Q3 2020 Dana Inc Earnings Call
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Good morning, and welcome to Dana Incorporated's third quarter 2020 financial webcast and conference call. My name is Regina and I will be your conference facilitator. Please be advised that our meeting today, both the speakers remarks.
And Q1 day session will be recorded for replay purposes.
It will be a question and answer period after the speakers remarks, and who will take questions from the telephone only.
I'd like to ask a question. During this time press Star then the number one on your telephone keypad to ensure that everyone has an opportunity to participate in today's Q and we ask that callers limit themselves to one question at a time, if you would like to ask an additional question. Please return to the queue. At this time I would like to begin the presentation by turning the call over.
To Dana's senior director of Investor Relations and strategic planning Craig Barber. Please go ahead Mr. Barber.
Thank you Regina and good morning, everyone on the call. Thank you for joining us today for our third quarter earnings call. You will find this mornings press release and presentation are now posted on our Investor website. Today's call is being recorded and the supporting materials. The property of Dean incorporated they may not be recorded copied or rebroadcast without our written consent.
Allow me to remind you that today's presentation includes forward looking statements about our expectation 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 statements found in our public filings, including our reports with the SEC.
On the call. This morning, as usual, Jim Kamsickas, Chairman and Chief Executive Officer, and Jonathan Collins, Executive Vice President and Chief Financial Officer, Jim will start us off this morning, Jim.
Good morning, and thank you for joining us today, when we spoke with you last quarter. We were just beginning to come out of our global locked down in response to the COVID-19 pandemic.
I cannot be more proud of how the Dana family successfully navigated the shutdown and restart of our operations around the world driving strong sequential improvement in our quarterly results.
Throughout this challenging time, we've not wavered from ensuring the safety of our people when we meet the needs of our customers.
During the third quarter, our customers accelerated production to meet growing demand, particularly in light truck market driving sales.
For the quarter to nearly $2 billion well sales this quarter were down compared with last year due to the COVID-19 related customer demand impact early in the quarter sales rebounded sharply to finish nearly 1 billion higher than the second quarter.
Adjusted free cash flow for the quarter was 261 million driven by improved working capital efficiency.
Adjusted EBITDA in the third quarter was $201 million or 10.1% margin.
The Dana team did a tremendous job adjusting from a slow start to it dead sprint in production in the quarter, achieving financial results better than we had expected.
These results were only possible due to the continuation of numerous cost mitigation efforts deployed during the pandemic shutdown as well as the incredible Cross company team work required to restart not only our operations, but in support of our supplier partners around the world.
Efforts led to diluted adjusted earnings per share of 37 cents, which was a sizable one dollar and six cents increase from the second quarter.
Moving to the key highlights in the upper right hand side of the page we will provide our perspective on the end markets in these dynamic times, although the global COVID-19 pandemic continues to adversely impact our industry. We remain positive on the end market outlook is most markets continue to remark rebound around the world.
Also during the quarter, we are pleased to announce exciting new electric vehicle business that Dana has been awarded a course, winning and delivering the propulsion programs is only possible. If a company has the technical capabilities to successfully execute and deliver on customer requirements and commitments. Therefore.
Therefore, consistent with Dana is very decisive and methodical approach of organically and inorganically accumulating the critical skills and experience personnel required to successfully supply power trains. We are excited to share more details regarding this very important new investment our acquisition of a substantial stake in pioneer <unk> LLC.
As a leader in electric vehicle software development.
Finally over the past two years, you have witnessed our intense commitment to sustainability by developing clean and efficient products through our efforts in electrification.
Later in the presentation I will expand upon and illustrate other key areas of Dana sustainability plan that you may or may not be aware of.
Please turn to page five is I'd like to provide you an update on our end market conditions.
As we see our markets recovering the bright spot for US has been the light vehicle market and in particular full frame truck demand has been better than expected inventories on some of our key vehicles remain low indicating that most of what is being produced is being sold we have seen the fast recovery in North America and.
No.
Moving to the center slide the heavy vehicle market are also seeing pockets of strength. We began this year with soft for expectations in both the medium and heavy duty truck commercial truck segments, and obviously the pandemic slowdown.
Down has adversely impacted them as well, but as production resumed in the third quarter, we saw strengthening in class eight trucks medium duty demand in North America.
Demand demand in Brazil, and India, while showing signs of improvement remained comparatively soft.
Lastly, our off highway markets, we have seen continued improvement in agriculture end market, while the construction markets remain stable specifically markets in Asia continue to be stronger than expected driven by China, where recovery began earlier in the year.
As markets around the world continue to recover we remain intensely focused on partnering with our customers to navigate these challenging times, all while remaining diligent about safety quality and cost discipline.
Turn with me now to slide six where I will provide details about an exciting new electrification program when that is launching next year.
All around the World, we are seeing global governments continue to push for cleaner emissions and improve fuel economy across all mobility sectors, including construction agriculture mining and material handling.
Industries that Dana has supported for nearly 100 years today, many major port authorities have aligned with the international maritime organizations standards of reducing emissions by at least 50%.
But it goes even further as many of these ports are targeting aggressive initiatives to reduce emissions across Asia, Europe, and North America major ports are committed to zero admissions over the next few decades. For example, the two largest ports in California are required to be zeroed mission by 2035 in Europe. The portable Lynch here is aiming to.
Zero emissions by 2030, Antwerp is committed to a 50% reduction in emissions.
Hello is committed to an 85% reduction in Q2 by 2030 ports across Asia are also adopting similar regulations with Singapore committed to green cut greenhouse gas emissions by 50% by 2050, and China committed to peak carbon dioxide emissions before 2030 on its way.
Two occurred towards carbon new Charlie.
As global logistics continue to push.
Heavily towards zero emission vehicles to meet the global regulations, Dana electrified technology is well positioned to help our customers meet their sustainability goals. This quarter. We're excited to announce that all new electric wheel drive system launching in 2021 that is suited for the large port container material handlers. This day.
And the design designed all electric solution replaces the diesel engine and traditional driveline by leveraging our core capabilities and innovation acquired through the strategic acquisitions of Fairfield Brevini NTM for combined into an all new Spicer electrified hub drive. In addition, we are providing software.
Integration by leveraging the electrification competencies we've gained through our recent acquisitions have been addressed.
Rational motion and as communicated in my opening remarks Pi Innovo.
The bottom line Dan Dan It can provide a full line of advanced technologies that deliver class leading performance in ever increasing regulations across mobility markets from small interior excess equipment, such as scissor lifts to port container handlers, while at the same time, we will be able to increase our content per vehicle by four.
At times in a growth segment and further expanding our portfolio of sustainable products.
Turning to slide seven I want to highlight some of the exciting things one of dana's customers has been doing in the electric mobility space.
As many of you are aware lying electric is a leader in the development and manufacturing of all electric architectures from class five through class eight trucks.
Full size school buses and many buses in early 2019.
Ryan chose Dana as their preferred supplier for traditional and electric componentry on its all electric urban class eight vehicle line eight.
In electric stated that it chosen to partner with Dana because of our unmatched proficiency and proven propulsion systems, stating or capabilities will be a strong addition to the development of their all electric truck platform.
These forward to September of this year and line electric announced it will deliver battery electric trucks to Amazon with the first being delivered later this year Amazon plans to use these trucks in the middle mile trucking operations. The truck is a range of up to 250 miles and features dana's team for direct drive system.
Coupled with Spicer driveline systems.
Additional line electric vehicles, including zero admission waste disposal truck, featuring Dana's powertrain vehicle controller and onboard charger.
Our relationship with Lion electric began in 2016 when they introduced the line type C School bus North America's first all electric zero admission school bus and powered by a complete Dana drive system with hundreds on the road mine electric buses have proved themselves in harsh cold climate condition.
Ones with millions of miles driven.
Our collaboration with line of electric and all of our electric vehicle customers further solidifies dana's position as an industry leader in E propulsion.
Moving to slide eight I'd like to talk about the recent addition of software engineering capabilities to our product portfolio.
Earlier today, Dana announced that it acquired a 49% stake in Pi Innovo, a leading developer of custom embedded software solutions and electronic control units for the light vehicle commercial vehicle and off highway markets. This acquisition will enable Dana to further enhance our software and controls offerings for CA.
Customers, which are critically important for the management of the complete propulsion system.
With more than 25 years of systems control units software and electronics design expertise hi, Innovus team of software engineers Leverages experience to provide proven flexible solutions to meet the growing demand for software in the mobility market and beyond.
When combined with Dana's complete systems capabilities for propulsion, we will be able to further enhance the efficiency of the entire system, while adhering to the highest functional safety requirements.
As I talked about on slide six our customers are increasingly required acquiring advance software in control solutions that are capable of managing complete propulsion system as well as the telematics and ancillary control systems of today's vehicles for example high Inovas electric electronic.
Control units or easy to use and software platform will be used on an upcoming medium duty electric vehicle program that we will be launching in the new year. This investment will further further our capabilities and electric powertrain software and we're excited to be partnering with bayano, but as we look for further opportunities to develop capabilities and solutions.
That will enable lease systems.
Turning to slide nine I'd like to talk in more detail about dana's commitment to sustainability.
If you turn on the news or read the paper, it's hard to Miss the increased focus on sustainability. There is a growing movement across industries in our personal lives to be even more responsible stewards of the world around us come.
Combined this with an ever increasing global regulations intended to drown drive down emissions. It becomes very clear the clean energy sources, such as electric hydrogen fuel cell and natural gas will continue playing an important increasing role in the day to day on our day to day lives over the last five years, our enterprise strategy.
Has been focused on being a leader in electrification with class leading portfolio of technologies that enable all vehicles no matter their power source.
As these trends continue to quickly evolve Dana is prepared for them.
Our industry has a unique opportunity to lead by example in how we not only design, but also how we manufacture our products that will have a positive impact on the environment that is why it publicly announced last week that Dana is committed to reducing our total annual greenhouse gas emissions by at least 50% before the end of 2000.
35. This result in reduction of more than 300000 metric tons of greenhouse gas emissions annually.
Well. This is an aggressive target. It is a very important one to achieve this we have developed a roadmap focusing on three core areas. The first is reducing our energy consumption, increasing the efficiency of our processes over the past five years, we have completed more than 400 projects to take direct team at reducing our admissions generation.
And we have many other projects in progress.
Dana is currently utilizing solar arrays at several locations globally, and we will be implementing the further use of renewable energy such as wind or solar to make use of clean energy sources that will forward further reduce our greenhouse gas emissions.
Lastly, as we look at reaching our target we will exploring the use of renewable energy credits purchased on the open market. These credits represent proof that energy was generated from renewable source and sent to the grid Dana.
Dana has a long history of developing advanced technologies that address current industry needs and potential future challenges.
We not only believe it's good business, but it's the right thing to do.
Thank you for your time today, I would like to turn it over to Jonathan to walk you through our financial results for the quarter.
Thank you Jim Good morning, and thank you everyone on the call for being with US today I'd like to begin with a review of the third quarter financial results the.
The comparison on page 11 shows the change from both the priors years third quarter as well as the sequential change from the second quarter of this year highlighting the rapid improvement from the pandemic related shutdowns earlier this year.
If you recall last quarter, we outlined our expectations for the third quarter that called for a sequential increase in sales of over 50% positive adjusted EBITDA and positive adjusted free cash flow in the third quarter. We exceeded all three of these targets sales were nearly $2 billion in the third quarter, a sequential increase of more than nine.
$100 million compared to the second quarter or 85% growth due to increased demand as customers rapidly resume productions. After the pandemic related restrictions were lifted sales.
Sales decreased $170 million compared to the same period last year, driven by lower demand early in the quarter, resulting from COVID-19 production shutdowns and an eventual restart in June.
Adjusted EBITDA for the third quarter topped 200 million a significant sequential improvement from the near breakeven level in Q2, but remained 49 million lower than the same period last year, primarily due to loss contribution margin in our heavy vehicle segments on lower sales net.
Net income was $45 million up 219 million sequentially, but down 66 million from the prior year.
Changes in net income were primarily driven by the changes in adjusted EBITDA.
Diluted adjusted EPS, which excludes the impact of nonrecurring items was 37 cents up a dollar and six cents from Q2, but down 37 cents versus prior year and finally adjusted free cash flow was $261 million for a sequential improvement of $394 million as well as a $136 million improved.
Men versus last year, as improve working capital and lower capital spending more than offset lower profits. Please.
Please turn with me now to slide 12 for a closer look at the sales and profit changes in the third quarter.
The change in third quarter sales and adjusted EBITDA compared to the same period last year is driven by the four key factors shown here first organic sales were 159 million lower than last year, primarily attributable to our heavy vehicle segments, where production has yet to return to pre pandemic levels. However, in our light vehicle.
Businesses volumes increased dramatically during the quarter and were largely in line with the same period last year.
The rapid increase in volumes led to a number of our plants in North America running at maximum capacity when they were completely idled just a few months before this dramatic increase in production led to premium costs, which held back the sequential incrementals and increase the year over year Decrementals.
Second is the impact of the Graziano in Fairfield acquisition, which we closed in the first quarter of last year. So.
Since we lapped the one year anniversary of the acquisition the impact illustrated here is the year over year improvement due to cost synergies.
Third the currency impact during the quarter was negligible as the US dollar was generally unchanged from the same period last year and finally lower commodity costs provided a 25 basis point benefit as gross commodity costs decreased by $13 million for a net profit gain of $4 million. Please turn with me to slide 13 for a closer look at how.
Adjusted EBITDA converted to cash flow.
Adjusted free cash flow for the third quarter was $261 million offsetting and nearly quarter billion dollar use of cash in the first half of the year, leaving us with positive free cash flow on a year to date basis for the quarter lower one time cost related to acquisitions lower taxes and reduced capital spending all contributed to the improved.
But by far the largest driver was our improved working capital as we had guided at the end of last quarter working capital efficiency improved in the third quarter as sales volumes increased in our light vehicle segments and inventory was reduced in our heavy vehicle businesses.
The strong cash flow performance in the third quarter positions us to deliver positive free cash flow in 2020. Despite the challenging circumstances. Please turn with me now to slide 14 for our outlook for the remainder of the year.
As a result of the dramatic improvement in our end markets. During the third quarter. We are reinstating our full year financial guidance, which does not anticipate production stoppages in the fourth quarter due to pandemic containment measures. We expect full year sales to be approximately $6.8 billion at the midpoint of our range and adjusted EBITDA to be about 500.
$60 million, which implies a profit margin of about 8%.
This guidance anticipates lower sales on a sequential basis, which is typical in our business as the fourth quarter has fewer workdays. It also implies relatively high decremental margins compared to the fourth quarter of last year. When we received 17 million in proceeds related to an indirect tax expense recovery in Brazil, we.
We expect positive adjusted free cash on a full year basis of up to 1% margin diluted adjusted EPS is expected to be approximately 45 cents per share at the midpoint of the range. Please.
Please turn with me now to slide 15 for a closer look at the year over year sales and profit changes at the mid point of our guidance ranges.
Shown on slide 15, our the four factors driving our expected sales and profit changes in 2020 compared to the prior year.
The difference between our current guidance and the initial guidance we issued at the beginning of the year is almost exclusively due to the impact of the global pandemic, including production shutdowns in end market disruptions first organic changes are expected to be about a 1.8 to 1.9 billion headwind to sales again, primarily driven by the pandemic related shutdowns.
In the end market disruptions, we are expecting decrementals in the mid 20% range as we indicated on our last earnings call leading to nearly a half a billion dollar profit decline second.
Second inorganic growth from the Graziano in Fairfield business as shown on this chart include the sales and profit for the first two months of 2020 and the full year incremental cost synergies. This business will add nearly a 115 million in sales and should expand margins by 20 basis points as a result of the subsequent contribution margin and the delivery of the.
Remaining 15 million of cost synergies.
Third we anticipate the impact of foreign currency translation to be a headwind of about 50 million to sales and about $5 million profit with no margin impact finally, we expect the commodity cost tailwind of about $10 million in profit our input cost have been lower this year. So the recovery from customers are lower as well representing about a $30 million headwind to sales.
The combination of lower sales and higher profit will generate about 20 basis points of margin expansion.
While this year certainly has not played out as anyone had anticipated we remain committed to managing our cost and remain on track to deliver decremental margins in the mid twentys through this unprecedented period.
Please turn with me now to slide 16 for a closer look at how we expect adjusted EBITDA will convert to cash flow.
As mentioned previously we expect positive free cash flow this year up to 1% of sales at the top end of our expectations. The chart on the page illustrates the major components that would deliver free cash flow of about $50 million and compares the major changes to last year.
More than half of the year over year profit decline should be offset by lower one time cost associated with last year's Graziano in Fairfield acquisitions, lower cash taxes from lower profits a modest source of cash and working capital as sales are lower and a meaningful reduction in capital spending.
Please turn with me now to page 17, where I'll provide some color on our end market outlook as we begin to think about how 2021 is shaping up.
As we look forward, we expect generally positive end market conditions first in the light vehicle market, we anticipate full frame truck demand to continue its recent strength as vehicle inventories for our key platforms remain an abnormally low levels. We will also see a sales benefit from our backlog as new models, such as the Broncos sport launches.
Later, this year and from the highly anticipated Bronco launch slated for next year.
Second in the commercial vehicle market class eight and medium truck demand in North America has strengthened this year coming out of the production shutdowns improving demand is expected to continue into next year as third party estimates call for production near replacement levels will also begin production on key envy truck platforms for customers in mid 2021.
Adding modestly to our topline initially but growing in importance from a margin contribution perspective as the programs mature.
Finally in our key segments of the off highway equipment to market demand for agriculture equipment has strengthened over the last few quarters and that trend is expected to continue into next year driven by government incentives around the world aimed at stabilizing the farming sector and from normal equipment replacement activity.
Construction equipment demand has stabilized and is expected to improve as we move into next year, driven by low inventory levels and infrastructure investment.
The foundation of the Dana operating system is underpinned by four major pillars safety quality delivery and efficiency as a team we will remain laser focused on utilizing this system to protect our employees and customers while maximizing value for shareholders as we capitalize on these improving market conditions next year.
Year.
Thank you for listening in today and I'll now turn the call back over to Regina. So we can take your questions.
And at this time, we would like to begin <unk> session. If you would like to ask a question breakfast Starkey and the number one on your telephone keypad.
Your first question is from the line of Eileen.
Give america.
Good morning, everyone first.
First question using the midpoint of your revenue and EBITDA outlook for 2020 implies an EBITDA margin outlook, thank a little less than 9% for the fourth quarter. Some of which you noted with seasonal and then also a function of the Brazilian indirect tax recovery. However, as we think about the starting point for 2021 in terms of margin performance is three.
Q4, Q the more appropriate level to think about or perhaps asked another way where theyre factors at work in the third quarter like very favorable volume mix and price that perhaps inflated margins a bit more than you would think would persist going forward. Even despite you working down factors like premium freight and other cost efficiencies.
Sure. Good morning. This is Jonathan typically our margin cadence is higher in the second and third quarter with normal seasonality. So typically we have fewer workdays in a larger margin or lower margin profile in the first and fourth quarter. So season.
Seasonally Q3 is closer to a better performance, but really I think the answer is neither a quarter is typical of what we would have expected to see at the beginning of the year sales levels still remain below where we would have anticipated, particularly in the heavy vehicle business and the contribution margin from the off Highway segment is Mary is a very meaningful.
Profit indicator to get us to that 12% range closer to where we were last year. So I think.
Thats, probably a better way to think of it as those markets continue to recover which we expect as we indicated.
Early into next year that will start to happen, we expect to see margin upside from where we are today.
Okay, Great. That's helpful and then second.
Question.
And our last disclosure on in the fourth quarter of last year was that about 15% of your 2020 to 22 backlog was attributable to the program given what appears to be real traction more recently with any technology EDI players across all end markets as well as some of your partnerships like highly on do you have an updated or.
Or even high level view around the percentage of your backlog or even programs launching next year that are attributable to ease.
Yes, when we provide our refreshed backlog early next year, we'll absolutely give an update on that but you're spot on weve had a lot of traction there we would expect to that percentage to grow.
We talk about the medium duty platforms that we've won both in the us and in Europe.
Jim touched on the the reach stacker applications to be coming to market next year. So we really are starting to see some some traction we would expect that to improve and more to come on the specifics early next year.
Okay and last question, if I may and I appreciate it maybe a top one as we think about the upcoming your selection and potential implications from the new administration on internally what are some of the things that youre thinking about whether it's taxes or trade or environment, and you're planning around with respect to the election and perhaps some preemptive.
Actions you might be taking to mitigate those implications. If there are any under a new administration.
Hey, Aileen. This is Jim Thanks, a lot for the question you're right that's a bit of a toughie I will tell you from our standpoint, it would not really changing a lot we at Dana I have already been doing.
Some would have argued which I think would probably been around argument looking back on it would have argued that we were ahead of the curve jumping on the electrification and sustainability trail a good five years ago doing what that is there's certainly a lot of a lot of optics on that could be a much stronger push not just here obviously.
The United States, but around the world. Besides that I'd say, we're very plugged in to what is going to happen and current administration whatever the next administration may or may not be and very representative that was being a leader in the u_s_m_c process as the only mobility supplier that was.
Deep into the into the discussions and trying to support our customers in that so we will continue to be plugged in and supportive in the what we believe is the right direction to support our customers and our stakeholders.
Great. That's very helpful. Thanks for the questions.
Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.
Hi, good morning, everybody good.
Morning minimal.
Just quick additional clarification on that.
The fourth quarter implied guidance. So I think that's mid points, we're talking about maybe revenue coming down sequentially by $200 million of so maybe.
Maybe 10%.
So I understand the seasonality like is but that isn't on a lot of production, especially on the light vehicle side seems to be running flat out as you pointed was no inventory so any specific segments within the.
Now, where you would expect some of that seasonal sequential decline to two happened more than elsewhere.
Yes, we're probably just a bit more cautious on the heavy vehicle market. So I think you're right. I think we are going to continue to see quite a bit of strength in light vehicle on the margins. It may be slightly lower but I think the space or probably a bit more cautious as just on the heavy vehicle side. So these are quite uncertain times.
We're confident enough to put guidance out because we have pretty good outlook through the end of the year, but I would say that's probably the area, where we're a bit more cautious is on both of our heavy vehicle segments.
Okay. So thats whats implied in guidance, yes, the bulk of the sequential decline in commercial and off highway revenues and right, Yes, Thats fair.
Okay, Perfect and then just one more clarification on the the fourth quarter, so that implies sort of 8.8% detect guidance. That's on that to your point on the year over year decremental in the absence of a tax recovery, but just in terms of absolute margin can you just go back over some of the factors there I think there's some currency.
An NPL to thinking about.
Yes biggest driver is just the sales level. So a 1.8 billion dollar quarter is pretty low for us, particularly compared to where we would have been last year. So the loss contribution margin in the off highway business. As an example is a pretty meaningful impact on that and then the second factor you noted compared to last year is.
Dimension, we made to the indirect tax recovery in Brazil. So when you take both of those into account Thats whats driving the margins that are high single digits versus into the double digits.
Okay, Great and then just following up on the.
Electrified vehicle pipeline and your backlog can you just.
Remind us sort of the.
The main segments or just a rough breakdown of where your current backlog is likely to go.
Which was last disclosed before its yesterday and what you've announced since then and you know I'm sure you're seeing increased activity in the light duty.
Trucks as well it such as pickups when would you expect some of those.
First industry awards due to happen.
Sure. So as you alluded to in our indication earlier this year of our backlog haven't about 15% and electrification. The largest portion of that was in the commercial vehicle segment, where we had announced our first then medium duty electrification win towards the end of last year. Since then we won another major program in Europe.
We've picked up some programs in the off highway segment one of those that we featured today. So those would be the incremental wins that would be driving that increased proportion of our backlog that we would expect to come in electrification.
As it relates to the light vehicle segment tremendous amount of activity right. There we don't have anything.
We can talk about right now within the light vehicle space on the major program side, but I would indicate that.
Thats going to be coming in the next couple of years as we see the more effort put into that category, but a lot of effort right now on the medium duty segment with a host of customers and.
As well on the off highway side.
Great. Thank you.
Your next question comes from the line of Noah Kaye with Oppenheimer.
Hey, Thanks for taking the questions. Let me just follow up on that last one.
Because I think it speaks to kind of an ongoing debate around the degrees of in sourcing.
Ill around electrified powered screens.
And certainly with your current backlog, reflecting relatively more exposure to commercial vehicle and off highway is it strikes us that.
Between all the acquisitions, you've made including the investment you announced today.
You just continue to focus more on integrated systems and getting the software capabilities the motor.
Integrated axle and I guess, just how do you think broadly about the.
Sensibility.
You know that that sort of integrated go to market. When you look at commercial vehicle and off highway versus say the light vehicle market.
Yes, sure. So when we think about the traction we've gotten your the heavy vehicle market, you're absolutely right. Our customers are looking for for full systems.
But in those markets today, the customers do a lotta a drive system work in house and then many of them are working on in house solutions for those vehicles as well too and we think the same is largely true on the light vehicle side certainly many of the early programs customers have announced some in house content in those but just to continue to remind every.
One in the light vehicle business today for traditional internal combustion engine.
Propulsion systems, many of the rigid axles and Driveshafts are done in house today by customers as well and they also outsource a number of those to us in many of our competitors. So we expect that trend to continue as we continue to indicate there is a lot of activity with many of our customers across all end markets.
Demonstrating the systems capability and we continue to believe that customers from all three of our major end markets will outsource.
The propulsion systems in the future as well too and that's why these investments to give us full electrodynamic capabilities in house the software capabilities to continue to develop and grow to the Pi innovo are going to help us to deliver really strong systems. When our customers look to have some of these platforms done on the outside.
Hey, This is Jeff. This is Jim if I may just as to kind of give you some color to it I would almost argue are not argue but.
Reference.
Wasn't by accidents of our cover page.
Picture. This time, just reminding maybe a very good chunk of the audience in today's call about the multiple end market exposure that we have in commercial channels, which is not by accident. That's our strategy and it has and it's a very intentional secondarily, what does that do for us It gives us plenty of lessons learned.
Road miles or other miles if you want to call that are kilometers and as we're continuing to develop and launch medium duty vehicles. Those are obviously on the smaller side of the commercial vehicle market all of that benefits us in terms of being prepared for our markets on light duty as they come through but we've said since the beginning of the enterprise strategy.
Development back when is that our markets are going to come further down down down stream and we've been to provide the keyword I would offer you to hang on his optionality optionality of which markets with in light vehicle optionality outside of into our other multiple markets that it's all coming together the way, we I guess I would say as we expect.
Yes.
Yes, I appreciate that Jim and I think it makes sense in terms of seeing these middle mile last mile medium duty.
Applications being some of the first really.
Show strong demand so I understand your positioning there and thanks I guess just.
I wanted to go back to.
The comments you made around.
The near term you mentioned, you're just a bit more cautious in terms in the near term outlook on the heavy.
Coal side.
And I guess it will be helpful. If you can provide any regional color on where you think there might be some softness has certainly I think north America here, we're seeing improving construction trends as we head into the fourth quarter.
The obviously the build rates for.
Class eight seem pretty stable if not on an upswing.
So I don't know if you're thinking about that potential sequential softness coming from China or another region, but any kind of color you can provide would be helpful.
Sure just a couple of markets I'd point to that were a little bit concerned about South America. The Brazil market is very important for us.
That market continues to be quite sluggish the.
The second one would be India.
That market, particularly on the construction side.
Has been has been a bit slow. So those are a couple of areas that we would point to as you know and as we've noted as we look into 2021, we think that Theres promise for improvement not only in agriculture, but also in construction globally, but just in the near term I think we're a little bit cautious on the next couple of months and a couple of those.
Spots outside of the U.S. I'd point to as areas of concern.
Okay. That's very helpful. Thank you.
Overall.
Your next question comes from the line of James Picariello with Keybanc capital markets.
Hey, good morning, guys morning, James can.
Can you quantify maybe I missed it can you quantify the premium freight and inefficiency cost that that light vehicle incurred in the quarter is expected to continue in the fourth.
Yes, it had a material impact not only on light vehicles results, but also on overall Dana had we not had premium cost in the third quarter, you would have seen decrementals closer to the mid Twentys like we saw.
In the in the prior quarter and as we mentioned the premium freight was the biggest driver. The positive. There is that has subsided. So we saw the highest spike in the month of August September improved a bit October is on track to improve again sequentially. So we're seeing that come down we think we'll be in a much better spot by the end of the.
Fourth quarter and as we mentioned, we think we're going to be in a really strong position to have a strong year over year Incrementals in the light vehicle segment next year.
So some spillover related to premium freight in the fourth quarter, but not to the add just a little I mean, if considerably lower but were still incurring some in the month of October but the important part is the trend is moving in the right direction and we're we're working ourselves into a better position.
Okay, and then just back on the guidance for for revenue in the fourth quarter.
The implied decline is maybe a point worse than third quarters, and I mean, yeah. If we if we look at.
Commercial vehicle production comps for the fourth quarter.
We look at trends in off highway I mean, theres nothing that would directly support a worse revenue comp year over year for Dana in the fourth quarter compared to the third.
Is it really just Brazil sluggishness in India construction or is there more to kind of round that out.
Yes, those are the best discrete examples I can point to and then also I think we're just we're cautious in this environment and we're we are reinstating our guidance, but we're certainly in a position to to make sure that we want to have a strong finish to the year.
Okay Fair enough and then just one last one for me as we think about next year.
And Dana is normalized incremental margins or are there any one time costs are permanent savings.
Kind of call out as we consider next year's earnings Bridge I mean does the unwind of this year's temporary.
Temporary austerity measures Tempur next year's decremental margins are there positive offsets to sustain a normalized contribution margin, possibly something better how should we think about maybe some of those buckets. Yes. I think you touched on a couple for example, you're right. We will we will pay all our people for a full five day work week, we would expect.
Next year, where obviously some of those austerity measures in the second quarter of this year. We are temporary so you're right there'll be some lower traditionally fixed cost that we flex that'll come back, but we've also indicated that.
We took some we made some very difficult decisions and made some investment and took some permanent austerity measures during the midst for the crisis that will have a lasting benefit into next year. So we will we will be in a position where those those cost reductions will benefit that and help us to make some of the investments we would like to to bring.
Some of these exciting new products to market so more to come on that will give some color on the on the permanent cost reductions when we give our.
Guidance for next year, hopefully early next year.
Got it thanks, guys sure absolutely.
Your next question comes from the line of Rod Lache with Wolfe Research.
Hi, everybody.
I just wanted to follow up with a few more questions on electrification.
See you focused on the commercial vehicle and off highway side I I think not only because you thought it would come first but also because you kind of saw more competitive more attractive competitive landscape.
Can you just give us your high level view on.
The light vehicle side is is are you still kind of looking at up.
A sector that will be significantly more competitive are there any specific areas that you see as.
It is more compelling for for Dana specifically within light vehicle and.
Over time, you just do you believe your position in light vehicle will be sustained.
Is that Electrifies.
Hey, Rod good morning. This is Jim Thanks for the question. Thanks for joining today I think it's a good question. My view is that it's not marketing or just let me give you. The positive. The reality is that we as you know but for everyone else I mean, we're focused on large issue. These in trucks on up and purely the fact that rigid axle bemag.
Tools and all of the torque and robustness of those products are in all your knowledge and understanding the markets and all that is still going to be very critical not to mentioned everything as it relates to this signal.
Significant upswing in the off road enthusiastic markets and those type of products, which you know were on the on the wrangler were on the Gladiator around the Bronco and all that so we're going to participate in different ways Theres no doubt about that.
As it comes through the system and I Hope I can answer your question would I can't do is gun jumping get any further than what I can talk about all I can tell you is back to over you. So my word I said earlier, we have positioned ourselves and the optionality standpoint of supporting our customers with the full three in ones in the future in these areas and we're going to have the benefit of a lot of.
The lesson learned and on the road products that are out there for some period of time not to mention the full operating system software. That's on these vehicles that are going to be on the road next year that will pull back as it relates to just three in one side of it but it's going to be a very efficient systems that are going to put our customers in that same situation had been for years, which is sometimes they do it in house.
Sometimes they don't do it in house, sometimes they break it up between the products of a motor inverter and gearbox. So all we can do is position ourselves for success and we feel pretty strongly that we're in a good position.
Great.
Thanks for addressing that and just lastly.
I know, you're not updating backlog or or mid term revenue expectations, but can you give us any kind of high level thoughts on either volumes or potential content per vehicle on some of these applications and medium duty in off highway that you've cited.
Yes, Rod we've given a general comment that the adding electrodynamics will at least double the content, but certainly we're seeing better than that we indicated for example, the medium duty electric platform are launching next year is that a multiple much higher than that because we were responsible for the full powertrain system, but.
We also feel that the the proof point on the reach stacker as interesting as well to where that quadrupled our content. So we continue to see that this is going to be at least two acts the content and certainly theres quite a bit of upside on that depending on the application. So as we bring forward. The backlog. This CPV increase is a big driver of what's helping too.
To create this revenue potential.
Great. Thank you.
Sure.
Your next question comes from the line of Joseph Spak with RBC capital markets.
Thank you good morning, everyone our Joe.
Just to go back to the.
So the inefficiencies in the premium costs I understand you say, they're they're getting better and it sounds like you think they should.
Subside as we move into 21 is is that because I'm trying to understand the source of I guess the cost. This quarter was it really a function of the pace of the recovery and not a function of freight capacity and availability and as prices that why you see it coming better.
Hey, Joe This is Jim this isn't your first rodeo you hit the nail right on the head. It were totally was all about pace. If you just kind of think about the programs. We're on the demand that you can imagine that was out there and the markets that are certainly our customers wanted to capitalize on we will do what it takes to do that no matter how fast.
Paces and then all the challenges that are around the world.
As it relates to people getting people to go to work and all that other stuff.
So it was a I'll call. It a window in time that we had to do we had to do but if you kind of take sequentially between the months of June to July August September et cetera, et cetera, I mean I've never in my life I can tell you that I know you know this about me I come from manufacturing will come from somewhere right and never in my life of a taken down.
Over 150 facilities to a dead stop then start them all up and then all by the way put them not it kind of a run rate normal capacity well put them fully at full giddy up maximum capacity. It just is what it is and the team did a remarkable job frankly, I can even put into words, what a remarkable job our operating team.
Pull that pull it off and do what they are doing today. So I hope that answers. Your question. Yes. It helps explain why if things are really relatively smoother next year, you could see better margins.
Just on the implied free cash flow in the fourth quarter.
I think typically the fourth quarter is stronger than the third quarter for you guys perspective, the guidance implies a little bit lower was some of that timing in our working capital timing between the third and fourth quarters anything any other color you can provide there.
No you're absolutely right more of our seasonal generation of free cash flow came in the third quarter. So thats. The primary driver between that typically most of that comes in the in the fourth quarter, but just due to the shutdowns in Q3 Thats the biggest driver okay.
Okay, and then just to follow on some of the electrification question as it pertains to the light vehicle side.
We're seeing.
In some cases.
If you go side the concept of the motor moving closer to the wheel in some cases, even even in the wheel.
I think you actually have that type of technology for the off highway segment, but what's your view on that approach for the light vehicle market and can you participate if thats the way that market evolves, if it's not sort of a straight axle for light vehicle.
Currently.
Let me start with that and you set up the now for me a little bit there Joe in your the way you put that question I would take the audience back to the visual that we showed in the off highway market just as a starting point as.
Essentially that is a form albeit in.
In a reach stacker, it's a form of Wieland technology. The point the point it or is that every vehicle is going to have it's not going to be a one size fits all develop depending on which type of propulsion system, it's going to have its going to depend on the vehicle.
I would tell you that theres going to be certainly a lot of them that.
But we I would argue more in the passenger car side that might be closer to the wheel, but when you think about the load bearing and the load carrying requirements on pickup trucks and medium duty trucks and all that stuff you still need you still need that support E beam axles and other so I'm not going to tell you I'm not and I am not an OEM I know.
Her pretend to be an OEM and I don't design.
Cars and trucks for a living but I would tell you at least from a from a propulsion system standpoint, and actual standpoint, and what we do for a living I think you're still going to continue to see a mixed bag as it relates to the design of the vehicles and if it's either again a beam exports at the at the wheel.
And you're in a different or be faster or differently. I guess, you could participate either in either side of those approaches.
Yes, absolutely again, maybe I didnt make very clear, but just did I use. The example, without gun jumping again with that reached Aker is a form of a wheel end type of electrification X.
Execution, but if you take the vehicles that we're going to we've already communicated to you are presented to that will be on the road in a in the new year. Some of the media use those are going to be more of a beam is more historical beam axle with electric either.
Either integrated design for the motor or a direct drive as we call it.
Thank you.
Yes, Thanks, Joe.
Your next question comes from the line of Brian Johnson with Barclays.
Good morning, Jim job day, and its a.
Everyone circling around the same question. So I'll just adds ask it directly I know, you're not giving guidance mid term guidance or backlog.
But if we think.
Mid decade, and I think what people are trying to get their heads around is what's the upside opportunity in commercial and off highway from electrification versus the potential erosion of light vehicle ads.
It seems like they're going to be in the Badger comes to market et cetera kind of eat in at least some end of the movie pickup truck market.
Yeah sure Brian the best thing I can point to last year at our Investor Day, we highlighted that we believe by 2023, our electrified business would achieve.
Half a billion dollars of sales and that in 2018. It was only a 100 million dollar business, so that $400 million of upside over that period was one of the big drivers to our longer term revenue growth outlook, we don't believe.
There will be any.
Cannibalization of internal combustion product in the light vehicle side over the next few years, so that was a pretty meaningful it.
Was largely all.
All upside or you could add to and that's where we had this was pre pandemic, but we had indicated that we felt sales could go from the mid eight and a half billion dollar range to $10 billion in that electrification growth story was one of the major drivers. There. So that's probably the best thing I can point to right now and we'll hope to get a little more color on the progress.
We prosecute against that plan early next year, when we lay out a guide in a backlog refresh.
And will that go through at least mid decade, when electrification instructions likely to accelerate yes.
Yes, we typically do a three year backlog. So I guess next year would take us through to 2023 on the backlog side, that's where our target was and we'll give some thought to what we indicate beyond 2023.
Okay. Secondly, could you maybe elaborate a bit on where you see the applications for the pie software.
In your portfolio and kind of how quickly that relationship could ramp up and now kind of accelerate your module business.
Yeah, it's probably no surprise that relationship started quite some time ago. So the investment follows working with them on some existing programs in their open E. C. U platform and software architecture, we are utilizing on a on a few programs already this software can sit on it.
Tektronix control unit that is managing a three in one system it could be a vehicle controller on a full electrified powertrain. There are number of applications that will use this in and the real key here is.
Having a stronger relationship in an ownership stake in this business will help to improve our competitive position as the the software and control logic of these systems can be a meaningful differentiator. So really excited about the further expansion there but to your question. It's quite broad it can be used in the three in one system that can be used in the.
Full embedded.
Nicole software the vehicle control unit on their number of places that can be used in the electrified propulsion architectures.
Okay. Thank you sure.
Your next question comes from the line of Ryan Brinkman with Jpmorgan.
Hi, Thanks for taking my question, which is how are you thinking about normalized margin now relative to before COVID-19, so sort of putting aside all of the social distancing or protective equipment cost to sales to leverage the premium cost inefficiencies associated with the shape of the recovery the structural cost saves when you add it all up.
For the normalized margin of the business relative to whatever path you were on prior to the pandemic.
Yes, while we're not in a position Ryan necessarily to update our longer term guidance right now.
The indication I give you is that we think that these puts and takes are probably pretty balanced.
Maybe a little bit more leaning to upside with some of the structural cost improvements that we made so we still remain convicted in the long term margin expansion potential in the business end of equal if not greater importance the ability to convert more of that to cash than we have in the past.
The growing pains that we've talked about in light vehicle in the third quarter as Jim mentioned are just unprecedented never have we idled factories for months at a time and then brought them back up to Max capacity. Shortly thereafter. So we think those things are temporary and we'll work through and we remain pretty optimistic about the long term profit and cash flow prospects of the business.
Great. Thank you sure.
Our final question will come from the line of Dan Levy with credit Suisse.
Hey, good morning. Thanks.
Right now.
Hey.
So first question just wanted to ask on power technologies 13, plus percent margin. That's I think like the highest quarterly margin that we've seen in over two years.
Give a little color on the underlying.
Dynamics of that result, I mean, how should actually carry forward and I think historically the segment was doing 15% margin I think there were some issues on commodities.
Reduced aftermarket mix.
15% margin in power technologies.
Feasible in the future.
Sure. So Dan if you go back to what caused the margin compression in power Tech last year that we talked about it was a few factors first geographic mix hurt we saw some reduction in highly profitable regions outside of the U.S.
Second was the commodities as you mentioned, we really saw some increases in some of the key components.
The for aluminum nickel and then finally on the.
Front of the product launches, we had a couple of really big product launches that brought new technology into the business.
And we needed some self help to improve those and really all three of those have improved in 22.
20, compared to 2019, so lower commodity costs getting past those initial launches that we had touched on for new technology and then also an improvement in geographic mix have gotten us there. So as you noted delivering 13.5% margins and still it's not a fantastic global market.
It was a pretty good indicator that the profitability. This business has some room to improve going forward. So we will continue to focus on that and executing to help to deliver some margin expansion out of the profit or the power Tech segment as well.
Great Tom.
Just a question on easy and I guess actually let's call. It maybe your powertrain 1.0 content because.
I think all your customers on the light vehicle side pretty clear going needs to focus much more heavily on the transition to easy and so there is a lot of de allocating resources away from combustion vehicles.
But we know combustion vehicles are still nearly all vehicle sales combustion is still very well is it possible that given combustion is very relevant but Oems need to ship a lot more of their focus.
Toward you need that you could arguably gain more let's call a powertrain 1.0 content the Oems need to rely more heavily on the on the supply chain. So let's call it more of an opportunity over the next.
Three to five years.
To capture that that incremental business.
Yes, Thats something Dan that we talked about when we talked about are laid out our strategy last year, one of the real key components. The second element of our strategy is.
Continuing to strengthen customer centricity and the view there is that by being close to our customer performing well there is greater opportunity to.
Pick up some of the outsourced content as they focused on the other mega trends such as shared mobility autonomous driving digitalization of vehicles. So we absolutely believe that.
They are their capital is precious and we have shared some proof point over the last some proof points over the last few years, where we've picked up some incremental internal combustion engine driveline content as customers reallocate capital. So we do think that continues to be a a.
A bit of a tailwind for us and we're focused on.
Having the right performance to make sure we're the supplier of choice when they make those decisions.
Those outsourcing discussions accelerated more heavily in the last call. It six months as easy as become much much more in focus.
Yes, the last six months have been a lot of focused on equity in a lot of focus on navigating through these challenging times, but it's fair to say that we still think that that that trend and opportunity exists.
Okay, great. Thank you. Thanks.
Thanks Stan.
Okay. This is Jim with that I'll do a quick close.
Again, thank you for everyone for attending today with Dana I Hope you, it's pretty obvious.
Not just this quarter, but any quarter that we tend not to let the grass grow under our feet. We tend to keep moving like everyone. We're certainly managing through the effects of COVID-19 and that can't be minimized and as a quick shout out to particularly all of our associates in our manufacturing facilities and technical centers or test centres.
I would think about it theres a lot more folks that are working at Dana on site than that are not and we appreciate everything they do not just for us.
Dana but for everyone. It isn't by accident that ambulances get built and we're part of that solution and many other so thank you to our team members.
Secondarily from that we're managing at maximum capacities and supporting our customers and the team has done a great job with that.
At the same time, we're maintaining that optionality that I talked about earlier, which leads to scale across multiple end markets. It's not for the faint of heart, but it is for the right thing for our stake our shareholders and we do that at the same time why coming up now we will be launching new business associated with for example, if you at Chrysler Trx or the Bronco sport.
In the quarter, but.
But we don't stop there as you heard today, we've also added pioneers of as extent outstanding.
Partnership as it relates to gaining access to the open SDN platform, which has superior software controls that really truly provides us the ability to optimize their systems and create maximum value for our customers. So we're going to continue down with falling our enterprise strategy, taking care of our customers and doing the right thing for our shareholders out same time being very focused on just.
And ability we thank you again for your attendance and look forward to talking to all of you very soon.
Thank you for participating in today's meeting you may now disconnect.
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