Take your seats. We're gonna get started. Next up, we have Dana. We're very happy to have Tim Krause, Vice President and Chief Financial Officer, here with us today. You know, Dana's a company that is really interesting, crossing a number of end markets outside of light vehicles, heavy-duty and commercial vehicles. I think one of the interesting things is, you know, despite some people maybe not appreciating it as much, they're making a very good transition towards the EV world across all segments. I think in some ways, having that exposure to off-highway and commercial might be giving them a very interesting, unique opportunity to expand in markets where they're actually able to make money on EVs.
Maybe soon, maybe sooner than other folks in those end markets. Tim, thank you so much for joining us today. I mean, first, maybe if we can get into just sort of the, what's going on in the industry at large and how you're seeing volumes develop here in 2023, and maybe even beyond. Really, you know, as you think about sort of the schedule normalization, what we've been hearing from a number of folks in the industry is it's getting a bit better, but it's still a little bit volatile. This is more on the light vehicle side than the commercial and off-highway.
You know, what are you guys seeing as far, from your customers as far as schedule fulfillment and volatility on mix, and the like?
Yeah, I think, you know, volume tends to be a little better, right? T hey're not dropping out, large amount of volume. The ability, you know, volume and mix is a, it continues to be, I think, a challenge for for the customers, really across the end markets, I think. I like to make the comment that, you know, they have a set schedule they'd like to make, but I think a lot of times they're building a lot what they can make based on what the part availability.
And that's really tough for folks like us, where, you know, we tend to have, especially if you think about light vehicle and commercial vehicle, well, I guess off-highway too, it's a very, you know, the mix changes tend to drive a lot of costs into the plants. And light vehicle especially is a volume business, right? Like the setup run and really drive the efficiencies from that volume. And when they're changing mix a lot, you miss out on those opportunities.
Have you guys quantified what sort of that disruption cost was in 2022, and what you might think it might be in 2023?
We haven't said, you know, publicly. It's obviously a mixture of both idle labor, obviously changeover costs. There's a lot that goes into it. You know, we work with the customers to try to make sure that they understand the impacts they're having and how we can work together really to try to minimize the impacts on it. We think this continues to get better as we move through the year, and we're really thinking, you know, the second half of the year starts to show a bit more improvement than certainly last year in the front part of 2023.
Okay. We think one of the other headwinds, which might be switching to a tailwinds as far as inflation on input costs, you know, what are your thoughts on that sort of near term, and how much of a headwind was that last year going into this year? As you think about sort of recoveries potentially there on that the incremental sort of penalty of this cost volatility, what are the discussions and recoveries like with your customers?
I feel like we're in every day having a discussion about recoveries. Obviously the rate of inflationary costs on the business are starting to slow down. We're not seeing that. I think all of us experience it every day as we kinda go through the rigors of life. For us, you know, inflation last year was about net $117 million headwind. This year we see that number being, you know, somewhere around $50 million, so it continues to be impactful both to pure earnings and to the margin profile in the business. It 's a mix, right? You know, we still see large amounts of energy, although the rate of change in energy obviously is down.
Labor is a big, big factor. The inflation that we all saw last year is flowing through in cost of living increases, across all the businesses which are now showing up in labor costs. It continues to be impactful, and we're in having those discussions really every day with the customer about recoveries, and how we can, you know, get those margins back.
I mean, what we're hearing is that there almost seems like there's a bit of a change in the discussion with the automakers where there's, you know, more price recovery coming from these incremental costs and the inflation. Is there anything really changed here, or is this really just kind of blocking and tackling in the short run, and we're gonna be back down to sort of 1% to 3% price downs at, once we get through this?
Yeah, I think the, you know, I mean, we obviously operate across a number of different end markets. You think about light vehicle, which is sort of your typical, you know, 1% price down or we think of it as more productivity sharing with the customer. The customers, I think, really want to get back to that normalized level, which is why for the most part cost recoveries aren't becoming sort of contractual, kinda like we have with commodities, 'cause they believe that this situation we're in with the high inflation is going to revert back to sort of the way it was. I mean, we'll have to see where that ends up.
You know, I think as this has moved on, most of the customers in all the end markets have been more constructive around recoveries. You know, I think, you know, you see $117 million last year, only $50 million this year. You know, that, some of that is really recovery driven with the customer. Some of that also is we had a lot of, we have a lot of New programs coming on, you know, typically, when those programs come on, they get repriced. They have a number of different aspects to them. We see some of that coming through as well in the business really across all the end markets.
In the new programs, you're definitely seeing a little bit more improvement.
Well, it is. I mean, typically, when we end one program to begin another, right? You bid the program.
Reset it.
A number of years you know, before it, and there's been engineering changes, cost structures have changed, and that's really a typical aspect when you get ready to launch and go back and sort of settle up with the OEM. Probably more to discuss with the OEMs today than there was typically, but, we're following the same basic path.
When you think about labor, there's kind of maybe three sub-questions. I mean, first, when you think about labor inflation, you know, what are your assumptions and your thought around that? Is that something that, you know, you can potentially, you know, unwind as you go through 2024 and 2025 after you have some inflation this year? Your second, I mean, are you having a hard time finding folks? I mean, if we see production ramp up significantly, are there any issues with availability of labor? Forget about the price. The third thing, you know, the UAW is gonna have a pretty contentious, you know, round of negotiations with GM, Ford, and likely Stellantis to start with.
There's a good chance that there might be a strike later this year. It's a little bit outside of the inflation cost issue. Have you guys seen anything as far as order patterns or anything like that from Stellantis, or are you prepping or hearing any prep for that in advance of those negotiations or potential strike?
On the last one obviously, we keep an eye on it, but really, we don't have any position or we haven't seen anything specific relative to how the OEMs might be preparing for the discussions with their labor unions. On your first one, I tend to believe, and I think this is probably true, labor inflation is pretty sticky. You know, once you give a pay raise, it's pretty hard to get back. I think those cost structures are going to end up being far more permanent in nature than others, such as freight or energy, which tend to move with the course of economic activity.
on your second part, I think, you know, labor availability is starting to get a little better. I think we saw it as we redid our labor agreements, a couple years ago, and starting wages are now, you know, in the plants, you know, pretty competitive. I think that certainly has allowed us to attract the labor we need in the plants. you know, I wouldn't say it's easy, but I think it's, you know, better than it was, say, two years ago.
On the backlog, which you mentioned before, with respect to kinda Doug's kinda question, I mean, you look at the backlog growth, it's been pretty impressive, $203 million. You have a record backlog of $900 million right now. What do you think is driving that? It seems like a lot of it's coming from the EV side, which we'll get into the products in a second. What is the key driver of that growth in backlog?
Yeah, I think the key driver is, you know, we, you know, we're delivering products and developing products that our customers across all the end markets want and that their ultimate customers are demanding. I think that's the real driver behind the growth in the backlog. You know, obviously, the mix of that backlog has changed dramatically over the last few years, which, you know, our EV backlog now stands at 65% of that. That's again reflective of a early recognition on the part of Dana to shift to EV. You mentioned this in your opening comments. I mean, we are the only supplier that's capable of delivering a four-in-one EV integrated system.
We have the capability to not only manufacture the hard parts, right, the traditional axle, but the power electronics, inverter, motors, and then the cooling system that goes along with it. Our thermal business, which historically has cooled engine oil and transmission oil, has transitioned into a having the thermal dynamics to manage the thermal properties within the integrated e-axle. I think it gives us a distinct advantage and really a product that is optimized for what the customer's application is. That's really what the heart of what's driving our ability to continue to expand the backlog.
When you think about the 65% that's EV, how do you think the margins are? Or what's your expectation for margins on that portion of the backlog? Is it average? Below average?
You know, I think w ith every new product, right, we're spending an awful lot on developing the program. The programs overall are healthy from a contribution perspective. Overall, the margins in the business, you know, continue to be held back by the enormous amount of investment we're making in technology and product development to continue to push forward in the EV space.
When would you expect them to be more than just contribution margin positive? I mean, when would you expect them to kinda get to corporate average? Is this a question of scale?
Yeah. It's really comes down to when we get to a scale. I think a lot of this depends, I mean, the market's moving, you know, pretty rapidly and changes quite dramatically. You know, as we move through, you know, we thought, you know, that by the end of the decade that the businesses should be comparable. I think that's probably still a fair assessment. You know, we really, if you think about it, have built an EV business from scratch, right? You know, we're a 100-year-old company, 120-year-old company that has really reinvented itself in building, you know, what will be a multi-billion dollar EV business from scratch.
You know, as we saw with Ford, right, coming out and trying to split the business, right? There's a lot of investment that goes into that.
How does the process work in the commercial vehicle and the off-highway market as far as the bidding for the four-in-one axle or other EV products that you have that's different than the light vehicle side? Is there an opportunity to price when you're going through that quoting process at good margins and returns in those somewhat more fragmented markets or are you running into the same challenges there? Meaning, are they a good seed market to develop the initial scale on this EV technology and then bleed it into the light vehicle market?
Yeah, I mean, if you take a step back, right? If you think about, you know, the non-hard part, hard part version, so the motor, the inverter section, I think the advantage we have is that we are supplying motors and inverters, the electrodynamic components for all the end markets. That's going to allow us to gain scale along with light vehicle, which should give us a cost advantage over others that perhaps only play in commercial vehicle or off-highway or light vehicle because we have the volumes associated with all the end markets. You know, I think when you think about the bidding process, you know, CV, they're all slightly different. Off-highway is probably the most diverse end market with numbers of customers.
I think there you have smaller customers that need a lot more development work and systems integration work. They don't have that in-house. They don't have it on the ICE side. They don't have it on the EV side. There's an opportunity where the customer sees a lot of value in what we bring. Now, those are also much lower volume programs, which tend to be better margin. You can see that just in the margins across the businesses today, right? CV, I don't think there's much different between selling the CV customers an EV system versus an ICE system. They're right now in the sort of the ramp stage, so they're not looking to have multiple suppliers.
I think long term, they probably do end up with, you know, it could be ultimately still multiple suppliers into that business and the competitive landscape would be as it is today. I don't see much difference in how we bid for EV business on the commercial vehicle side today as we do the ICE side.
One of the interesting things is, as the powertrain is evolving here, it does sound like there's more opportunity for you to run light-duty commercial and off-highway in the same plants, meaning there are parts that will spread across the segments. Is that true that you might have, you know, greater opportunity to scale across all three verticals?
Yeah. Absolutely.
That you haven't had in the past.
Yeah, I mean, on the electrodynamic parts, certainly, right? If you think about it, right, the motor that goes into a light commercial vehicle and the motor that can be used in a large pickup truck they're in the same size range, power range, right? They can be made and the components can be made in the same plant.
Delivery of the final axle, those will still be made in separate plants as they are today, but we don't see any need to put new concrete down to build those axles. We'll build them along the same lines that we're building the ICE axle today. Where we can get the scale is on the electrodynamic components, and when we go to the assembly, we'll just use the current footprint we have for the customer and deliver them the eAxle along with the ICE Axle they might have for the same basic truck.
One of the challenges the industry faces is the capital intensity, actually going up dramatically. If you can scale across end markets, I mean, could your capital intensity actually or could you become more capital efficient? Over time?
We think we will become more efficient. I think, you know, you can see, you know, just from the our view now, right? We're spending, you know, quite a bit on CapEx, a lot more than we have generally, and that's reflective of the investments we are making in EV plants. These are really EV plants on the motor and inverter side, not on the, like, axle assembly side, so. We continue to invest in new space for power, for our Power Technologies business, for battery cooling.
Maybe if we get to product specific, if you could talk about this. I mean, it sounds like you're supplying, you have content on the Silverado/ Sierra EV, and the F-150 Lightning. Obviously, you know, you have content on like a Super Duty. You know, how different is sort of the launch process? 'Cause I think these are both, the Super Duty is launching this year, Silverado and Sierra is late this year, the F-150 Lightning is a running, you know, contract win. I mean, as you launch that product, I mean, how different is that for you?
So those are t he products you've mentioned, if you think about those products are really on the battery cooling side of the business, right?
Okay.
Lightning, we do the battery cooling, then for GM, we do the Ultium battery plan. That's their common battery platform that they're putting in all of their vehicles. Those products are, I mean, if you think about it from a Power Technologies side, we're running those products off of lines, and those lines grow as volume comes on for those products. I would say the launches aren't particularly different, right? We understand how to launch product. We've been launching products for a long time. The good news is like, if you think about it, right, we've been making battery coolers, you know, for a number of years now, it's now just starting to ramp where you're getting more volume.
it's not like we're kinda starting from scratch trying to launch these products. These products have already launched and are really working their way up the volume chain, which is where we're at today.
Is a battery cooling system on a Silverado/ Sierra and an F-150 Lightning a lot more similar than or sort of more similar that you can scale in a way that you couldn't scale axles, right? I mean, it seems like there's something happening here in the markets and what you're offering the folks where you actually could gain scale and have less differentiation and really, like, once again, drive better capital efficiency and margin.
Yeah, we can make battery cooling for the Lightning and for the Ultium battery platform in the same exact plant. No question, right? We don't generally make axles for the Super Duty and the Wrangler in the same plant or they don't tend to work as well. Yes, in those cases, yeah, we can make. It's no different than the current thermal technologies, thermal business we have today. We make coolers, right, oil coolers in the same plant for multiple engine applications across multiple OEMs. The business scales in the same way around the battery cooling and electronics cooling versus say the core axle or drivetrain technology.
Doug you had a question?
I want to maybe talk a little about some of the cost inputs. You've got ICE businesses, you've got EV businesses, we've seen, you know, raw materials be not just supplies from actual physical raw materials being an issue. Can you just give us a little overlay of what you're thinking on the cost side?
I think when you think about, core commodities, right, we this year, we see commodities, abating, throughout the year, becoming an actually a tailwind for us. If you think about, and I'll speak broadly, but this is really around the light vehicle.
Yeah.
You know, we typically recover through contractual obligations, you know, about 75% of our commodity costs. Those typically run on a 3-to-5-month lag in terms of the recoveries we get from our customers. As commodities increased dramatically over the past year-plus, we were recovering those from our customers about $0.75 on the dollar, about 3 to 5 months in arrears. We're generally paying those costs immediately or very soon after to our supply base.
It's a catch-up.
Right. As you move through this, as the commodities start to abate, right, we stop paying the higher cost to our suppliers, and then, you know, we catch up with our customers. Both on the lag and then of course, you know, we're only giving back to the customer, you know, what we gave them in the first place, which was, you know, 75%, that then ends up becoming a tailwind for us in the current period.
One of the things that we also have seen on the four-in-one axles , I mean, you've got other, you know, companies that are out there that are going after this as well, right? I mean, and, you know, stuff that might not be as advanced, let's say. It seems like you're kind of a little bit at the leading edge. When you think about power electronics, inverters, electric motors, and then sort of the combination in iDM or a, you know, an e-axle, however you wanna, however the application ultimately works, it seems like the competition there is ramping up in a very significant way.
As, you know, powertrain content drops out on the ICE side, there's kind of a flood of competition heading towards the electric powertrain. I mean, what do you ultimately think the automakers are going to look for when in their suppliers to really differentiate and allow you to win business in a way that's sort of, you know, robust and supports your business versus sort of this, the, what seems like sort of a splintering, and a lot of folks going after this? In addition, you know, what, you know, versus what they're doing sort of in-house, 'cause they are trying to do some of this stuff in-house as well.
I mean, how do you think it's sort of the competitive landscape as you go after this, maybe getting tougher or maybe not as tough over time and the insourcing potential?
I mean, I think the basic tenets of supplying to the OEMs doesn't change between ICE and EV, right? Quality, delivery, technology, the reasons the automaker outsources a drivetrain or an axle to a Dana or someone else, I don't think changes whether you're under an ICE or EV. I think they're gonna be looking towards the supply base to be able to continue to supply those. I also think that we believe that, you know, the reasons why the automakers have outsourced certain types of powertrain components under the ICE model will continue under the EV, right? If you think about, you know, one of our largest customers in our largest programs, which is the Super Duty, right?
You know, Ford makes the F-150 axles in-house, right? They don't make the Super Duty axles in-house. Why is that? Well, in large part, you know, they sell an awful lot of F-150s. There are only a few variants of those axles. They can make them, they can make them very efficiently in their own plant. When you look at the Super Duty, it's not one truck, it's an enormous number of variants, right? The 250, 350, 450, or even the 550, right? There's duallies. There is an enormous number of differentiated products within that product line, and the volumes are much smaller.
We believe the same reasons that they outsourced those types of products to a Dana in ICE will work under EV, and then they will choose the supplier for the same abilities, right? Technology, delivery, quality. For Dana, what we offer the customer is a detailed understanding of how these systems integrate. How to make them more efficient, right? If you think about it's not just the hard parts, it's how the hard parts, the motor, the inverter, how the power electronics work with the rest of the system, and then how that system is cooled. All those drive efficiency into the drivetrain, which, you know, allows them to either get better range, smaller batteries.
All those have a cost or a performance component which is valuable to the OEM because it's valuable to the people like you and I that are gonna buy these vehicles ultimately. I think we have a. You mentioned we're a bit ahead of the curve. We have a very strong understanding of the thermal dynamics of these systems and how to optimize them. In some cases, we're actually helping the automakers understand or the customers, it's not just the automakers, but across the, you know, all of our end markets, you know, how these systems act, how they interact with the rest of the vehicle, and how to make them more efficient.
Got it. I've got a bunch more, but are there any questions in the audience? Okay. Okay, I'll keep going. I mean, you guys have mentioned that your content potential on an EV versus an ICE is 3x. I think is that?
Yeah. Sure.
About that ballpark. you know, how much of that do you think you can capture? Maybe we can explain sort of the difference in the actual content that gets you there.
Yeah. You know, it's interesting. If you just think about, you know, just I'll take your typical like just think of a pickup truck. 'Cause we typically-
Yep.
Today supply drivetrain, so we just think about the core light vehicle drivetrain market, you know, pickup trucks, you know, Bronco, Super Duty, Wrangler, it's not a pickup truck, but heavy use, rigid beam axle components. Right, today, there's an ICE engine, there's a drive shaft, and there's a rear axle. Maybe it's all or four-wheel drive, but in its simplest sense. If you think about it, today, we supply that axle, right? We probably supply the drive shaft as well, right? You think about what's gonna happen. The ICE engine goes away, the drive shaft goes away, so we lose $200 worth of content on a drive shaft.
What happens is all of the powertrain component or value that was sitting in the front of the vehicle in the engine has moved south and now sits essentially connected onto the axle. If you think of the electric motor, the transmission, typically these have a certain amount of gearing, and they're not simply direct drive one speeds. These typically be, you know, one or two-speed gearbox that sits along there, along with the power electronics. If you really think about it, right? The axle, we don't really lose any content within the axle. We lose a little bit of content on a drive shaft, we pick up all the power electronics and the motor. You think it's a third, a third, a third, right?
That's 3x the content that we used to have because everything that used to be in the front of the vehicle has moved south.
Drive shaft is what you lose.
The drive shaft is relatively minor. I mean, it's, I mean, it's a nice business, but that's for us, that's the only business that really effectively goes away in a shift, you know, from ICE to EV versus somebody who makes, I don't know, piston rings or something like that. There just won't be as many piston rings made. That's why the our content per vehicle goes up in an EV world versus an ICE because basically all the stuff that used to sit in the front of the trucks moves and sits onto our base, our base product, and our base product does not go away.
I was gonna have a capital location. Do you wanna ask a few more?
Yeah. Go for that. I gotta go after.
Leverage is a little bit elevated now because the EBITDA given market conditions, but you've always kinda had a good keen focus on the balance sheet. If you could just give us a little bit of thought about where do you want the balance sheet to be? How with the free cash flow where it is, will you be able to afford some of the expansion into, you know, more EV technologies?
Yeah. I mean, I think we've traditionally managed the balance sheet, I think appropriately. Some maybe you say conservatively, but I think, you know, we operate in end markets that run through business cycles. You know, our view on leverage is one that should take us through the business cycle. That is, you know, 1 to 1.5 returns over the long term. I think, you know, when you think about the free cash flow we do generate, if you look at operating cash flow right now, almost all of it, right? Think of it this way, nearly all of it's going into paying for investment into the business.
We'll continue to make the investments that we need to support and then grow the both the ICE and the EV business and continue to take any excess cash flow and earmark it for making sure we keep the leverage where it needs to be.
Do you see any M&A? There's been some M&A 2020 to 2021. We haven't really seen a lot very recently. Is there any scalable kind of business that you could think of?
Yeah. I mean, you know, most of the acquisitions we've done over the last two, three, four years have been concentrated around sort of two main areas, most of it in the EV space, right?
Yeah.
Acquiring the capabilities that we thought we would need to be competitive and offer the products and capabilities that the customer is desiring. We also acquired a number of companies in the off-highway space. Those off-highway companies also came with gear technology that actually works very, very well on an EV side. There was some other tie-ins to those acquisitions. Principally, when we think about it, where we sit today and, you know, the investments that are needed. We don't see a real need for any, you know, we don't have any holes in sort of the capabilities that we need to be competitive and deliver the products in an EV perspective.
you know, look, there could be some small technology that comes along that we think is helpful and it, and it fills a niche. For the most part, we have everything we need-
You've got the infrastructure.
Yeah
to make transitions.
Right now it's really, you know, commercializing a lot of that and really scaling it, you know, to meet the demand from the customers.
Maybe if we just talk about the two end markets that are not necessarily core to a lot of our other discussions, commercial vehicle and off highway. The commercial vehicle market, I mean, some of the things have been running, sort of layman's terms, fairly well. I mean, what is your, what is your view, on what's going on in the commercial vehicle market from a cycle standpoint and backlog, you know, orders? It sounds like it's pretty strong.
Yeah. Continues to be strong. You know, I think they, like all the OEMs across all the main markets, had trouble producing vehicles last year, and obviously there was a lag when you think about 2020 and 2021. A lot of that got pushed into this year. You know, the order books remain very strong in commercial vehicle and we're supplying, you know, the automakers or the truck makers for those needs. We see it continuing to be strong throughout the year. I mean, obviously it's very economic dependent, so we'll see and as we go. This year looks very strong with the order book.
off highway?
Same thing. I think, you know, off highway, you know, there's a lot of factors. Off highway is a pretty diverse space, from underground mining to forestry to ag and construction. You know, we continue to see that market, which has been underserved just like many others, to be strong and customer intake continues to be well. That's a market that can change pretty quickly. You know, with, you know, commodity prices still being relatively cooperative, it tends to put money in the pockets of, you know, farmers and others to buy equipment.
Great. I think with that, unless we have any questions in the audience, we're going to wrap up. We'll finish just a few minutes early so everybody can get on to lunch. Tim, thank you very much for joining us today. We really appreciate the time.
Thank you.
Thank you.
Take care.
Thank you.