Q2 2020 Dana Inc Earnings Call
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With more than 20 years of Mecca Tronics experience Dana has developed numerous award winning patented technologies for electrified vehicle.
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Browse our complete portfolio of Electrodynamic solutions at Dana Dot Com splash electrified.
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Good morning, and welcome to Dana incorporated second quarter, 2020 financial webcast and conference call.
My name is Carmen and I will be or conference. Operator today. Please be advised that are meeting today better speakers remarks, and acuity session will be recorded for replay purposes.
There will be a question and answer period after the speaker's remarks.
And we will take questions from the telephone only if you would like to ask questions. During this time press star one on your telephone keypad to ensure that everyone has an opportunity to participate in todays you an eight we ask that callers limit themselves to one question at a time.
If you would like you ask an additional question. Please return to the Q.
At this time I'd like to begin the presentation by during the call over today your senior director of Investor Relations and strategic planning Greg Barber. Please go ahead Mr. Barbara.
Thank you Karen and good morning, everyone on the call. Thanks for joining us today for our second quarter of 2020 earnings call. You will find this mornings press release and presentation are now posted on our Investor website. Today's call is being recorded in supporting materials or property of being incorporated they may not be recorded copied or rebroadcast without our written consent.
Let me remind you that today's presentation includes forward looking statements about our expectation for tenants 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 statements Thunder public filings in included with our reports with the FCC.
On this call. This morning is Jim Kamsickas, Chairman and Chief Executive Officer, and Jonathan Collins, Executive Vice President and Chief Financial Officer.
Thank you.
All in Jim Colliers.
Okay. Thank you Craig and good morning, and thank all of you for joining US today, we hope that you and your families continue remains save throughout this difficult season.
As you are aware mobility markets have seen a great deal of disruption in the first half of the year as a result of the global coal that 19 pandemic.
As we communicated at the end of the first quarter, a large percentage of customers idled, some or all production in April and we're not able to begin restarting production until may.
The initial may production ramp up in the U.S. and a few other countries was just a bit slower than we'd expected, but since then we've seen a steady increase in demand has nearly all of our customers are back online.
As a direct result of the global shutdowns sales for the second quarter were $1.1 billion, just over 50% decline from the second quarter last year.
As depicted in the lower left sided slide April saw a majority of the shutdown impact we saw an 83% improvement in may as operations began to restart and further and 84% improvement in June as demand continued to improve.
Through a combination of cost management actions and efficiently restarting operations, we ended the quarter with nearly breakeven adjusted EBITDA in a slate adjusted EPS loss.
Despite the challenges we had several highlights in the second quarter as we pivoted to restarting in Reengaging the business.
To begin with all our operations have safely and successfully reopened and we continue to win new business, notably a new electric vehicle programs. We also continue to invest in easy growth through both targeted acquisitions of key capabilities and strategically partnering with industry leaders to bring new technologies to them.
Market.
But it's not just on hybrid and electric vehicle programs were Dana is growing perhaps she had a chance to virtually watch one of the most highly anticipated and exciting vehicle debuts of the year the all new for Bronco.
The Dana brand is well known to consumers in the off road space because for decades, we delivered the most durable and robust driveline products capable of handling the rugged terrain that these vehicles experience in other words with Dana it's more than the products alone. It's also about brand loyalty and the consumer experience.
Moving to slide five I'd like to talk about how we've successfully restarted our operations.
Starting in the left hand third of the page as you can imagine restarting approximately 150, Dana manufacturing and technical facilities was challenging enough. But then you factor in the execution required to ensure supply chain continuity from our tier one integrated global supply chain across nearly 50 countries.
I cannot possibly thank the Dana team and our supply partners are enough for their amazing and continued efforts in helping us safely bring our operations back online around the world. They have committed countless hours, establishing and sharing best practices and especially from the initial high impact cobot areas such as China.
In Italy, and collaborating to ensure that everyone stage safe as we brought high volume manufacturing back on line quickly and efficiently.
Looking to the center of the page approximately six weeks ago, we started to ramp up operations in line with our customer startup schedules most aggressively in the light vehicle North American market and global agricultural markets.
As a reminder, this was all occurring welding and never stopped operation in what was characterized as essential businesses, such as aftermarket and industrial products, thus, making our operational challenge, let's say that much more interesting.
Specific to the light vehicle North American markets throughout May there was uncertainty as to how fast the customers would be able to restart and when the supply operations would be permitted to resume especially in Mexico.
In the in the May ramp up was somewhat slower than expected, but ultimately all operations came back up at a very good cadence.
As we moved into June we experienced accelerating customer demand as they look to replenish low dealer inventories. In addition, many of our customers have indicated that they will have limited or no summer shutdowns.
In our European in South African operations are light vehicle customers started a little slower, but they too have largely return not quite to pre coated volumes, but to reasonable volume levels.
Pivoting to our commercial vehicle customers in North America, they too restarted in May after several weeks of downtime, obviously volumes are down from the record highs of previous years, but there is resiliency there more than some would have predicted.
The global off highway markets have restarted because.
The restarted across the board with bearing run rates, depending on the region in the end markets. We continue to see stronger demand in agriculture and weaker demand in construction and as I stated earlier, our aftermarket business continues to operate uninterrupted.
As you can imagine with different end markets ramping up production at different rates cohesively and consistently executing a very robust global operational in supply chain management system is essential to success, the Dana operational purchasing and supply chain management team did a remarkable job navigating through the ebbs and flows of the dramatic cuts.
Summer requirement changes and of course this was not only on a country by country basis as the pandemic altered manufacturing around the world, but often on a state by state or Providence by provenance basis.
Drawing your attention to the center of the page.
Customer engagement may have slowed for a brief period of time, but today, we are back, albeit in its new normal of digital communications, where we left off pre kobin customer satisfaction starts with having great people, who have a tremendous passion for creating value for our customers at Dana customer satisfaction is in our DNA and the team is executing pro.
Design reviews product validation testing launch readiness reviews, and all other facets of the business.
Most importantly, we are all doing this safely as you will notice on the right hand side of the page coincided with the new normal we have thoughtfully not only increased safety protocols and our operations in many ways. We have clear we clearly understand that the new normal work environment could result in any manufacturing company deviating away from standardized.
Operating processes.
Accordingly, we have also elevated our focus on quality to be more proactive than ever as are our operating challenges are required in the manufacturing environment.
For example, as we adjusted Schaeffler operations to support social distancing protocols. We have in should ensure that all processes are revalidated to ensure that product and prosecutor jurisdictions meet our customers' requirements.
Of course this this much translates over into new product launches as illustrated in the bottom right hand corner. The page, we continue to see minimal delays in new product launches for future programs.
Furthermore to continue the steady stream of new product launches in the future. We continue to make investments in new product technology to support our customers' needs as they move from internal combustion engine to electrified vehicles, which will drive growth across the businesses we serve.
Now turning to slide six I'd like to share some exciting news about another new electrification program, we are working on.
Our customers continue to recognize the strong value proposition for a turnkey suppliers with full E powertrain capabilities I will briefly remind the audience that what I mean by complete powertrain capabilities.
As you can see in the bottom left hand side of the page Dana of course has the propulsion system capabilities, including the motor inverter and driveline.
Moving to the right. We also provide power electronics and battery system to complete the full powertrain system.
By having all of these capabilities in house, Dana, including our E. Thermal competency is the only supplier with complete powertrain supply capability, thus, enabling us to partner closely with their customers to provide optimized inefficient solutions to meet their needs.
Specific to the presentation page and announcing the exciting new business Awards.
We were recently source the powertrain by a major European commercial truck manufacturer for new battery electric medium duty truck that will be used for urban and regional product distribution. The vehicle production is slated to start next year.
The zero emissions electric truck will be equipped with the data content and updated to the chassis will supply the powertrain system, which generates in stores and manages.
The energy for the vehicle consisting of the battery packs and electrified auxiliary systems. The vehicle also utilize edina sealed 300, and Berger as well as what we describe as assumable HD motor coupled to a Dana drive shaft.
Dana develop software and controls will run the diagnostics and telemetry of the complete system.
As the global demand for fuel efficient low emission vehicles continue to expand our ability to leverage our longstanding leadership and truck driveline capabilities now coupled with our full powertrain capabilities provides our customers with highly efficient solutions to support the reduced emission and total cost of ownership objectives.
And further into this a key element of our energy enterprise strategy is to lead in electric propulsion.
Accordingly, we continue to strive to develop the best in most innovative solutions. This can only be accomplished by having the right team and more specifically the most experienced people.
Please turn with me to slide seven to discuss the most recent steps we've taken to strengthen our capabilities in software controls and engineering services.
I'm often asked the question you've been filling out the white space via executing on M&A opportunities and especially in electrification Dana have everything that we need.
And my response to that to that question has been something like we always keep keep our eyes open, especially in the area of software controls and systems. Accordingly earlier this month, Dana acquired rational Malaysia motion GMB.
The company with a rich history, and proven tech technical expertise and software controls and system integration for electric vehicles with more than 10 years of proven capability and drawing on many decades of experience from its talented lineup of engineers the skills and expertise to the rational motion team will increase our localized support for European based customers.
As well as further strengthen our global development of software and controls for complete electric vehicle integration.
And by the way the timing of the acquisition and Dana winning the new program in Europe is inadequate incidents the former rational motion team members will be involved in the launch of the Preleased announced new European electric truck as well as numerous other projects that Dana is working on.
Please turn to me in turn turn with me to slide eight to learn more about new hybrid electric class eight truck application hitting the market this year.
There has been a lot of buzz about highly on accompany we first told you about earlier last year.
We are excited about the opportunity our market opportunities through our strategic partnership and equity linked investment with highly on earlier. This year highly on delivered the first of three hybrid class eight vehicles to leading transportation services provider with the remaining vehicle slated to be delivered later this year through this partnership Dana is there so.
Tours for the propulsion system, including traditional driveline components as well as fully integrated equals which include motors inverters controls gearboxes as well as thermal management technologies. The highly on system converts a traditional six by two into hybrid by adding dana's propulsion system. The system allows for.
Were easy installation in simple servicing.
It's an engine type agnostic and can be installed on any class eight vehicle.
From any manufacturer.
This is another example, how we're committed to helping our customers navigate the electrification journey with industry, leading technologies and programs. Thanks strategic partners such as this one we have unique opportunity to implement high value proposition long haul solutions that revolutionize power commands and help our customers to meet.
Our sustainability goals.
Please turn with me to slides nine to hear about.
The more exciting and highly anticipated vehicle debuts in years.
As I'm sure you're aware for revealed our Unbilled. Its 2021 built while two door and forward or model Broncos and the new Bronco sport a few weeks ago.
You may not be aware this but dana's involvement with the Bronco program dates back to its initial launch and then can 66 and we we are excited once again to be collaborating with Ford to offer robust suite of advance driveline ceiling and thermal management technologies for this exciting new vehicle family.
Our feature technologies on the Fort Bronco include the gain of 44, Advantek solid rear axle and the Dana Advantek independent front axle.
From those who want to one extreme performance there is an optional upgrade to the Dana 44, Advantek independent front axle.
All of these axles are available from the Spicer performance track elect electric.
Lacking differentials.
The Bronco also uses a spicer rear drive shaft with Dana design constant velocity joints, and our industry, leading thermal management in sealing technologies.
We first announces program win back in 2017 in fact Ford has stated that they selected dana's accident axles, even before they decided the frame of the vehicle and we are looking forward to seeing the bronco out in the trail.
Well, we are we're not able to announce at the time was dana's driveline system would be featured on the all new forward Bronco sport. This new vehicle will be equipped with dana's Spicer advantek ultra rear axle and Spicer Smartconnect disconnecting four by four system.
Dan Ford have a long history together and we're proud to once again be partnering on these exciting models, which are part of one of the fastest growing vehicle segments in the United States. In fact in 2019 sales to the us fees in the United States were nearly 50% as our customers increased their offerings in the segment, we're looking to leverage driveline.
Solutions still delivered the best on road experience as well as a high performance pickups initiate used for operating as well.
Dana supported this growing segment and their desire to enhance customize and personalize their vehicles with aftermarket solutions by offering technologies exclusively design for Maxim off Road performance will only help to further grow this market.
Thank you and I'd like to turn the call over to Jonathan for look at our financial results.
Thank you Jim Good morning to all of you listening and I'd like to begin with an update on the progress we made on our near term financial priorities, which I outlined on last quarter's call. So please turn with me to page 11.
Starting on the left side of the slide our first priority as we faced the market uncertainty was to conserve cash as production schedules in sales began to fall off due to the global pandemic. We focused on four key actions to achieve this objective first we aggressively managed our supply chain by reducing material orders and lowered our inventory by more than.
75 million in the first half the year.
Secondly, flexed our conversion costs by utilizing temporary layoffs of direct and indirect hourly associates temporarily reducing compensation for salary associates and aggressively lowering our overhead spending across the all non labor categories. The combination of these actions led the decremental margins of less than 25% on an organic sales.
Decline of more than 50%, which I'll discuss a bit more in a few moments.
Third we continued to make prudent decisions on where to invest capital in the second quarter, we reduced our capital spending by more than 35% compared to last year, while continuing to serve our customers on current and new programs.
Finally, our common stock dividend remained temporarily suspended as a means to further preserve cash during this unprecedented time.
Our second priority as shown on the right of the page was to maximize our liquidity.
We took several actions in the second quarter to that end, we issued 500 million in new senior unsecured notes proceeds from this issuance added to our cash balance which at the end of June was more than 700 million an increase of over 50 million compared to the end of March we used a portion of the proceeds to repay the 300 million revolver.
Our balance from the draw we made in March we now have access to the entire 1 billion of ready capital on the facility and terminated the 500 million Undrawn bridge facility that was put into place at the beginning of the pandemic out of an abundance of caution to guarantee our access to additional liquidity.
We have maintained the amended terms of our senior credit facility to allow additional headroom under our sole maintenance covenant.
As a reminder, we did not have any significant debt maturities for the next few years in total we had 1.7 billion of liquidity at the end of the second quarter, which is typically the seasonal working capital peak in our business.
Please turn now to slide 12 for an overview of our second quarter results compared with the same period last year.
Second quarter sales were 1.1 billion a decrease of 1.2 billion compared to the same period last year, driven by lower demand, resulting from production shutdowns due to the coated 19 pandemic adjusted EBITDA for the quarter was nearly breakeven at a loss of just $5 million 291 million lower than the same period last year net income was a lot.
And 174 million 106 million lower than the second quarter of 2019.
Earnings were reduced due to higher income tax expense, resulting from the establishing 56 million in valuation allowances in foreign jurisdictions.
The second quarter of 2019 was reduced by 258 million in one time pension settlement charges related to the transfer of future pension liabilities from the US pension plan to third party insurers.
Actually offsetting this onetime charge was a net tax benefit of 87 million in the second quarter last year, driven by the pension termination and foreign tax credits. Excluding these one time tax and pension charges. The second quarter net loss was $118 million in 2020, compared with net income of 103 million in 2019.
Reflecting the lower operating earnings this year, resulting from lower sales due to the coated 19 pandemic.
Diluted adjusted EPS, which excludes the impact of nonrecurring items was a loss of 69 cents, a dollar and 56 cents lower than last year largely attributed to the lower adjusted EBITDA.
Adjusted free cash flow was a use of 133 million 176 million lower than the same period last year as lower profit more than offset lower working capital requirements cash taxes in capital spending.
Please turn with me now to slide 13 for a closer look at the sales and profit changes in the second quarter.
The change in second quarter sales and adjusted EBITDA compared to the same period last year is driven by three key factors shown here.
First organic sales were nearly 1.2 billion lower than last year, primarily attributable to a large portion of our customers halting production in mid March with Reopenings toward the end of May throughout this period of extremely low demand our effective cost flex actions held decremental margins on the organic declined to 24% 10.
During the overall margin impact.
Unlike the first quarter, we own the graziano in Fairfield businesses for the entire second quarter last year. So there is no year over year impacting Q2.
Second the U.S. dollar was stronger against key foreign currencies compared to the second quarter of last year. This translation impact lowered sales by 27 million with a negligible impact of profit.
Finally, lower commodity cost provided a slight margin benefit as gross commodity cost decreased by 5 million for a net profit gain of 1 million.
Please turn with me to slide 14 for a closer look at how adjusted EBITDA converted to adjusted free cash flow leading to the overall change in our cash position in the quarter.
As you can see in the middle of the page adjusted free cash flow for the second quarter of this year was a use of 133 million as there was no profit to fund interest taxes and capital expenditures. Despite the fact that taxes and capex were considerably lower than last year.
Working capital was a slight use of cash despite the lower sales volumes in the quarter. This was due to the fact that at virtually idle production levels in April and May there was little opportunity to meaningfully reduced inventory until June which will lead to significantly improved cash flow in the third quarter.
At the bottom of the page you can see our cash balance increased 66 million as the result of the net proceeds from the bond offerings after repaying a revolver.
Please turn with me now to slide 15 for an overview of our market conditions based on what we're seeing in our July sales as well as releases from our customers for August and September.
First in the light vehicle market full frame truck demand is a bit stronger than we would have expected just a few months ago, particularly in North America, where vehicle inventories for our key platforms remain low providing for a robust production environment as was the case in China. After production started there in the first quarter, our key North American light truck Mark.
That is experiencing a faster recovery than other regions.
Second in the commercial vehicle market class eight truck demand in North America remains challenged the order rates are showing some encouraging improvement. However, we've yet to see this have a meaningful impact on our production schedules outside of North America customers in India are ramping up production more slowly than other hard hit regions, such as Brazil, as the health crisis content.
Used away on the regional economy.
Finally in our key segments of the off highway equipment market agriculture demand remains reasonably strong while construction and mining lag with much softer demand around the world with the exception of the Chinese market.
The combined impact of these market conditions should result in sequential sales growth in excess of 50% leading to a return to profitability and cash generation in the third quarter.
The entire Dana team remains focused on protecting our employees with safe work environments supporting our customers as demand continues to improve and flexing our cost structure to match that level of demand to deliver improving financial results to our shareholders. Thank you for listening and we'll now turn the call back over to take your questions.
Thank you at this time, if you'd like to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from all line of Aileen Smith with Bank of America Eileen. Please go ahead.
Good morning, guys.
First question I notice that you excluded your free cash flow breakeven slide you presented at once you're reporting and you've talked about at conferences sense is that breakeven estimation is still valid or based on your operating performance in the quarter and some of the cost in cash savings actions that you've taken could potentially be even higher.
Sure I think from our perspective, it's still remains pretty consistent we may have made a little bit of progress with them structural cost reductions to improve that but I would highlight that the indication we've given on sales demand for the third quarter would be a bit better than the demand level in that scenario so from an outlook.
Standpoint.
Just in the third quarter demand is better than that.
Okay, and and now that you've terminated year bridge facility and repaid Samir revolver, what does the decision tree look like in terms of reinstating the dividend or potentially repurchasing shares and specifically what would you need to see across your end markets. If you are comfortable enough to get more aggressive on this front and put the balance sheet to work.
Sure I think it would have to be stable demand with a significantly reduce probability of any types of future shutdown. So as the health crisis. Further comes on our controls in the numbers would start to move down and we'd have more confidence and consistent demand we'd be in a position too low.
Look at moving back towards a more normal capital repatriate repatriation approach.
Great and last question if I may you've cited a lot of progress you've made on the electrification Brian in the commercial vehicle market. Another segment, that's starting to get a lot of attention and height is around electric pickups in the light vehicle market with new products coming from GE on test last board.
Can you remind us where Dana said in terms of quoting for some of these new program are you heavily involved in these discussions are many architectures being pursued more internally at the customer level.
Alan This is Jim Thanks for the question. Thanks for joining today I would say, it's a mixed bag of things.
Certainly as I've said since the beginning your initial pull through was in the bus market.
Then it moved into even to what we talked about today more that last mile. We're involved in one form or another when the light vehicle side, obviously, not here not tier to communicator or announce anything but I would just say there's plenty of involvement across the board that's about as much as I can give you.
Great. Thank you very much for questions.
Your next question is from the line of Dan Levy with Credit Suisse. Please go ahead.
Hi, good morning.
Thank you everyone.
Owning them.
Hey.
So I wanted to start just with.
A couple of questions.
The decremental I look at a commercial vehicle.
Decrementals Wally 20%.
Thats, obviously better than than the rest of the business.
A little color on that and then similarly off highway decremental.
All of 24%, which I would think is lower than.
What you would get for segment like that which is going to typically have higher decremental. So just some color on the decrementals for.
Two segments. Please.
Sure Dan I pointed two things. The first is both of those business units on the heavy vehicle side have strong aftermarket presences. So in this environment. When OE production was idled trucks were still on the road and needed to be repaired. So I would say that the aftermarket business, which in both of those as a good and profit.
It will business helped to bolster that a bit the second thing is that the widespread cost flex actions that I referenced we're really across the board.
So we ended up with better Decrementals in those businesses, partly because of the severity of the cost actions that we took combined with the support that we receive from the aftermarket segment. If you will.
Okay, and then I mean specific to the off highway.
Revenue down, 40% and you still put out a 10% margin.
It's pretty good.
Hey, it sounds like there's nothing I mean, you just as of the typical cost actions that you're taking to keep that margin.
Intact and at that.
You know indicative that when things finally, whatever we can get back to that sort of 16% pipe.
Margin profile.
Yes, absolutely the margin potential of the off highway were business remains very high.
Particularly because of the acquisitions the cost synergies that we've achieved and then the strong cost discipline through the operations. The combination of all those make that a very attractive segment from a margin standpoint.
Great.
And then the second question electrification.
Through you win on.
The electric truck program in Europe could you give incentive how the sourcing decision was made at that customer was where that all considering in sourcing or with multiple suppliers for the powertrain or did eight specifically to you because.
You mentioned, you're the only one out there doing complete solution and so they wanted a complete solution and just more broadly on the competitive landscape.
It sounds like you're the only one with a complete solution you know.
That's correct and with what extent are your customers in the heavier applications looking to in source on electrification.
Yes, thats it Thats, a big question and I would tell you theres in one notable in this jump no no. Once you fits all with each customer I would tell you kind of.
Emphasizing the complete system capability speaking in an example terms is I'm pretty sure you're aware we've been in the thermal management business for 100 years and when you think about a full propulsion system in the impact on cooling batteries electronics all of the other moving parts associated.
With it now couple that with all of our capabilities. That's that's kind of how you get to the full system differentiation is one differentiator, but coming back to your question more specifically and how to the decisions get made one im not in the board rooms at the OEM, specifically to know how they're thinking about things, but I will tell you. This is is that it all starts at the engineering level.
Engineering, the products and and your engineering teams have to have with the Oems have to have great confidence that they're going to bet the better business on somebody that can actually.
Make sure that the whole system is going to integrate when it's on the road youre going to be able to react to it you are going to be able to diagnose it you're going to be able to supply parts to it youre going to have to everything and in if everything is shopped out and everything is kind of just.
Kind of trying to cobbled things together from the outside looking in I don't know that gives customers a great deal of confidence that when their vehicles are getting and on the road that they're not going to get a brand pop.
Pop in the face for it so we believe that that's a competitive advantage that it's all in house and Joe engineer talks to Suzy engineered talks to Tony engineer and they find a way to get it done and we think we find that many of our customers see at the same way. So it's a long winded answer answer to your question, but that's about the best I can give you.
Okay. Thank you that's helpful. If I could just squeeze in one more just can you give a housekeeping if you could provide some parameters on.
What you expect in working capital in the second half.
Yes, similar with what we communicated with the the breakeven analysis that we shared at the end of the first quarter. We would expect in this significant of a sales decline for working capital to be a substantial source of cash it's really going to start to happen in the third quarter. So inventories came down late in the second key.
Quarter, that's going to convert to cash in the third quarter. So we would expect to have.
A significant generation of cash from working capital in the second half of the year and also on a full year basis.
Okay, great. Thank you very much.
Hi.
Okay.
Yeah.
No what your line is open.
Please I meet your line.
Hi, there as Joe on for now is this morning. Thanks for taking your questions ongoing Joe just circling back on the Decrementals are you expecting similar decrementals in Threeq Q.
As as designed to Q in it so that would imply threeq EBITDA.
Actually more than 100 million.
I get the Decrementals are material worse sequentially can you just went to any puts and takes regarding that.
No I think as far as the Decrementals are concerned when we shared the breakeven scenario at the end of last quarter. It implied a full year decrementals in the mid Twentys. So I think we expect to remain pretty close to that range on a year over year basis in the third quarter. So I think thats, a pretty reasonable assumption.
Got it.
And then I guess also in the past, where we've seen quite a bit of attention and policy development and access to capital for hydrogen fuel cell power trains, particularly in commercial vehicles. So you guys have already supplied fuel cell stacks, but wondering if you see the opportunity or need going forward to.
To expand your offerings in this area similar to how you've done with ease in it so where you'd like to focus your investments.
Thanks for the question Joe appreciate it very much.
You never say never you're right our experience in fuel cell is goes back decades as well it certainly helps us be in the game relative to the full driveline solution or integration solution is working on many projects in that regard and especially in a in the commercial vehicle segment.
To do more as it relates to the actual stack that's not our intention right now it's to support our customers like we have for years, but we'll see it we'll see how the how that market continues to unfold as you know, it's a little bit further out there and in a lot of folks are thinking about it working on it but.
We keep our year to the ground and keep our technology roadmaps in place to be flexible.
Sure so going to squeeze one more in ties circling back on the product launches.
You've announced a number of these wins for that fully integrated powertrain supply.
Are those launches generally tracking timeline wise similar to your expectation and then second can you talk a little bit about how you're managing supply chain and make versus buy decision for EMV compliance emitted given the limited scale in the industry.
Thanks, Thanks again for the question I would say first of all yes, they're tracking.
As I've said in previous calls the way I would look at it I think most people are there was a bit of a bubble for everybody in the world whatever you want to pick six eight weeks you could argue that launches are delayed a little bit by that amount, but thats not substantial anyway.
Back to your supply chain piece of it.
You're right. That's a good observation that you don't have as much history on that but.
I think by accident that our acquisition and roll up of various electrified assets out there are people that have been doing some form of electric vehicles and components for well over decades, such as obviously TM for Ash Woods.
The list goes on SMB, except for uneven today's announcement on rational motion the best of the best supply base, they've worked with we're working with them and we're we're working off of that to build up the most sophisticated robust supply chain we can.
Thanks Scott.
Welcome.
Your next question comes from the line of James Gorilla with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Turning on.
If we compare your your cost structure next year to 2019 as a basis, excluding any impact from acquisitions is there a structural cost savings number we should be considering for 21 or would that maybe just be captured in a in a mid 20% incremental margin contribution.
Yes.
At this point, we're not giving a specific number but we would indicate that of structural cost actions taken in the second quarter. Some of them will be permanent it won't be insignificant. So we do think it's going to be something that's going to help the margins be higher on the on the upswing or the incrementals to be.
Higher than they would have been prior to that so certainly there is a combination or a number of temporary actions that we referred to but there are some permanent ones as well there and as we get towards the end of year and start providing an outlook for next year, we'll provide more color on that.
Okay got it and as we think about your your backlog new business backlog contribution for the back half and maybe within the context of the full year right. The original guide of 350 just.
Wondering if there's any order of magnitude color you could provide on your thoughts it does seem as though.
You are seeing minimal launch delays for new programs, so any color.
Yes, I think thats right. The only color we'd give there is what we shared before which is the reduction of the backlog is going to be pretty much in line with what we're seeing in our overall change in sales. So certainly the dollar amounts going to be lower by a comparable amount as Jim mentioned the program shifts are relatively.
In significant at this point and we still expect to have a pretty similar cadence of launches going into next year that that we would have expected earlier this year.
Have you worked with with rational motion in the past and today it from a vehicle mix or customer channels standpoint, who have they been working with.
Good question by the way.
The first part of the question I'll give you a.
Kind of a yes, but answer to it yes via our team for team that we acquired a whatever it was year and a half ago. So they can literally finished each other senses. They were essentially the outlet for TM for in Europe.
For all the activities anywhere from quoting designed to whatever the case, maybe and their background and back to your engineering question, if thats, what we call it and products background actually there's started and spend a large portion of their early days in their business tied into the Formula E racing.
In particular with Toyota and then into a multiple of other products and you can see some of those goes to pictures, we seen them they've worked on on the coordination and integration of various electrified components. So a really good background in history.
Thanks.
Sure.
Your next question comes from the line of Rod Lache with Wolfe Research. Please go ahead.
Good morning, everybody.
A lot of focus obviously on the Bronco and I wasn't aware of your your position on the Broncos sport I was hoping you might just be able to to speak to a little bit more broadly about the backlog of new business that you're looking at it in light vehicle as you.
You look out the 2021 and then also on the new business front given this.
The intensity of activity that we're hearing about in in EDI programs have you updated your view on the trajectory that you see for easy growth for you how big that this could be at a certain point in time.
Sure just of the backlog specifically on the Bronco Rod all three of the vehicle variance and the technology that Jim talked about just a few moments ago have been contemplated in our backlog. So thats been a part of our calculation. The entire time, we really think that the trends.
In that consumers shifting from.
Cars to our sedans to full size actually and many of them that have off road capability is really moving into right direction. So we're really excited about.
The launch of that product.
On the electrified side.
As we highlighted earlier this year there is a more significant portion of our backlog. That's now in electrified vehicles certainly the one that we announced.
Earlier on the call will be accretive to that it was not in the backlog. When we started this year and we continue to see.
More opportunity to grow our backlog on the electrified products, particularly in the heavy vehicle markets. So lot of activity there as Jim mentioned in last mile or urban delivery of medium duty vehicles. But then also we're really excited about the potential for through the road hybrid via highly on that could come to the of the class eight over the road applications in the coming years as well.
Two.
Any.
Ill comment on on just the magnitude of the opportunity for you I know that.
You provided some color on the Investor day, but that was a while ago and sounds like the opportunities bigger than what you suggested back then.
Yes, there is certainly a tremendous amount of opportunity, but we remain pretty convicted in our ability to deliver a half a billion dollars of electrified sales by 2023 and all of the programs that we've talked about so far keep us on track to that end.
Probably early next year, we'll we'll take a look at refreshing those projections, but at this point for we're tracking pretty well.
Okay, and just lastly, your slide 15.
You gave some sort of directional color on our commercial vehicle off highway.
Can you just maybe be a little bit more specific on what your expectations are for those are or what the.
I don't know is there a.
In the different colors for those those arrows, maybe you could just give us a little bit of a key that decoder key to magnitude.
Sure from from.
Indications, we put on that page, that's really how the third quarter is shaping up compared to what we expected. So what we're trying to give a sense is that the light truck market in North America is certainly that green represents that it's performing better than we would have expected. So sales of those vehicles during the second quarter remained.
Stronger than we would have anticipated there was little production.
In April and May with some production coming back in June so inventory levels for our key platforms are better than we expected demand in July.
For those products would have been higher so we're just indicating that the light truck market is coming back a bit better commercial vehicle, whether its class eight or medium duty. Both of those continues to be soft and if anything class eight is probably a little bit softer than we would have expected just a couple of months ago. So thats, what that arrows intending to represent and then.
Off highway on balance across all three segments is probably pretty consistent with what we thought as we said AG continued to do reasonably well, but really.
Construction and mining has been quite soft around the world with the exception of in China, where that came back quite strong. So on balance that's what we're trying to indicate as compared to what we expected in that all gets too.
The sense that we think we're going to be 50% better than 50% from a sequential standpoint in Q3 compared to to where we were last quarter. Okay. Alright. Thank you.
Sure.
Your next question comes from the line of Emmanuel Rosner with Deutsche Bank. Please go ahead with your question.
Hi, good morning, everybody good morning.
Youre sort of quarter outlook for positive adjusted EBITDA and free cash flow seems like a pre low bar.
If your revenues going to grow more than 50% than decrementals are still in the mid Twentys you could be drew.
Quite a bit more than.
I guess more than $100 million, so any other factors that.
We're not thinking about in terms of.
Negative offset or is it just are you trying to just state.
A little more bay.
Yes, it's more of the latter Emmanuel we were just indicating that obviously conditions are improving significantly on the topline and they will so we weren't saying we're going to be just above breakeven on both were going to generate a significant.
Amount of of cash flow in the third quarter based on what we see right now as working capital becomes a headwind or excuse me a tailwind in starts that moves from a headwind to a tailwind in Q3, and we would expect to see strong sequential.
Conversion on the incremental sales and on a year over year basis.
It's certainly implies that we would still be lower than last year, but we still think those decrementals on a year over year basis, they're going to be in the mid 2000. So we think giving all those points or giving enough information to give people a sense of where we are without being too specific.
Great.
And then thinking there was hoping to learn a little bit more but youre working relationship was and how you.
And just go over some of the motivation there do you think that natural gas solutions for truck will.
Take off or is it sort of a good use of existing capacity that you have also curious sort of like how the relationship works and if you're willing to comment on how much did you invest or how much of the company.
I'll take first part at least manual good morning, Thanks for the questions. Thanks for joining US today. The one key thing I don't know that anybody has of course of all that certainly the Oems and have more of a crystal ball than than I would or most any supplier relative to fuel cell and all that other stuff. What I will tell you is you've often heard me use that.
What is staying is.
What is dana's.
Strategic plan relative to electrification future mobility, all that and it's always been the set of words, which has to be is to be energy source agnostic.
In terms of our driveline and powertrains and when we're talking about fuel cell vehicles were working on plenty of projects that you take our drive lines and they're essentially adaptable for those type of.
Energy sources so.
That's kind of that's probably the best answer I give you as you are trying to evaluate what's what's going on at Dana Jonathan on have you anything in the cure and just a reminder, what we discussed at our Investor Day last year, we've concentrated our investments on the medium duty segment for fully electrified vehicles, because we see more of the near term opportunity silly.
Platform that Jim spoke about earlier that we've won in Europe is obviously.
Fits with that but on the heavy vehicle side, particularly over the road long haul we believe that hybrid applications are going to carry the day in the near term.
As the infrastructure comes in place for fully electrified solutions in the longer and so we're really excited about the opportunity to get these spicer electrified propulsion systems on the road in that category from a financial standpoint, we made an equity linked investment.
Early last year, there will be a nice return on it but we're not a.
Youre a major owner in the company, we will have a stake it'll give us a nice return, but it's not going to be anything that some.
Overly significant for Dana.
Okay and in terms of the the way the relationship works, our you'd be size for the financial and are you tier two supplier do you do you sell them the.
This bison systems and.
Do you also do the integration costs are those actually work in practice, yes. The partnership has.
Aside from the financial aspect has a couple of aspects number one we will be their supplier of the propulsion system. So that electric axle that are driveline that Jim referred to the had the motor the inverter and the in the dark transfer via the gears is going to be the Dana system that will you be combined with very power system, you know there there.
Hybrid controller, the battery pack and all the auxiliary is to provide the full hybrid electric powertrain. The second aspect to the relationship is from a manufacturing standpoint.
We have offered our manufacturing expertise to help get the full systems put together manufactured and delivered to customers. So that's a part of the relationship as well too.
Great. Thank you.
Sure.
Your next question is from the line ever Ryan Brinkman with JP Morgan. Please go ahead.
Hi, Thanks for taking my question I wanted to ask on good morning capital allocation.
I think you'd already planned to March toward one times leverage are investment grade credit metrics, even prior to the crisis of course, now would take longer you'd not levered to repurchase shares thankfully in recent years like some other suppliers and I see you're still doing bolt ons, but just maybe broadly just experience with grown a virus change at all how you think about capital allocation.
And or leverage going forward.
No I don't think so I think as you noted it's going to take us a bit longer to get there given this environment. So as we pre crisis, we had anticipated generating substantial cash flow in the business and intend to use that to de lever that remains our priority, but it's going to take a bit longer so as we.
We see the second half of this year play out hopefully things stabilize and market conditions improve in 2021, you would be seeing us look to generate more meaningful cash flow and use that to continue to de lever the balance sheet and as you noted in the cost of the rational motion acquisitions very small so we will.
Continue to make smart plays to position ourselves to deliver great electrified products to our customers in the coming years, but youre going to see most of it go towards continuing to to get towards that target of the one turn net leverage.
Okay. Thanks, and then just obviously, there's been a tremendous amount of enthusiasm in the public markets recently with regard to Tesla Nicola hopefully for you in relation to highly on soon.
Just curious the extent to which you think that's.
Corona virus may delay or accelerate.
The transition toward sustainable transportation, just knowing what that means for you guys potentially from a content per vehicle perspective on the commercial side.
I can only go based on the inputs I have of course and answering the question doesn't mean I have a crystal ball for everybody all the Oems capital allocation plans and everything else, but at least from my chair our chairs really its nothing's changed.
Every program we're working on every one are quoting everything we're hearing or seeing is still steady as you go that's a direct answer to a question much better than I did earlier, so I hope that over yet thank you.
Thanks Ryan.
Your next question is from the line of Joseph Spak with RBC capital markets. Please go ahead.
Thanks, Ron maybe just.
Some follow ups and some topics that are already.
Brought up.
The first is on that on slide 15, and you sort of talked about.
I guess, maybe a little bit more.
Negativity on class eights as versus prior.
Competitor of Yours, if there is talk pretty positively about the September quarter, Belden being above the third party forecasts and and I think we've even seen some positive revisions are so can you just tell us what what youre seeing in your conversations with customers because there's a little bit of.
At odds with many other commentary out.
Sure I think in prepared remarks, what we indicated was we are seeing the orders the same information that the orders are getting a bit better we're not necessarily seeing that as a meaningful impact to our production schedules compared to what we are anticipating but certainly some improvement will take I think we're probably just remaining.
A bit cautious we anticipated this year on class eight was going to be a soft year.
Coming into it and obviously the current dynamics of only exacerbated that so.
Yes, I think just generally were a bit more a bit more cautious.
Other thing is as a reminder, you know the medium duty segment for us in commercial vehicle is important and that has been.
Quite a bit softer than we would have started this thought at the beginning of the year and the recovery there is going a bit slower. So I would say, it's a combination of our views on heavy and medium duty vehicles in that segment that put us at a place where we're a bit coffin cautious on the commercial vehicle segment.
Okay and Jim Thanks for the.
Good explanation about rational motion I guess I'm still trying to.
Right.
Had around a little bit more is it's really more for now at least of the way, we're sitting right as a sort of like.
You know and engineering ACO higher so you get better competency internally about how these systems work.
And then eventually you can sort of help your customers or or did I Miss interpret that.
Yes, I think you're absolutely all over it or usual.
It is I've said it since the very beginning people saw your about acquisitions and electrification and topline and go Okay sure Yeah, alright, not really though I mean, it's really more about.
Being ahead of the curve getting the best people with the rest talent. So the of the learnings throughout your organization, they're learning structure organization not sitting here headquarters the sitting at your distributed technology centers around the world and being prepared for that because ultimately one thing about vehicles in any of that any industrial system. If you want to call. It the winner comes back to the.
Efficiency efficiencies between the moving parts in the systems and controls and all those learnings and ability to go through this is what's really important from from future efficiencies invest systems that are out there. So to answer your question yes.
Okay, and then last winter some on the Helen.
So you're providing the the axle spicer product.
Is there a major difference between what you would provide and in what's what are your for doing for that much as effectively or a retrofit hybrid solution versus what you would provide too.
No like a brand new sort of OE, whether either by either better or fuel cell.
Axle solution.
These are the same product no. It's a good point, it's basically the same products. So the three in one system with the the motor the inverter and the gears is essentially comparable to what you'd see on a fully electrified vehicle most of the difference in the powertrain would be north of that so into the size of the battery pack the controls.
All of that would be different in the power system. So the propulsion systems very comparable.
Okay. Thank you very much sure. Thanks, Joe.
Your next question is from the line of Brian Johnson with Barclays. Please go ahead.
Yes.
Just the final housekeeping Tonkin question. So between when you gave your guidance for adjusted FCF breakeven.
To use when you updated added June conference. It was it really the swing in inventory or other parts of working capital that was the big difference you're thinking.
And yes, yes, Brian just to be specific at the end of the first quarter. We said the to adjusted EBITDA would be about breakeven, but we did say that we would be a use of cash in the quarter, we specified that a bit more midway through the quarter to make sure was clear that people knew that it would be slightly more than what we saw in Q1 and you're right. The.
Primary driver is we didnt have a crystal ball to when production was going to go down and come back up. So we tried to clarify that the inventory reduction really happened in the month of June when customer schedules were really back up and running and we could bleed off some of the inventories so.
You got it was the cash used in the quarter is driven by that we're going to see the cash benefit of the inventory reduction in June and inventories are going to come down in the third quarter as well too. So the combination of that will will help augment the cash and does it make a difference was a raw mats finished goods.
Work in process or current all of the about no you're right. It's really across the board days on hand are going to come down across most categories because demand is lower than when we when we started pre crisis, so you'll see adjustments across the board.
Okay, and second and third similar to the last question, but.
If you compare your European truck way into the business, you're doing with your joint venture partner in North America.
For class eight highly and what's the additional Dana content and in particular, where their software electronic.
Content that could offer.
Better margin profiles.
Sure. So so the real difference between the two on those two pages is the what we refer to as the power system. So all the.
The battery pack the battery management system all of the auxiliary is would be included in the power system. So the win in Europe includes those and obviously, that's much higher content very high value content.
But in I'll, just remind you did and the propulsion system. It also includes all the software and controls in the inverter to manage the the moving at a vehicle. So theres good content in both but certainly theres greater content in the in E power system and in the case of highly on they have that part of the system and we're providing.
The propulsion system so.
Great opportunity for us compared to a traditional vehicle, but there are some differences between the two as you noted.
And just just a follow up I mean, you have a focus on class five to seven but when you get into that.
Our any class fives used for last mile delivery and with those go electric and then when you look at the next thing down since you do provide.
Sort of the three quarter ton truck and many of the traditional band platforms in North America, where built off of that you'd or would you see even though your focus would you see going into the LCB kind of larger than the market as those electrify.
Yes, no I think thats, a any other REIT assessment you could see.
Medium duty vehicles being used for a lot of those applications that are being electrified. So I think broadly year correct, there and absolutely that has been our target market because we think the duty cycle for the applications. Those are used for is attractive economically to be electrified. So thats why we put so much energy and effort in that segment.
Okay. Thanks, Thanks, Brian.
Okay Thats, Jim Thanks, everybody for calling in today and her really good questions and dialogue I appreciate that very much a quick shout out or extend an extension of my appreciation recognition for though our light vehicle group and for that matter are off road enthusiasts group.
Leading us to what I call annually value creation for our customers and example of the new Bronco family of vehicles, but even more so to the overall sq the high performance market at least as we describe it.
I'd like to call. It the business school, one on one certainly better to grow the pie than it is to carve up the existing size of the pie and thats exciting market and our decades of experience at Moab and off road enthusiastic activities. All those learnings that keep coming back the learnings are critical in our product design critical on our customer engagement and so far so thanks.
All you moving on quickly to the.
The relative electrification new energy preparedness.
All of US would agree who knows exactly where things are going to stop and end up and who knows what and all that stuff infrastructure readiness et cetera et cetera.
But from our standpoint.
We know what our strengths, our and our strengths ours to have great people people, finding a better way.
Miles on the road, how long that people are kilometers on the road for that matter, how long of people actually been doing us what is their experience whether they are lessons learned all these learnings all of these capabilities rollover into again, who knows what's going to be next and new energy, but we know we're going to have markets and aerial work platforms are buses or underground mining or me.
Im duty last mile or whatever it is all of its shared all of its tied.
It's how our business models coming together. So thanks, everybody for your time and attention we look forward to talking to you the next opportunity.
Thank you. Thank you everyone for joining today's webcast. This concludes the call you may now disconnect.
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