Good morning and welcome to Dana Incorporated's Off-Highway Business Divestiture Update webcast and conference call. My name is Sarah, and I will be your conference facilitator. Please be advised that the meeting today, both the speaker's remarks and Q&A session, will be recorded for replay purposes. There will be a brief Q&A period after the speaker's remarks, and we will take questions from our sell-side equity analysts on the telephone only. Due to time constraints, we ask that callers limit themselves to one question at a time. If you would like to ask an additional question, please return to the queue. At this time, I would like to begin the presentation, turning the call over to Dana's Senior Director of Investor Relations and Corporate Communications, Craig Barber. Please go ahead, Mr. Barber.
Thank you, Sarah. Once again, welcome to Dana Incorporated's call for Off-Highway Business Development Divestiture Update. Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from what we discuss here today. For more details about the factors that could affect future results, please refer to our safe harbor statements found in our public filings and our reports with the SEC. I also encourage you to visit our investor website, where you'll find the presentation and the press release we issued last night, which has further forward-looking statements. As a reminder, today's call is being recorded, and the supporting materials are property of Dana Incorporated. They may not be recorded, copied, or rebroadcast without our written consent. On the call this morning is Bruce McDonald, Dana Chairman and Chief Executive Officer, and Timothy Kraus, Senior Vice President and Chief Financial Officer. Bruce, I will turn the call over to you.
All right. Thank you, Craig. Good morning, everybody, and thanks for being with us here on relatively short notice. This for us is a very exciting call. We're really pleased to be able to announce the sale of our Off-Highway business. The transaction that we signed yesterday evening has us selling the business to Allison Transmission Holdings. The enterprise value, and Tim will go through some of the details further here in the call, just a shade over $2.7 billion. There was, as a result of the negotiations with Allison, a few changes to the perimeter of the transaction and a few pieces of the Off-Highway business that we will be retaining with sales of about $130 million, and it's an all-cash deal, 100% cash.
As we think about, as we sort of step back and think about this for Dana, last November, we announced our intention publicly to pursue the sale of the Off-Highway business. Drivers were first and foremost capturing value. This is a premium part of our company. Multiples are higher in the Off-Highway sector than the On-Highway sector, so we were determined to capture that premium that was not reflected in our stock price and deliver that to our shareholders. We have done that with the 7x multiple that we have achieved here. In addition to that, it really gives us, if I look at our business, we have taken a lot of cost out as we focus on our two main businesses, being Light Vehicle and Commercial Vehicle Systems.
With technology leaders in both electrification and traditional ICE business, leveraging our common practices and approach to the market, we've been able to significantly reduce our corporate overhead expenses, which has been a key part of our $300 million cost reduction plan. With respect to the proceeds that we're going to get from this transaction, and Tim will sort of go through how that works later on, but it gives us the at-once and the, I'll say, generation opportunity for us to really transform our balance sheet and kind of move from the neighborhood of the 2x-3x type levered suppliers into the best-in-class neighborhood at 1x or below where we're going to come out of this transaction while at the same time delivering a staggering amount of capital to our shareholders here in relation to our market cap. It is a real transformational transaction for us.
It creates value for our shareholders that positions new Dana to win, and we're very excited about the future that we face going forward. With that, I'll turn it over to Tim to go through the transaction summary in more details.
Thanks, Bruce. I mean, just turned to page four in the deck. As Bruce mentioned, the acquirer is Allison Transmission Holdings. Enterprise value of $2.7 billion. The deal is subject to regular closing adjustments, but the implied multiple of about 7x our expected Off-Highway 2025 adjusted EBITDA. It's a 100% cash consideration, and it's expected to generate about $2.4 billion net proceeds after the assumption of liabilities, fees, taxes, and separation costs. We do expect the transaction to close in late Q4 of this year and is subject to customary regulatory approvals and conditions. As Bruce mentioned, we plan to use about $2 billion of the proceeds to pay down our debt to achieve a targeted net leverage ratio of about one turn over the business cycle. We do expect that'll probably be a little bit lower than that at closing.
We have announced a $1 billion total capital return to shareholders through 2027. Of that, $550 million we plan to return to shareholders between now and around closing time. This is in addition to our normal quarterly dividend of $0.10 a share. With that, I will turn it back over to Bruce to take you through the new Dana-focused markets and technologies.
Yeah. Obviously, we'll spend more time on this going forward, but just to sort of reconstitute what Dana's going to look like once this transaction closes, we'll have our two main business segments, Light Vehicle and Commercial Vehicle. We will be a leader in traditional ICE business as well as electrification on both sides of our market. Clearly, the electrification opportunity is not as large as we thought it was going to be, say, 12, 18, 24 months ago, but nonetheless, that is still an important driver to our growth as we go forward. We also have a full suite of Thermal and Sealing Products as well. Just off on the right, I kind of remind people about our Aftermarket business.
It is something that we spend a lot of time talking about, but within new Dana, that's going to be 10% or 12% of our sales. Obviously, it brings a higher EBITDA margin profile, and it's a different cycle than our other two markets. That is an important part of our story going forward. Just in terms of on the next slide here, the breadth and scale of new Dana sales, we think based on our looking at 2024, we'd be around $7.6 billion, $7.7 billion, 65 manufacturing sites around the world, over 28,000 employees, a very diverse customer mix, that 5,000 really reflecting the aftermarket presence. We have just sort of put at the bottom of the page kind of our major sales by end customer here, so you can compare that to other guys in our space. Tim, do you want to go through the debt reduction and how we're planning to return the capital?
Yeah, absolutely. Turn to page seven. You can see net leverage right now stands at about 2.8x , as I mentioned earlier, and we've been, I think, quite specific about this over the past six months. We have a target to get the business to about one turn of net leverage over the business cycle. Our allocation priorities for capital going forward, we're really focused on three main areas: organic growth, so we'll continue to allocate capital to the highest returning opportunities to drive profitable organic growth in the business. We talked a little bit, but huge amounts of debt paydown early on, and we'll look to maintain about one turn of leverage over the business cycle. This will significantly reduce the interest expense and cash interest that are on the business today and should significantly enhance the operating flexibility of the business.
From a return of capital perspective, I mentioned we've got an authorization to return up to $1 billion of capital. Our market cap yesterday, that's somewhere in the 40% range of our market cap through 2027. This is in addition to our existing $0.40 a share annual dividend. The return of cash to the shareholders will be via dividends and/or opportunistic share repurchases. We do plan to return about $550 million of this between now and around the closing of the transaction. If you turn with me now, I thought it'd be helpful to touch on the outlook for the business on page eight. We maintain our full-year guidance for 2025. Just to be clear, this is still based on Dana as it stands today with Off-Highway. We expect Off-Highway will be treated as a discontinued operation in Q2 when we report.
At that time, we'll update the forecast and give you a complete reconciliation and walk between the current forecast and how the business will look with the discontinued operation. Our market assumptions include North American commercial vehicle demand to continue to soften. We mentioned this a little bit in April. We still see that happening. Light vehicle demand continues to be stable in our businesses, and tariff exposure continues to decline, and our mitigation and recovery efforts are accelerating. We continue to see that being less of a risk on the business. Our $300 million cost savings plan is on track, and we will deliver the $225 million of cost savings that we highlighted in our first quarter earnings. We'll generate a free cash flow this year of $225 million, which is in line with our estimate.
With that, if you look out and beyond on page nine, the $300 million is on track, and we will deliver the balance of this, about $65 million, incrementally in 2026 for a full run rate of $300 million. We anticipate that in 2026, new Dana will have adjusted EBITDA margins between 10%-10.5%. We expect about $35 million-$40 million of stranded costs from the transaction. Initially, these will be partially offset through transitional service agreement reimbursements from Allison, but we expect to substantially eliminate the remainder of the stranded costs by year-end. We will have significantly lower cash taxes and interest should provide about a $200 million tailwind to free cash flow. We expect our adjusted free cash flow to be around 4% of sales going forward. The billion-dollar capital return, as I mentioned, is authorized through 2027, and our growth trajectory is maintained.
We have a robust three-year new business backlog in our Light Vehicle and Commercial Vehicle segments, and we will continue to invest to win new business that is profitable and adds value to our shareholders. With that, I'll just turn it back over to Bruce.
Okay. Thanks, Tim. Like I said, an exciting day here for Dana. I think just going back and reflecting on my time since I've been here at Dana since last November, I've really brought in with a mandate to do three things. First was to reassess our electrification strategy to reflect the new market realities and improve our near-term cash flow priorities. We have done that. As a result, you sort of see the significantly higher free cash flow generation this year. I'd give ourselves a tick in the box for that one. Secondly was to begin to position new Dana for its future without Off-Highway by attacking its corporate overhead costs. We came out with a $200 million target last November. We upped that to $300 million in January.
We said we're going to focus on faster implementation, which we announced that we would improve the realization in 2025 in our Q1 earnings call. Tim's done a great job on that one. Third, and most importantly, we said we were going to sell the Off-Highway business. I'd say despite the fact that we had a tough macroeconomic environment since maybe the tariff situation arose, we feel good about the value that we got for the business, and we look forward to getting that closed and behind us. The market obviously has responded very favorably to this thing. Our stock's up over 100% since November. We think if we look at new Dana on a go-forward basis, the best is yet to come. We talk about margins next year.
This is obviously without our Off-Highway business being higher than they are this year, including the Off-Highway business. Cash flow, we see it stepping up to 4% of our sales. We can continue to invest and grow in our business. The billion-dollar return that the board has announced is, I would not say, is a long putt. That is not using all of our free cash flow over the next two years. We still have a lot of flexibility to look at other things and possibly up what we are going to return to shareholders as things happen. Again, on behalf of our team, we feel great about where we sit right now, and we think our best days are ahead of us. This is obviously an important step in our transformation. With that, we will open it up for some Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure that your phone is not on mute when called upon. As a reminder, please limit yourself to one question. Thank you. Your first question comes from Ryan Brinkman with JPMorgan. Your line is open.
Hi. Thanks for taking my question, and congrats on getting the transaction done amidst the uncertain macroeconomic backdrop. Not surprised at all to see you drive toward the 1x leverage. You've talked about that for, I don't know, 5+ years, I think. Just curious on some of the math. I'm kind of getting to below 1x leverage, just given sort of the implied rest of year free cash flow, the $225 million plus the $112 million outflow in 1 Q, and the $2.4 billion coming in relative to the $2.56 billion of debt and $500 million of cash. I don't know if maybe you're using a different number, or what are you assuming for normalized EBITDA throughout the cycle, or are you maybe including the pension obligations in your debt calculation?
Yeah. Hey, Ryan?
Yeah. Hi, Tim.
We would expect to exit the transaction at lower than 1x . 1x is really our target over the business cycle. As the business cycle runs the course up and down, that is likely to move a little north of one or be a little less than one. Our target is 1x over the cycle. We would expect to exit a bit below that coming out of the transaction. I think your math is probably correct. We are not necessarily calculating any differently. We are just showing kind of where we want to be across the business cycle.
All right. That makes sense. And then just on the, you alluded to the capital return, some sort of breakdown of repurchases versus dividends. I assume like a special dividend, but you did not sort of quantify, I guess, because you want to be opportunistic, or how are you thinking about how you can do that?
Yeah. I mean, yeah, we have not landed on it. We are really going to look at where the stock trades and where we think it makes the most sense in terms of the best way to return that to shareholders. We are absolutely committed, as Bruce just mentioned. We do not think the billion is in any way a stretch through 2027, and the $550 million coming out between now and around closing, we are committed to. I think there is a lot of upside for our shareholders given the amount of capital we are planning and will be able to return given our current market cap.
Very helpful. Thank you.
Yeah. I mean, yeah, It's Bruce, if you think about it, we're going to opportunistically, I would say, feather in a little bit of repurchase between now and closing. I mean, we're not going to go crazy, but we'll feather a little bit in. Upon closing, we'll take a look at where we think our stock price is versus our intrinsic value. Let's just say we probably, all things equal, would have a bias to buyback. If we think we're fully and fairly valued, we'll probably lean more towards dividend. If we go the buyback route, we could either do an ASR, we could do a tender, or we could do just an ongoing repurchase program over the first half of, or let's say, Q4 and Q1 and Q2 of next year. We'll look at it all.
We got a lot of discussions that we need to have with our shareholders and our advisors, our board. The billion dollars is happening, but we just can't give you any more detail on the pieces just yet because it's subject to factors beyond our control.
Understood. Thank you.
Your next question comes from Tom Narayan with RBC Capital Markets. Your line is open.
Thanks for taking the questions, the first one, just the $300 million delta between the gross proceeds and the cash. I know you gave out the kind of high-level categories of it. Any kind of granularity on how much is tax? What are the other kind of components of that?
Yeah. So obviously, there's $130 million of assumed liability, as I mentioned, it's mostly pension. If you take the balance, tax is less than $100 million. The balance is really fees and then the cost to separate the business. While this is not the most highly integrated business when you think about the other segments, there are costs to have to get to separating. There are a few facilities that are co-mingled. The balance of those costs are really the separation cost necessary to deliver the buyer a freestanding business at closing.
Okay. Thank you. Just to follow up on your last question, comments, there is a bias to buy back stock based on where your stock is trading. If you are fairly valued, maybe consider more on the dividend. So $1 billion opportunistic 2027. Just curious how you think about that versus leverage. Would you be willing to go above? Certainly right now, if you look at the analyst community, they would suggest that your stock is undervalued relative to these deal terms. Just how do you think about going above that leverage if needed near-term or to be opportunistic? I know it is one time through the cycle. Given you want to be opportunistic on where your stock is.
Yeah. I think maybe I'll say something, then Tim, you can add. I think right now, our board is comfortable having a conservative balance sheet, and so am I. Would we be willing to leverage the thing up a little bit more? Possibly. I guess what I would say is if you look at Dana today, it is my belief that our multiple suffers due to a higher beta, i.e., we're highly leveraged. We're in the very cyclical markets. We're going to be more cyclical going forward than we are with Off-Highway because that operates in a different business cycle. I think we will be rewarded with a conservative balance sheet through a better multiple. To the extent that doesn't happen, then I think it's a valid question for us to go and look at, does it need to be quite that low?
I mean, I do not think it is going to be back to where we are now by any stretch of the imagination, but could we tweak that up a little bit? Possibly.
Got it. Thank you.
The next question comes from James Picariello with BNP Paribas. Your line is open.
Hi. Good morning, everybody. Congrats on getting this deal done. I was just hoping for you guys to help bridge to the targeted 10%-10.5% EBITDA margins for next year, right? Because for this year, pro forma Dana without Off-Highway, right, margins are guided in that low to mid 8%. For next year, you do not get the full $300 million in cost savings, but you get close to it, right? Let's say an incremental $50 million. How do we, that $50 million, that maybe adds another 60-70 basis points to your margins for this year, right? If we just kind of use that as the base, the jumping-off point. Now we are close to 9%. How do we get that 125 basis points margin improvement next year unless it is mid, high single-digit type revenue growth? I mean, is that the underlying expectation to get there? Just wondering on the incremental margins. Excluding savings.
Hey, James. This is Tim. Yeah, I can help you out. Your math's reasonable. I wouldn't undercall the cost savings. To be very clear, we're going to deliver the $300 million on a run rate basis. That would imply an incremental $65 million. The difference in your math, there is some growth, some organic. We've got a pretty strong backlog, and CVs have been weaker than we expected this year. We do think we get a little bit of tailwind on volume from that. We also see some of that relative to some of our Light Vehicle programs. The balance is that we have a number of additional margin improvement activities around what we're doing at the plant level. Remember, our $300 million is above the plant.
We have a number of projects ongoing, really a long-term project where we continue to drive the margins in the CV business higher. Those will start coming through. We have had some, I would not say difficulties, but as we have relocated some plants and put those plants together, there is some startup related to that that is weighing on margins. Those should go out. When you look at the battery cooling business, we think that gets to be a nice stable run rate, which will help us drive additional margins in what was the PT business, now in our Light Vehicle Driveline business. The rest of it is really margin improvement at the plant level from those projects.
Got it. Okay. So you do fully address the $35million and $40 million of stranded costs. That is a pure zero number for 2026.
Yeah. We think between taking the costs out and offsetting them with recoveries on the transitional services, we shouldn't see any of that in the number next year.
Understood. And then just a quick follow-up.
I think on that, just to be clear, though, I do not know if it is all going to be out on day one, but there is probably going to be a number next year. Again, it is too early to say what the phasing is because we have got to sort through a lot of the details here with Allison. I mean, we have obviously agreed what the TSAs and things like that are. As we get work with Allison between now and closing, there is going to be changes, things that neither one of us foresaw. We will get the stranded costs out, but I do not believe they will all be out on January 1st of 2026. We will have some overhang within that 10-10.5 number that we are saying. Not a significant amount, but by the end of 2026, we will take it out for sure.
Yeah. Understood. Just my quick follow-up regarding the retained business within Off-Highway, the $130 million in sales. What's the approximate associated EBITDA with that?
It's marginal. The Hydraulics Business is undersized. As you recall, we tried to sell that last year. The other businesses have decent margins. It is marginal margin business from our perspective today. It does not mean we are not going to work on it because we will, but it is not a big number. It's below our current view on where the average margins are.
Yeah. Slightly below this.
Yeah.
Thanks again.
The next question comes from Joseph Spak with UBS. Your line is open.
Hi. Good morning. It's Alejandro on for Joe. Congrats on the transaction. Maybe just sort of following up on your commentary regarding your view on Commercial Vehicle for 2026, can you provide some of the other end market outlook that you have for or how you're looking at the other end markets for next year?
No. I mean, we do not see huge changes anywhere else from a volume perspective on the Light Vehicle side, so to speak. We are not really—but we will certainly update that as we kind of come through the second and the third quarter.
Okay. Great. Thanks. Moving to the follow-up, to go through, I know you sort of talked about opportunistic for the $550 million for the first tranche of the authorization of the $1 billion. How should we think about sort of the second part of that as you go through 2027? Is that going to be more share repurchases, or should we also think about that as a possibility for another special dividend for the second half of that return?
I mean, I would say, as Bruce mentioned, for the balance, we probably would lean more to share repurchases. Again, we need to see where the market values us relative to what we believe the intrinsic value of the business is. If I had to guess, it is probably more likely to be share repurchases than special dividends.
Yeah. I think I agree with that, Tim. I think it's going to be—we got this one-time front-end loaded of it, which will be—we'll study. I think once we get that through, we will become, again, I'll say more of the blue chip type suppliers here with an ongoing share repurchase program on it quarter by quarter, buying back X amount of stock.
Great. Thanks for taking the questions.
Thank you.
The next question comes from Colin Langan with Wells Fargo. Your line is open.
Yeah. I just wanted to follow up—thanks for taking my question—on James' question on the margin jump into next year. If I'm coming up with similar math, that you need probably another $100 million to kind of get to a 10% margin, even with its full year run rate of the savings. That is all coming from plant-level cost savings actions. That is the main driver of the extra sort of $100 million that is going to pop into next year?
Yeah. It's contribution on some higher sales, and the balance of that is coming from cost actions that are on the plant floor. Not new. These are actions that we've been working on over the last 24, 36 months, and a lot of it's really going to come to fruition and start to deliver in there. We have a number of footprint optimization programs ongoing this year, which are weighing on the margin that we have this year. We would expect those to reverse and get the full value of the savings from those actions in next year. It's a little bit—you are kind of doubling up. We do not have the overhang from the inefficiencies from those moves in the current year. The savings we expect to get from those would then flow through.
Yeah. Colin, maybe just to help you out a bit. I mean, we have just one plant. I do not want to get into any specifics about which segment and all that. We have one plant that in 2025, it closes in Q4. It loses $25 million. Next year, that will be closed. We got a sure $25 million there. We have associated with that, I would say, startup costs of the new facility that, again, those are trailing away. We will not have those reoccurring next year. Just one footprint alone is about a third of that delta. We have launch ramp-up in battery plate. We have a couple other footprint things. It is not like 100 actions all scattered about. There are four or five big ones that are 80% or 90% of it.
That's helpful. It's interesting because if sales are flat, your guide is something like $780 million, and almost half of that would be the $300 million of cost saves and then another $100 million of cost actions. I guess my follow-up would be on the backlog. I think the last question.
I mean, I know you have a more pessimistic view than we do, but just in terms of the cost reduction. I would expect by the time we exit Q2 here, we're into the 80%-85% realization mode. That's where we're currently sitting at.
Got it. No. I was just highlighting it. It is quite a big jump from cost actions.
Yeah. For sure. It's huge .
Yeah. Obviously, I was just doing the obvious math. But then just lastly, the backlog, how much is left after Off-Highway goes away, and how much of the remaining backlog is going to be EV-related?
will update you and take you through that when we kind of reset the segments and go disc up. We will be able to walk you through all of that. On your—I mean, obviously, it is a portion. That business does not come with enormous amounts of backlog, just given the nature of the customers and the programs. There are not a lot of brand new rough terrain forklifts that are coming out. We can update you on that as we take you through the reconciliation of the disc stops when we come out in the second quarter.
We still do have a good chunk of electrification in our backlog that launches here next year. It is not like electrification is gone. It is just not going to be the multi-billion dollar opportunity that we thought, say, 24 months ago.
Got it. Okay. All right. Thanks for taking my question.
Yep.
Yeah. No problem.
Your next question comes from Dan Levy with Barclays. Your line is open.
Hi. Good morning. Thanks for taking the questions. I want to ask a question that I think I've asked in the past, but this environment is evolving as far as electrification goes. I knew the $300 million—only a piece of that is EV. We are seeing some pretty rapid changes here now on the policy side. Wondering what more potentially could be done on the cost-save side beyond what you've already discussed, given the EV situation is still early in days of change.
Yeah. Yeah. I mean, what we've done, and I think we talked about this before, is we've taken a bifurcated approach in terms of our willingness to invest. For customers where we do not have ICE exposure or for new entrants into this space, we are saying, "Hey, we are willing to invest, but we need to be 100% covered." We are not going to take all the risk. For customers where we have ICE business and there are EV opportunities, yeah, we are willing to invest there, again, making sure that we have some protection in the event the volume becomes a fraction of what we originally quoted on. I would say to the extent some of our current customers change their EV product plans, there would be some opportunity for further reduction. It is not in the 50 million range. It is between 0 and 50. It is sort of dependent on their product plans, Dan.
Got it. Okay. Thank you.
It would probably be more relevant for us. It would be more of a cash opportunity than a P&L opportunity because there is quite a bit of capital.
Right. Second question is on geographic mix. Obviously, you're losing a lot of European exposure with this transaction. As you're thinking about doing bids into new programs, how does the geographic component play out here? Is the intention or focus to be more heavily North America-centric, or does that not really factor into it?
Yeah. I can take—oh, sorry. Go ahead, Bruce.
No, go ahead, Tim. Go ahead.
Yeah. I think if you look at the markets we're in and what the dynamics are, we're not focused necessarily to drive the business regionally. It's really to make sure that we are driving the business that makes sense given the product and capabilities we have. If you just think about it, right, take Light Vehicle, right? We're generally a large truck, large SUV, fixed beam axle supplier. That's largely a North American-centric business. We don't have an enormous amount of pass car business, and that's not likely to change. The regional mix will tend to continue to be more North America. Now, if you look at CV, right, we tend to be, again, North America-focused, not because we're not interested in serving CV customers, say, in Europe, but most of the European OEMs are highly vertically integrated.
We will continue to, where we have great products and technologies, continue to go and be able to sell those. We are not driving to try to figure out where the regions are not, but really to make sure that where we have superior products and technologies, we are able to get to sell those to the customers wherever they are in the world.
Yeah. When you think about Europe and China, much, much more of a pass car type market and smaller pass car that we just do not play in. Those markets are obviously, it is a totally different view in terms of electrification on the small end of pass car. In the big pickup truck and SUV Jeep market, it is just a lot less opportunity for us. It is not by design. It is like Tim said, it is really by product strategy.
Got it. Thank you.
This concludes the Q&A session. I'll turn the call to Mr. McDonald for closing remarks.
Okay. Again, I appreciate the strong interest and positive comments from everybody. We know we did not give you a lot of lead time, so we really do appreciate your taking time out of your busy day to be with us. For Dana, we are super excited about being able to get this signed. We anxiously look forward to closing. We will see everybody here in another five, six weeks when we go through our second quarter numbers. Thank you, everybody. Goodbye.
This concludes today's conference call. Thank you for joining. You may now disconnect.