We're going to get going with the next presentation. Once again, I'm Ryan Brinkman, the U.S. Automotive Equity Research Analyst at JPMorgan Chase & Co. Very excited to get started with Dana Incorporated, including their new CEO, R. Bruce McDonald, and Craig Barber, Vice President of Investor Relations. Bruce and Craig, thanks so much for coming to the conference.
Thank you.
OK. Look, since he became CEO in November last year, it seems there have been two major things happening at the same time. Number one, the off-highway sale. Number two, a massive, materially margin-enhancing cost-cutting program. There are a few drivers of the cost-cutting, including less spending to support growth areas and old-fashioned execution. Maybe to start, I'd love to get your sense on the degree to which the two major things may be linked. The simpler corporate structure in conjunction with the off-highway sale allows you to become leaner and more efficient with less overhead. Where are you finding the overhead savings, and how much of it has been catalyzed by the decision to sell off-highway?
OK, so there's a lot to unpack in that one. I guess I maybe start with, you know, the decision to sell off-highway was really triggered by the fact that we are trading at an automotive, I'll say, maybe even an automotive light type multiple, even though we had an accretive off-highway business. It just wasn't being reflected in our stock price. When you ran the sort of sum of the parts analysis of Dana on what we could sell the off-highway business for, it was materially accretive, like 40%, 50%. When my appointment was announced last November, you know, we came out and we said, hey, we're selling this business. We'd already made that decision, but we came out of the closet, I'll say, said we were going to do it. We got a fairly significant run-up in our stock price because people kind of got it.
Like, we're trading at 4.5 or 5 times. This is a 7 or 8 type multiple business. Times a pretty big number, right? We accreted higher as the uncertainty around that transaction diminished. The cost reduction side, Ryan, was really around kind of backed into the number a little bit in the sense that we said, hey, if we do sell the off-highway business and capture that value, unless we can maintain our margins and improve our cash generation, it's going to be kind of a one-and-done event. We're just going to be in a situation where we're significantly deleveraged. We have a capital return, and then we kind of have nowhere to go. When we ran all the numbers, we said, hey, we need to pull out $300 million, at least $200 million, at which we later upped to $300 million.
I was kind of fortunate in that, you know, being on the board previously, I did some access to our cost structure. When I went in there, the board sort of said to me, well, you know, how comfortable are you that you can cut the $300 million? I said, I'm highly confident. The savings really came in three areas. First, you made a characterization about cutting some growth investments. I wouldn't characterize it like that. I would say we were overinvesting in light of the risk in an EV. Dana for the last few years, and I'm part of this because I was on the board and approved the strategy, is there's a huge opportunity for the company. We pushed all our chips and went for it.
If you want to go back, say, 24, 30 months ago, we would have been here saying, hey, we've got a huge content per vehicle growth story, $4 billion or $5 billion of growth opportunity if the market would have moved in the direction that we all thought at the time. This, by the way, is not a Dana unique issue, obviously. Where I came in is, look, we were still investing a lot of our free cash flow, like all of it, and a lot of our engineering resource in pursuing electrification businesses that were inherently higher risk. The market basically voted with their feet. We don't like it. You're taking all of our money, investing it in long-tail high-risk projects. I had to sort of reverse that coming in. Roughly speaking, a third of the $300 million we cut is investments that we were making in electrification.
Not to say we aren't making any. It's just right now we've got the customers co-investing in it or upfronting the engineering, whereas before we were taking it all at 100%. The other two-thirds has really been just radically simplifying our structure. We're going to be much more North American-centric. There are a lot of corporate expenses that we had in Europe, Asia, and South America that we've eliminated or pushed into our businesses. We deleted our power technology segment and combined that with larger light vehicle. We had aftermarket split in two different businesses. We put all that together and had a corporate piece. If you just look at the corporate overhead that we had as a company, it was probably sized for a business that was going to grow to $12 billion or $13 billion and not a business that's going to be $6 billion or $7 billion, $8 billion.
A pretty radical reduction in, I'll say, the manager and above level in the company. It's been the quick wins, I'll say. There's more opportunity. The $300 million was stuff that we could kind of recognize quickly and focusing on what I would say is about a billion of our $7 billion cost base.
Thanks so much. To follow up on that comment, you're not one-and-done. I think that's a great analogy. You're not one-and-done because you still have the restructuring program to go. What about the degree to which the transaction itself can continue to provide benefits? The stock's up 98% since November 2025, 91 points better than the S&P, up 7%. The average auto parts flyer underperformed that by quite a bit. What about the share repurchase? If you're not one-and-done, you've got the restructuring savings. The share repurchase enabled by the transaction can really amplify that. Maybe just scope out the magnitude there, and also the benefit to valuation for new Dana from deleveraging the balance sheet. What could happen?
Yeah, yeah. Again, a longer answer than a question, I guess, up here on this one. I guess a few things. First of all, the way we've positioned new Dana here and Dana's post-off-highway. By the way, the transaction we expect to close probably at the end of November, but in the fourth quarter for sure. For those of you maybe not familiar with it, it's $2.4 billion of net proceeds, of which we will take a big chunk of that and reduce our debt so that our net debt post-transaction is about 0.7 times EBITDA. We've announced that we will return $600 million or approximately 25% of our market cap by way of buybacks before the end of this year. We did just a little bit over $250 million last quarter. We've guided to another $100 million, $150 million this quarter.
We'll do the balance of that $600 million over the course of the fourth quarter. For next year, we've guided, and we've talked consistently about being 10% - 10.5% margins for next year and 4% free cash flow. We walked through on our earnings call kind of how do we get to next year because some of the commentary has been around, it seems, I'll say, aspirational, I think, is a quote somebody said. I view it as a tap-in put. If you just think about this year, we're guiding to be around 7.5%. You annualize our cost savings. In other words, the $300 million, the $310 million, about $225 million of that flows through this year. Another $75 million, $80 million next year, that's one point. It takes you from 7.5% to 8.5%.
If you look at stranded costs that we have, we think we can take out conservatively two-thirds. That's another 40 basis points, 50 basis points. That gets us to the 9s. Then a combination of some new business that we have coming on stream from our backlog, which is about $300 million, and I'll say a very conservative view in terms of what we've been able to do from an operational improvement perspective, gets us into the 10.5% type range comfortably. On the cash flow side, we've done a little bit more work on this one since our call because there's some question about, like, we gave sort of a total cash guide for the year inclusive of both continuing and discontinued ops.
If you sort of take our $275 million at the midpoint and you think about how much of it is off-highway and how much of it is Dana on a go-forward basis, about $125 million is off-highway. The way I'm calculating that is taking their EBITDA, their change in working capital, their taxes, and then also attaching the interest savings that we will get next year to that business. That lays them with a cash flow of about $125 million. The rest of the company, which then reflects the ongoing interest expense and the cash taxes, which are lower for the ongoing part of Dana, our free cash flow for this year is $150 million, about 2% of sales. How do we get to the 4? We got 200, 300 points of margin expansion. That falls right to the bottom line.
We've talked about lower one-time costs next year because we've had to do some restructuring around the off-highway sale. We will have slightly higher CapEx next year as we capacitize for increased volume on the Super Duty and the next generation Super Duty launch, which is in late 2028.
Great, thank you. The benefits of the off-highway sale are obvious. I just wanted to check in, though, on the potential for any dissynergies and if there may be ways to mitigate those. Starting on the cost side, I'm not sure there were a ton, maybe in purchasing. Can you just confirm, are the cost-cutting targets you've given inclusive of any headwinds? On the revenue side, I'm guessing what synergies there are between the various segments is more between light and commercial vehicle drivelines or the class 4 through 7 kind of meets together. Just checking if there's anything to consider there, too, or just how you're thinking about dissynergies generally.
Yeah, I would say the dissynergies are very manageable. I would say the only area is in the purchasing side of things. From what we've seen so far, I don't see it being overly problematic. On the revenue side, I would say the only area where there's some benefit in us being combined was maybe on the motor-inverter part of our business, the low voltage side. The low voltage sale of our motors and inverters did not go with Allison's sale. That's something that they're interested in. Because we haven't bought that business back from Hydro-Quebec yet, we couldn't include it in the transaction. As things stand right now, we still have that. I would say it's not really going to affect us in any material way.
Great, thank you. Of course, while there's a valuation benefit to delivering the new Dana balance sheet in terms of the multiple, just curious if there could also be potential commercial benefits, too. In the past, management has talked about wanting to drive toward one-time net leverage, given that it could be helpful in securing business in the electrification space where you might be competing against non-leveraged technology companies. It might be helpful in winning business with certain foreign automakers. Here, the Japanese referenced as preferring suppliers with lower leverage. Just given you're likely to be well below 1.0 times here very soon, I think 0.6, something like that. How are you thinking about the potential for any commercial benefits?
I'd say a couple of different ways. I mean, we want to be at one times through the cycle. That's kind of the number that we've talked about. You know, as it relates to new business, I would say two things about Dana that we hear a lot. One is our leverage target. Obviously, we're in a product that people have to source many years in advance that's highly engineered. Switching costs are difficult. To the extent we have a safer balance sheet definitely makes us, we're not going in there with one arm tied behind your back. Also, they don't like having agitators in there. The fact that we were able to buy out Carl Icahn from his position and sort of reposition ourselves as a normal type supplier, that'll be helpful.
I don't expect a year from now we're going to say, hey, we're growing way quicker than we could have before because of our balance sheet. I think it helps at the edge. We do have, I would say, we do have more opportunities to reinvest in our business to both grow it, but more importantly, expand our margins because we'd starved our business of some things that we otherwise shouldn't have because we were chasing growth. I'll just, I can give you kind of a few examples. If you look at our manufacturing footprint, we need to do more restructuring. That will lead to a significant benefit in our cost base. If you went into our factories and went into an investment-grade BorgWarner ad unit leader or something like that, you would see a radically different level of automation. I'm not talking about Tesla robots manufacturing things.
I'm just talking about basic AMRs, AGVs, moving material around, basic robotic arms unloading and loading machines or unstacking pallets and things like that. We've got hardly any of that as a company. There's just, I'd say, a $100 million type opportunity just from low-level automation. Same thing on, if you just look at what we manufacture and take a look at our true manufacturing cost from an activity-based costing point of view. In other words, how much of our overhead is directly attributable to specific functions instead of just smearing it across based on sales. We've probably got over $100 million of things that we make that we lose money on. I still see, even though I think you said a breathtaking amount of costs that we've taken out of our business, I still think the opportunity in front of us is even larger than what's behind us here.
Interesting, thank you. Just to follow up on that point, we've all been very surprised, right? You started with $200 million in November. You said the street called it aspirational. I think I used the word ambitious. Look, it was over 20% of total company EBITDA. It was over 40% of pro forma new Dana EBITDA at the time. Also, it was a company that had really struggled to restore its margin to pre-pandemic levels after most of the supply base already had. Buck it out again. Where are you getting these savings? The relative comp, I heard one tap put earlier. Some of these must be easier to achieve than others. Some of them are more in the bag than others. How much sits down at the plant level? Seems like not a ton, actually. It's a little bit more.
It's largely, it's very little at the plant. There is some plant-level SG&A, but a minor amount. This may just help you out here. Let's just take, let's just call it the $300 million. Roughly speaking, a third of it is what we were spending, like I said, on electrification. If you think about our CV, commercial vehicle side of our business, it is a, and same thing with motor and inverters, it is a, you could sort of think about catalog-type business. We spent a bunch of money over the last two years developing a suite of products that will then be application engineered or tailored to a specific need at a relatively minor cost. The investments are behind us, we have the full suite of products. Even without me coming here, that would have dropped down this year anyway.
On the light vehicle side of the business, we were chasing business, a lot of upfront investment, both in capital and engineering, on programs that, with the benefit of hindsight, were far too risky. If you look at, I'll say of the 20 or so electric vehicle programs that we have in flight right now, ranging from big to small, every single one of them is financially challenged. Either a customer's in financial distress or bankrupt. The volumes are a fraction of themselves. The program has been canceled. The job one date has been deferred, etc., etc., etc. We've unpacked that, renegotiated the way we go to the market. Not to say we're not investing in electrification because we are. It is upfront in terms of engineering. It is customers putting their money into the capital.
It is having volume, I won't say volume guarantees, but a volume pricing matrix so that we make sure we cover our investment. We've been very successful. That's like $100 million of the $300 million, just the quoting disciplines, not continuing to invest in new products for the marketplace because we're just not seeing the demand. The other two-thirds are, it's really span and control. It's $25 million, $30 million is eliminating the power technology segment. Probably $25 million or so is combining our aftermarket operations between some at corporate, some in CV, and some in power technologies. There's probably $30 million, $40 million of reduced corporate costs outside of North America. If you just looked at our general corporate overhead costs as a comparator to what I would say is normal, we are on the high end. We've trimmed that back.
A lot of those cuts have been in the Senior Manager, Director, the Vice President level.
Very helpful, thank you. Turning to your North America driveline business, given that light vehicle really, you know, it's largely North American electric entirely. What impact do you see from, you know, on the specific programs or type of programs that you supply, like Ford Super Duty, some of the Jeeps and SUVs, from the relaxation of the federal greenhouse gas and corporate average fuel economy standards that Congress passed in July?
Yeah, so for our light vehicle business, the best way to think about it is it's really five or six programs. It's Ford Super Duty, it's Wrangler, it's Gladiator, it's Bronco, it's Ranger, maybe Maverick to some extent. I mean, that's the bulk of our business. It's almost all of those are assembled in North America, high USMCA compliant from a tariff point of view. In some cases, they're advantaged. Our customers are advantaged versus their competitors, particularly, say, on Super Duty from a tariff perspective. These are, you know, Super Duty being our biggest single platform, over 10% of our sales. You know, it's a work vehicle. The decision to go electric is going to be economic. It's going to be, hey, is dollars and cents, is it worth it?
There are some, because of that, the way the Super Duty truck is graded, reducing the CAFE requirements could be helpful in terms of some of our customers are still planning on an electric variant to that vehicle, not just Ford, but GM and Stellantis as well. If there's a relaxation, these are going to be programs that they electrify because they need credits, not because the underlying economics are favorable. To the extent some of that stuff goes away, it'll be helpful.
Great, thanks. Next, I wanted to ask on electrification to follow some of the earlier comments about the $100 million of savings. Obviously, there's a headwind to your electrified driveline portfolio, but a tailwind from all of the savings. With what we just talked about, the tailwind to those programs on the ICE side, when you net it all together, I feel like for most of the companies at the conference, there's like a silver lining to the EV slowdown, which is, you know, we have to spend less, this and that. For you, would you say it's actually a large net tailwind?
Yeah, for sure. Just because of the amount of cash flow and P&L that we're invested in it and the payback being so far out. Now, I'd say if you look at our electric vehicle business overall today, and this would include things we have on the thermal, like the battery cooling plates and things like that, it's still a several hundred million dollar business for us. I'd say we're at the point now where, without there being this massive investment in the growth side, that business will start to turn accretive as opposed to being, I mean, you've sort of seen in our earnings call over the last two or three years, like electrification on our bridges was a negative kind of quarter after quarter after quarter. That business will turn positive for us. We still have good electrification growth in our backlog.
It's just not as much as the several billion that we thought it was before. It's more like in the few hundreds of millions.
Very helpful, thank you. I wanted to ask on near-term capital allocation, including the change recently between the time of the off-highway sale announcement in June and the Q2 earnings call in August. You upped your targeted return of capital this year beyond the ordinary cash dividend from $550 million to $600 million. You also went from saying that the $550 million could consist of some undetermined combination of buyback and special dividend to just entirely buyback. Firstly, could you talk about the decision to increase the payout? Secondly, what drove the preference for buyback over dividend?
Yeah, I'm glad you asked that. It's probably the most important question. First of all, as we generate more cash, and we upped our guidance here in terms of cash flow and earnings, as we continue to do well on generating cash, it will go all towards returning capital to shareholders as well as on a go-forward basis because we'll be appropriately levered post-transaction. All free cash flow in the intermediate term, the way we're seeing it right now, will go back to shareholders. You're right in terms of our original announcement and sort of said TBD-based and really based on what's the underlying financial value of our stock. Do we see our stock as trading, you know, how's our stock trade versus its intrinsic value? I guess the way I would look at that is, we've guided towards how we get to our 10%, 10.5%.
When we calculate the intrinsic value of our stock, we're using our number. If you look at where I think the consensus is for our margins next year, based on the reports that I've seen so far, it's more like in the lower 9s. Based on that, including your note, you get to a stock price in the $24- $26 range. Our math is a higher number. Right now, it's very simple. We're buying two shares and getting one free from my perspective. Hence, all the money is going to buyback.
Very love the confidence. What are your thoughts on some of the recent onshoring announcements by automakers as a result of tariffs? For example, we've seen GM investing $4 billion to bring back a number of body and frame pickups and SUVs, crossovers, BEVs from Mexico to Michigan, Kansas, Tennessee. Nissan's bringing more Rogue crossovers from Japan to Tennessee. Honda's moving the CR-V from Canada to, I don't know, Indiana or Ohio, I imagine. It looks like a lot of your light vehicle driveline facilities are clustered around the Midwestern United States, more so than in Canada or Mexico. Are you in a position to benefit from this onshoring trend? Have you maybe had any preliminary discussions with automakers about supporting their onshoring activities?
Yeah, I mean, not really, because for, again, when I sort of say where our exposure is, they're almost all made here. Maverick is an exception, but almost all of them are assembled in North America. We don't, you know, it's not like they're bad. It's just they're already well positioned, so there's not an opportunity to reposition. Maybe with the one exception, I know you have this later on your questions on Super Duty volume uplift. That is something that is a go program for Ford. They're uplifting their capacity by, I think it's just a shade over 20% by introducing it into Oakville. That kicks in next August and ramps up to the full run rate of just under 60,000 by October.
Let's move to talking about that now. Tomorrow, I have Naveen Kumar, the CFO of Ford Pro. One of the questions I'll be asking him is, are you really going to go forward with this $3 billion investment for your most profitable product when right now you'd be paying a 25% tariff? Even if you didn't, there's still USMCA coming up in July next year. Treasury Secretary or Bessant, it was, said, you know, we're going to renegotiate NAFTA. We don't want vehicles built in Canada when they can be built in the U.S., et cetera. I don't know what's happening there. I haven't heard you say, it makes all the sense in the world. I'm sure you're going to supply that product. Maybe you haven't officially announced that. Where would you supply that product from?
What would be the implication to you if it was built in Canada or the U.S.?
It is built in the U.S. now, and they're adding capacity in Oakville. I can tell you it is a goal program because obviously we had the same question. You know, we do have to spend a fairly good chunk of capital this year and next year to help us. We're not putting any footprint in Canada. Everything that we supply will come out of the U.S. It's adding capacity to our existing footprint in pretty short order. I would be shocked if they're not going to do it given the lead times. I was actually in Oakville last week. They are expanding the plant. The plant is vacant right now. It's idled because they were going to put some electric stuff in there. They are expanding the plant, adding rooftop. I suspect they sell a half decent amount of Super Duty in Canada.
I don't know if it's 60,000, but if you think about their market being a tenth the size of ours roughly, and they sell 300,000, it wouldn't surprise me if they sold 30,000 or 40,000 of them in Canada. Making them there probably, to some extent, makes sense. Maybe what time is he on? I'd like to listen in. There could be a UAW element to this, too.
Yeah, thanks. You mentioned that the street was at low 9% EBITDA margin for next year. You're targeting 10% - 10.5%. Can you maybe help us, what can you say to increase the confidence in modeling that? I mean, you're doing 7.4% - 8.1% this year for new Dana. What's the walk to 10% - 10.5%? You gave the confidence in the cost saves. What else is required to kind of get there? What kind of end market backdrop, et cetera?
is no improvement in the end markets. This is 100% within our control. It assumes that the markets stay kind of where they're at right now. If they were to fundamentally improve, if we were to see off-highway kick up in advance of CAFE or not CAFE, the clean air standards in 2027, we're starting to see a pre-buy. We're not expecting that. Those things would only help us. The only thing that we have from a top-line perspective is about $300 million of our backlog that rolls in, some of which is the Super Duty. Probably about 20% of that would be the Super Duty volume for next year. It is all within our control. Like I said, it's a short put.
I just got one follow-up there. I'll turn it over to the investors on the no improvement in end markets. I want to ask about what you're seeing for commercial truck demand in North America and Europe. On the Q2 call, you said North America is a little bit softer. The headwind didn't seem overly huge. You said you actually managed to raise guidance, and you said there's actually tailwinds to commercial truck in EU, South America. Now, other suppliers this quarter sounded actually a lot more negative on commercial truck. There could be different 5 through 7 versus 8 split. I think you might have a little bit more South America than them. What are you seeing out there?
Yeah, for us, just to put it in perspective, CV North America is about a $1 billion business for us. I think that's the area people are focusing on. The rest of our CV business would be Europe. We have a big, like you said, big business in South America. South America is holding its own, a little bit of softness with some of the interest rate increases here. Europe is actually doing better, bottomed out. If you think about our North American business, we may have maybe $50 million of like 10% risk here in the back half of the year. In the scheme of the revenue guide, that's like 1.5% of our total sales. It's manageable. Obviously, in terms of our guidance, we don't plan on everything going right in there. I view our second half guide as absolutely middle of the fairway.
I know there's been a lot of questions about walking from first half to second half. You'll see a marked increase in our margins in Q3 and beyond. In Q2, we are at 7.5%. We've guided to sort of that number for the year. You'll start to see the benefits of improved operational performance, the higher level of cost save. A lot of that's going to be flowing through in Q3. You'll see a massive step up in margins year-over-year and versus from Q2 to Q3.
Great.
It is not really going to be a long-term wait and see.
Very helpful, thanks. I've got more questions. Why don't I pause and see if there's any questions in the audience for Bruce? One up front, please.
A lot of the things we're talking about today are decisions and debates that took place probably a year and a half to two years ago, if not longer. What are the things inside of your executive team conference room that you're sort of debating and raising questions about now about the future of the business?
Yeah, I think a couple where I think we feel pretty good where we are right now. As the changes that I've talked about that we've made as a company have been, I've certainly had my full team, the Executive Team, engaged. To some extent, I've pushed them maybe a little bit in some areas, but not very many. We ask ourselves, like, we're going to be very, I would say, we're North American-centric now, like 70%. Really got to look at what we can do to become more global. That's, I'd say, a little bit of a dilemma for us because if you think on the light vehicle side, we don't really have, if you look at our product portfolio, it doesn't match up well for Asia or Europe. There are no big volume Ford Super Dutys, big SUV stuff out there.
It doesn't really mesh well for us on the commercial vehicle side of things. The European and the North American market operate kind of differently. It's more in-house manufacturing in commercial vehicles in Europe. In China, we're a fairly small player. It's probably going to be much more of an electrification story there where it's not going to be so much. Here in North America, we're strong. I'd say the strategic questions are probably more on the commercial vehicle side and how we position that business for the long term and/or should we be in those markets or should we be more concentrated?
Lastly, if you could comment on the competitive environment within the commercial vehicle driveline market. I was curious what impact, if any, you've seen from the Cummins acquisition of rival Meritor.
Yeah, I mean, it's a very, it's a bit of an oligopoly here in North America. If you look at the marketplace, you know, we're in some customers that they're not. They're in customers that we're not. There are other places where we compete sort of head to head. In a lot of cases, our products are almost substitutional, so we compete with them. They're a good competitor. I would say there's opportunities for us to gain share, mainly because we've taken some actions to re, I think we have an advantageous cost position now because we've opened a brand new commercial vehicle facility in Mexico. I think we have a cost base coming out of a world-class facility versus our peers, and that should position us well to gain some share over the long term.
Great, very helpful. We are over time. Please join me in thanking Bruce and Craig.
Thank you.