Autos Summit. I'm Emmanuel Rosner, and I'm the lead autos analyst here at Wolfe Research. For our next discussion, we're very happy to welcome Dana, a leader in propulsion and motion systems for light, commercial, and off-highway application, and the best-performing stock in our coverage since late November when management announced plans to divest the Off-Highway business and implement significant restructuring actions that the company expects will eventually yield $300 million in savings, including $175 million this year. To discuss these exciting and transformational steps, as well as the company's fundamental outlook, we're very pleased to welcome CFO Tim Kraus and Craig Barber, who runs investor relations. Thank you so much for being with us.
Thanks, Emmanuel.
Maybe starting with some of the near-term dynamics. We're most of the way through the first quarter. Any update on how business conditions or industry conditions are tracking? Are you still on pace for your 8% EBITDA margins in the quarter?
Yeah, I mean, we continue to track, for the most part, on plan. I mean, we're seeing it's a bit of a mixed bag out there in terms of the end markets, but generally speaking, we're where we thought we would be. Yes, right now, we see that we'll be able to deliver the 8% margins in the first quarter.
Would you want to elaborate on the mixed bag in terms of industry condition? Is that by end market or region, or?
Yeah, so we're seeing the softness we expected in most end markets. There's a few little pockets here and there where we're starting to see some maybe flattening out of some of the degradation on the markets, but we remain cautiously optimistic that it's the start. Right now, we're pretty much where we figured we would be this part in the first quarter.
Now, on the light vehicle side, you guided light vehicle production to be flat year over year in 2025. Ford built significant inventory last year, which certainly creates a difficult volume comp, at least in the first half of the year. Stellantis volumes are off to a pretty slow start this year as well. What are your assumptions around key customer volumes, and are you factoring or expecting a big second-half improvement?
Yeah, so we would expect, if you think about our story here, first half versus second half. For the reasons you just mentioned, we're expecting a continued weakness in the first half relative to where they were coming out of in the fourth quarter. That's generally due to they built a lot of inventory. When you compare our first half, especially our first quarter this year, especially in light vehicle versus last year. Last year, in the first quarter, we were coming off of a pretty significant fourth quarter 2023 event around the North American UAW strike, which disproportionately impacted Dana. You think about it, we're on Super Duty, Wrangler, Ranger, and Bronco. All of those were impacted by the UAW actions with our customers. The comps for us, especially in the first quarter, but certainly in the first half, are difficult ones.
We expect this to be a down first half when you're thinking about first half of 2024 to first half of 2025. Then we do see growth in the back half as the inventory situation stabilizes and production volumes begin to come back to something more normalized.
Shifting to the off-highway and the commercial markets, how are they shaping up this year? Any additional color on the regional or end market dynamics?
No, I mean, we were expecting a weakness, some slight weakness in the commercial vehicle. We're seeing that. We continue to keep our eye on the markets there. Off-highway, we were expecting continued weakness, especially in the first half. I think that, much like the light vehicle business, we see that being down in the first half and then the rebound coming through in the second half of the year.
Your outlook for the year, it implies margins improving from that 8% level we just discussed in Q1 to something that would be low double digits maybe in the second half. What's driving the improvement?
I think there's a couple of things. Obviously, as we move through the year, we've got $175 million of incremental cost savings, as you mentioned in your opening remarks. That'll obviously flow through as we move through the year in larger amounts given the timing on those actions. Then, obviously, as volume increases, first half over second half, that contribution margin will help the overall margins for the company as well.
Just on these cost elements, how should we think about the cadence of it in terms of the savings?
Obviously, we started taking the costs out in the fourth quarter last year. You saw that in our walk when we reported here last month, about $10 million of that came in, $175 million this year. Much of what we did last year, a lot of that's flowing through here early and through the balance of the year. We continue to take actions in the first half of the year, really throughout the year. We will see this building from a $35 million-$40 million in the first quarter and building up through the year, delivering that $175 million. From our perspective, we are on track to deliver run rate savings of that $300 million as we move into 2026.
I think we have to speak about tariffs. Definitely a topic du jour .
We don't have to.
Yeah, no, it would be unprofessional not to. How are you thinking about your exposure to potential U.S. tariffs this year? Can you remind us if you ship goods across Mexico or Canada border and the structure of your metals purchases?
Yeah, we do, obviously, we have an integrated North American, both internal and external supply chain. We do ship both finished goods and semi-finished inputs. Think of stampings or machining across the border, both Canada and Mexico. From a metals perspective, we do not buy a lot of raw metal, especially in the driveline business. A lot of the metal comes through in semi-finished goods, whether they be forged or cast parts, which we then machine and finish and ultimately assemble into axles and the like. We are exposed, obviously, like much of the supply base and our OEM customers, to the tariffs, both in the U.S. and any of the retaliatory tariffs that might be applied.
How would you think about mitigating actions if those were to pass? Was it largely around customer recoveries? Are there any things that would need to be done in terms of moving manufacturing around?
Yeah, so moving manufacturing is obviously a much longer timeframe. You have to understand, we supply generally safety-critical parts and supply into the global OEMs, whether you're thinking about it on a light vehicle or a commercial vehicle market. Generally, those will require OEM certification and sign-off on the move. That is generally a very long process or a somewhat long process. It does not happen overnight. Generally speaking, the tariffs that we are incurring, we are going to seek recovery from our customers for those costs.
Can you also remind us on the metal side, so to the extent that these tariffs would increase the spot prices of some of the metals and the things that you're the inputs that you're purchasing, what are the mechanisms to pass this through to customers? Is it contractual? Is there a lag? How should we think about that?
Yeah, so we don't measure against the spot. There are usually a group of indexes. To the extent tariffs or really any other influence increases the indexes, we do have contractual, by and large, especially in CV and our light vehicle customers. We have contractual agreements with our customers for recovery of that. Generally, that recovery is somewhere in the 75% or 80% range. Generally, we're on a lag of somewhere in the two- to five-months range, depending on the product, the customer. A lot of the lag also occurs because we're buying the metal through our suppliers of the stamped or forged parts. There is a bit of a lag through that. Those contractual mechanisms have worked very, very well if you go back over the last few years, and we continue to see those.
Those would work in the same way if tariffs were to increase the indexed costs for these metals.
Great. Shifting gears to some of the transformation plan with the off-highway divestiture and the cost savings initiative. You've identified $300 million in cost savings. You indicated earlier in this call that you feel very good about getting there as a run rate next year. How would you, I guess, what would be drivers of upside or downside risk to it?
I mean, obviously, I mean, we came out, said $200 million, and then we came out in January and took that up to $300. Look, I think in terms of upside, I think there, obviously, we're still early in the process. I'm guessing we'll identify some more costs, but some of the things that a lot of things move around. I'm very, very confident in the $300 million, but make no mistake, we continue to want to drive efficiency into the organization and into the business. To the extent we find new opportunities, we'll continue to action them. In terms of the downside, I think that, as I mentioned earlier, very, very confident. I don't see much downside. We continue to have the roadmap we've identified. We've already taken about $100 million of those costs out, maybe a little bit more now.
We're well on our way to delivering the $175 million that's in the plan for this year and have a plan set out to get to the $300 million. I don't see this being a lot of risk around the plan. Obviously, there's a lot of things going on in the world, but we remain laser-focused on delivering on the commitment to the $300 million.
Can you just remind us the sources of the savings and to what extent you can sort of tie those up to your specific segments?
Yeah, so largely the $300 million is in the three segments, all the segments non-off-highway. There is some of it, but it's very small that's in off-highway. Largely the $300 million will be in what we're calling New Dana or the Remain Co. That's going to be left after we divest of the off-highway business. Largely, you can think about that in terms of being realized in 2026 post-off-highway or in the non or the ex-off-highway business. In terms of buckets, we haven't really broken down the buckets, but one of the largest drivers is the EV costs that we've taken on over the last three, four, five years. As that business has experienced delays and volume reductions, we've been able to take a lot of the costs out.
If you remember, just maybe 12 months ago, all these programs were kind of piled on top of each other, needing to be engineered and produced and readied for production all at the same time. That required an enormous amount of resources. As these programs are more sort of staged and normalized in terms of both value and volume and timing, that has allowed us to really rationalize the amount of resources we have. It's not just engineering. Think about engineering, purchasing, program management, all the things you need to have in the organization to bring brand new programs from basically design to delivery of a manufactured good. The other big driver around, if you think about the electrification, is we spent the last three, four, five years developing a group of technologies and core product capabilities around motors, inverters, chargers, software engineering, software development. That's largely complete.
Obviously, those products will continue to need to be updated. You think of version two, three, four, five, six, whatever it is, and then be actioned or applied into specific products. That has largely been completed, and now we don't need that level of investment on an ongoing basis. That's come out. Obviously, we're moving post-off-highway to two segments. That obviously has a cost takeout in it. On top of it, as we're going through and thinking about an organization post-off-highway, we're really challenging the organization to think about, hey, how do we do more with less? How do we do absolutely less? Do we really need to be doing all we're doing? Are we doing the right things in the right places? Are we using the low-cost country?
Are we centralizing what we need to centralize and keeping what we need in the countries by the customer that really is value added to the customer? All of those types of things really have taken a really hard look at in order to generate the $300 million. One of the things is we were already down this path quite a ways when we made the announcement in November. A lot of this work had been worked on. It really was part of the reason why when we moved in and got through this, Bruce came in, and we really started to sharpen the pencils and really go after it. We were able to take that from $200 million - $300 million.
I guess what's been pretty stunning is the magnitude of it, right? Because I think the Remain Co ex-off-highway probably earnings have probably been sort of like moving between $400 million-$600 million or so a year in the last two or three. This is essentially a 50% boost just from essentially pulling back on a lot of the levers that you've described. It's a very considerable magnitude. I think that's what's been quite impressive, also a little bit hard to get comfort from the outside. Your point is that most of those, I mean, a lot of it is already well on the way, and then the rest has been generally identified pretty clearly in terms of where the savings would come from.
Yeah, no, correct. Do not forget, right? If you go back, one of the other things we have announced is when you think about our electrification, we were chasing a lot of electrification business with a lot of different customers, including a lot of startup customers, right? We are taking a much different approach in terms of how we approach new business, especially with a lot of the non-incumbent or the startup OEMs. We had a lot of cost in the business around those types of chases and growth strategies. Obviously, a lot of those players are either bankrupt or have changed strategies. We are changing that strategy as well. That is also obviously a big driver in terms of what changed, sort of allowing us to take some of these costs out. It was a change in some of the strategy.
Yeah. Any update on the off-highway divestiture process? Can you provide color on the bidding process or the bidder types or just how is it going?
It's going very, very well. We're very pleased with the process. We're well down the process at this point. We have an active list of bidders in the process. We continue to work. I think sometimes they're maybe too involved given the amount of time that the teams are spending with the bidders. That is a good place to have, and we're on track to be able to announce a deal sometime in early to mid-second quarter. We're very, very happy with where we're at in the process.
you have any comments on the types of companies that are bidding?
A lot of high-quality strategics in the process. We are very, very pleased. I think that gives us a lot of confidence in both getting to that signing as well as getting the value that we expect for the business.
Great. Now, investors may not fully appreciate off-highways' industrial focus. Can you clarify its end market exposures and the key players and competitors there?
Yeah. You got to think about the business in two parts. Think of it as about a $3 billion business. The core industrial business is $400 million-$500 million of that. The rest is what we would call the mobility side of the business. The mobility side is the classic off-highway. Think of ag. Think of field tractors. Think of construction equipment. Rough terrain forklifts, scissor lifts, skid loaders, those types of products on that side. Also, underground mining, forestry equipment. Really all the things you can think about that are very heavy duty and that are gauged to off-highway. On the industrial side, it's a lot of the same products. Think of drive lines, shafts, gears, those types of the same technologies and capabilities on the industrial side. They're just changing the way we move torque.
Think of high-speed driveshafts for industrial applications like steel mills or high-speed rail. Think of drilling rigs with shafts. Same thing. It's a shaft. It's being used in a different situation. Torque conveyance. For example, we made the gearing for the Panama Canal locks. Again, it's power conveyance. It's torque conveyance just in a different play. We make winches and hub drives that go onto both equipment and stationary type of machines as well as marine applications. Really, it's a very broad—our industrial business has about 15,000 customers. Very different than, say, the light vehicle driveline business. Very diverse. Obviously, very different go-to-market strategy than the rest of the business, but uses the same technologies, the same processes that the rest of the business does.
How do you plan to mitigate these synergies from the divestiture over time?
Of all the businesses, it's the one that has been least integrated, largely because of the differences in the markets. Much lower volume, much larger in terms of the size. Obviously, there's some dissynergies around purchasing. Obviously, we have a plan to mitigate that. We called out about $40 million worth of stranded costs that will be left that were being allocated into the business that we will have to take out. I don't anticipate those being able to be taken out until we get into 2026. We'll have some TSAs, some transitional services agreements that will need to be dealt with. As we move through that, we'll then start attacking. I do believe we'll get much of that $40 million out of the business. It may just take a little bit more time. Some of the costs will come out just from having a smaller company.
If you think about it, right, just in my organization, we have a global PwC audit that's done, U.S. GAAP audit. We're going to be auditing a $10 billion company now. We're doing a $7 billion company then. Obviously, the cost of the audit will go down. Those costs will come out naturally. We'll continue to work. We don't have any view that we're going to accept the fact that we're going to eat the $40 million, but it may just take a little bit longer to get out. It'll be front and center as we move into 2026.
Now, if we think about the Remain Co, how should we think about your growth profile, particularly between light and commercial vehicles?
Yeah. We're principally going to be more heavily on the light vehicle side. If you think about the three segments today that we have, which is Light Vehicle Drive line, Commercial Vehicle, and Power Tech. Power Tech, for the most part, are light vehicle business. We'll be much more heavily tied as a percentage of the total business into the light vehicle. Obviously, we still see growth prospects in the business, right? EVs not going away. It's just lower for longer. Obviously, that helps the ICE business. We'll continue to work on the business, both improving the efficiency of the business and then finding and driving the places where we have an opportunity for that growth. We're very excited about the prospects for New Dana on the other side of off-highway. Very focused.
The team is very, very focused on those end markets, and we think we can deliver a lot of value for both our shareholders and our customers.
What do these structural cost reductions in the New Dana mean for future margin potential and operating leverage at Remain Co? How would it differ between commercial vehicle and light vehicle?
Yeah. We haven't really broken down the 300. Obviously, we're in the process of resegmenting the businesses now. We'll be down to just the light vehicle and the commercial vehicle and aftermarket businesses. We haven't really broken it out. It's largely probably on a percentage of sales basis, which is probably a reasonable way to think about it in terms of a lot of these costs are corporate costs that tend to get allocated based on sales or cost of sales, one of those types of drivers. Typically speaking, they'll end up in that manner back in the BUs. There are costs that are inherent in the BU SG&A or fixed costs that are coming out. Largely, that's kind of the best way to think about it.
In terms of leverage, right, we're talking about New Dana having margins that are double digits, probably 10.5% when we come out. Obviously, as we continue to grow the business and that contribution margin comes out, we see the potential for growing that margin as well. Look, we're not happy at 10.5%. We think this business can ultimately grow into much better double-digit margins. That is the focus for the team as we come through the transaction and move into 2026, really making sure that we're delivering a lot of value for the shareholders and our customers.
With these structural cost reductions, does that mean any change in the incremental margin on volume?
Yeah. I mean, there'll be some. Generally, if you think about contribution margins, generally, it's the variable cost margin. The base business will be more profitable. I don't believe that there's a large impact on the variable cost in the business. If you think about it, right, direct labor and direct material aren't really affected by the $300 million. That's not to say that we don't continue to drive efficiency on conversion costs and burden that are at the plant. The $300 million is really focused above the plant, so to speak.
Now, how should we think about long-term free cash flow potential for the New Dana?
It's going to be significant. I think depending on where we're at in the cycle, somewhere between 3%-5% free cash flow is certainly absolutely a potential for the business. If you think about as we move through, right, the $300 million obviously that comes through in cost saving, that falls all the way through to the bottom line in terms of free cash flow. As we sell off-highway, we delever the business. We're going to sell the most profitable part of the business, at least today, that generates most of a disproportionate amount of the cash taxes. Cash taxes will be disproportionately lower. That free cash, that turns into free cash flow on the Remain Co as well.
Despite having lower sales and lower dollar of EBITDA, what we will be getting is a far better conversion of those sales into free cash flow by the very nature that we have one higher EBITDA, but significantly better leverage and therefore a lower cash interest in taxes.
With that free cash flow, what will your capital allocations priority be? First of all, do you still believe you'll be largely debt-free post the off-highway sale? What would be sort of like the path beyond that? Would you relever, buy back stock? How should we think about that?
I think we see the business at about one turn net leverage over the business cycle. Sometimes it'll be a little higher. Sometimes it'll be lower. When we get to the announcement, we'll lay out the cap structure and how we're thinking about it. To the core of your question, which is around what do you do with the free cash flow going forward, our view is we're going to invest in the business where it makes sense, and then the rest will be available for return to the shareholder. We're going to be focused on maintaining leverage at our optimal rate. To the extent we have excess capital, our intent is to return that to the shareholders.
Got it. Do you see any value creation opportunities through inorganic growth, or is the opposite true where further divestitures are on the table? I guess, how should we think about the inorganic side?
I think we are laser-focused on delivering the commitments that we have out there. $300 million of run rate cost saving, the divestiture of our off-highway business, the delevering of the business, and obviously running the business on a post-off-highway basis. That's really the focus for the team. It's a lot to deal with. That's where we're going to continue to focus the business, continue to make it more efficient, look to grow the business inorganically in the areas that we think are best for us. The businesses that we have post-transaction, we think are really good businesses. We want to continue to invest in them.
How are you approaching future EV investments? I think you mentioned how you're being much more discriminant now in terms of who to partner with. Is it still a priority?
Yes, absolutely. Obviously, EV is not going away. It's just going to be a lot slower ramp over the next 5 to 10 years than perhaps the market was thinking a year or two ago. I think the focus for us around how we approach our EV pursuits are where we're the incumbent on an ICE program. We believe we have the technologies, the products, and the capabilities to deliver a high-quality value product for the customer. We're going to continue to go after that. We believe that's our business. We have the right to win that business. We think the customer will see us as the natural choice for that business. We expect to continue to invest in those businesses to take that and capture that EV business.
Where we're not the incumbent, our view is we're going to be very selective about what we choose to invest in. Largely around that, we will expect the customer to pay for engineering, to pay for large portions of the CapEx, right, to really reduce the risk to the company around the investments, given the uncertain nature of the EV market going forward. Obviously, where we have really nascent startups, that's not really business that we're going to pursue in the future. We don't believe that's business we need. We'll continue to focus on those two other areas to grow the business. We think there's plenty of opportunity for us in the light vehicle and the commercial vehicle markets around that.
On the power tech side, if you think about battery cooling and power electronics, that's an area where we have a substantial presence today. We will continue to invest in that along with and grow that with not only our current customers, but with a lot of future customers. We have the best technology. We make them at scale today. That is a business that we believe will continue to be a growth area for us and we will continue to invest in.
Great. It sounds like a lot of exciting stuff going on. I really appreciate all your time and insights today. Tim, thank you so much for being with us. I want to thank all the investors for joining us.
Thanks, Emmanuel. Appreciate it.
Have a great one. Thank you.