullback from, right?
Yeah.
So for us, the electrification to date has been primarily commercial vehicle.
Okay
A nd off-highway. So where you hear about the slowdown and the, you know, maybe, you know, some of the larger OEMs talk about slowing down, that's not really impacting the products that we're currently producing.
Okay.
Okay? And you know, even if they slow down, you have to remember that we are, you know, we're supplying a product that's gonna be there, whether you're in an electric vehicle or if you're in a traditional, you know, gas engine, you need an axle, right? So that's gonna go on the vehicle no matter what. So in that sense, we are, you know, fuel source agnostic. If you wanna do it, you know, gas, diesel, the traditional ICE engine, we'll supply that. As the power source and electrification moves to, you know, from the engine back into the back of the car, we can supply that as well. We can supply fuel cells, so our products are needed regardless of the power source.
That's helpful. Is there any, I don't know if you've broken that out, but is there any profitability characteristics that are different from ICE versus EV products?
I'm not sure we've broken that out. We have said that, you know, on a contribution margin basis, our electrified products are profitable. So what you've seen, you know, it has, you know, you've seen some, I guess, compression in our commercial vehicle, but that's largely because of the investment we're doing in the business. And we're taking a business, you know, on the electrified side, that really didn't exist five, six years ago, growing it to, you know, $700 million-ish in sales this year. And so that's the kind of investment you're seeing. But like I said, contribution margin basis, you know, the electrified products are profitable.
Maybe we could turn to free cash flow. Free cash flow for, I think, the quarter may have been impacted by the UAW strike a little bit, but maybe you could just, I know you're not giving out guidance for free cash flow, just thoughts around uses of free cash flow, you know, between maybe acquisitions, shares, delevering.
Okay. Yeah, so. You know, first of all, you know, we're investing in the business, so on the CapEx side, our CapEx is elevated this year, will be for a couple of years as we grow out the electrification side of the business. But let me take a step back from there, though. If you go back about five or six years, we started on the electrification journey, might be seven years. Made a series of acquisitions to provide us the capabilities on the motor side, the inverter side, and some of the software side. We think we're in a pretty good spot right now, so I wouldn't expect to see any large acquisitions. Maybe you'll see a small bolt-on or something like that, so. But that's about it on the acquisition side.
You will see, you know, free cash flow. We do want to direct some of that to delevering over time. Our leverage is a little higher than our target. We stated that our target is around 1-1.5x of net leverage. We're probably in the 2.5 times right now. As EBITDA grows, a little cash flow going to debt reduction, that should come down over time. And if you look at dividends and share repurchase, you know, this year we'll do about $60 million of dividends, which is pretty consistent with last year. I think the dividend was last raised in 2019. Share repurchase, we have not done a significant amount in the last five or six years. We've done enough to offset some dilution, and then, you know, through the third quarter of this year, we hadn't done any.
Maybe we could talk a little bit about costs. There's been inflation in labor, for sure, across almost every industry I cover, and more recently, UAW, you know, inked a pretty meaningful increase in wages. How have labor negotiations gone for you at your firm? Where do you see your labor costs, employee retention? I think it's a big concept now.
Yeah. So we, I mean, we do have UAW, United Steelworkers in the U.S., and then we have some unions outside the U.S. So I would expect that, you know, the negotiations that have been going on, they will eventually come our way.
Do they go plant by plant, or do they go region by region?
No, I think, we have a national.
Okay. So if we're thinking about labor, potentially wages increasing, what has the company done, you know, on the cost side? Have you any initiatives on cost-
Well-
P rocurement or efficiencies?
You've always got those initiatives going on, but, you know, we spent a lot of time and a lot of effort improving our operating efficiency. Some of that you're seeing flow through, flow through our results, and that's, you know, that's better matching production with orders. That is more efficient changeovers. That's commonizing parts. That's, you know, less, you know, less waste. So, you know, we've got to, we've got to focus on, you know, costs and, you know, keeping those down and keeping those manageable, regardless of, like I said, the labor situation. I mean, then you're also looking at, you know, where you're seeing some of the other inflations, such as, you know... We'll take commodity inflation off to the side, because most of the commodities, and for us, that's steel.
We tend to pass through 70%-80% of that to our end customer, usually on about a quarter lag. But when you get to, you know, freight, you know, energy, things like that, that is going back to the customer and working with them on pricing. And so that is a negotiation with each customer, you know, a give and take. You know, we haven't had to do that the last 20 years, so it's a lot of work on our commercial teams to go about and recover some of those costs.
Before I hit the next stage of questions, do we have any questions from the audience? There's a question here in the middle. Thank you.
Thanks. For us non-engineers, can you tell us what's different about the drive shaft and axle hooked up to an electrical engine versus an ICE? Is it because of lack of a transmission? You mentioned software, too. Does it talk to the engine differently, or just in layman's terms?
Well, I'll-
'Cause my question is, why the big investment? Why couldn't you just run the same axles and drive shaft, is really the question.
Well-
Thank you.
Let me, I'll take a shot at this at high level, as a non-engineer as well. So if you think about a traditional ICE vehicle, right, you have your engine up front, you have a drive shaft that transfers the power to the wheels and the axle, right? Okay. Let's say now you go to EV. Engine goes away, drive shaft goes away, okay? But then you're putting... There are other configurations, but the one, you know, we deal with the most is you're putting your motors on the axle, and you're generating your power that way, and you also have the inverters and the software that's running it.
So there are other versions where you might have, you know, a battery up front, and you still have a drive shaft, but I think the most efficient one, put your motors on the wheels, on the axles, to propel the vehicle. And so we supply the motors, we supply the inverters, and have the associated software to go with that. So we're capable of doing a four-in-one configuration for the EV vehicles, and that, the fourth part of that is battery cooling, engine cooling. Some of these cooling technologies and the thermal technologies we've taken from our traditional ICE business. So-
Thank you.
Oh, you're welcome.
That's a good question. Thank you. Maybe we could turn a little to the global diversification you guys have. We're more focused on North America, 'cause that's where we operate, but if you could just talk to us about some of the global opportunities.
Yeah. So if you think about our business, about half of our business is in North America, okay? And that is, I'd say, primarily, it's on the light vehicle side. So if you start to leave North America, 30%-ish, in round numbers, would be in Europe, and that is primarily an off-highway business, although they do ship product around the globe, okay? And then we have the remaining 20% is Asia, I think China, India, Thailand, and then South America, primarily Brazil, with the Asia piece being a little bit more than half of that 20%.
As far as your China, it's kind of a complex relationship to understand. Do you have JVs in China, or are you just producing your parts, the OEMs there? How does that work?
Yes. So we do have JVs in China. You, you'll see some of that on the motor side. But we also have wholly-owned subsidiaries there as well. And so a lot of that is producing for the local market. But, and, you know, some of those JVs, like, what? Dongfeng. I'm probably blanking. So we have, you know, a JV on, you know, for bus manufacturing or supplying the axles for the bus manufacturers is one of the JVs. Like I said, motors JVs, but then there are some wholly owned businesses that are supplying parts there, primarily for the local market.
Just going through the slides here, and I was impressed to see that on the off-highway side, that infrastructure spending is showing continued demand for construction and equipment. Can you maybe just highlight some of the opportunities in the off-highway? I think it's a segment that's a great segment and maybe overlooked a bit by investors.
Yeah, and if you think about—I mean, if you look at, if you look at our Off-Highway segment, it's actually the highest margin segment.
Yeah, okay
T hat, that we have. And I break it down. There's probably a few more, but at a high level, you know, it's construction, ag, mining, okay? So they have their different characteristics. You know, I mentioned earlier that, you know, you have global infrastructure spending around the world, so that's supporting the construction side. On the ag side, think of more your medium-duty tractors. And so that's gonna be impacted by commodity prices. And then your mining is gonna just be general economic activity, kind of depending on where it is, and that's been relatively steady this year. But, there's, you know, there's other stuff you could throw into off-highway. You can get into the, you know, I guess, lawn care, we've gone into.
You've got, you know, the skid steers, so I guess that falls into construction. But it, it's a wide breadth of things, that's basically anything that you're not running on a highway.
It's a nice diversity there, and good to know the margins are the highest there. For commercial vehicles, I'm just seeing here, the EV heavy truck production outlook remains strong, up 15%, which is almost double the production increases we're seeing in light vehicles. What do you think is driving the 15% EV production outlook?
Well, I think, you know, on the EV side, like I said, on the commercial vehicle. You know, you're not seeing it on your Class 8 trucks. It's more the delivery trucks, it's your last mile. I'll go back to the known duty cycle. I mean, there's got to be an economic opportunity there for the customers, but it is easier adoption there because of the, I said, of the known duty cycle. You know how heavy the trucks are gonna be in general, so you can go back, you can charge them overnight, run them again the next day.
Right. It's an excellent business. I don't know if we talked about CapEx. So you as the gentleman asked the question, the difference, which actually you very good, I think, answered in layman's terms, which was helpful. It seems like there's a lot of new intricacies into that, moving the axle to an e-Axle . If you can give us an idea of, like, your CapEx spending, how much is it directed to these new components? How much of it is kind of status?
Well, we haven't broken it out, EV versus traditional on the CapEx side. But, you know, if you think about where we're headed, we're investing today for the EV products of the future, and our CapEx is, you know, it's elevated versus what it has been historically as we build that business. So you're gonna continue to see some elevated CapEx as we, you know, look out 3, 4, or 5 years. Now, the one thing to think about as we're investing in this CapEx, and like I said, most of it has gone towards our commercial vehicle and our off-highway business to date. It's transferable. So the CapEx you're doing for your commercial vehicles today lays the foundation for what might come in the light vehicles in the future. So you're not just...
You know, it's one of our core tenets, is it's leveraging the core, and that's what we're doing as we move into EV too. Our CV was the first mover in our markets. That lays the foundation for future, you know, EV growth in the LV side of the business and off-highway.
I thought maybe I'd ask a question, kind of big picture strategic, if that's okay. So, leverage stands around 2.5 turns, and you thought the range would be a little lower than that. Do you know how many years you're looking to get there? Is it two or three ? Is it something reasonable?
I would just say in the medium term-
Medium term.
We're looking to get there.
Okay. Your consolidation in this space has not been really tremendous compared to some other industries. There's quite a few players out there. Can you ever envision you, Dana, looking at any more meaningful strategic acquisitions? Is there anything in the EV world, or in off-highway, or, you know, outside the North America footprint that seems attractive?
I think we're in a pretty good spot right now. I think from, you know, you know, we have our traditional ICE business, which has been around for a long time. We've built, through a series of acquisitions, the EV capabilities.
Yes.
We think we have what we need to move forward and to support our customers going forward. I wouldn't expect anything, you know, large from us.
Anything really transformative-
Yeah.
That would take leverage way up.
Yeah.
All right. That's, that's pretty helpful. Here's the last question I'll ask. Yeah, as we see the transaction pricing for automobiles kind of skyrocket... I think we had Penske up last, and said the average transaction price was $56,000 per vehicle, and they have a very premium segment. I know there's always a battle between, I won't say battle, it's the wrong word, but trying to get the best price you can for your products as the OEMs continue to try to, you know, push costs down. How have the discussions been? With this, like, elevated pricing they have, has it given you any, like, daylight to try to eke out any better pricing, or is it still just kind of tough to come by?
It's still, you know, negotiations with the customer. I mean, they're not, you know-
They're not looking to give it away.
They're not looking to give it away, but they also realize that they need a strong, supply base so that, you know, we can invest.
Right.
Because they've also not only have they pushed down costs, they've also pushed down some of the innovation that's going on or some of the engineering, right? So-
They've pushed that down to you.
Yeah. So we're, you know-
More content.
Yes. Yes. So, you know, we're innovating, you know, for them. And they know that we have to be profitable in order to do this and in order to support them on a go-forward basis.
That's great. Well, that actually wraps up our time. I want to thank Dana. Thank you very much for being here at the conference for so many years, and enjoy the remainder of your day and the one-on-ones, and thank you, everybody, for attending. That concludes the fireside chat.
Thank you.