Q1 2021 Dana Inc Earnings Call
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Employing more than 38000 people and 33 countries Dana as the World leader and the design and manufacture of highly efficient propulsion and energy management solutions for all mobility markets across the globe and the company's conventional and clean energy solutions and support nearly every vehicle manufacturer would drive and motion systems.
The electrodynamic technologies, including software and controls and thermal and fueling and digital solutions.
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Good morning, and welcome to Dana Incorporated's first quarter 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 Q&A session will be recorded for replay purposes, there will be a.
Question and answer period after the Speakers' remarks, and we'll take questions from the telephone only and you would lie.
You asked a question during this time price.
And the number one on your telephone keypad.
To ensure that everyone has an opportunity to participate on today's Q&A, we ask the callers limit themselves to one question at a time Inc.
Thank you asking additional questions. Please return to the queue at this time I would like to begin the presentation by turning the call over to Dana Senior director of Investor Relations and strategic planning Craig Barber. Please go ahead Mr. Barber.
Thank you Regina and good morning, everyone. Thanks for joining us today for Dana as the first quarter 2021 and earnings call. You'll find this morning's press release and presentation are now posted on our Investor website. Today's call is being recorded and the supporting materials of the property of Dana incorporated they may not be recorded copied or rebroadcast without our written consent.
Allow me to remind you. The the presentation includes forward looking statements about our expectations for Dana as 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 and in our public filings, including our reports with the SEC on the call. This morning are of Jim <unk>, Chairman and Chief Executive Officer and Jonathan.
Collins Executive Vice President and Chief Financial Officer, Jim Please start us off this morning.
Good morning, and thank you for joining us today.
During the first quarter of customers continue to accelerate production to meet strong demand across all of our end markets driving sales for quarter to nearly $2 3 billion compared with last year, representing a $337 million improvement.
Adjusted EBITDA and the third quarter and the quarter was 234 million compared with 205 million per the same period and 2020 and.
And as is normal with the first quarter of our business adjusted free cash flow was the use of $26 million, but this compares favorably to the use of $114 million and the first quarter of 2020, which saw the onset of the global pandemic shutdowns.
Diluted adjusted earnings per share were <unk> 66 cents.
And the first quarter of 2021 compared with 47.
And the same period of the prior year due to higher earnings this year.
Moving to the key highlights on the upper right hand side of the page, we were able to meet stronger demand and key markets and continue to execute our sales our strong sales backlog to drive sales higher for the quarter.
We also continue to manage higher costs related to supply chain disruptions logistics and labor constraints that are challenging the industry is and market recovery quickly.
Quickly recovers from last year's production shutdowns I will provide more detail around this and a moment I'll also update you on the efforts to expand our electrification capabilities to meet the growing EV sales in our backlog and finally, we will discuss the progress we're making on our ESG goals, which is illustrated in our recently published sustainability and social responsibility report.
Please turn to page five and so I'd like to go into further detail about how we're capitalizing on strong demand across all three of our markets.
The World has certainly changed from a year ago as markets continue to recover globally strong demand and the first quarter was driven by continued higher volumes, especially in the light vehicle market and particularly full frame trucks in North America, we successfully capitalized on higher volumes at the same time, we remain cautious on the outlook due to some of the challenges facing our.
History, including the shortage of micros or semiconductors, which are impacting many of the major Oems around the world moving to the center of the slide the heavy vehicle market continues to be strong, particularly in North America.
The rebound of class eight truck sales continues as we're expecting production to be around 300000 units. The medium duty segment also remains strong. However, we are seeing demand for the heavy and medium duty trucks, and Brazil remains somewhat subdued.
Lastly, and our off highway markets, we have a strong presence in Europe and Asia demand for off highway equipment is improving it remains especially strong for agriculture equipment, and we're seeing global construction and mining markets beginning to rebound.
As you would expect the higher demand across many of the end markets is pushing up against both capacity and labor constraints across the global supply chain. Please turn to slide six for how we are managing this challenge.
As markets continue to recover from last year's shut downs higher raw material costs semiconductor shortages impacting our customers' logistics constraints and labor shortages related to COVID-19 restrictions continue to test the mobility industry.
Through all of these challenges we remain focused on managing the just used to successfully serve our customers.
And the upper left hand slide of satisfied we have seen of rapid rise in steel and other raw material costs, particularly <unk> steel and aluminum.
As we have state of before we recover a majority of the increase from our customers our supply team our supply chain team has done an outstanding job planning for these various impacts and we continue to actively manage our supply base and recovery mechanisms.
Moving to the upper right hand side of the slide.
Everyone on the call is fully aware of the semiconductor shortage, causing many major Oems to slow or idle production. So far there's been less of an impact on many of the key light truck programs that we serve is our customers of prioritize these productions for those key vehicles.
And this remains a risk across the mobility industry and it is something we continue to monitor in conjunction with their customers and adjust our output accordingly.
Moving to the lower left of sea container shortage and vessel availability also impacted global supply chains, resulting and shipping delays bottlenecks at port facilities and insulated freight prices. According to the industry reports the cost of shipping of container has risen by 80% since early November and has nearly tripled over the past year, well these and <unk>.
On the supply challenges and put cost pressures on our supply chain, we continue to implement countermeasures to limit the impact where we can while still maintaining our commitments to our customers.
On the lower right side of the page, it's very clear that we are not past the challenges related to COVID-19 pandemic and all parts of the world. The remains hotspots, such as Brazil and of course, India.
And that are putting added pressure on and already challenged supply chain.
To mitigate the risk we have taken a proactive approach to work with our customers and suppliers to ensure the right material and labor is available as we continue to be very thoughtful about the level of service, we need to maintain for our customers both win within the impacted regions and outside.
While we expect these issues.
We will be of headline for the entire industry. This year are multi and market focus and global presence AIDS and our ability to manage these forces.
We have been successful and protecting our customers and enabling demand fulfillment, while we continue to launch significant new business backlog and strengthen our position and vehicle electrification.
Turning to slide seven I'd like to update you on our new electrification facilities that will support our strategy to lead and electrification.
Vehicle electrification isn't just the far off the ambition for the mobile and industry.
It's right here right now and we are investing and the infrastructure needed to meet this demand as we continue to expand our sales backlog by winning new electric vehicle programs, we're adding manufacturing capacity and a measured fashion to ensure that we have the capability to meet and capacity to meet the specialized electrodynamic needs of our customers around the globe.
By expanding our electrification manufacturing footprint not only of reinstalling the capacity to support current and future volumes. We are also strengthening our electrification design engineering and manufacturing capabilities across the globe.
And the mobility industry exists on all points of the global map, hence it's important that we have the equipment and human capital and all regions of the world to support our customers to.
To date Dana his commission more than 250000 square feet of electrodynamic manufacturing capability to meet current and future demand and regions with strong EBIT growth.
Beginning at the left side of the slide and China, We continue to have an active and growing footprint ready to support the fast growing vehicle electrification trend, including the new Dana Weifang Electrodynamics manufacturing center. The Weifang facility provides our customers a full portfolio of motors, and Inverters and leveraging our global systems expertise and electrification.
And this facility has automated production lines as well as testing capabilities for electric and hybrid driveline.
And India, Dana's neutral kind of electrodynamic manufacturing facilities of World class operation of serving both the light and heavy vehicle markets domestically and for export and the Chuck on team is responsible for manufacturing integrated mechanical and electrical components for alternative propulsion applications, including low voltage synchronous and high voltage solutions.
A vehicle from the smallest to largest across our customer base.
Moving to Europe, Dana shortly UK facility further expands our motor manufacturing capabilities, serving a variety of important customers. This facility produces electrodynamic products that are integrated seamlessly with Dana its E axles gearboxes and hubs or pumps applications include aerial work platforms excavators.
Hello of handlers and many more.
As the only supplier and capable of delivering all elements of the complete fully integrated electrified system across all mobility markets. We expect electrification to continue being a larger percentage of our sales backlog.
To meet the growing demand, we are investing and partnering with our customers to support their electrification journey.
Moving to slide eight I'd like to talk about the continued progress we are making towards our sustainability and social responsibility objectives.
From time to time, we're providing you an update on environmental social and governance activities. This quarter I thought I would mention that we recently published our annual sustainability and social responsibility report on April 22nd for US. This is not just of report that we pull together each of each year, but rather it helps encapsulate our vision for <unk>.
A better future and measure of our progress as we adopt.
Our balanced approach that considers the people we encounter the products, we develop and the planet and enables us to do our work highlights include dana's commitment to reducing our total annual greenhouse gas emissions by.
And by more than 50% before the end of 2035, along with supporting vehicle electrification and other sustainability initiatives to help achieve the Paris climate agreement targets. In addition.
And we're committed to 90% of our U S electricity demand being addressed by wind and and exceed exceeded more than 1 billion customer miles driven with Dana is electric motors and 2020 equivalent to more than 275000 metric tons of Cotwo eliminated.
To be clear it all starts with people.
Our number one priority is the health and safety of our employees customers suppliers and visitors contractors and the communities. We call home, we practice safety first and everything that we do and part of the safe work environment is providing and respectful and inclusive workplace, where everyone can contribute participate and thrive.
We believe that listening to diverse voices and opinions gives day and the strength, enabling us to sell of problems faster and drive continuous improvement and profitable growth.
Were also driven by the desire to provide and our innovation that helps to anticipate understand and shape market trends and fast track new products deliver industry shaping ideas, our strategy of leading and vehicle electrification is a key element of our sustainability objectives, and ultimately helps our customers and their customers to achieve their sustainability goals.
This brings us to our planet and addition to our commitment to reducing greenhouse gas emissions. We've established the technology and sustainability Committee Committee with our board of directors and appointed a chief sustainability officer, two of our executive leadership team.
But not least we take corporate governance very seriously at Dana approaching everything that we do honesty and and with.
The integrity is ingrained in our strong one Dana culture, which has delivered outstanding service and unwavering commitment to ethics for more than 116 years.
Thank you for your time today, and I would like to turn it over to Jonathan Collins for a financial update. Please go ahead Jonathan.
Thank you Jim Good morning, everyone. Slide 10 provides an overview of our first quarter results of 2021 compared to the prior year.
And the first quarter of this year sales approach $2 3 billion delivering growth of 17% and exceeding the expectations. We outlined in February as heavy vehicle demand accelerated and light vehicle demand was negligibly impacted by the chip shortage.
Adjusted EBITDA was $234 million for of profit margin of 10, 3%, which fell just short of last year and our expectations as commodity cost rose sharply and we incurred premium cost is the result of the supply chain challenges that Jim outlined a few moments ago.
Adjusted free cash flow this quarter was the use of $26 million and improvement of $88 million over the first quarter of last year on higher profit and lower working capital requirements and.
Net income attributed the Dana was $71 million and this year's first quarter compared to $58 million last year. The difference was primarily higher earnings this year and lower impairment charges, partially offset by changes in the valuation of marketable securities and higher income tax expense compared to the first quarter of 2020.
On an adjusted basis net income and the first quarter of this year was 97 million $29 million higher than in the same period of 2020.
Diluted adjusted EPS was <unk> 66 cents of 19th and improvement from the prior year due to higher adjusted EBITDA. Please turn with me now to slide 11 for a closer look at the drivers of the sales and profit changes for the first quarter.
The changes in the first quarter sales and adjusted EBITDA compared to the same period last year is driven by the key factors shown here first organic sales were more than a quarter billion higher than last year as all our segments benefited from stronger end market demand. The profit conversion on incremental sales was constrained by premium cost resulting from supply chain.
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The second foreign currency translation increased sales by nearly $50 million, but with no margin impact as the dollar weakened against the basket of currencies, namely the euro.
Finally, the recent spike and steel costs compressed profit margins by 90 basis points gross commodity cost increase by $35 million, but only about half of the cost was recovered from customers in the form of higher selling prices and the quarter due to the typical lag we see during a rapid run up and cost. Please.
Please turn with me to slide 12 for a closer look at how the adjusted EBITDA converted to cash flow.
Free cash flow was far closer to neutral than our historical first quarter precedence. Despite the typical seasonal buildup of working capital out of use of $26 million. This was an improvement of $88 million compared to the same period last year due to higher profit lower working capital requirements and slightly lower capital spending.
Please turn with me now to slide 13 for a look at our revised full year guidance for 2021.
We are raising our full year financial guidance ranges that we provided just a couple of months ago has and market demand continues to exceed our expectations. The revised guidance is bolstered by our strong first quarter sales results and a relatively clear line of sight for second quarter sales. However, we remain cautious on the second half of the year given the uncertainty.
Surrounding the ongoing supply chain disruptions and regional pandemic containment actions.
We now expect full year sales to be approximately eight seven and $5 billion at the midpoint of our range, which is an increase of the nearly half of 1 billion over our prior guidance.
We now anticipate adjusted EBITDA to be approximately $960 million at the midpoint of our range with an implied profit margin of about 11%, which remains unchanged from our prior guidance as we anticipate higher commodity cost and premium costs from supply chain challenges, we will continue to temper our margins and the short term.
Adjusted free cash flow margin is expected to improve modestly between three and three and 5%, which is 25 basis points higher at the midpoint compared to our previous guidance diluted adjusted EPS is now expected to be approximately $2 35 per share at the midpoint of the range and increase of 20 per share.
Please turn with me now to slide 14, where I will highlight the drivers of our expected sales and profit changes for the full year.
As with our earlier comparison this chart highlights the key factors driving the change and expected sales and profit for 2021 compared to last year.
The first organic growth is now expected to add nearly $1 5 billion and sales, including our new business backlog of the half a billion and the end market volume increase which is approaching $1 billion incremental margins are expected to remain strong and the mid twenty's, providing more than 300 basis points of margin expansion second we're updating our outlook for the timing.
And of closing the pending acquisition of loadings automotive liquid cooling business. We originally expected the transaction to close and the first half of the year, but based on the status of the regulatory approval process in Germany, and Austria, We do not expect the transaction to close until later this year, we continue to exclude the impact of this acquisition from our guidance and we will.
Provide further updates as the process unfolds.
Third we anticipate the impact of foreign currency translation to now be of benefit of approximately of 100 million of to sales and about $10 million to profit with no impact of margin.
Finally, we now expect gross commodity cost increases of about $125 million as steel prices have continued to rise we anticipate recovering about $95 million of the increase from our customers and the form of higher selling prices, leaving a net profit impact of $30 million, which will compress margins by about 50 basis points.
It's also worth acknowledging that and 11% margin is 80 basis points lower than 2019. Despite comparable sales. This is driven by three factors, one gross commodity cost or nearly $100 million higher than 2019, and even though we will recover and majority of these cost this compresses margins by 40 basis points.
Two.
We've elevated our investment and electrified products by more than 20 melding million holding back and another 20 basis points as there are limited abilities to offset these investments with cost efficiencies given the current condition of the supply chain and three of the retroactive recovery of indirect taxes in Brazil, and 2019 will not recur this year, resulting in another.
The basis point headwind, regardless, we remain confident and our ability to expand our margins to over 12% and the next few years as we prosecute our plan to achieve more than $1 billion of sales growth and the supply chain challenges abate.
Please turn with me now to slide 15 for more detail on how we expect this year's adjusted EBITDA will convert the cash flow.
Our full year outlook for adjusted free cash flow margin has increased to a range of three to three five per cent of sales representing approximately of 220 million of improvement over last year. The growth is entirely driven by the increased profit I just outlined on the prior page, which is partially offset by higher working capital requirements to deliver this year of sales growth.
Higher capital expenditures to fuel future sales growth and slightly higher cash taxes as a result of the profit growth. Please.
Please turn with me now to page 16 for our perspectives on the major issues, we will navigate through the remainder of the year.
As Jim outlined earlier and the call in keeping with the core tenant of our strategy customer Centricity, we remain laser focused on the quality and delivery of our products as we manage external factors that are pressuring the entire mobility industry.
Our cost recovery mechanisms are working effectively to mitigate the economic impact of the rapid increase in raw material prices. So we expect to see higher recovery ratios through the remainder of the year as the lag effect debates.
There is also the potential for cost of moderate later this year as more steel capacity comes online we remain cautious regarding the uncertain resolution to the microchip shortage and the resulting production slowdowns at our customers as we mentioned previously and the first quarter, we were impacted to a lesser extent and many of the industry due to our beneficial and market mix of full frame trucks.
And heavy vehicles, but we are seeing a more meaningful impact and the second quarter and our light vehicle businesses, which is reflected in our guidance.
We're also actively managing our global supply chain to buffer of many of the logistics constraints and higher cost associated with access to shipping capacity and port bottlenecks, we expect to see higher cost continue into the second quarter, but moderate and the second half of the year on.
Our operations and regions still facing the impact of the global pandemic continued to prioritize the safety of our people, while serving our customers through heightened restrictions and resource constraints as.
As we step back and survey the landscape of the global mobility markets. We're extremely encouraged by the demand fundamentals driving of definitive cyclical upswing in all of the markets. We serve we are clearly cautious about the supply required to fully meet this demand and the coming months, but are prepared to take all the necessary steps to capitalize on this opportunity.
We're also incredibly encouraged by the long term secular trend towards vehicle electrification and the significant opportunity of this creates to grow our business and under and as a result of taken meaningful steps to put the capacity in place across the globe to deliver these new products to our customers I'd like to use this opportunity to thank the entire Dana team for your time.
This work and commitment to support our customers and thanks to all of you for listening and this morning, and I'll now turn the call back over to Regina. So that we can take your questions.
At this time and wed like to begin the Q&A session. If you would like to ask a question press the star key and the number one on your telephone keypad. Our first question will come from the line of Colin Langan with Wells Fargo.
Oh, great. Thanks for taking my question.
And last quarter, you had indicated sort of Q2 Q3 would be the higher margin.
And I noticed that slide wasn't on here any color on the cadence. It does seem like some of the key platforms are going to be a bit weaker in Q2. So is that now the much weaker quarter.
How should we think about sort of the progression through the rest of the year.
Sure well good morning, Colin just want to start by welcoming you back to Dana. Thanks for joining this morning, and a little color on the the margin color. The second quarter. We think will has the opportunity to be a modestly improved from Q1, primarily because of commodity recovery. So the lag effect should start to catch up in Q2.
We are going to continue to see some premium costs. So that original curve, we indicated where margins get better and the middle of the year will likely continue as for the second half of the year you know essentially our outlook is relatively unchanged from what we showed you just a couple of months ago.
We will continue to see how all of these factors shape up and the next 60 days and then we'll have a little better sense on the second half of the year when we're together in July.
Great. That's helpful and just maybe one quick follow up there's a lot of headlines around the infrastructure Bill I know a lot of your your off highway business is in Europe.
And any sort of color on what kind of tailwind if that goes through we.
We could be expecting how much of your business could be benefiting from something like that.
Yeah, you know a lot of the benefit that we're seeing and off highway right now is from the AG market and so there's still quite of bit of room for construction to improve as you noted even though we do a lot of our production in Europe. That's for equipment. That's used around the world. So certainly any of these stimulus catalysts that could.
Help to increase demand could benefit our business and that could be of real margin benefit for the off highway segment as well as Dana because construction and mining are our more profitable segments within that business. So yes, we're certainly encouraged by that.
Great. Thanks for taking my questions.
Sure. Thanks, Carl your net.
Next question comes on the line of Emmanuel Rosner with Deutsche Bank.
Hi, good morning, I apologize if I missed that.
Could you quantify the impact from the supply chain inefficiencies and the in the first quarter and maybe how to think about it.
And the second quarter or the rest of the year.
Sure and in Q1, it was significant for us while we didn't put a specific number on it just to give you a sense it had a meaningful impact on our margins in the form of a couple of areas number one we still continue to see quite of bit of expedited freight.
We have suppliers that have gotten behind and then with the slowdowns in the global logistics chain that Jim talked about just a few moments ago. We ended up having to continue to incur some premium freight at a rate that's well above what we normally would secondly, our operations are less efficient when they're sitting around waiting for parts. So you can imagine.
And the running overtime and other factors that drive that as well too. So in terms of how we see that progressing. Unfortunately, we do see it continuing into the second quarter, we are seeing improvement and some areas. So we're cautious that we may see a little bit of a tailwind there in Q2, but we certainly expect.
Later in the year that we would start to gravitate more towards normal levels and we'll have more to share on that when we're together again and just a few months.
Okay. That's helpful. And then just the point of clarification on the.
Some earlier comments so I.
I think you indicated the.
And the increase from the prior guidance of the top line.
It's mostly reflective of the strength of the first half of the year, but you remain cautious on the second half.
Just to be clear are you seeing any sort of the risk factors.
Second half of are you, saying that this is too early and not to get more positive on the second half outlook.
Yeah, I really think it's more of the latter of Emmanuel it's that we have pretty good line of sight into the next few months from customer releases, we can see the downtime that they're expecting to have due to the chip shortage. We're starting to see continued encouraging signs and our heavy vehicle segments as those orders go up but we're in a position where with all of the.
And the supply chain and and particularly with the chip shortage. We're just reluctant to call. The second half of the year up yet so I would characterize it as more of the ladder. We just want to get through a few more months before we have greater confidence and the the higher demand and sustaining through the balance of the year.
Okay, and just one quick follow up on this one.
So your.
Contribution from market factors of to the top line I think increased by about $350 million for the year.
And the way to split that between your various end markets.
It's pretty evenly spread so and the first quarter as an example, we had contemplated more downtime due to the chip shortage and actually actually occurred Jim touched on the fact that we saw our customers diverting chips towards the key truck platforms that we produce and so even light vehicle was a bit better for us and the <unk>.
First quarter than we thought but also we saw encouraging signs or higher demand and the heavy vehicle markets and really picked up and the off highway segment and we saw both heavy and medium duty vehicles and commercial vehicle do a bit better than we had anticipated. So it was it was pretty evenly distributed across the board as we move to the second quarter, we see that continued strong.
<unk> demand and heavy vehicle, we're just a little bit of a headwind on the light vehicle side due to the chip shortage. So broadly speaking, it's pretty it's pretty well distributed across all three of our end markets.
Great. Thank you.
Your next question will the come from the line of Brian Johnson with Barclays.
And just wanted to start I know, we don't you don't.
Scott the <unk>.
Segments, except in the appendix. So you know if I look of commercial vehicle and drive motion systems, you know typically of low margin segment, but in particular the.
It was negative incrementals on that 50 million and can you talk a little bit more about that segment is that where some of the supply chain pressures are most concentrated and then I've got a follow up around kind of the longer term.
Yeah. So on the I'll take the the first part on the.
See the margins you nailed it it is the supply chain was more acutely impacted and see that as a longer supply chain and some of the challenges we ran into affected them incurring more premium freight that was the biggest driver of why we didn't see incremental profit on those incremental sales. The other undertone is that's the business where we are.
We're seeing most of our growth and electrification early on so when I highlighted that higher EV spending compared to 2019 as an example, CV is one of those areas, where you're really starting to see it so they've.
And they've made some progress on the supply chain, we see line of sight into that improving but that was the biggest driver and Q1.
Second question, and it's not going to be around electrification.
And just around mid term, if we are moving globally and to a more of an inflationary environment or at least the north at least and the U S and it's not just commodities were mined and where it gets you pointed out and you do have contractual recovery mechanisms, but kind of everything labor.
Electricity costs freight costs and so forth.
To what extent as you think about either your formal recovery.
Mechanisms or the pace at which you can re price the business.
<unk> shorter cycles, and say versus light vehicle programs that might have pricing locked in for multi years.
How do you feel about an inflationary scenario and its impact on data and the ability to pass on a broad range of input cost increases.
Hey, Good morning, Brian. This is Jim really good question, you already said, it but I'm going to reiterate the point, yes, there's hard structured programs much more so on the on the commodity side of it. Okay. So we place hold that one for a minute. The second one would certainly be out of the box, but I will start with you know from unfortunately somebody that was running income accompany it.
And the middle of the crisis and O eight and nine.
Our customers are of different customer base and my opinion and they were say 10 to 20 years ago and that they need of healthy supply base that'd be the first one to tell you that they need a healthy supply base, especially of supplier like Dana that's put so much focus and commitment and money into the electrification and providing solutions.
And for the future and where things are at and so the discussions would have to be had but I think they'd be a different level of black and white. This is what the contract says and what the contract says in the event that what you said holds true as it relates to inflationary pressures around the world.
And I'm not there yet I know, what you are saying I'm not there yet that the inflation pressure and inflationary pressures are going to be as extreme as maybe others are but at the end of the day again I think between a combination of our ability to take out cost and the ability to have a global supply chain, where necessary as well as are much more reasonable and understand and customers of the health of the supply base being critical.
I think we'll get there and if there is no better evidence and that I mean, just think about the challenges and the Oems are having right now as it relates to supply and theyre going to want to make sure that they have sophisticated capable capable global suppliers, such as Dana to be there for them to continue to create value for their customers.
Right and they're benefiting from price inflation and the ATP.
The quick follow up and the course of vehicle drive because that's fleet selected as the pricing there a bit more flexible with it on an annual basis or is it similar to light vehicle procurement contracts, where it was kind of of six glide paths of pricing.
Yeah.
Yeah.
And there's some similarities and differences so I would say, it's a mixed bag, but in principle. There are some opportunities over time to address that but theres certainly some structure as well, but I think you characterized it right, it's a bit more flexible than lv.
Okay. Thank you.
Yep. Thanks.
Your next question will come from the line of Noah Kaye with Oppenheimer.
Hey, guys. This is Brendan Steven on for Noah Kaye.
And I appreciate the color on the supply chain can you just talk a little bit about any strategic initiatives, you're pursuing the better track suppliers and their inventory levels and what youre doing to diversify the supply base.
Good question and welcome to the call I appreciate that.
And there's there's a we don't have enough time on the day right now to go through every initiative that we're doing to be able to to be able the to kind of work us through that.
But there are many there are those like you said, we've done anywhere anything from multi dual sourcing to reengineering products to be able to produce them closer to home country and I don't mean, just and for American manufacturing, but around the world and the list is long wants it but it is unfortunately for us it's not a journey that we just said Oh my goodness, we're in the middle.
All of our pandemic, let's do that that's something that we've been working on for at least three to four years and terminal and terms of having flexibility and supply and I'll even speak with and example, we were not a believer that everything has to be vertically supplied for sake of vertical supply, but instead, making sure that we have balance in terms of what we do for a living so.
It kept getting back to an example form.
And back three or four years ago. Many of you may recall that we bought the or acquired the largest independent forging company in Brazil to give us more flexibility of out of country et cetera. So again I could go on and on and on but they'll all of those are in place and we'll continue to see continuous improvement as we go through it on the supply chain and my view.
Because of why one everything I just talked about and two as we came back from that V shaped recovery. Some may argue it was of you, but whatever the case you know as you go through that you're certainly going to have to do it takes times to get some things in place and many of those things are in fact in place now.
Great. Thanks, and then just to follow up on the <unk> acquisition.
Could you give us any update in terms of integration planning any incremental thoughts on the fit into the portfolio. I know you said it got delayed but just any thoughts there.
Yeah, the the PMI work has progressed.
Progressed as normal wear and a good position to be able to integrate that business of just the regulatory process has taken a bit longer and we should have a better update for you on when we're together again and a few months.
Great. Thanks, so much.
And welcome.
Your next question will come from the line of Aileen Smith with Bank of America.
Good morning, everyone and thanks for taking the questions first one when aggregating each of your segments is it possible for you to quantify how we should think about content per vehicle across the region and where I'm getting with the question is when you look at the semiconductor shortages and supply chain disruption North America appears to be one of the more impacted region, which I.
Would assume is one of high higher content per vehicle for you guys. So is this a fair characterization and would you expect to see any regional mix headwind on revenue growth in future quarters or is it kind of be offset by the fact that mix within regions generally continues to improve.
Yeah, It's a it's a very fair point, certainly our highest C. P V. In the light vehicle segment would be and North America. So some of those foundational programs for us the Ford Super duty and the Jeep Wrangler carry very high content and so you're right about that and that is some of the downtime and we think about North America.
And that we've reflected and our second quarter. So we think that youre right its going to start affecting Q2, that's true and the light vehicle businesses and maybe the exception to that is we do have pretty comparable content across the power technologies segment in most regions. So you won't see much of the difference there from a content regionally and power Tech, which largely serves the light vehicle.
Local market on.
On the off highway and commercial vehicle size I think the air side, there is a bit more.
And parity and the content across the region. So largely what we're producing is for a global market and its and its pretty comparable but I do light vehicle drive systems is certainly a bit more skewed to North America that's fair.
Great. That's helpful. And then second question on <unk>.
Look at the commentary around conversion on organic revenue of which I think excludes the impacts from around that is it possible for you to bridge for US how you got from 15% conversion and <unk> 26 per cent for the full year on in the backdrop, where you've talked about supply chain disruptions that may linger through the course of the year on is it just a function of.
Lapping easier year over year comps, particularly in the second quarter or is there something from an operational perspective that you think is going to be resolved on a relative basis and the back half of the year.
Yeah. Its two things you hit one of them it's the.
It's the comp in Q2, so Q2 of last year, obviously was a just approaching breakeven on a dramatic sales decline, but you also touch on the second one which is and the second half of the year. We've indicated we do see some of these premium costs abating and and the second half of last year, we saw a pretty significant.
The impact to those parts of the business for premium costs really across all of them and and the other factor that really is outside of the organic conversion, but helps the overall margin profile is the catch up in raw material costs from a recovery standpoint, but just isolated to organic it's those two items.
Fantastic that's very helpful. Thanks for taking the question Yep. Thanks Aileen.
Your next question comes from the line of Joseph Spak with RBC capital markets.
Hi, Thanks, good morning, everyone.
You talked.
A couple of times about L V the and <unk>.
And the mix and the light truck sort of holding up.
Better this quarter I'm wondering.
And if also you guys and maybe this is difficult to quantify but do you think theres been.
Any benefit.
And at least when we sort of compare versus some of the production forecast for those vehicles for your for your sales because you know a lot of these automakers sort of employed the strategy to make as much of the vehicle as they can so you might especially if you sort of compare your results versus what was actually what was reported as Purdue.
<unk>.
Maybe screen and a little bit better or is that is that difficult to comprehend.
Yeah.
I think if it is it's on the margin because the inventories for those vehicles.
Haven't risen so there's still relatively low from a historical perspective demand remains really strong. So I don't think there's much of a dislocation there and I would expect Inc. Q2 that what youre going to see and our sales is likely going to be more comparable with our OE customers as well as other tier ones that are supplying these programs.
Okay. Thank you for that.
And then.
And I noticed also on the slides you talked about.
On the EV investment weighted by 20 basis points.
I know you raised your sales guidance. So maybe you can just start to talk about more and in dollar terms like is that also what was expected previously and.
Your guidance or are you also taking the opportunity with maybe you know sales coming out of that better fits of to step that up a little bit.
And it's.
It's pretty close to what we thought a couple of months ago. So that the 20 bps headwind or that are more than $20 million increased compared to 2019 was the reference that I was giving is pretty close to what we thought we will continue to watch that carefully theres a tremendous amount of advanced sales and advanced engineering work that continues to happen.
And with key customers across all of our end markets. So we do continue to highlight that when it's there's attractive opportunities the smart our customers with this core technology, we're going to take advantage of that but no. That's not been a meaningful change from the original guide to this current guidance.
Okay, and maybe just one last quick one and I'm sorry, if I missed this and.
And anything in particular behind the strong conversion and power technologies this quarter.
Just the those markets continuing to perform us getting past some of the launches that we saw and obviously most of the commodity inflation. We've seen has been on the steel side. So they are having less of an impact so really that's the market's getting better and the business performing well. So we're really encouraged about the the recovery, we've seen and that business.
Over the last couple of years.
Thank you.
Yep.
Yeah.
Regina, we'll take the next question.
Yeah.
Yeah.
Okay.
Yeah.
Yes.
Yeah.
Alright, and we're just going to pause for just a minute here, while we reconnect the line with our operator, and we will continue our Q&A just a moment.
Okay.
Your next question comes on of James with Keybanc capital markets.
Hey, good morning, guys.
Thanks for your passion and the James go ahead.
The problem.
Just back to the cadence for the year it sounds as though you have decent visibility for the second quarter.
And if we just think back to your prior guidance rate, which had a pretty even first half second half split for both revenue and EBITDA could you provide any color on on how we should be thinking about that first half second half breakout now within your current framework.
Yeah, I mean, I think the upside would follow any potential upside we had and the second half would follow a comparable phasing where we're gonna see typically based on work days and higher sales towards the middle of the year, the second and the third quarter, which yields a better margin seasonally Q4 is usually a little bit lighter on sales and.
So that's kind of how we're thinking about it and obviously once we get through the next couple of months and have greater clarity on the chip shortage will be and are better positioned to to give a better outlook for the second half of the year.
Okay.
And then can you provide I mean is there any update on on EV programs the.
And maybe the EV program pipeline and then can you just remind us Jim.
Based on what you've already communicated what programs what do you. The awards are starting to ship this year the <unk>.
On frame.
And then day Dana the EV related spend is that unchanged for the year and know that there's the 20 basis point impact as it's called out and the guide is that as that of new number or.
Is that correct yeah. So the.
Yeah, Great point that one remains consistent.
So not a meaningful change there what we were just highlighting is the impact that that's having on margins compared to just a couple of years ago, and we did want to accentuate that typically we would look for cost efficiencies and other areas to help offset that but right now with everything that's happening and the supply chain. There is limited ability to do that as it relates to the backlog really.
Light at about the pack our medium duty programs, where we're producing vehicles today for them. As a reminder, that's the complete on electrified powertrain not only the E propulsion system or the electric driveline, but also the E power system and the full embedded software and vehicle controls on that so really encouraged about that we highlighted some of the.
Off highway programs just on our last call we have the a scissor lift with a.
J L. G. That's coming on line the da Vinci, we're excited about that so those are a couple of the key programs. There on the electrification front as it relates to new programs I tried to highlight just a moment ago. There is a tremendous amount of work with all of our customers across all of our end markets on the new business. So our advanced sales.
And advanced engineering teams are absolutely swamped right now.
Getting pricing and technical timing to customers for a lot of the electrified products and we're really excited about them more.
The more electrification business to talk about and the near future, but what we wanted to focus on today is all of the infrastructure work that we're doing to make sure that we can support those new programs.
Got it and then if I could just ask one more on on the off highway markets.
And I think and the in your 10-K.
And you talked about industry global volumes for construction and mining AG.
Anywhere in the range of flat to plus 5% and it seems as though of those markets are collectively recovery and more rapidly. So.
Is that a major component of the the raised market outlook.
And that 50 million and I think you said it's per share.
Fairly evenly split across the segments, but just wondering on off highway because it just seems that the indicators are showing.
Turning green.
Yes, you're absolutely right more so in AG and then the other two so AG has done quite a bit better than we anticipated that caught us off guard and that's been very encouraging but we are seeing.
Particularly in construction and there are some signs that that could do better as well too and the second quarter.
Part of what affected our guidance is the fact that on the light vehicle side of why it's a little bit more evenly split as in Q1, we thought we were going to see a bit more chip shortage impacting Q1, and then we actually did so but you are right from a pure demand standpoint really encourage by what we see there and really hopeful the construction starts to pick up with some of this infrastructure spending.
And Thats plan because.
That's great contribution margin business for the off highway segment as well as Dana overall.
Thanks.
Yes.
Yeah.
Your next question comes the line of Rod Lake with Wolfe Research.
Good morning, everybody.
I.
Wanted to ask.
About electrification just a number of light vehicle Oems, even the ones that are in sourcing electric driveline and like the Gms and <unk> of the world.
Seem to be aligning themselves with <unk>.
Certain power electronics suppliers and and I'm wondering if you could just maybe talk a little bit about whether that has any longer term implications for Dana whether you think there is going to ultimately be multiple power electronics suppliers and that that would be separate from other aspects of their they're driveline procurement strategy.
<unk>.
Yes, I think it's an interesting observation rod, we're certainly seeing a broad range of sourcing models and electrification from component sourcing at customers to full systems sourcing.
We've been engaged in conversations across the all of our end markets in the ability of the supply certain components or a complete system.
We think it's going to continue to create content upside. So we now have offerings in the electrodynamic or and power electronics and electric motors that we didn't have just a couple of years ago. So that's a growth opportunity for us, but clearly a lot of our early wins that are in our backlog are for the full system.
But the market you highlight light vehicle is the one that's moving the slowest of for our three because they focused on the smaller and lighter vehicles, but we're encouraged by the engagement that we have with our customers across all end markets and are looking forward to this unfolding and the next year or two.
Okay.
And maybe if you could just just.
And just clarify for us the degree of confidence that you have or visibility that you have on on the decline and premium costs and and improving incrementals and the back half can you size up what.
Sort of the the delta might be and whether you think that has any implications as we think about the bridges into 2022.
As that recovers.
Sure good morning, and all.
And Jonathan and touch on the back side of that question. If he can without going too far into the details of weeds, but on the big picture and the confidence I want to reiterate.
Part of it besides looking into the supply chain piece of it is just the recoveries I don't think and my 30 plus years of being in supply and manufacturing that ive seen anything like it in terms of a run up we've seen run ups, but not like this one so I mean it is what it is as it relates to the supply chain. It is starting to the the world's certain to come back together a little bit.
I don't know that I can give you a direct answer but those of you that are out there that maybe don't follow it as closely as certainly you need two of your leading of manufacturing company is when you talk about sea container delays when everybody talked about the you know the ship the got stuck and port shoot that was small potatoes compared to all of the other sea container delays that were at port and Los Angeles.
And Norfolk, et cetera, et cetera, and so that Jim, which ultimately turned into a a delay of returning of containers and vessels back to other countries of origin was a massive issue that's starting to sort itself out so to quantify it exactly rod that's very very difficult, there's a million moving parts out there between obviously, it's the labor supply issues that any one.
And of your calls you're going to have this quarter youre going to hear about that from the tier ones tier twos tier threes to the supply of sea containers and vessels to soon and so forth very difficult to quantify I will only say to you and you know this this isn't per se of my first rodeo and being on operations Guy first and something else second I don't know what.
Is that.
And I feel comfortable that it is getting better on a day to day basis, but for sure. This is not something that's going to be fixed and a day or a week, it's going to take its time.
And just in terms of the margin profile Rod, we're indicating we think Q2 is going to be better than Q1, but we wouldn't expect it to be such that the first half of the year would be at 11%. So we're certainly expecting most of the improvement in the cost to happen in the second half of the year as Jim indicated we still got.
Months, not the days or weeks to work through some of these issues, but we are expecting an improvement this year to get us to that of 11% margin great.
Great. Okay. Thank you yeah.
Yep.
Yes.
Your next question comes from the I'm, Dan Levy with credit Suisse.
Thanks for taking the question.
And I think you sort of the dresses and the questions, but the day.
<unk> thin and light vehicle, particularly where you obviously had very good revenue contribution and your core platforms I think or.
The good that the contribution margin of only 16%.
And that's just purely a function of having this outside of North America exposure and that's.
And where the supply chain issues were.
Much more magnified, that's what underscores that lower contribution margin.
Light vehicle the despite good core programs.
You got it yes, it's a it's these premium costs that were incurring not only on the logistics side, but also the operating implications on our factories due to.
And not getting deliveries when they're needed. So you are right and then obviously and all of these overall margin was affected by commodities and the first quarter as well too, but just on the organic conversion you you hit the key items.
Okay and then.
And it sort of of just a quick follow up on that when your customers are seeing the same set of the pressures.
What is the how does the tone or tenor of the commercial discussions with them.
Shape up.
And they're seeing the same pressures as well and they're trying to deal with data and to mitigate.
And the pressures on their margin side, so how does that shape the the commercial discussion.
A good question, a little bit it'll be redundant and my answer so I apologize, but or somebody else's question earlier, which is I think he needed the dimension into two different buckets first of all the talk about commodity costs. Those are generally formulary of formulaic and if theyre not formulaic theres precedents that everybody both us and our customers are pretty.
[noise] pretty familiar with and we just roll down that path and we collectively work together as it relates to the the other associated costs on it I.
I would say it hasnt reached the pinnacle that it's become a pressure point for that but I would say that they're there.
They do have the ability I would call. It this not saying, it's easy, but they do have the ability to move price on vehicle sales.
And so and some to some degree and some fashion and theyre going to have a recognition that the.
The the supplier of the tier one supplier can't be the Ham and the sandwich and and I think you can visualize the the you know the.
And the visual and I'm trying to paint there and and they'll work with us on that and so on and so forth and you know I would even say it all depending on end market you know, there's already some flexibility for extraordinary costs and.
I will just be more blunt about it on the off highway side of the business for a multiple of different reasons that I won't get into but we're doing some I'll call. It extraordinary things beyond extraordinary things to ensure that our customers and protected and they've been very fair with us, let's put it that way.
Great.
And then second question and I wanted to follow up on the the EV sourcing question.
And specifically on the commercial vehicle side.
And we just saw some news of ball the trucks investing and a company that's doing some work on batteries and.
Global charging technology.
And when you can just revisit the insourcing questions specifically on the EV side, because I know and the path, that's where you had a different dynamic versus light vehicle, where there's maybe more in sourcing efforts commercial vehicle and maybe there is more of a of lines of working on suppliers is that evolving at all are you seeing that.
The shift at all in terms of how your customers on the commercial vehicle side are looking at their sourcing decisions on.
Yeah, Dan while that's a fair characterization of our experience is that it's been pretty consistent over the past 12 to 18 months so on the CV side.
Some of these early vehicles that are coming to market. They are looking for a very broad system solutions and we've been and a great position to help provide those but as that matures and we think that it's going to take on a lot of different forms as volumes increase of.
So on total systems, and subsystems and even some component level of sourcing so lots of opportunity out there and we're engaged with our customers in all of those different models within the commercial vehicle space I'd only add a little bit of color to it as it relates to the customers' interest and they're sourcing models and stuff like that and we always have to be a little careful not to turn every earnings call into.
Our backlog discussion because theres. So many of other things that happened and the world and our business et cetera, but just to reiterate if garble. The was lost and my overall upfront of the commentary it's.
It's not at all lost on our customer base that it's that we have over a million and I said million over a million miles traveled on our motors and inverters, because we've been and this business for well over a decade. Okay. You could argue and it was acquired but it's the same people and some of the same capital. It's the same knowledge base of some of the same warranty and and field issue.
Learnings and all the other things associated with it so our customers are very bullish on our basically we're not we don't take it. It's one thing to go sell of program. It's another one to actually put it on the road make sure that the the.
The total cost of ownership as well as reliability is where it needs to be and so our customers are really bullish on it. So I think we're going to continue to be in a position of strength as our markets pull through as they pull through.
Yeah.
Great. Thank you.
Thanks, Dan.
Your next question comes the line of Ryan Brinkman with J P. Morgan.
Thanks for taking my question.
There's been a lot of discussion regarding the bite and administration support for light vehicle electrification, including more funding for consumer tax credit support for charging stations et cetera, and I think of lot of the details have yet to be fleshed out maybe we'll hear more tonight, but just curious if you are seeing hearing or expecting any incremental support or subsidy for electrification on the commercial side of the biz.
And where you know maybe the the math on cost benefit of subsidies and might even be greater given the high amount of miles driven per vehicle of et cetera.
A good question I don't want to speak on behalf of the government or the administration or anything like that because of who am I to know number one number two if I did of it'd be kind of crazy per say anything but number two is I don't think they're going to they're going to.
Isolate light vehicle of the commercial vehicle and anything else and it gets more of a green solutions of emission sustainability and the focus on overall, whereas our world tomorrow not today, so I don't although it may seem like it and the big bold print that it's more on light vehicle for obvious reasons I don't think that that's going to be the case moving forward.
And I think you're going to you're going to make sure you're going to hear a lot more about and markets across the board.
Okay, great. Thanks, and then just finally and maybe on the flip side of the higher raw material input costs that you're seeing which have been discussed at length. I'm, just curious what might be happening on the AG or mining sides of the off highway market and what sort of.
What demand might look like there or how you think it might track going forward just in light of the the increase in revenue for the the farmers and the miners around the world.
Yeah, we certainly think that thats been on one of the demand catalyst and AG performing so strong in the early part of this year.
And it could be of great leading indicator of better performance in the mining segment as well too. So that's a catalyst that we're keeping a careful eye on them.
And part of the reason, we think there's continued opportunity for the markets to strengthen throughout the year.
And then just final follow up there you did mention that Brazilian commercial truck might have been a little bit softer and I know, sometimes the commercial truck down there and sort of benefit second derivative from the mining and AG as they transported around the country. Just curious I don't know if that's due the.
Some of the headlines around COVID-19 down there or what you're seeing with the Brazilian commercial truck market and how that might track going forward.
Yeah, it's a good point the demand the underlying demand fundamentals are strong. So we should see a better performance there the best indication, we get from our team our local team and from our customers. This year right. The of the pandemic containment measures have affected.
That country and have had a bit of a cap on the output. So we're hopeful that as they work through that and people are more safe one of the other benefits will be a better demand for our products and services later on the year and very helpful. Thank you. Thanks.
Thanks Ryan.
Okay, well, thanks, everyone for joining the call today as always I guess I'd put a quick stamp of summary on this one that I'm Super encouraged the business is growing profits of returning to normal levels I'd almost put it into the fray and of the phrase of this.
And this is what we've been waiting for this is what we've been preparing for and I think the team has done a remarkable job where a bit of a bit of the tip of the spear here and earning season as many of your obviously you're aware of so I feel like we're might be explaining this the unexplainable to a degree this is.
A bit of also falls under the end of the umbrella of a once in every.
100 year of global pandemic and all of the moving parts to go along with it. So besides the fact I hope we gave the audience and clarity on the craziness that are out there and whatever your vote. He's dealing with I'll just take this opportunity to thank thank our customers for.
Working with US as we go through things help thank all our employees for everything they're doing to navigate through the challenges of what theyre doing to protect their people as well as support our customers and the list goes on and on it is nothing like any of us of ever saw before I will tell you. This it is dramatically tougher and my view anyway than anything we dealt with back and await <unk>. So thank you everybody for your.
Support and look forward to giving you an update next quarter.
This concludes today's conference call. Thank you for your participating you may now disconnect.
Okay.
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And then.
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