Q4 2019 Earnings Call
And.
With more than 20 years of Mega Tronics experience Dana has developed numerous award winning patented technologies for electrified vehicle.
Promoters and Inverters to gearboxes and thermal management, we are the only supplier with in house capabilities to deliver all core components of a fully integrated electrified powertrain across all vehicle segment.
Browse our complete portfolio of Electrodynamic solutions at Dana Dot Com slash electrified.
Good morning, ladies and gentlemen, and welcome to Dana incorporated fourth quarter, and full year 2019 financial webcast and conference call.
My name is Carmen.
Facilitator.
Please be advised that are meeting today, but the speakers remarks, and today's session will be recorded for replay purposes.
There will be a question and answer session. After the speaker's remarks.
We'll take questions from the telephone only.
Did you like to ask a question. During this time. Please press star one on your telephone keypad.
To ensure that everyone has an opportunity to participate in today's Q.
That callers limit themselves to one question at a time.
I would like to ask an additional question. Please return to the Q.
No at this time I would like to begin the presentation by turning the call over to Dana's Senior director of Investor Relations and strategic planning Craig Barbara. Please go ahead Mr. Barbara.
Thank you Carmen and good morning, everyone on the call and thanks for joining US today, you will find this mornings press release in presentation are posted on our Investor website and today's call is being recorded and supporting materials. Other property of didn't incorporated they may not be recorded copy or rebroadcast without our consent.
Today's presentation includes forward looking statements about our expectations for Dan its future performance actual results could differ from those suggested by our comments today additional information about the factors that could affect future results are summarized in our safe Harbor statement found in our public filings, including a reports with the FCC.
As I think this morning are Jim Kamsickas, Chairman and Chief Executive Officer, and Jonathan Collins, Executive Vice President and Chief Financial Officer.
Now my pleasure to the calling back origin.
Thank you Craig good morning, and thank you all for joining us today.
Dana achieved record sales last year of $8.6 billion, a 6% increase over last year 2019 was our third consecutive year of growing sales. This continued success as a direct result of our strong backlog and accretive acquisitions.
Especially happy to report that Dana Cross the $1 billion profit threshold for the first time.
And as committed our adjusted free cash flow improved by 12% to over 3% of sales, even even while we continue to invest to grow and strengthen the business and finally reporting adjusted earnings per share above expectations at $3.06 a four.
Four cents increase over last year and again a record for the company.
Our success in 2019 was made possible because of the focused execution of our enterprise strategy.
Which we refreshed and presented to you early last year.
You'll notice that the core elements are shown in the bottom of slide four as gears one through five.
Good morning, Thank you for the opportunity to share some at a high level key outcomes, resulting from the execution of our enterprise strategy, including leveraging our core meaning our business units and our functional groups collectively driving synergies to exceed.
Acquisition savings targets complete five electrodynamic technology acquisitions, and can create value and numerous other ways.
Driving customer concentricity as evidenced by our more than 35 customer in industry Awards.
Expanding global markets, especially by expanding in Asia, which for Dana, Matt, adding six new facilities in this critical region.
Delivering innovation as mark by winning yet another pace award for technology, and finally, leading and electric propulsion, which of course cannot be more clearly demonstrated tend to be sourced a fully integrated vehicle with complete Dana electrodynamic content software in controls and an all new medium duty.
Truck platform.
I will discuss this in more detail on a few minutes, but suffice it to say we believe the enterprise strategy, we announced in late 2016 and updated last year has in fact provided the right goalpost for Dana as we were out in front of this incredibly dynamic time in the mobility supply industry.
All this hard work is cumulated into continuing to win new business and maintaining our strong new business backlog.
Now turning to slide five.
Obviously, having an effective enterprise strategy is critical as part of that achieving profitable growth along journey of executing the strategy.
Especially in these times of unprecedented and rapid change is that much more challenging accordingly, and only seems fitting that as we close out 13 consecutive quarters of year over year growth that I highlight the results that Dana has achieved over the past four years.
Since 2015, Dana has achieved 42% growth in sales and 63% increase in profit.
We have also improved cash flow by 86% and diluted adjusted earnings per share by 72%.
I'd be remiss if that thank all of our loyal customers and incredible Dana team for helping us to achieve strong and sustained growth.
This growth has been the result of three factors.
First the most significant factor is that all four of Dana's business units have gained market share and grown sales organically over this period second we capitalize on sustained yet challenging high volumes by delivering exceptional operational performance, which resulted in greater appreciation in the form of new business awards from our customers.
And third Dana very selectively acquired in integrated accretive assets that have already delivered profit profitable growth for our business and we'll continue to do so in the future.
Please turn to slide six.
The foundational element of our enterprise strategy centers around operating the business in a way that leverages the benefits of our core processes assets technology and most importantly, our people.
In 2019, Dana made our largest acquisition and over two decades, when we purchased the drive systems business from Oerlikon.
At that time, we announced that transaction, we estimated we could achieve 40 million and cost synergies in 24 months, including $10 million in 2019.
We've been able to accelerate that timeline by the close of 2019, we've achieved 25 million in cost synergies by streamlining purchasing implementing gain is operating system system and rationalizing fixed cost.
For 2020, we're expecting to complete the cost actions to achieve the remaining $15 million synergies.
In addition to the Graziano in Fairfield business acquired from Oerlikon, We have made five acquisitions that added key electrodynamic products and capabilities to our growing electric vehicle business not only have these acquisition contributed to our topline growth, but they've added new technologies to dana's existing in house electro mechanical capabilities that we hope.
And over the last 50 years to address the current vehicle electrification Mega trend.
And we've strengthened our relationship with hydro Qubec, one of the worlds largest clean energy producers, whose expertise and sustainable energy storage and energy distribution establish them as a very valuable partner.
These acquisitions have further increased our market and geographical diversification and expanded our customer base all in support of our enterprise strategy.
Slide seven illustrates dana's commitment to customer satisfaction, which is again being recognized across the mobility industry.
This year alone Dana has been honored with more than 35 industry and customer awards, including a seven seven automotive news pace Award.
In addition to earnings supplier the year awards from both General Motors and Fiat Chrysler were recognized by Caterpillar for the supplier quality excellence gold level multiple master of quality awards with Daimler as well as quality and innovation awards with John Deere Paccar Sani and Toyota We also receive high street sales above and beyond.
Award.
Needless to say these awards represent that our customers recognize and appreciate the value that Dane and provides we're very proud that when customers think of Dana They think of the exceptional service, we provide and in turn they most often reciprocate by choosing Dana to partner with them on the new business.
A recent example of this is with Hyster Yale.
You are materially hanting material handling customer Dana's, Spicer Yell announced division.
Of their 2020 strategy and in conjunction signed a multiyear supply agreement that positions Dana as the preferred supplier of drive in motion products.
It is about creating value for customers and doing our part to ensure that they are positioned for long term success.
Moving to slide eight year, three is about expanding our global markets, specifically in Asia, which is not only the largest mobility market in the world, but has the highest global growth rate across all segments and is a leader in the adoption of new energy vehicles.
Several of our strategic acquisitions, we have completed have augmented our manufacturing and engineering capabilities in Asia, specifically in India, and China, furthering our capabilities to manage complex global customer programs.
The results of our actions can mention it can be seen in the numbers over the past four years, we have increased facility in India by over 40% in China by 150%.
We've increased our staffing in India by more than 100% and 70% in China.
These efforts have resulted in an 81% increase in sales in India, and a 55% increase in China.
We are building our global business for the long term as you can see on the right side of the slide Dana has added outstanding businesses that support many current and new customers in the region across multiple markets, including Tata Cherry Valley setting.
VW and zoom line just to name a few.
Turning to slide nine we continue to execute our fourth year, delivering new innovative solutions that are driving growth across our markets.
Starting in the upper left hand corner Dana's 2019, automotive news pace award, winning Spicer Advantek Ultra actual system has set the new standard for actual efficiency performance you can find this award winning technology driving all will.
All wheel drive for to edge and escape.
Only can cause there and nautilus among other vehicles.
Our drive lines are also featured award winning vehicles, including the two 2020 Gladiator recently named the North America truck of the year included on car and drivers 10, best cars and trucks.
Moving to the left lower left of the page Dana's power Technology group supports the industry with best in class engine capability and this group also provides outstanding technology to support electric vehicles in the form a battery calling.
Insulated gate bipolar trans transistor or IGBT, equaling as well as supporting Dana's in house powertrain thermal management requirements.
On the top rate of the page in the commercial vehicle market Dana Inder introduced several industry, leading technologies in 2019, including our Spicer 175 series single drive axle, which is now notably standard position on mobiles be it and now and.
Beyond our six by two four by two configuration in North America.
Hi efficiency fast ratio axle is well suited for many applications, including line haul trucks, which will need to meet the EPA upcoming phase two greenhouse gas mandate.
Also in the commercial vehicle market Dana's rhombus tire analytics cloud based software platform is a 2020 automotive news pace Award finalist. This app based digital solution allows fleet owners to predict and optimize tire maintenance in order to maximize of vehicles operational efficiency effectiveness.
Finally, moving to the lower right side of the page.
In our off highway segment Dana launch the all new Spicer T. 50 power ship transmission.
This is the largest transmission Dana has engineered and launched and over 60 years ways in at approximately 5000 pounds.
This new modular transmission offer superior performance and efficiency through eight speeds and is now being featured on the Sandvik Th 663, hi mining truck the largest model they manufacture.
Now please turn to slide 10.
At our Investor Day last year, we emphasized electrification and our plans for investing in new technologies and products as end customer demand shifts from internal combustion to electric propulsion in certain of our end markets.
In 2019, we achieved major milestone by combining our recent acquisitions of electrodynamic components with our traditional mechanical competencies and integrating them with embedded software and controls to provide a complete E. Powertrain comprised of all Dana components shown on the slide.
This will enable us to more than double our content per vehicle and capitalize on the growth opportunity.
One of the most exciting advancements has been the major program when we announced in late 2019.
At that time, we weren't we were not able to disclose the customer, but last month Paccar announced at Dana will providing a bully electrified powertrain for both peterbilt to 20, EA and the Kenworth K 270 medium duty truck pilot programs.
This three year program launches later this year as 200 million incremental sales include a complete gaining E power propulsion system, including electric motor and drive system battery modules and battery management thermal management and onboard charger Inox Hillary systems.
We have several additional electrified programs that will be entering our backlog as we work closely with our customers during the transition to a more sustainable future.
Turning to slide 11, when we talk about sustainability.
It means much more for us than just the good work, we're doing internally to be environmentally responsible such as adding solar power generation at several of our manufacturing facilities and utilizing state of the art energy efficient manufacturing processes around the world that have reduced our greenhouse gas emissions by nearly 20% and water consumption by.
15% over the last four years.
It means that the products, we provide our about more than the bottom line. It means that we transition our business to eat propulsion, our products will directly enable our customers and their customers to achieve their sustainability objectives. This is truly something the entire Dana family is committed to isn't electrification big.
Comes a larger part of our business.
On slide 12, we can see how growth any propulsion is evidenced in our sales backlog backlog.
Our three year sales back log through 2020 remains a strong 700 million with electric vehicles, now, making up 15% of our growth.
We expect to realize 350 million of incremental new business in 2020.
This is a 150 million dollar increase from the prior outlook for that for this year due to the stronger demand for key light vehicle platforms, including the new Gladiator and additional sales from acquisitions.
We expect an additional 350 million in incremental sales into 2021, driven by new programs such as support Bronco in the full run rate of the medium duty truck programs.
Looking out to 2022, let me remind you that we always show our backlog as a net number and while we continue to see new launches across all of our businesses, we will be rolling off production of the GM, Colorado Canyon program in that year as you can see on the chart other new business wins that offset the impact.
Of that single program and we will at a minimum maintain the 700 million of cumulative new business growth considering we continue to pursue numerous new programs that will launch in 2022.
Turning to slide 13, I'd like to close by sharing some thoughts on economic environment as we look forward through 2020.
Binney on the left class eight truck production, which are only about a third of our North America commercial vehicle business is expected to be down this year with volumes in the range of 210 to 230000 units compared with approximately 335000 units in 2019, a peak year for the industry.
We have fully anticipated this downturn and as a result continued take the necessary actions to rightsize, the business and exercise appropriate cost savings measures.
We're also expecting demand for off highway equipment to be lower this year.
Likely in line with the demand levels, we saw in the fourth quarter of 2019.
Moving to the center the slide after a few years of increasing commodity cost input costs, such as steel and aluminum aluminum have been steadily moderating which is expected to provide a modest tailwind going into 2020, Jonathan will cover this in more detail in just a moment.
And finally, we see the resolution of global trade disputes as a positive for overall business environment in 2020.
The uncertainty surrounding the trade deals weighed on the end customer demand as many refrain from making capital investments until the speech were settled.
The first phase of the United States and China trade deal completed in mid January.
We expect our customers are important export vehicles in the country to see a more stable demand environment.
In addition, mobility industry is pleased that new United States, Mexico, Canada agreement or U_s_m_c, a was signed into law less than two weeks ago.
As you may be aware the day after the signing in Washington, DC, we're honored that the present in the United States Jos Dana to host an official and important policy speech outlining the new agreement.
There were just not mine the White house has great appreciation for the legacy and contributions the data has made on American manufacturing for over 116 years.
We believe the passage of U_s_m_c, a will provide a much needed modernizing of the 25 year old NAFTA agreement.
Like our customers Dana relies heavily on regionally integrated supply chain and we believe this law will further allow north America mobility production to remain competitive globally.
Before I turn it over to Jonathan I'd like to say how much I appreciate the outstanding performance of our Danna team. This past year as we have executed our strategy, including the successful integration of acquisitions, while we still have a lot more to do I'm excited about the opportunities for the future and our continued dedication to driving future growth and innovation.
Thank you and I'd like to turn it over to Jonathan to cover the financials.
Thank you Jim Good morning, everyone Slide 15, as an overview of our 2019 fourth quarter and full year results compared with the same periods in 2018.
Fourth quarter sales were just shy of 2 billion, an increase of 14 million compared to the same period in 2018, driven by the conversion of our backlog and acquisitions offsetting the lower market demand for heavy vehicles.
Adjusted EBITDA for the quarter was 226 million for a profit margin of 11.4% a 10 basis point improvement over the prior year I'll cover the profit drivers on the next slide.
Net income was 85 million 15 million lower than 2018, largely due to higher interest depreciation and integration expenses related to acquisitions as well as expenses associated with the refinancing of a tranche of our senior notes diluted adjusted EPS, which excludes the impact of nonrecurring items was sick.
67 cents lower than the prior year by nine cents, primarily due to higher depreciation expense adjusted free cash flow was 218 million 23 million lower than last year, primarily due to higher capital spending.
For the full year sales were 8.6 billion, an increase of 477 million compared to 2018, driven by the conversion of our backlog acquisitions and strong organic growth in the first half of the year more than offsetting the lower market demand for heavy vehicles in the second half.
Adjusted EBITDA for 2019 was over $1 billion for the first time and the company's history for a profit margin of 11.8%.
Net income was 226 million about 200 million lower than 2018 due entirely to a onetime charge of 259 million related to the transfer and elimination of pension liabilities earlier in the year.
Diluted adjusted EPS was $3 in six cents, a four cents improvement over the prior year on higher earnings as the share count remained relatively unchanged and finally adjusted free cash flow was 272 million 29 million higher than last year, primarily due to higher profit and lower working capital requirement.
Please turn with me now to slide 16 for a closer look at the sales and profit growth in the fourth quarter.
The growth in fourth quarter sales and adjusted EBITDA compared to last year is driven by four key factors first organic market headwinds primarily in our heavy vehicle businesses lowered sales by 114 million compared to the fourth quarter of the prior year profit was 20 million lower than 2018, primarily due to the loss cost.
Contribution on a lower market demand, but was partially offset by indirect tax recoveries in Brazil that had been adversely impacting our business for quite some time second inorganic growth from the Graziano in Fairfield acquisition contributed 161 million in sales and 25 million and profit for the quarter, which expanded.
Margins by 30 basis points offsetting the comparable compression from the aforementioned organic market headwinds third the stronger us dollar compared to keep foreign currencies lowered sales by $18 million and adjusted EBITDA by 3 million, but had a negligible impact on margin.
Finally, lower commodity cost compared to the fourth quarter of 2018 expanded margins by 15 basis points as gross commodity costs decreased by 16 million for a net profit benefit of a million.
Please turn with me to slide 17 for a closer look at how the fourth quarter adjusted EBITDA converted to adjusted free cash flow.
As a result of the seasonality of our working capital we generate most of our free cash flow in the fourth quarter, we generated 218 million and adjusted free cash flow for a margin of 11% primarily from a more than 200 million reduction in working capital and amount similar to the same period in 2018.
Capital expenditures increased by nearly 40 million compared to the fourth quarter of the prior year as a result of acquisitions and investments to new programs in order to deliver our backlog.
Please turn to fee now to slide 18 for a closer look at the sales and profit growth for the full year of 2019.
As with the fourth quarter the change in sales and adjusted EBITDA for the full year compared to the prior year is driven by four key factors first organic growth was essentially flat on both the top and bottom lines as our 350 million of backlog offset softer end market demand, particularly in the heavy vehicle markets and.
On the impact of overlapping production of the new an older model Jeep wrangler in the first quarter of 2018.
Second inorganic growth from the acquisition of the Graziano in Fairfield business contributed 630 million in sales and 87 million in profit last year conversion on inorganic growth steadily improve throughout the year as we executed our cost synergy plan as Jim mentioned, we successfully pulled ahead cost savings compared to our original plan.
Despite softer end market demand, we delivered approximately 25 million in cost synergy savings in 2019, which is 15 million higher than our original full year target. This strong acquisition integration performance is responsible for 15 basis points of margin expansion.
Third the U.S. dollar strengthened throughout the year against key foreign currencies lowering sales by 177 million and adjusted EBITDA by 22 million. However, the profit margin impact was insignificant.
Finally, the full year impact of commodity cost increases compressed margins by 15 basis points nearly 30 million of gross cost increases were offset by approximately 20 million of incremental customer recoveries in the form of higher selling prices, resulting in a net impact of a 9 million reduction to profit.
Please turn with me to slide 19 for a closer look at how the full year adjusted EBITDA converted to adjusted free cash flow.
We achieved our 2019 adjusted free cash flow target delivering a margin of 3.2% or 272 million, which was a 12% increase over the prior period.
Growth in adjusted EBITDA, combined with lower cash taxes, and lower working capital requirements were partially offset by higher one time and debt servicing cost related to acquisitions and capital expenditures to support new business growth.
The 20 million reduction in cash taxes was primarily due to tax planning initiatives and incentives.
As a result of flat organic growth working capital remained relatively unchanged in 2019, resulting in a year over year improvement to the change in working capital of $117 million.
Please turn with me now to slide 20 for a look at our full year guidance for 2020.
As we look forward, we are expecting the weaker end market demand for heavy vehicles that emerged in the second half of last year to continue this year lowering our sales about 1% or essentially flat with last year on a constant currency basis to about 8.5 billion at the midpoint of our range, we expect adjusted EBITDA to be about a one.
Billion at the midpoint of our range, which implies a profit margin that's comparable to last year, notwithstanding a relatively flat top and bottom line, we expect our cash flow to improve dramatically. This year, we anticipate adjusted free cash flow margin will be in the range of 4% to 4.5% for 100 million increase over last year driven.
By lower onetime cost related to last year's acquisitions and lower capital requirements.
Based on recent trading levels. This represents a compelling forward free cash flow yield of more than 15%.
Diluted adjusted EPS is expected to be in the range of $2.65 to $3.15. The midpoint of this range represents a mid single digit declined from last year and is primarily driven by the 2% decline in adjusted EBITDA and higher depreciation expense from recent capital investments.
Please turn with me now to slide 21 for an overview of our market expectations that underpins our financial guidance.
This chart provides a summary of our vehicle and equipment volume expectations for this year compared to last year. The arrows in colors indicate the direction and scale of movements as shown in the legend at the bottom left hand corner of the page I'd like to draw your attention to three quick highlights on the chart. One we expect the North American class eight market.
To declined by more than 30% compared to last year. This is the primary reason sales in our commercial vehicle segment are expected to decline by 150 million this year to across the globe. We expect off highway volumes to decline compared to last year, when we already experienced a meaningful reduction in demand in the second half of 2019.
From a combination of all three core segments agriculture, construction and mining, we anticipate a reduction of 350 million in sales.
The combination of these variables leads to a total reduction of a half a billion in sales or approximately 6% compared to last year. Fortunately due to our continued commercial success that Jim highlighted earlier in the call our new business backlog is expected to temper about 70% of this market decline. Please turn with me.
Now to slide 22, where I will highlight these as well as other drivers of our expected sales and profit changes for this year.
As with our earlier comparisons shown here are the four factors driving our expected sales and profit for 2021st organic growth is expected to be a net 150 million headwind to sales as our new business backlog of $350 million will offset a large portion of the slowdown in our heavy vehicle end markets that I just detail.
Hold on the previous page.
Decremental margins will be higher than ordinary due to unfavorable segment mix and the normalized tax expense in Brazil second inorganic growth from the Graziano in Fairfield businesses is expected to add 120 million in sales and about 25 million and profit contributing approximately 10 basis points of margin expansion.
Since two months of incremental sales as we completed the transaction at the end of February last year as Jim mentioned, we expect to complete the remaining cost synergy projects this year, which will yield an incremental 15 million of savings.
Third we anticipate the impact of foreign currency translation to be a headwind of 65 million to sales and about 10 million to profit with no margin impact and finally, we expect that commodity cost tailwind of about 15 million in profit since our input costs will be lower recoveries from customers will also be lower.
Our representing about a 30 million sales headwind the combination of lower sales and higher profit will generate 25 basis points of margin expansion.
Slide 23 illustrates the expected seasonality of our sales and profit for this year, the grey columns and diamonds on the chart represent last year sales and profit margins as reference points and the solid and dotted curves delineate our expectations for this year.
We typically achieved peak margins in the middle of the year last year was an exception to this rule as heavy vehicle market demand declined in the second half of the year lowering margins compared to the first half given we anticipate a consistently lower level of demand in the heavy vehicle markets. This year, we expect a more normal distribution of our sales and profit.
Please turn with me to slide 24 for more detail on how we expect the full year adjusted EBITDA will convert to adjusted free cash flow.
Our full year outlook for adjusted free cash flow margin as in the range of 4% to 4.5% representing about 100 million improvement over last year slightly lower profit will be offset by significantly lower onetime costs, lower working capital and reduced capital spending.
We believe it this year marks a meaningful inflection point in our free cash flow profile and that we will continue with higher cash generation in the coming years.
Please turn with me now to page 25, where I'll provide some color on how we intend to use this cash and consonants with our capital allocation priorities.
The Pie chart at the left of the page illustrates the major uses of free cash flow, we expect to generate over a five year period from last year through 2023, We introduced this chart at our Investor Day last March and since then we've deployed capital to three of these areas. We have illustrated these actions and our future plans in the timeline below.
Last year, we made the most of an attractive opportunity to fund and terminate a pension plan in the U.S. effectively eliminating a 165 million net liability with 60 million cash contribution.
This action improve the quality of our balance sheet by extinguishing a long term variable debt like item. We also deployed capital by executing a series of disciplined acquisitions that yielded new technologies and capabilities necessary to move the company forward into electrified mobility. We did both of these while maintaining our commitment to our.
Our attractive dividend payments, which are generating a yield of nearly 2.5% based on recent trading levels. As we look forward to this year you can expect us to remain committed to the dividend the remainder of our free cash flow will be directed towards Delevering. We have turned loans in our senior secured credit facility that can be repaid immediately without incurring.
And call premiums will take advantage of this feature later this year as we progress towards our net leverage target of approximately turn.
The term loans in the rest of our debt structure as illustrated on the right hand side of the page in November of last year, we refinanced our 2023 unsecured notes extending the maturity by four years and reducing the interest rate by five eight silver point.
It's also worth noting we have no significant debt maturities for the next four years.
The combined improvement in our free cash flow and leverage profiles should help us to achieve investment grade credit metrics in the next couple of years, a fortress balance sheet enhances our appeal as an investment but it also signals to our customers that were a stable partner with the financial strength required to maintain commitments to product technology through demand cycles.
Yes.
I'd like to thank all of you for listening in this morning, I'll now turn the call back over to Carmen. So that we can take your questions.
Thank you at this time I would like to ask a question Chris Star one on your telephone keypad again that is star one.
Hello for your first question.
Your first question is from the line of Aileen Smith with Bank of America go ahead.
Good morning, guys first question on the backlog as a point of clarity what do the shaded versus non shaded boxes. In this chart on slide 12 for 2021 represent is that business that you'd actually booked versus expect to Buck and then relative to your prior backlog asset 2020, Ron is a little bit lower which would make sense give.
Then the end market trends, but that totaled 2021 is relatively similar is that reflective perhaps of lower end market demand, but dana seeing better traction for its products and let customers.
Sure. Good morning Ali in this is Jonathan relative to how to read the chart. The Blue portion of the chart represents the incremental portion for that year.
Which just carries over into the following years and then as you get to the right you get the accumulation of all three for the three year backlog amount.
Relative to the changes in each of those pieces of the backlog. The 2020 number is actually about 150 million higher than what we previously put out.
The 2021 number is slightly higher and then the 2022 number is a new number and Thats flat based on the dynamics. We indicated couple of things that have driven up the numbers from where we were at least the first two tranches from the prior.
Numbers, we had out there. The first is we've incorporated the acquisition. So previously the graziano in Fairfield backlog were not included in the numbers. When we came out early last year.
Second we have up to 15% to the backlog now thats coming from electrified vehicle sales that was a very small number in the prior year and then the third number we've indicated before particularly in the 2020 traunch that's coming on.
We had use some pretty conservative volumes in the compact pickup truck segment for this year.
We have a couple of key programs that are driving that the gladiator the Ford Ranger and we wanted to make sure that there was plenty of room for those vehicles in the segment.
And we've seen strong build rates and sales of those vehicles. So we're more comfortable with the projections that we have going forward. So hopefully that gives you a little bit of color on what's driving the chart and what some of the changes where compared to last year.
Yes, Thats very helpful commentary on second question around free cash flow you noted on slide 21 that you're looking for adjusted free cash target margin of 4% to 5% for the next three years, 5% free cash flow as a percentage sales is kind of in that target number from you guys for the past several years. So when you think about some pretty choppy end markets and other external macro fact.
Areas versus what you can execute on from an internal perspective with acquisitions and integration what does the bridge from 4% to 4.5% this year to that 5% target look like.
Sure I think the most significant factor we would expect beyond 2020 as a contribution I think incremental profit. So we said we believe this will be a 10 billion dollar business by 2023, a combination of backlog coming online, but also getting some market recovery. So we don't believe that.
The heavy vehicle end markets will be compressed much longer we think we'll see a softer year next year, but we would expect that to pick up in 2021 and beyond that combined with continued discipline on working capital and on capital expenditures gravitating more towards the the 4% level is what gets us to the to high end of.
The range that you just referenced in closer to our long term target.
Great and one last question I may on following on commentary with your capital allocation priorities and paying down the term loan is that a comment at all on what you're seeing in the M&A pipeline, we've seen some pretty big deals in the market recently.
Is there any opportunity that you want to keep some dry powder on the balance sheet for or is this more an internal refocusing and integrate integrating the acquisitions you've already made.
Yes, it has a bit more to do with the fact that the transactions that we've completed in the last couple of years have given us the key pieces that we need particularly to complete in.
The electric vehicle propulsion segment.
So we believe we're at a place where we have the core components in the portfolio, we're going to focus on delivering that technology and we think it's the right time to continue to further strengthen the balance sheet.
Great. Thanks for taking my question sure.
Your next question is from the line of Dan Levy with Credit Suisse go ahead with your question.
Hi, good morning.
Thanks for taking the questions Hey, good morning.
A couple of questions on.
On off highway please.
This first.
If I look at slide 21.
Note that the core off highway end markets are going to drive revenue down $350 million, that's a 15% drag on off highway revenues up quite a bit.
But as you break down the sub.
End market outlook ex Europe mining you don't flag any of these end markets being down more than 10%. Some you actually have flat. So recognize there's probably some mix that's going on here, but could you talk to the underlying mix dynamics, which are driving the magnitude of this decline.
Versus sort of the overall end markets not being down as much.
Sure. Your intuition is right. It is a product mix issue within those three core segments I can give you a couple of examples the numbers show the total units, which includes everything and obviously were more concentrated on some specific applications. So the first I'll give you in agriculture is obviously, we're not a major player in.
Large open field tractors and combines.
But we're a larger player in smaller tractors. So we see more softness in that proportionately compared to the larger. Another example would be within construction. So remember we're a major player in material handling and Thats a segment that we see now being down more than somebody out or categories. If you'd see so those are just a couple.
Of the example, why while the market may be down mid to high single digits were down on a double digit basis.
Understood Great and then the second question on on off Highway.
In the past Youve talked about the ability to flex costs in that segment and maybe one to two quarter lag, but we've actually done pretty well specialty during I think the tough years of 14 15.
You mentioned on slide 22 that part of the high Decrementals on segment mix and presumably that would just reflects weaker off highway how should we consider the opportunity of flex costs is that.
Additive to to the guide potentially or how should we be thinking about off highway.
Margin in the opportunity to flex back costs mitigate some of those declines.
Sure I think you touched on a couple salient points. The first is the timing associated with it. So we think that the costs flex within off highway will continue to improve we can do better than we did and even the third and fourth quarter, where we saw pretty rapid drops in demand in both the third.
Fourth quarter, we had to guide towards the lower end of our range late in the year moving into this year, we've taken a pretty conservative look we're assuming the off highway markets are going to stay relatively depressed for the full year, which gives us opportunity to take actions and see those effects on a couple to a few month lag. So we think we'll do better this year relative to the.
Opportunity, we think thats largely reflected in our guidance and really the reference to the segment mix is the fact that the backlog is coming in in our largely in our light vehicle segment, which you can see on the backlog slide and that typically comes at an a contribution margin pretty close to 20%, but given the off highway businesses.
As a more profitable business, we will typically see conversion margins or downward contribution margins north of 20%.
Even with a strong cost flex so thats really what we were referencing in the in the segment mix.
And to the extent that there is cost flex theres no cash restructuring that's associated with that that would threaten your free cash guide is that correct nope those costs are relatively small.
Great. Thank you.
Yep.
Your next question comes from the line of Noah Kaye with Oppenheimer.
Good morning, good morning, Thanks for taking the questions.
Obviously, you highlighted the paccar powertrain win.
15% of backlog.
Can you talk about the mix of easy and hybrid in the new program opportunities, you're seeing in quoting on and which segments you see most potential free viewed to be a greater contribute to future backlog.
Sure we've highlighted before if you go back to some of the things that we laid out in our Investor day, almost a year ago.
The commercial vehicle spaces is leading in this area and in particular the medium duty segment. So our first major when came from there and I would say that it's fair that.
A meaningful portion of our quoting activity within that part of the commercial vehicle business.
His his electrified and we would expect to see further growth towards our half a billion dollar electrified sales target in 2003 coming from the medium duty segment thinking.
Urban delivery and then maybe some more heavier applications in urban transportation, where we see opportunities as far as our other segments are concerned we are seeing some growth, but it's still a relatively small percentage in both the off highway.
Segments are multiple off highway segments construction applications small excavators.
We're certainly seeing some ramp up in activity.
Aerial work platforms, which are fully electrified or another area, we see more and more activity for opportunity and growth in planetary hub drives under the Fairfield brands that are being electrified by Ash Woods Motors.
And then also within the mining segments. So as that segment grows in new mines are being Doug Theres, a cost benefit to putting in electrified vehicles to not have to make the investment to put the exhaust systems in the mine. So those are a couple of areas that we're seeing increased activity in off highway and then in the light vehicle Theres a lot that we're working on with our customers on now.
Got a lot that some public out there, but we continue to work on our core segments more full size eshoo fees.
And pickup trucks working on applications and solutions for those customers that we should see in the in the coming years.
That's very helpful. Roundup. Thanks, then I guess just on the market outlook assumptions for 2020 I. Certainly these these are all reasonable and looking at run rates over the past.
Several months.
Makes sense.
But just given that we're starting to see some modest improvement in Florida industrial indicators.
Yes, and other areas, where you feel like there maybe some more upside here, where you maybe relatively conservative you. They kind of color that your customers are giving you that would inform that perspective.
Sure maybe I can touch on the numbers in our assumptions and Jim might be able to add some color on what you're seeing in the market, but we've taken a view for 2020 that demand in off highway is going to be relatively depressed.
For the balance of the year certainly some of the indicators with trade deals could help. We've also got other concerns obviously with the current a virus in China that could have a near term impact so only away all those together will be carefully looking at sentiment with our customers in the upcoming trade.
It shows in the next couple of months to get a sense of of where they see demand, but if things were to pick up a little bit from where they are that would represent some some modest opportunity to the numbers that we've we've guided to.
Yes, not really a lot to add to that this is Jim good morning. Thank you.
Jonathan said kind of Expos coming up construction Expo up at Las Vegas and.
Kind of working the Earth and the customer base, we feel pretty good about the volumes, where they're at especially in the platforms, which were on considering as we all know by now being in truck and up and.
We have the peaks and troughs of off highway, but with some more stabilization at least what we saw at the end of last year.
Okay very helpful. Thank us much.
Sure.
Your next question is from the line of Emmanuel Rosner with Deutsche Bank. Please go ahead.
Good morning, everybody.
Hey, good morning manual.
So wanted to drill bits.
On your outlook for 2020.
Starting re with with margins so.
Sort of flattish guidance overall, and the puts and takes that again highlight for us by by segments is it's roughly flattish in general or are there.
Big variations within that.
Sure I think probably the most careful thing we'll be watching is heavy vehicle demand probably more in the off highway segment. So that's a market that tends to move up or down a bit quicker than we'd expected. So we'll be carefully looking at that and when that does come back whether that's later in the year or early.
Next year, we'll look to see really strong contribution margins on those incremental sales that could provide.
A little bit of wind in the sales to expand our margins. The second thing we continue to watch carefully our commodities. So we've seen commodity prices continue to fall in the second half of this year.
We broke positive in the fourth quarter and we're looking at those to the extent that the commodities continue to move down there could be a little bit more opportunity there, but I would say those are two of the variables that we're watching more closely is demand and input costs.
As meaningful drivers to our full year performance.
And that's helpful and then your base case scenario.
Can you provide some directional outlook bye bye.
By segment for the margins.
Sure because margins are flat, we expect relatively flat margins in most of our segments I'll start with light vehicle they've got some backlog coming on so we should expect to see just a little bit of improvement in the light vehicle segment commercial vehicles going to be a little bit under pressure next year not.
Particularly because of the volume declines we've indicated before that the class eight over the road applications are not our most profitable segments. So we think we'll manage that well, but it's really a step up in investment in the electrified program. So in order to deliver those programs that Jim talked about earlier in the call were.
To be making some pretty meaningful investments and that'll put a little bit of pressure on the CV margins. We think off highway is going to do a pretty good job of managing the volume downturn and we think they can keep their margins pretty close but dive a little bit of pressure due to lower volumes.
And then we see a little bit of opportunity for our power Tech segment to improve modestly the drivers there have been lower volumes outside of the U.S. and while we expect those to remain relatively soft we see an opportunity to improve.
Our cost in that business as we move past some of the major launches that occurred last year in a couple of our key thermal products.
And that combined with a little bit of alleviation of commodity prices should help to to give a little bit of opportunity. There. So these aren't big movements, but maybe you know tens of basis points either direction in each of these businesses that kind of get us to a pretty flat margin profile in that in 2020.
And that's extremely helpful. And then just maybe finally sort of when they look at your solid backlog in 2022 dozen 21.
Potentially what could have been 2022 axa roll off is there like a larger and longer term framework to think about in terms of your potential grows above markets when you're thinking about your technology in sort of like the adoption of it the the work that you're doing the certification is there a little bit or framework, where we can see.
Okay. This is dana is targeting to grow exponents above its underlying markets.
I think the best thing I could point you to a manual is the growth.
Profile of the electrified business compared to the traditional business. So we remain convicted from our early program wins.
That electrified propulsion systems are going to come at a content at least double of what a traditional sistemas. So it's really going to be applying that to our share of the market that we win and the adoption within each of those segments. So we think in the near term as I mentioned, we think it presents a really attractive growth profile for the commercial via.
Well business to grow above the market.
But then we also going to see it come in our light vehicle in our off highway segments as well too. So that's probably the most significant driver of our longer term growth beyond even this this few year period that we highlight in the backlog.
Great. Thank you.
Sure.
Your next question comes from the line Joe's back with RBC capital market.
Thanks, Good good morning, everyone.
Yes.
And just want to go back to.
Dan Dan Levy's questioning about some of the Decrementals in.
The corresponding off highway.
Market assumptions is part of that large decremental also because.
I think historically in mining you've got a decent aftermarket business and that is expected to be.
Down as well.
Yes, certainly aftermarket in both the commercial vehicle and off highway segments are a meaningful part of those businesses I.
I wouldn't say that the rate of decline for aftermarket is as high as the OE that we're looking at it next year, but because of the profit profile. It does put some pressure on that but really the segment mix is just about the profitability difference between the off highway business Thats declining meaningfully and the light vehicle business that is growing with backlog.
At lower margins and then we also highlight the fact that we'll have a more normalized tax expense in Brazil next year, which as a part of that organic conversion that that makes the decrementals a bit higher so it's really more of those latter factors than the aftermarket decline in 2020.
Sorry, why does the tax change impact the decremental on EBITDA sorry, yes. It was just the the recovery that we achieved in 2019.
It was a benefit that we won't see again in 2020 and that was apart was lumped in with the organic change.
And just to be clear I'd say, it's an indirect tax not the not the income tax.
Okay.
So.
If we could shift gears to the free cash flow and I guess slide 25 like.
We just.
Role on your backlog assume sort of middle market recovery.
And then you know.
You can sort of achieve someone at 4% to 5%.
You're talking about.
It looks like over 1.5 billion of free cash flow over that over that period.
I know you're talking what you're saying you know some deleveraging.
This year, but if I look at the chart on 25.
It doesn't look like.
Our amounts of of that term loan I mean are you I guess, one are you, saying you're going to spend youre going to retain more than just 15 that sort of matures in 20.
And I guess, even beyond 20.
Should we really think about.
Beyond the deleveraging that you expect to occur this year.
The focus will then really shifts more towards share repurchases and sounds like you. You think you have what you need from an M&A perspective.
Yes, I think what we were trying to illustrate Joe with that timeline on the bottom as that of the 375 million a cash flow will pay our dividend, which we expect to be about $60 million in the balance which is around $300 million would be available to de lever and whats reflected on the debt maturity profile is just what to do that year, but we tried to.
Highlight that Theres those tranches of the term loan both the a and b in.
24, and 26, respectively can be prepaid without any call premium. So we would intend to prepay some of that this year and then looking to next year, there's still plenty of opportunity to prepaid that efficiently and then as you know maybe by the time, we get to the 2022 timeframe our leverage is closer to the one.
Turn that we would be expecting and then at that point, we can look towards reevaluating opportunities for more aggressive share repurchase store or M&A opportunities, but we're really trying to signal in the near term theres an attractive opportunity for us to use some of this cash to continue to strengthen the quality of the balance sheet.
Okay.
So you didn't 20 or any of your expected to repay some of that.
20 426.
Terminals and should we think about sort of balance of the free cash flow. After the dividend is sort of roughly the magnitude of that pretend yep Yep. That's what we're trying to illustrate on that bottom timeline. There is the dividends will take a piece and then the rest will be available.
For Delevering.
Okay. Thanks.
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Question.
Okay.
Right.
Hi, guys just on the electrification spend.
It's it's within the bullet of your capital spending on the free cash flow slide.
But John if in your commentary on off highway.
Margins are I'm, sorry on commercial vehicle margin sounded as though that discretionary spend is going to hit the BNL. So just curious what.
What actually is hitting where.
Yes, it's a little bit of both so the engineering span spend in the program spend to deliver programs a lot of that is operating expenses that will run through adjusted EBITDA, but we're also making some investments in capital expenditures, what we're trying to highlight on page 24 with the capital spend.
Turning is that we believe in the long run we can still get closer to about 4%, we're guiding a little bit higher than that this year, because we're making some discretionary investment our head of program wins to build out some of that capability in internal production of electrodynamic components. So it is a combination of both.
As you noted, but a little bit of pressure on the CV margins, but also we're making some expenses are making some investment and capital expenditures as well.
Got it okay, so little bit above and then just thinking about your electric if you are electrification business today.
If we go back to your 2018 analyst day, you size the revenue.
The revenue pug revenue pie of a 100 million.
Just wondering what's that number as of yearend 2019 and.
Can you would you be willing to talk about the margin profile that business today.
Yes, sure I can give just a little bit of an update but it's going to be pretty consistent with what we shared last year, we said that 2018.
Sales for electrified products were about 100 million, we expected them to grow to about a half a billion by 2023 and that the progression over that period would be pretty linear I would say that's continued to be the case, we saw growth and electrified products. In 2019, we expect nice growth in 2020, we'll get a little bit of an inflection.
In 2021, as we see the that Peterbilt and kenworth programs that Jim highlighted really start to ramp up and then relative to profitability we're still.
Year to away from starting to see healthier margins in that segment and get to a more critical mass, but we did indicate.
At our analyst day last year that we expected that to have a healthy margin contribution by the time, we get a few years out.
Got it.
Okay, and then just just spin light vehicle, if I scrub one Q nine change Wrangler program impacts.
Then after go all the way back to 2014 to fight it to fund inorganic decline for that business. So just wondering what played into the fourth quarter was it mainly strike related just wondering with the key dynamics for.
Yes, the only meaningful factor for that business with some of the demand outside of the U.S. So the north American market for full frame trucks was pretty strong we saw a little bit of softness.
In other regions the impact for us on the Jam strike was pretty small, but it was more of a geographic mix in the quarter that drove light vehicles.
Topline.
Okay, and just last one on power technologies, our launch costs fully out of out of the way and that is the mix backdrop.
Pretty favorable.
For 2020 at this point.
I will jump on that one that I can jump in on that this is Jim as you recall in your on it I mean as you recall there was really three variables that associated with a little bit tougher times in what we're used to that most of it was low volumes and some of the key markets and secondarily commodity costs. So only the third variable in that was launches and taking on a lot more higher.
Content per vehicle, we are certainly through that.
We're now now we just got to let the volumes kind of come back the other side and as I mentioned in my prepared statements, we see commodities hopefully anyway being a tailwind for us in the next year.
Thanks.
You're welcome thank you.
Your next question comes from the line of Brian Johnson with Barclays. Please go ahead.
Hi.
Morning, Brian.
Good morning, I want to talk a bit more strategically and in particular the pack our medium duty when couple of questions first.
Roughly how many trucks and in particular is say.
Prototype for test fleets are actually a scale up of line production.
Second kind of want to get a sense of how all the acquisitions.
On the right hand side at page six kind of came together for the integrated content that you were able to bring the packers and kind of where that position going forward.
Sure. Good morning riots, Jonathan I'll, just touch on the Paccar program to try to dimension. It for you. The best we can and then Jim can talk a bit about the acquisitions.
As it relates to the Paccar program, we've mentioned that it's a three year program that starts at the end of this year most of the sales.
We'll really ramp up in 2021 through 2023, it's a 200 million dollar program is what we're targeting.
Yes, we're not going to disclose the content per vehicle at this point, but suffice to say, it's a dramatic increase over what you would typically see on a medium duty program, where we provide the driveline, we're going to be private providing the fully propulsion system, which will be in electrified drive line as well as the power system, which is going to be the battery battery.
Cells modules impacts, but then more importantly, while providing the entire vehicle systems controls the embedded software to operate the the propulsion of that vehicle. So a full electrified powertrain, but what we can give you as its $200 million program over the three year period and as a pretty sizable.
Increase from where we are and then maybe Jim can touch on the acquisitions, Hey, Brian Good morning, its Jonathan just had its Jim So just kind of some background there over the last 18 months ish, we'll get it exactly right. As you recall, we started the process or I should backup just slightly before that was the for BT power electronics was part of that.
Kind of stealthily that was integrated in the company that was a starting point. Besides the fact that as I said in my prepared comments, we truly head to head Ed retained for approximately 50 years, some development in one form or fashion on electrified vehicles anyway moving forward on the remaining than we hit the team for peace.
Which was probably July of 18 Thereabouts and then we did the olbrich road or the rest of them a couple of them integrated within the Oerlikon acquisition. For example, the voices piece, the ashwood piece et cetera.
And then of course, SMB, which is again on your low voltage synchronized motor capabilities and Inverters that was headquartered out of Italy, and then address it was kind of a linchpin to putting a lot of it together, providing which is us outside of Montreal, which was allows us the full capability of pulling the vehicle dynamics together software controls et cetera et cetera. So.
Thats the background to it and Thats how it all comes together Weve, therefore, no different than Dana what we would call more the classical.
Classical products, where we had a distributed technology model around the world kind of benefiting from where the capabilities of people are that's exactly what we've done with our you propulsion.
Full pull system in organization because that organization.
Supports all of our business units, we don't we don't reported that such it wouldn't be able we wouldn't be able to do that but be assured that were structured as such to be able to ensure that we have the operational efficiencies the engineering efficiencies and all the other things that go along with it. So hopefully I answered your question, there, but thats kind of the background I think thats what you are looking for.
Yes, yes, and in particular, just a follow press around software sort of ongoing data collection.
One thing Tesla.
And as a bear.
Sometimes what seems to do well, let's get data on the battery management, the power electronics, and so forth and use that update control algorithms.
Nor do raise that you have that capability with APAC. Our program will you be able to harvest data from the fleets that are out there.
Is that the refine your control algorithms and that.
Yes, what you're describing is certainly.
Sure sorry, Brian cut out there it's higher finished.
Certainly that capability that you described is going to be an important part of.
The software systems in electric vehicles, we will be partnering with.
Our customers and fleet operators to ensure that they get the full experiencing capabilities of the the software controls in electrified vehicles system.
The key piece to US is that you that delay that your product.
Yes, I think thats something that we'll continue to emerge in the coming years, but the near term focus is going to be on making sure that we support our customers and fleets and having the best experience with that vehicle.
On an ongoing basis.
Thanks.
Your next question comes from the line of Ryan Brinkman with JP Morgan. Please go ahead I.
Hi, Thanks for squeezing me in a couple more on electrification firstly.
How do you see the 15% mix of your backlog you mix evolving Greece.
In coming years.
And what market share do you expect to command and electrification content versus in your more traditional business understanding of course that content per vehicle is much larger so maybe it doesn't need to be as high and then finally in electrification. When you bid for these programs I do find yourself bumping up more against your traditional light and commercial vehicle driveline competitors like American axle.
Borgwarner meritor et cetera versus maybe more less levered technology type companies, you've not traditionally competed with.
Sure to the first part of that relative to the proportional.
Impacted electrified versus internal combustion in the backlog based on the growth that we expect to see and electrified products or the next year as I would expect that to increase we certainly don't think it's going to be a majority here within the next couple of years, but you can see it to continue to move up in order for us to get to that.
Half a billion dollar number that we have out there for 2023 on electrified sales.
The the last part relative to.
The.
Perspective on electrified sales and how quickly that will grow it can just reemphasize that we see the greatest opportunities in the commercial vehicle space in the near term, particularly in medium duty lot of focus and attention. There. Other work that's going on for development is probably coming a little bit further out.
And then on the competitive landscape I would say that we are seeing more competitors theres a lot of focus right now on.
Cementing wins in this category and we see we see a meaningful set of competitors across each of the spaces, maybe there's some jim I'd like to add to that yes, I would actually just supply there may be different competitors, but the way we look at our business I think it's important to reinforce we have never said, we were going to do get beyond our skis jump into the passenger cars.
Business do something that we don't do before and done before we're going to continue to leverage the experience and capabilities, we have in high torque and propulsion in the markets in which we participate.
And I always like to say it I think theres going to be to make it a reasonable kind of environment for everybody to be healthy we're going to have two competitors like we have in the past and we expected we expect to look at it like we always have which is we just want a third of our business do a great job for them and move forward and based on our in our 116 years largely anywhere from.
With many of our customer you take Ford Motor Company 116 years General Motors 114 years, but we'll disclose write down John Deere told me when to stop I think we're going to be and nice nice position to continue to do we've always done it would just be propelled versus just IC propelled.
Got it thank you.
Yeah.
Thank you and your next question comes from the line of fraud Shave with Wolfe Research. Please go ahead rod.
Hi, everybody.
Total remaining things just first of all you've had a really impressive set of wins and light vehicle driveline in the past couple of years and this Colorado.
Is the first loss or non.
Nonrenewal that I've seen in awhile could you maybe just address what happened there and.
Was that something that just didnt meet your criteria or some other reason.
I would just say this thanks for the question around Nicer voice I would just sit at Wynn Ceos going on these calls and they come up with the cheap suit answer in all those somebody else still that price and all the garbage I think thats ridiculous. So I'm not going to go into any positioning like that because what do I know I don't have some crystal ball I can only tell you that by our track record.
To your your inference when you just launched the wrangler in the Gladiator the range or in the escape.
We're going to launch the defender the new defender coming up Broncos Happing ended the year and we just one GM supplier the year for driveline I don't worry about it at all from a business capabilities, creating outstanding value. It's just sometimes programs move around and they move around in the meantime, we have to deploy capital and we're in a pretty good position, obviously deploy capital for all these.
Electrification wins, we have as well as the other opportunities throughout our business. So we just keep doing our job Theres no question that our customers are completely satisfied with us based on speaking with data not opinion.
Great Thanks, Jim for that and.
Just.
Maybe just picking on this this off highway decremental, which you said is going to improve this year Q4, I I believe the Decrementals were about 50% on this $350 million decline that you're you're talking about for next year could you just give us some some sense of how how much you can whittle that down to.
What are some of the actions, you're taking and where could that go.
Yes, the primary focus in the costs flex for 2020 is obviously going to be in the heavy vehicle segments. The margin profile for class eight is such that we think we can do a pretty good job there to limit the decrementals below 20%.
Lot of work to do in off highway, but that really started in the second half of last year. So the team has done a very nice job of flexing the cost structure, all the way down through the piano. So we see those benefits coming out of the gate in the first quarter. So I think.
The the guidance, we put out for this year is reflective of that and Thats. The plan that we're executing against and I think theres.
A good level of confidence in the ability to deliver the numbers for for 2020. So just to clarify do you think that the off highway decrementals can kind of moderate to the 30% range, where I believe you had been targeting in the past. We do you have been the only reason they've been.
Around that and higher in the second half of the year is just the timing issue.
In the near term once we see to schedules really starting to fall, which they did in the third quarter and came down even more in the fourth quarter. It takes some time stick. It takes some time to get these actions into place.
We feel quite confident that that those are in place and we'll see those benefits in the first half of this year, Okay and just lastly, Jim I was hoping you might talk about Powertech in how you think about that strategically relative to all the focus you have on electrification, making putting in the right places the right assets to grow.
The business going forward.
Any updated views on that part of it and how it fits and how how you continue to assess it.
I'll just give you one public service announcement that I'll answer your question Ive known each other for 30 years, I think right and as part of the roll up of vehicle interiors on that side and everything in between and the acquisition stuff. We've done I have no hesitation to evaluate our portfolio and make the right choices to reiterate value for our shareholders.
Thats not public service announcement relative to Powertech I tried to emphasize it a little bit in my prepared comments, but I would also I'd offer to the audience today don't underestimate for sure the value of which the especially the thermal management and thermal management is not only not only that that may.
During the early cooler capability, but also the ceiling capability on the side of business, what that's doing to help us accelerate our capabilities I'll take the pack our program take all the other programs. So we will look we will be very disciplined organization and not close our mines to opportunities to for assets in or out but in the means.
Time I can tell you that spent a great asset for us for a long period of time, and we're going to continue to too.
To utilize it in that front. So thanks for the question I know thats not a direct answer maybe but it's because guess what we're just going to run the business and we're really happy with that team and everything they've done for us over the years great. That's helpful. Thank you.
Thank you.
Okay with that front just I'll just close on a couple of things. Thank you all for your participation today, we always appreciate that the other thing I don't have an offer opportunity to very often is the thank the team that puts our deck together.
I'll take that opportunity this time, because it's for the first one of your we're providing the full year guidance and on the other stuff we must they must did it something right because almost all the questions were helped helped the audience answer a lot of questions on how they should think about us financially the rest of the questions, but really you folks did a really good job on that last minute at least I would close by saying I told team. This all the time, it's easy to tell.
Great story, when you have a great story to tell Fortunately they've done a great job with our customer support on electrification on growth think about it. The launch success you haven't heard anything about launches and Weve. The business has grown since 2016 over 50%. So I mean, you could go on and on and now the focus, especially with doing it but even more in sustainability in those types of things.
The company has focused the team is focused thank you for all your support we look forward to talk into the next time around.
Thank you. Thank you again for joining today's webcast you may now disconnect.
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