Q1 2020 Earnings Call
We do this by consistently delivering superior products and service to each and every one of our customers.
Dana improves the performance of passenger cars commercial vehicle off highway machines, and industrial equipment by making a positive contribution toward the way they are designed tested and manufactured.
Dana is the leading supplier of traditional electrified driverline solutions for passenger car crossovers Sq V band in light trucks, working collaboratively with the original equipment manufacturers and the aftermarket our light vehicle business unit is focused on delivering best.
In class efficiency maximum durability and superior ride and handling.
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Dana support the medium and heavy duty commercial vehicle with driveline solutions entire pressure management system.
Our commercial vehicle business unit help Oems and end market customers achieved the best weight performance deficiency in total cost of ownership no matter the powertrain configuration.
Dana off highway business units support construction, agriculture material handling and mining machines with conventional and electrified power sources. It also supports a wide variety of stationary industrial applications. Our customized solutions are designed to extend vehicle image.
Seemed like reduce maintenance and convey maximum power.
Dana's power technologies business units provides advanced feeling and thermal management solutions to all of our end markets in support of internal combustion hybrid and electric powered vehicle.
Leveraging the most cutting edge technology and manufacturing processes, we deliver custom engineered solutions designed to optimize vehicle efficiency and performance.
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For more than a century. Despite their brand has offered trusted drive train solutions for cars commercial vehicle off highway machines military vehicles and high performance applications.
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Good morning, and welcome to Dana incorporated first quarter Twentytwenty financial webcast and conference call. My name is CR and I will be your conference facilitator. Please be advised that are meeting today, both speak both the speakers remarks and acuity session will be recorded for replay purposes. There will be a question and answer period. After this path.
And we will take questions from the telephone only if he would like to ask a question. During this time.
Star and the number one on your telephone keypad to ensure that everyone has an opportunity to participate in today's Q1 day, we ask that callers limit themselves to one question at a time if he would like to ask an additional question. Please return to the Q.
This time I would like to begin the presentation by turning the call over to Dana Senior director of Investor Relations and strategic planning Craig Barber. Please go ahead mr. buffer.
Thank you and good morning, everyone on the call. Thank you for joining US today, you'll find this mornings press release and presentation are now posted on our Investor website. Today's call is being recorded in the supporting materials or the property of Dan incorporated they may not be recorded copied or rebroadcast without our written consent.
So let me remind you that today's presentation includes forward looking statements about our expectations for dana's 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 our reports with the SEC [noise].
Before we begin this this morning's call you may have noticed that our presentation cover image was not the usual product or market pictures, but highlighted what is a focus for dana today, namely getting fully back to work safely and taking care of those around us and we have fully embraced the separated together concept. So joining us remotely this morning, our Jim Kamsickas.
Chairman and Chief Executive Officer, and also Jonathan Collins, Executive Vice President and Chief Financial Officer, Jim would you. Please start us off.
Thank you Craig.
Good morning, and thank all of you for joining us I hope that all as well what you and your families.
As we've been navigating through the current virus for three to four months now starting in China earlier in the year certainly everything is change in the world. Since we last spoke with you in February.
We knew that colder 19 was serious but that was before we understood. It would become a global endemic and have such an impact on our lives businesses and communities.
Well these are unprecedented times I want to assure you that our business is strong and our priorities are to continue protecting the safety of our employees.
And communities supporting our customers.
And being prepared for the future.
Our financial Health is very good in a very good condition as our unique multi market business approach allows for operational flexibility needed to be responsible during this difficult situation.
Now turning to slide five I'd like to share with you. Some of the measures. We are taking to help ensure the safety of our most important and set our employees around the world.
Over the past several months, we have felt the power of the Dana family not just from the formal actions implemented across the organization to navigate crisis, but also the individual behaviors that it made a significant impact on the safety and welfare or people.
Together, everyone is done their part to ensure that we remain safe and the act responsibly, whether on the job or in the communities that we call home.
Through it all we've communicated a regular cadence with our employees. So that they can feel confident although they are working safely in a dana facility or in their home.
The sharing of information with our teams across the globe over the last months has helped us to make informed and quick decisions instilling confidence educating and enabling our global team to take quick and decisive action to protect our people while serving our customers.
In the end, we are a manufacturing organization and the real action begins inside the factory premises.
Accordingly, we've expanded our safety protocols, including implementing stringent disinfecting.
Social dispensing and hygiene practices in all facilities and asking employees. It can do their job remotely to work from home.
In addition to the many sake protocols, we've implemented our global purchasing.
Hello, Environmental and safety and human resources teams have worked tirelessly to acquire the necessary pp equipment.
As we work towards bringing more spill. The so these safely back online.
We will continue to fall government and health official guidelines globally and ensure that we're doing everything in our power to keep our employees sake.
Now turning to slide six I'd like to share with you. Some of the measures. We are taking to help communities, where we could business around the world.
One of the best ways to manage through crisis is to look for opportunities and that is exactly what the Dana family is doing.
As we all work to navigate the cobot 90 pandemic.
Well the tremendous pride at the efforts of Pete Dana people, finding a better way innovating and doing extraordinary things to help others in spite of such stressful circumstances.
During the height of the pandemic much of the world's health systems work and sometimes still are in dire need a protective equipment to protect healthcare workers to respond a number of manufacturers and suppliers and the mobility markets announced that they will utilize their world class engineering and manufacturing capabilities to help meet that need.
And I'm proud to say Dana has been part of this movement.
At our advanced manufacturing center in Maumee, Ohio, Our engineers design tested and produced Threed printed based shields or local health care professionals in less than a week, we used our engineering expertise to reduce the amount of material needed.
Reduce a version that is strong durable and lightweight it can be sterilized and reuse to date, we provided more than 3000 base yields but this was not down a little we're proud to work alongside many frontline providers and great partners in our community.
We also help to develop plexiglass intubation and excavation enclosures that allow doctors and nurses to have all visibility and access to patients to the patient and can be sanitized and use multiple times.
Notably in order to create more impact outside of maintenance local communities, we made they shield.
And intubation and closures open source by allowing designs to be really downloaded.
On our Dana cares website.
As I'm sure you're aware, we have a large presence in Italy.
We have been extremely impacted by the cobot 19.
With hospitals and medical staff overwhelmed and a shortage ventilators critical patients our team in Italy work to do Threed printing and test components to see Pat breathing machines into ventilators.
In addition, our global purchasing team served as a matchmaker for hospitals to help source critically needed personal production equipment, such as clubs shoe covers glasses in mass to help protect medical professionals and first responders.
In China, we donated 50000 mass to the local governments in the Gen two profits.
Good day, and charitable foundation in the United States also they don't need to financially to organizations, such as the United way and Red Cross that on the front lines of fighting the cobot 19 pandemic.
These are just a few examples of the extraordinary efforts made by the name that team members around the world. We've also had countless individuals or helping their local communities like getting glut.
Leading money delivering food or even making masks in fact in India.
Our colleagues colder personal resources, the purchase and 95 mass for local law enforcement officers and today.
Whatever is needed to make a difference.
Turning to slide seven I want to talk to you, but what we're doing to help our customers navigate this difficult time.
Our customers are taking extra cautions around the world to ensure manufacturing facilities or say, including but not limited to idling their facilities, when and where appropriate.
Largely speaking our customer plant closures across most of our end markets were gradually announced beginning in early March in Western Europe and then.
March 18th our light vehicle customers in North America announced that they would all production soon thereafter, essentially the balance of being as largest regions such as South America, India, South Africa Island ceased operations.
Accordingly, these customer shutdowns triggered the need for Dana to either completely or nearly completely shut down well over 100 manufacturing facilities, which implies tens of thousands of employees.
Yes, efficient and effective clan coordination and execution to accomplish this around the globe by the Dana operating team was remarkable.
Sincere appreciation goes out to all the team Dana team members that have executed through this incredibly challenging situation.
However, this was certainly not the end of the challenges.
The same time that we were winding down facilities. The operating team was also maintain production and supply for customers that remained open such as the aftermarket agriculture and mining segments as they were deemed essential businesses around the globe.
Operating numerous facilities at the apex, a pandemic was extremely difficult, but supporting the essential business was critical to both our customers and the communities.
Furthermore, supporting customers is not stop at this slide products.
And also provides product engineering and program management services are critical components and systems to ensure successful launch a new vehicles across all of our end markets.
As a matter of simply updating you on today's audience at this point, we've experienced very few customer new vehicle product development delays due to a pandemic.
Of course mobility customers also rely on sophisticated global suppliers to successfully managing complex shared supply base no matter the circumstance.
Dan is no different with nearly 3000 serial production suppliers. This is no small feat for us, but we believe our supply risk management system and team members have done a good job handling situation.
We would deem our supplier status is stable and we'll work intent to continue to manage at risk suppliers and implement risk mitigation plans as required.
Lastly, manufacturing companies cannot underestimate the complexities of restarting operations, we certainly do not.
Over the past week, we restarted numerous facilities around the world at various levels of output, including many facilities in Italy, where the pandemic terrible.
Our supply base, Indiana manufacturing facilities done an outstanding job restarting and supporting our customers.
Moving to slide eight I'll walk you through some of the measures were taking as we look to the future.
So far we've discussed protecting our people protecting our customers. The third leg of the sole is that is to protecting his future.
More specifically protecting our strong balance sheet and financial health of the business. We have been accomplishing this through a series of critical actions.
First we have taken numerous what we call cost flexing actions.
It makes it sound straight forward, but by cost flexing. We need addition to labor flexing in the form of temporary layoffs at our plants, we essentially either eliminated or flux all of our discretional spending across the company.
These actions were in addition to the comp compensation reductions they weren't after the beginning of April for all salaried associates and our board of directors from 20% up to 50% reduction and the chief executive officers compensation.
Frankly, I could speak in greater detail regarding cost flexing, however, suffice it to say.
That having been a sitting CEO during the 2007 through 2009, great sessions. The cobot 19 crisis has been very much like a do over of the unprecedented actions that required during that time.
These costs watching actions are aided our aiding us in the aligned aligning our cost structure with the reduced production volumes taking place across mobility markets.
We also announced a new credit facility that will give us access to additional liquidity should the need to rise. We took this action out of abundance of caution as Jonathan will walk you through on a few minutes.
We have abundant liquidity and the strength of our balance sheet and capital structure offers us flexibility and security as we navigate through these challenging times.
We've also not lost sight, what will drive our future growth.
We continue to invest in developing new technology, including advances in powertrain systems for commercial vehicle and off highway vehicles thermal management solutions for batteries and electronics and electrified propulsion systems for automotive applications.
As we look forward, we have assembled a global stand the test scores that is working with various government Union health officials to determine protocols as we bring plants online as soon as it's safe to do so.
This includes establishing pandemic control teams, who oversee response plans and our selies' and to help establish preventative disinfection measures and employee health protocols.
We know the world still in France, and enormous challenge.
As encouraging the global community now has a greater understanding of cobot 19, and can deploy lessons learned as we safely navigate.
With great caution and deliberate actions to limit the risk exposure together, we can begin to move forward.
Turning to slide nine I'd like to provide business status update.
As you know mobility markets are currently very unstable.
We are at the inflection point, where some customers have been idle are beginning to restart production where possible.
I will take a few minutes to cover a few key points on the status each of our markets.
Starting on the left side.
In our light vehicle market, our North America, OE customers, and but I don't through April April while several of our US based customers have indicated publicly that they will restart production in may with various certain dates.
A few of our European customers have remained operating but limited production and others are planning to restart on a country by country basis.
Most of our customers in India, and South America had been idle through April.
In China production has restarted and demand for light vehicles is recovering.
As we have mentioned China represents a relatively small percentage of overall sales.
But we learn valuable lessons from restarted in these operations that we have been declining around the world.
Moving to the center of the slide the majority of our commercial vehicle customers in North America began idling production in late March and we are expecting to see customers likely restart operations slightly sooner it may well.
While the smaller market for us it's encouraging to see a few customers in Europe, Europe, who are big unlimited production.
Like light vehicle customers and in India had been idle through April.
Some customers in Brazil's have commenced a little long production as of today.
And in China commercial truck and bus production has restarted.
And our off highway operations customer production in North America mixed with operation supporting essential industries, such as agriculture mining in a few other industrial sectors.
We remain in production.
In Europe, Italy was particularly hard hit by Kogan 19, and Dana was it has a strong presence in the country.
In a positive sign that many of the customers in Italy across the region are beginning to resume operations, while India, India has been idle through April there's a limited production in South America.
In China production has restarted again and our facility serving the off highway market in China, such as well she and chain are running at near full capacity.
Across all three of our end markets, our aftermarket operations remain mostly operational as service parts have been deemed essential.
Especially in the commercial vehicle markets and we continue to see good demand, especially in Europe and North America.
Through this all our supply base has been stable and we continue to monitor our suppliers with the eight of our customers to ensure the owner uninterrupted supply chain.
Good questions or what happens for the remainder of the year and what about upcoming launches.
As of now we expect only minimal delays to new programs in the launch cycle, but we will continue to work with our customers as always to successfully deliver our backlog.
As we look forward production levels and customer demand remains uncertain. However, we are encouraged it as most of the European customers are restart mode, and we expect remain customers to return to some amount of production in may.
We are working closely with all of our customers to support them through this process.
This I'll turn it over to Jonathan to walk you through our financials and I'll return with a few closing comments after Q1 eight.
Thank you Jonathan.
Thank you Jim Good morning, everyone I'd like to begin with the topic, that's top of mind for us and our investors. So please turn with me to page 11 for review of our near term financial priorities as we navigate through this challenging time.
Beginning on the left is Jim touched on our first priority is to conserve cash as production schedules and sales fall.
We're taking several key actions to achieve this objective first we are aggressively managing our supply chain by reducing our material orders and eliminating non production material spending wherever possible. The flexibility we have built into our supply chain over the last several years allows us to fine tune the inflow of material to ensure that our inventory levels.
Fall with lower production demand.
Second we continue to flex our conversion cost across the globe, including temporary layoffs of direct and indirect hourly associates across the board compensation reductions for salary associates as well as intermittent temporary layoffs and reduced work weeks throughout the organization.
We're also dramatically reducing our overhead spending across to all non labor categories third we throttled back our capital spending, making judicious decisions on where to invest as we work with our customers on current and new programs.
Finally, we have temporarily suspended our common stock dividend a step we did not take lightly but one that we deemed prudent to further preserve cash during this period of uncertainty.
Our second priority as illustrated on the right hand side of the page is to maximize our liquidity, we had a cash and marketable securities balance of nearly 650 million at the end of March the Undrawn portion of our revolver provides us with a comparable amount in ready capital and earlier. This month out of an abundance of caution we put in place a new half a billion.
Dollar bridge facility to guarantee our access to additional liquidity should the need arise.
We also took the added step of proactively amending the terms of our existing senior credit facility to allow more headroom on our sole maintenance covenant in total we have over a billion eight of liquidity and we remain laser focused on managing our cost preserving our capital and coming through this challenge strong and ready for the future.
Please turn with me now to slide 12 for an overview of our first quarter results compared with the same period last year.
First quarter sales were 1.926 billion a decrease of 237 million compared to the same period last year entirely driven by lower demand and production shutdowns due to the pandemic response.
Adjusted EBITDA for the quarter was 205 million 52 million lower than last year for a profit margin of 10.6%.
Net income was 38 million 60 million lower than the first quarter of 2019, primarily driven by lower adjusted EBITDA and the goodwill impairment charge of 51 million triggered by our lower market cap as of March 30, Onest, which was partially offset by income tax benefits of 32 million, resulting from recording additional you asked it.
Third tax assets related to foreign tax credits.
Diluted adjusted EPS, which excludes the impact of nonrecurring items was 47 cents 31 cents lower than last year largely attributed to the lower adjusted EBITDA.
Adjusted free cash flow was a use of 114 million, which was in line with the same period last year as lower profit was offset by lower onetime cost and capital expenditures.
As a reminder, and adjusted free cash flow use is typical in the first quarter for our business due to the seasonal nature of our working capital requirements, specifically the cash flow impact associated with the lower demand caused by the pandemic response was insignificant in the first quarter and the started the him to impact the business in the second quarter.
Please turn with me now to slide 13 for a closer look at the sales and profit changes in the first quarter.
The change in first quarter sales and adjusted EBITDA compared to the same period last year is driven by four key factors illustrated in the roll forward bar graph on the page.
First organic sales were nearly 300 million lower than last year.
The decrease is primarily attributable to the loss of volume in the latter half of March due to production shutdowns, resulting from pandemic containment measures.
It's worth noting that we originally expected weaker demand in the heavy vehicle markets that would've been largely offset by our strong sales backlog.
Effective cost management actions in the first quarter held decremental margins on the organic declined to 21% successfully muting the margin impact of the rapid sales decline that generated a 64 million profit headwind accounting for 150 basis points of margin compression.
Second inorganic growth from the Graziano in Fairfield business acquisitions contributed 112 million in sales and 14 million and profit for the quarter. While the cost synergy plan has been achieved the margin expansion impact was muted by lower production levels third the U.S. dollar continued to strengthen against key foreign currencies incur.
Putting the euro and the Radeye during the quarter.
This translation impact lowered sales by 34 million and adjusted EBITDA by 4 million. However, the profit margin impact was negligible.
Finally, lower commodity costs compared to the first quarter of 2019 expanded margins by 20 basis points as gross commodity costs decreased by 18 million for a net profit benefit of 2 million.
Please turn with me to slide 14 for a closer look at how first quarter adjusted EBITDA converted to adjusted free cash flow.
We've added some additional detail to our cash flow slide for this quarter to highlight the changes to our cash balance below free cash flow.
Starting with adjusted free cash flow in the middle the page the first quarter of this year was a use of 114 million, which was flat compared to the prior year. The primary drivers were lower adjusted EBITDA that was offset by lower onetime costs, primarily related to acquisitions and lower capital expenditures as we began to scale back on spending as economic conditions did.
Period.
The change in working capital during the quarter was comparable to the first quarter of the prior year. The rapid sales decline occurred late late in the period and as a result, the working capital benefit will be deferred until the second quarter.
Looking below the adjusted free cash flow line, you'll note a few highlights to the changes in our cash position one while we have suspended future dividends, we paid a dividend in the first quarter of 15 million, which was declared in February two during the first quarter, we drew down 300 million from our revolving credit facility to increase our liquidity mix to include more cash.
Three the effect of translating foreign denominated currency balance into us dollars reduced cash balances by nearly 30 million.
Please turn with me now to slide 15 for a more detailed look at our cost structure and the actions, we're taking to align it with current production levels.
You may recognize this slide from our third quarter earnings call last year, but I wanted to share. It again to remind you of our flexible cost structure and how we will manage it through this downturn.
In the middle the page you will see that as a percentage of normalized sales cost of goods sold represents the largest aspect of our structure at nearly 80% of sales.
On the left side of the page you can see that most of this is variable with two thirds as material costs, which are entirely variable and the remaining third is conversion costs, which are largely variable, particularly in times of large scale production declines for example, as Jim mentioned earlier, we are meaningfully reducing our salary costs through pay cuts and intermittent tempered.
Gary layoffs.
We've also reduced fixed costs by closing facilities and balancing our capacity as we shared late last year. We recently closed multiple facilities, while combining other operations and improving our overall efficiency.
Manufacturing footprint optimization is a journey and we're always examining ways to continuously improve our efficiency.
On the right side of the page you can see that we also have multiple levers to pull to flex our engineering and SGN, a expenses, which comprised three and 6% of sales respectively.
While most of these costs are traditionally fixed we have several places where we can flex our spending without jeopardizing our long term growth. In addition to the aforementioned salary austerity measures.
And engineering spend for example, we've been diligent and prioritizing those research efforts that will support our customers most urgent needs such as electrification while temporarily idling others. Another example in SGN a includes an accelerating back office consolidations, such a shared services and robotic process automation.
In addition to these cost elements. There are two key cash flow elements that are in our control highlighted in the lower right hand corner of the page first we have the ability to reduce and defer capital spending has already demonstrated in the first quarter and second carefully managing our working capital, including our inventory levels to generate.
Can't amounts of cash flow.
Please turn Anthony now to slide 16, where we illustrate how all of these variables can come together to minimize the cash flow impact of lower production levels.
Due to the unprecedented uncertainty in the global economy that is affecting our end markets caused by the pandemic, we have suspended our full year financial guidance in lieu of this we believe it will be helpful to provide some color on the second quarter as well as a sensitivity analysis that illustrates our adjusted free cash flow breakeven point.
For 2020.
At this point in time, we have a pretty clear view of our April sales, which we believe will be down about 75% from the same period last year due to production shutdowns for pandemic containment measures its worth recalling Jim's previous commentary that we are not incomplete shutdown mode as our aftermarket and certain OE customers.
Continued to operate.
We also have communications from most of our customers with regards to their restart plans and while we are not in a position to comment on any of them individually. We believe the collective impact of all of these will lead to a second quarter year over year sales decline of at least 50% for Dana.
At this level of sales, we expect to approach breakeven adjusted EBITDA and anticipate a modest use of adjusted free cash flow in the second quarter.
For the full year, we have estimated the adjusted free cash flow breakeven point for 2020 is about 6 billion of sales, which would represent an approximate 30% year over year decline.
While we are not guiding to this scenario and it should not be construed as our outlook for end market demand. It would imply production levels in the second half of the year that our comparable with the first half, albeit a modestly improved run rate from our expectations for the second quarter.
At this level of sales decline, including the austerity measures. We have planned we would anticipate decrementals in the mid Twentys for an adjusted EBITDA of about 400 million.
This profit combined with a source of cash from working capital in excess of 100 million wouldn't fund onetime cost interest taxes and capital expenditures for breakeven adjusted free cash flow.
While onetime cost and interest expense would be slightly higher than our original expectation cash taxes would fall significantly on lower profits. The source of cash from working capital of 125 million is in line with our prior experience for example in 2009 when sales declined by approximately 30% from the prior year the.
Business generated nearly 150 million of cash from working capital.
If this scenario were to occur we would have the flexibility to lower our capital spending by about 150 million from the prior year without jeopardizing the future of our business.
In summary, with the sales declined comparable to the last major economic crisis. In 2009, we would not expect to cash burn on a full year basis and would end the year with nearly 2 billion of liquidity.
Please turn with me now to slide 17 for a more detailed look at the strength of our balance sheet.
On the left side of the page you can see that all of our major credit metrics remained strong at the end of the first quarter, we had more than a billion three of liquidity, which now pro forma for the bridge facility exceeds 1 billion in eight.
Our net debt remains at approximately two turns of our adjusted EBITDA and our adjusted EBITDA covered our net cash interest cost by more than nine times.
It's also worth noting that our sole maintenance covenant under our debt agreements was proactively amended to double from two to four times for secured net leverage calculation, which excludes all 1.5 billion of our bonds in the numerator, providing a significant cushion as we manage through this downturn.
For all of 2019, we maintained a liquidity mix of approximately one third cash in two thirds available borrowings.
The health crisis unfolded in March we opted to shift to approximately 50 50 and plan to maintain this ratio for the foreseeable future.
The maturity profile of the debt portion of our cap structure is illustrated on the right side of the page. It's very important to note that we're in a desirable position we have no meaningful debt maturities for the next few years.
Our strong credit metrics robust and balance liquidity and long term debt maturity profile provide a solid foundation to whether this difficult time and emerge as a strong and stable partner for our customers as they transform the mobility landscape in the coming years I'd like to thank all of you for listening in this morning, and I'll now turn the call back over to fee entity.
Take your questions.
At this time, we would like to begin to Q1 day session. If he would like to ask a question, especially starkey and the number one on your telephone keypad now again that star one for any questions, we'll pause for just a moment.
The first question will come from Dan Levy with Credit Suisse. Please go ahead.
Hi, good morning.
And thank you.
First.
Let me just understand a couple of points on your capital allocation framework can you give us a sense of obviously your net debt to EBITDA will come up but.
Where would you ultimately and take that down too and then as far as priority.
Deleveraging is probably going to be the priority, but how do you ask de leveraging versus other areas between.
Internal growth M&A cash return would you be opportunistic opportunistic on M&A and.
Under what circumstances should we expect the dividends to be reinstated.
Hey, good morning, Dennis as Jonathan relative to our capital allocation priorities.
We went into this year highlighting that de levering was near the top of the list.
That is something that if we're in a situation.
Where we generate cash this year at the end markets end up.
Being better than the breakeven scenario that we laid out we would certainly look too.
Build our liquidity and de lever.
And then I would just mentioned on the M&A front, our position there remains unchanged as well.
We'll certainly look opportunistically, but in this environment or thankful that we've collected all of the critical pieces that we need to compete as the market shifts from internal combustion engines to electrified. So there's really nothing that will need to do out of necessity, which gives us the ability to continue to focus any cash that we generate towards continuing to.
The strength and the quality of our balance sheet.
And the dividend what like what.
Okay.
Yes, yes, and relative to the dividend we've indicated it's a temporary suspension I think we're going to look for the markets to stabilize.
So we would imagine that this is something that will be in place after a number of quarters and that we would likely evaluate once the market starts to stabilize which.
We would we would expect would certainly be towards the latter half of this year early next year.
The next question will come from Aileen Smith with Bank of America. Please go ahead.
Good morning, everyone and thanks for all the clarity any outline site.
Beyond April and May do you have any visibility around customer releases and the velocity of recovery or value and production across major markets. Then is there an expectation to returned to pre crisis levels at some point in the next few months or quarters or is there an incremental level looks conservative them being applied as demand.
Potentially than impaired.
Yep relative to our good morning, Salinas, Jonathan relative to the outlook that we have sitting here at the end of April we do have releases from the majority of our customers that would take us certainly through the month of May and for many of them through the month of June so the indication that we gave about set.
Second quarter sales being down about 50% from prior year are based on those releases.
And then based on that math that would assume that as most of our customers come back up in May and June it would be at levels that were lower than the pre crisis amount certainly if they ramp back up to those amounts sales would be better than down 50%. So I would say that our near term indication for the second quarter.
Assumes that demand levels are softer than when we went in and then obviously for the second half of the year, we've opted not to pay as they take a position on that just because there's too much uncertainty relative to what the consumer or the end market demand will be.
Great. That's helpful. And then following along on some of the prepared remarks about the complexity of Relaunching plans across different countries and Steve.
You have any approximation for house fungible your capacity might be to flex, where you need it across customers and end markets in instances, where your plants are we starting in our versus later.
Yeah, John I'll take that one generally speaking I would look at it needs forms obviously the program specific capital.
And you start kind of back forward when the assembly area.
That could be movable and could be more fungible, you've talked a heavy capital.
Can be somewhat fungible, but much obviously it can't be moved so I would say the answer to the question is is that.
We don't believe that we're going to be in a situation to move a lot around but I don't think we're going to be in a situation to happen moved quite a bit of it around I can't tell you right now there's not a country that I can think of off the top of my head. That's in its just in this dramatically worse condition with it significantly longer runway of expectations as to.
When they think they're going to get back into operation. So I'm not predicting that method actually predict anything right now, but I'm not predicting that to be a scenario that we're going to have to be overly concerned about I think we have enough we have enough inventory and.
Enough.
Protocols in place to manage the supply base to navigate through that.
Great. That's very helpful commentary, thanks for taking the questions.
Thanks Carolyn.
Next question will come from Rod Lache with Wolfe research.
Hi, everybody.
I also want to add my thanks for this presentation is.
Very very helpful.
I was hoping you you might be able to just talk a little bit about incremental margins on the other side of this obviously pretty impressive.
Containment of of the Decrementals here, but would you would you be anticipating adding cost back in as you know its production starts to ramp.
Hey, good morning rods, Jonathan the short answer is yes. So for example, it depends on the level of the sales decline, but in the illustrative breakeven scenario you would see decrementals closer to the mid twentys than the low twentys and some of that is the fact that we would be in a position.
Whereas we start to ramp back up we would be releasing some cost and adding back the ability to support demand.
At a higher level. So you see that Theres also some end market mix factored in there as well to based on what demand would be for each of the segments, but in principle.
Under the illustrative scenario, we would continue some of these significant austerity measures for a good part of the year.
That would help to keep those decrementals kind of in that mid 20% range, which is just slightly higher than what we saw in the first quarter.
Right I was just curious about the incremental beyond this as a revenue starts to ramp that is that at a lower level than that that mid twentys range simply because you have to add back cough.
Yes, I think it would be probably comparable so I think it would still probably being low to mid twentys on the way back up so I think there would be some cemetery as we start to get on the other side of this okay. Great and then secondly can you just talk a little bit about the business mix in off highway and your end market exposures there.
Maybe you can you just remind us of what that looks like.
Your current expectations for the business given that center of gravity is a little bit more European and Italy.
Sure as we touched on in the prepared remarks for example, the agriculture segment is one of the ones that.
Continued to operate at certain levels around the world during the downturn, that's something that's provided some stability, we're starting to see customers in Europe in that segment that our resuming production met at higher levels. That's a very important part of the business for us, but as a reminder of the construction segment did as well too.
So as construction around the world begins to resume and ramp up which we've already started to see happening in Asia and in particular in China.
Thats going to add support to that business as well too and that includes segments like material handling which are important for us as well too.
Mining has continued to operate.
No reasonably well around the world, we're starting to see signs that that's picking back up as an important segment for us as well too so really across each of those areas. We certainly saw periods of much lower production on particularly in Europe right now, we're starting to see those ramp back up.
Similar to what has happened in China, a few weeks before that so we'll look for that to continue to flow through to North America here in the coming weeks as well.
Just to clarify similar to and light vehicle segment, the ramp is occurring but not back up to the levels that you had seen prior to this decline is that accurate.
Yes, thats, our expectation rod virtually across all three of our end markets. We're certainly seeing production schedules for may and June that would be a bit lower than what we saw before they're a few exceptions, but broadly speaking thats a fair characterization.
Thank you.
Sure.
The next question will come from Noah Kaye with Oppenheimer. Please go ahead.
Good morning, and thanks for taking the questions I.
I think the prepared remarks, how are you.
In the prepared remarks.
You talked about the experience of restarting production in China.
The lessons that you kind of drawn from that being helpful. As you restart elsewhere can you expand on that what would you say are the big less since that you've taken away how are those going to be applicable to restarting in North America in Europe, and any differences that we might want to keep in mind as you do restart.
This is Jim I don't know the morning, and thanks for the question appreciate it and especially the ones that deal it mostly that people are the ones I'd like most.
And I would tell you a couple of things you later to waste the most by far the most important part of it was all the safety protocol.
Everybody's basically falling into the same playbook, but you know we took our team they will make taste in Tysons statement of.
You got to plan until you get launched in the pace, we didn't wait to get launched in the face in Italy. We've had very lucky are good.
We've we were way out in front of it relative to separately or people were talking about social dismissing a lot of things like that we took all of those into okay into account all the other things associated with base mass et cetera, et cetera, and give you watch the you watch the pandemic, though we know how it when China, Italy.
Kind of next Big Medical Center, and we have big penetration of assets there and so that was the biggest thing on that but the other one in terms of returning to work I'll. Just give you. An example ore body to tiers on operational detail, but you think about furnaces and maybe you've seen some or not I mean, there gigantic even that's even the concept of shutting.
Down is a little bit reckless at times, because it can be so costly and you can run into a lot of difficulties in the thing you know just following protocols in terms of getting those up and advanced when you're going to operate making sure that you've done all the preventative maintenance in advance of that all the other things associated with those seem somewhat simple when it comes off my tongue well, let me tell you.
Somebody that comes from that side of the business, there's been multiple issues across not just this year type of thing, but over the years of people underestimate the importance of that especially on the safety side, but also on the efficiency side.
Yeah. That's very helpful. And then you know you talked I guess on a similar theme you talked about kind of the confidence in the stability of the supply base.
We are are there different considerations that you're taking into account here we did yes.
Starting.
And if you're reaching out to that supply base in the North America and environment say versus versus China.
Understanding that production in China is pretty regionalized, just wondering how you're thinking about that and potentially trying to increase localized manufacturing wherever possible.
Yes, I think theres. Thanks for the questions I think there's a couple of question there one in the real term you.
You touched directly or indirectly on it that we have to be Cogs, though one your globally vertically integrated supply base you have to think about distance as simple as that sounds you have to think about distance.
Some things going all over the place and you have to think about.
We're issue, we're shipping containers at or were ships themselves that and all those things. That's certainly one of the key variables and then the second part of it more broader picture is as we know the pandemic and the movement has been it's kind of moved around the world, where the escalation points and there's some different areas around the world that or they're not going to get to their apex as early as you know.
States speaking from America here that you have to keep into account as well. So those are the big ones that as it relates to the pandemic. The other side of it which is maybe where you're going but certainly I don't I'm. A direct question. We all have to be cognizant of and the Oems to tell you. The same thing it's a tiered business tier one tier three whatever it may be.
Okay, and the financial stability across the or across all these organizations I mentioned in my prepared prepared remarks that were close to 3000 suppliers whatever it may be and you don't have strong diligence and you haven't had it Gideon just started yesterday in terms of knowing what your supply base is coming from and being out in front of that side of it you're going to have some.
The big problems I feel good about what we're at but you can never feel good enough because it's just too integrated too complex to say that you've got it all covered so just after stay on top of them. So hopefully that answers your question, but that's how we're looking at both on the health and safety side, the business side and the financial health side.
Thanks, I appreciate the color.
The next question is from James pick up in alone with Keybanc capital markets. Please go ahead.
Hey, good morning, guys and congrats on a very resilient quarter.
And I appreciate the color on your free cash flow scenario here.
Just as a as I look at the first quarter. The Decrementals were very similar across your light vehicle commercial truck and off highway segments. It and typically right. The decrementals would be the highest in off highway and lowest in light vehicles or were there any unique factors.
Played into the quarter should we expect a more normalized relationship through the rest of year when thinking about the decrementals.
Hey, good morning, Jim.
I think in this case, you're probably going to see them moves more towards what we would expect which is what you and described off highway being a little bit higher and commercial vehicle being the lowest I think in the near term given all of the cost levers that we pulled across the board on austerity I think that had a little bit of effective back.
One thing that but I think your intuition and a long run as right as the volume downturn per tracks the contribution margin loss will be higher.
One of the other things that you know probably impacted us in the first quarter is just the benefit of the aftermarket. So given the volume decline was more concentrated on OE production that helps a business light commercial vehicles detrimentals to do a little bit better. So I would say that's one of the other factors that played in the short term.
They kind of even those those decrementals out.
Got it that's helpful. And then just on the breakeven the free cash flow breakeven scenario.
The strong working capital conversion makes sense I just want to ask about capex in the scenario you provide capex would still be just north of 4.5%.
Total sales this would be almost in line with the prior year. So you clearly don't expect you cut this level of spend.
Commensurate with with the the sales declined by us or maybe in prior downturns the level of Capex got so.
I do view that is encouraging if you just talked about maybe some of the key investments you still intend to make this year I imagine there is commercial vehicle electrification programs new launches within light vehicle any any color there would be helpful.
Sure Thats, a really fair point I mean, it's helpful to remember that we still have a significant amount of backlog to the amount. We disclosed earlier. This year 700 million will be affected by the volume declines. So we'd expect on a volume adjusted basis. They this years and potentially the next year's number could be lower but it's a significant amount of new busy.
Thats coming online so out of that scenario with a 275 million that we would still spend there would be a meaningful amount of capital that would go towards launching new programs and bringing new technology to market. So we do see that as a benefit.
But we also think it's important to demonstrate that there are some discretionary investments in there that we can differ and we can delay to make sure that we balance near term financial health with.
With the longer term opportunities for growth. So I think it is fair to point out that what we're able to flex it to keeping in line with a percentage of sales, but that it more importantly, it's not a fixed amount than that we are able to two adjusted down when when the market is softer.
Thanks, guys.
Thank you James.
The next question will come from Ryan Brinkman with JP Morgan. Please go ahead. Good morning. Thanks for taking my question Congrats on the Decrementals.
A question just how should we be thinking about the 700 million 2020 through 22 backlog do you see the risk there relating more to just simply there being lower numbers of vehicles produced store.
You sensed a potential already for some programs to be delayed or probably less likely even be cancelled I ask because we've seen a couple of delay announcements already from GM and Ford and including I think as it might relate to the Bronco that you are on seemingly as they look to preserve capital. Thanks.
Sure.
Just as Ralph it's probably the greater impact is going to be the overall vehicle volume coming down. So certainly the 700 million will be affected by that and really because it's hard to call. The end market right now whatever projection you have there for the end markets could be reasonably applied to the backlog as well too.
Relative to program delays or timing Jim mentioned in his prepared remarks, those have been relatively minimal in terms of the impact US right now what we're seeing our some what we'd call shorter delays that are measured in months not all out program cancellations or things being pushed back a year too. So you may see just a modest move to the.
Right, but based on what we can see right now the core programs in our backlog are important to our key customers. We're continuing to work on preparing those in while overall volumes are likely going to be softer we think that the as a program cadence. There has held up pretty well at this point in time, but well continue to monitor it carefully and.
And support our customers.
There are product development roadmaps, Okay very helpful. Thank you.
The next question will come from Brian Johnson with Barclays. Please go ahead.
Yes, good morning, and I wanted to ask Jim sort of a broader tons of broader question.
I will probably get a more diplomatic answer than a Oems CEO gave your class side on the state of Lockdowns, but my question is just what advice, which you get policymakers both at the federal level year old thoughts for drip Mr. Secretary Ross.
And at the state and local levels about what needs to have started to get North American light vehicle production restarted.
Well, it's a good question per usual, Brian Thank you for that.
I think the.
Maybe so come across a little bit fit us trying to put me on spot was a direct question you'll get the direct answer my view is that to use an outage I'll be the first one is the CEO to say if the going back to work and any of our facilities that unsafe and I've told some Oems that have asked me to go back to work no already.
Because I didn't think it was right.
I would say I wouldn't supported but if I do build all the protocols and governments feel the protocols are in place by now many of many of the governments have their own audit people they have their own audit sheets checklist and all the other stuff if you feel like.
The manufacturing environment in fact is doing their job.
In theory I can say this much. This is the best way of getting at it I feel better that many of our manufacturing plants. If not all manufacturing plants are probably going to be safer than go onto the local grocery store or maybe on local pharmacy. So that's the only thing I can kind of frame up is it relates to it is an example, or I know our diligence.
Diligence on what we're doing from anywhere if you saw in our prepared remarks with temperature scanning with distancing I mean, we've had really knock on wood, we've had really really good performance as or if thats a work or relative to number of cases, we've had and I think it can be done and I think everybody's learning from each other and only with each other so thats.
I guess, that's the best way I can answer that question Brian.
And how does the age or health status of the work force fit into that especially with what you might have learned in Italy.
The data seems to show that.
Covered viruses.
More dangerous for older obese diabetic.
And then for the broader population just stereo typically that some auto workers.
Our in that category or factory workers. So have you kind of dealt with that in Italy, and I'd expect to deal with that in North America.
No. The great question I can honestly tell you we did not differentiate on age we didnt personally maybe some other companies did maybe they took some other unique precautions or whatever.
When you when you manage kind of the peak not the trough in terms of you're focusing your commitment to safety.
There is no age limit you have to do the same for everybody.
Say it to see inside of our company. We've had spectacular safety performance. Thank you to the team out there and it's great safety in any form or fashion has nothing to do with reacting to metrics are reacting in any form or fashion, it's everything about being preventative and looking for an opportunity. That's something we'll go wrong before it goes wrong and that's exactly the same thing on the endemic in May.
Managing cobot 19, and that's what we're doing in our facilities doing many things that are probably unique but we're passing along all best practices for all those that are interested.
Okay. Thanks.
We'll follow up later on some financial stuff.
The next question will come from Joseph Spak with RBC capital markets. Please go ahead.
Hi, Thanks, everyone.
So.
If we if we take I sort of face value.
Second quarter sales down if you sort of 50%.
Kevin EBITDA.
Then the decremental margins are a little bit worse in the second quarter versus first the first quarter. Despite a much more significant decline and I know you went through.
The cost structure in great detail, but I was wondering if you could maybe.
Bridge on the margin, where you expect more of those.
Offsets.
The variable costs to come in the second quarter versus the first quarter.
Sure Hey, good morning, George Jonathan some of it's Gonna have to do if the end market mix and and also some of the estimates on where we would think the aftermarket would be.
But I wouldn't take the the breakeven as an exact indication we do think the longer this last and then more significant the downturn the decrementals are likely to be a bit higher than what we saw in the first quarter.
But just broadly speaking, we think Q2, we're going to see a more a more broad spread reduction across them all of our product to the extent of what we saw just in the last couple of weeks of March.
We're trying to make sure that we're we're prepared for that and in the next 60 to 90 days.
Okay and then.
As a sort of touched on but just on the.
Illustrate of scenario, which again is helpful like that too I know, you're not guiding to 6 billion, but to 75 in capex should we interpret that as as sort of a fixed amount or sort of look at more sort of the percent of sales and then use that for whatever we think.
Sales are going to be Adam and I was a little bit curious about.
So your comment about how you don't think that really impacts growth. It because it would it would seem like that would that since that was planned at one point it would need to come back. So so is it fair to assume that you know maybe 21 and beyond the Capex is now looking higher than previously.
Okay.
Yes, sure relative to Capex. The to 75 is representative of the choices, we would make at that level of sales and certainly we would preserve.
The critical equipment or the products that we have to make for the programs that we're launching but we have choices that we can make relative to what we're going to do in house. What was we do on the outside some of that flexibility. There is capex that we spend on continuous improvement exercises.
Or other things that we could continue to differ so I wouldnt at that as a thoughtful prioritization of the the capex that we really would feel we need to spend at that level of sale and it does include some level of growth.
As a as programs continue to come online in the next couple of years, it's possible that capex could be a bit higher going forward coming out of this we may choose to spend some more as the market recovers.
Being about $100 million lower than what we originally expected. So just as a reminder, we expected capex to come down relative to last years, we got some of the major program launches behind us.
But certainly some of the levers that we would pull here would be because of the the softness in the end market.
Okay, but that sort of you know 100 odd million.
Is that there was there were obviously programs associated with it so as those programs come back it needs to get spent eventually.
Some of it well, but there are other areas that don't relate to new program spending that would not come back. So we may just choose not to do some things that we thought could create some efficiencies we prioritize the new programs over other areas of Capex that don't directly relate to a to new business.
Okay very helpful. Thank you Sir.
The next question is from Brian Sponheimer with Gabelli. Please go ahead.
Hi, good morning, everyone.
Good morning, Brian just just wanting to real quickly just.
If we're thinking about.
The ramp and the potential for.
Broader shutdowns occurring again, or just kind of as hotspot develop they're going to be a need for for greater working capital will be kept in order for you to.
Maybe give yourself a two week.
Two we cushion if the tier twos or just curious have issues in geographies, where you're buying from.
Yes, it's a really fair point, Brian even with the significant working capital that we demonstrate in the breakeven scenario or the significant use of cash for source of cash that we would get from working capital.
The days of inventory that we would be carrying would be higher than normal. So it's not the inventory reduction has not at a 100% efficiency. If we were carrying 60 70 days in inventory at year end under any outcome in the second half of the year, we're probably going to be carrying more days than that because of what you highlighted we're going to want to make sure that the customers protected.
And that we're making sure that we're in a good position, but even.
With maybe slightly less efficient inventory levels. There is a significant amount of cash flow.
To be generated as sales levels fall.
Yep. Thank you and then just Jim.
Going back to when you went through Snowy no nine obviously is different.
The challenge that you're facing here and apart from maybe the where the balance sheet is now.
Relative to that and some some post retirement obligations, what's what's most structurally different about.
About the auto industry I know you weren't at Dana that at that time, what's what's more resilient now then.
Than before.
Well I hope at this answer your question. Thanks for the question, Brian I think the biggest thing is just lack lack of having a cure to the pandemic into the the virus and that leaving such seemingly so much more uncertainty as to how long it could be prolonged I guess, if I fell back into 17.
And on nine and all that back then we probably would have said to ourselves. How long is is really going to go we don't really know this one's this one is real and this one is dealing with human life. So that's the biggest thing has to go along with it as it relates to the operating of the company, though at least in my view.
Obviously as CEO in that period of time, but like many of US we were all involved in anywhere from.
The grid loss, the United States, the volcanoes in Iceland that impacted Europe, and all the things I mean I can tell you. This.
In the chair and CEO, you're pulling off all those levers and your remembering all those best practices you took into account and.
You are just making sure that stays United and that's why overemphasize the need for communication is cheesy, maybe is that sounds the ability to communicate on a on a incredibly regular basis Youre business unit leisure country leads you are continent structure is whatever it may be has been mission critical but there is a small.
I'll silver lining in a blessing in disguise many of us have been through at one form or fashion to the late night on crisis and we're executing at the biggest lever to it is nobody has any idea that we'd have to manage something like this on health and safety of our people. The most important asset we have.
I appreciate that best of luck and help to all of you and Dan as their families.
Thanks Brent.
The final question is from Dan is a follow up from Dan Levy with Credit Suisse. Please go ahead.
Great. Thank you so much for squeezing in sorry for the drop earlier.
Yes, you mentioned thank you.
Had mentioned you know that that you're not seeing much in terms of wants to lay than I imagine in any case most of your discussions with customers are really limited to how to get through today, rather than bidding on new programs, but I guess I'm wondering what do you think.
Corruption might do to.
Any program development here at your customers how does he the story change that your customers.
If at all.
Yeah, I would tell you and Theres some did pretty good public information out there if you Google for example of the CEO from Daimler result recently.
And Google that you mentioned pretty direct comments about where he was focused like many of us Ceos and.
With a pretty strong conviction behind the platforms and I can tell you generally speaking maybe even more than generally speaking in all its it's still full speed ahead on electrification.
At least on the on the products that were working on and I guess, we're working on them in all of our end markets. So that should tell you something.
And this does not change any of your spending fact, though I would imagine it's still probably skewed to the upside.
If you called.
Go ahead, John and Vila Nova Abbas.
No I was just kind of say I mean spend the upset yes. It was already in upside. Our we are we ultimately taking some costs out of their via the short term hopefully short term actions relative to reduce wages and all the other stuff absolutely, but other than that I would say, we're just going to stand the same path, we're not going to we're definitely not going away.
The chart of our future and electrification in this tenure, we will we have a lot of other levers to pull the team's doing a spectacular job pulling all those levers. So that's how we're looking at the business.
Great. Thank you very much.
Thank you very much.
There no further questions are there any closing comment.
Yeah, I'll take the wheel for just a second first I'd like to thank everybody I understand but of course, you're all dealing with the same fears challenges issues that we are and I think I. Appreciate you taking the time to spend time with us.
Second I'd like to say I wish on the one and we could have provided you even better color and information around markets and restart and all that frankly I think of course, we all know this we're just basing it on uncertain demand environment and it is what it is on the other hand, hopefully by talking to Dana talking with US. We can help we provide you some more color.
Maybe you can't get elsewhere relative to all the end markets and it triggers thought maybe relative to respected GDP, so on and so forth.
No it's going to happen that's for sure if you take our closer to home in the United States and the impact to the four to five trillion dollars going a bit pumped into the economy is that kind of get spent is going to go right back into new vehicle sales are not people going ascent save the money, who knows what's going to happen. There has to be recovery is it not knows all I know as we're prepared as a.
Company to handle whichever that is and hopefully that speak it hopefully that came through in the presentation and the response today I will tell you hopefully one other thing you took from today's presentation, we've talked about and a lot in terms of how we.
Kind of recent reorganize the organization.
Potentially even transformed the organization with what we titled the leverage the core strategy, which is all about a matrix organization to make sure that we cooperate in at teamwork is really what it means across business units and some companies. That's just let's just call. It. It's lip service, it's not real we would not personally been there really is effective we didnt.
Have the matrix organization, leveraging the core working as a team and all by the way getting to where we wanted to from at least the last five years getting that balance across the business with 50% of our business being and heavy vehicle and 50% of it being light vehicle, even with all the growth in light vehicle. So all those things all in their playing out as good as the unexpected.
But this is certainly not the end of this game. This is what we got a lot on all of us and I. Appreciate all your support through this with that we look forward to talking in the next fall.
Ladies and gentlemen, thank you for participating in today's conference call you may now disconnect.
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