Q2 2021 Dana Inc Earnings Call
The fact, you bachelors in the aftermarket we focus on delivering best in class efficiency maximum durability and superior ride and handling of across the globe.
Dana the commercial vehicle drive and motion systems business unit is an industry leader in.
The main why of traditional energy.
Yeah.
Good morning, and welcome to Dana incorporated second quarter financial webcast and conference call. My name is Regina and I will be your conference facilitator. Please be advised that.
At 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 if you would like to ask a question during this time price.
Star then the number 1 on your telephone keypad John.
Ensure that everyone.
<unk> has an opportunity to participate in today's Q&A, we ask that callers limit themselves to 1 question at a time, if you would like to 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 as senior director of Investor Relations and strategic planning Craig Barber. Please go ahead Mr.
Sir.
Thanks, Regina and good morning, everyone and thank you for joining us today for our second quarter of 2021 earnings call. You'll find this morning's press release and presentation are posted on our Investor website. Today's call is being recorded and supporting materials of the property of Dana incorporated they may not be recorded copied or rebroadcast without our written consent.
So allow me to remind you that our today's 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 statement found in our public filings, including our reports with the SEC.
On the call. This morning as usual are Jim came cisco's.
Barb, Chief Executive Officer, and Jonathan Collins, Executive Vice President and Chief Financial Officer, Jim When you start us off this morning.
Good morning, and thank you for joining us today.
Review of our financial results for the quarter highlight significant improvements over last year's pandemic impacted second quarter.
And the reverse of last year when we.
We're discussing shutdowns and lower sales this year's second quarter, we delivered a strong $2.2 billion in sales representing a $1.1 billion improvement as our customers continue to see strong market demand and in many cases outpaced production and supply chain challenges continued to hamper their operations.
Our adjusted EBITDA for the second quarter was 2.
Chairman of <unk> 3 million, a $238 million improvement over last year, yet profit margin was again tempered by how high raw material cost and supply chain challenges.
Adjusted free cash flow was a slight use from the quarter, but it was an improvement of $120 million over the last year driven by higher earnings.
Diluted adjusted earnings per share. It was 15.9 for the second quarter of 2021, an improvement of $1.28 per share compared to 2020.
Moving to the key highlights on the upper right hand side of the page. We will provide you an update today and how we're managing through the key challenges facing the mobility industry.
Additionally, we're excited.
<unk> hundred and for about a few new business wins, including electrification programs Lastly, I'll highlight our recent announcement to further accelerate our commitment to reduce greenhouse gas emissions and the adoption of science based targets.
Please turn to page 5 and we will begin our discussion with the ongoing supply chain challenges and how it's impacting the.
The current cycle.
We continue to actively manage through the challenging commodity and supply chain environment as we face for key issues higher raw material cost semiconductor shortages impacting the production schedules of our customers.
Logistic constraints and higher transportation cost and.
Good to talk to labor shortages related to Covid restrictions. These challenges are not specific to our company, but are impacting the entire mobility industry, which is seeing high demand, but production is being constrained resulting in finished vehicle inventories for our OEM customers.
First high input costs for commodities such as steel.
Driven by high demand and limited supply of employee prices across all of our end markets, we're working to offset and recover these higher costs through our established mechanisms, but the inherent lag in those recoveries is creating a substantial margin headwind until the input costs stabilize and turn the other way Jonathan will highlight the financial impacts in just a moment.
Of course second is the semiconductor shortages of this leading to a lower production volume at our OEM customers or reducing model availability, particularly the in the light vehicle segment, but more recently in commercial vehicles as well however end customer demand remains strong leading directly to the finished vehicle inventory imbalance.
Shipping delays and higher.
As costs continue to impact the industry and are driving higher input costs. We're seeing this around the world to varying degrees.
Lastly, all 3 of the end markets are being affected by labor shortages, leading to production inefficiencies plant downtime and higher labor cost, we're taking the necessary actions to capitalize on this unique market dynamic of low inventory.
Inventory and high demand as a future opportunity for a stronger and longer duration recovery as the input challenges subside move.
Moving to slide 6 I'd like to talk to you about how we continue to successfully launch our new business backlog programs. Despite the challenges facing our industry.
In North America, we're excited to be supplying our spicer smart connect all wheel drive system to a new compact pickup truck slated to go on sale of next year.
The vehicles with our disconnecting all wheel drive systems are designed to transition to all wheel drive automatically and seamlessly when the vehicle system predict slipping.
It not only enables impressive gains in performance and safety, but is also more fuel efficient and perfect for the growing market for small pickup trucks.
Turning to slide 7 I want to talk about new partnership for us and the electric commercial vehicles.
Dana announced the signing of the strategic agreement with switch mobility.
<unk>, which is an Ashok Leyland subsidiary focused on manufacturing electrified commercial vehicles. The agreement positions us as their primary supplier of electric drivetrain systems, including <unk> Gearboxes Motors, Inverters software and controls for light commercial vehicles and buses in India and Europe.
Light commercial.
Commercial vehicles continued to present significant opportunities they lead the commercial vehicle segment shift to fully electrified platforms. We're very excited about the partnership and will enable us to have direct positive impact on the deliverable delivery of sustainable urban E mobility.
Please turn to page 8.
Continuing on the transition to electrified vehicles slide 8 highlights an exciting collaboration with Pierce manufacturing in Oshkosh Airport products on their new Revolutionary Bolter era platform of electric vehicles. When the first vehicle rolled off the assembly line. They will feature an electric drivetrain with 2 Dana team for Motors.
Coupled with a Dana manufactured electromechanical infinitely variable transmission pictured here in exploded view.
The Volterra platform of electric vehicles is engineered to channel mechanical power and battery power to maximize driving and pumping performance, while helping reduce fuel consumption depending.
Pending on the usage and mission profile the fuel savings could be significant the volterra platform of electric vehicles, not only reduces admissions in EV mode, but more importantly are designed to help save the save lives.
Every second matters, when responding to an airport emergency and the new striker Voltaire of.
<unk> is capable of achieving.
<unk>, 28% improved acceleration when fully loaded with the new EV technology.
As an added benefit the Stryker of Altera vehicle results in zero admissions driving during entry and exit of the fire station EV mode. So there is no longer of need for expensive ventilation.
Within the station during the next several months despite the Stryker Volterra performance hybrid will be showcased at airports across the United States, allowing firefighters to experienced the firsthand the revolutionary of Altera of technology.
Pierce manufacturing the first Pearce of Altera zero admissions pumper was placed in service in.
June of 2021, with the city of Madison, Wisconsin Fire Department, making it the first electric.
Fire truck and service in North America. The Volterra Pumper is serving frontline duty at station 8 the city of medicines busiest fire station to date the city of Madison has responded to over 500 active emergency calls.
Calls with this new electric pumper.
This collaboration with peers manufacturing in Oshkosh Airport project products enables Dana to expand our presence in the specialty vocational vehicle market. While also opening doors to leverage these capabilities across other markets as well.
Let's turn to slide 9 where I will share details on another new EBIT.
<unk> business win for US the success is in our power technologies group.
Several of electric electrified the lifestyle and support sport truck's have recently been announced early this year, we highlighted our battery cooling technology with the global light vehicle OEM and mentioned that there will be more announcements coming.
We're pleased to be showcasing our capabilities by supplying our advanced battery cooling technology. Unfortunately, we can't yet mentioned the name of the OEM. Our extensive range of long term of tech battery cooling product sets the industry standard for innovation The award winning customer designed cooling.
To the stem design cooling solutions feature lightweight aluminum construction, resulting in ultra clean products that stabilizes the battery temperature and enable faster charging.
Turning to my final slide.
Dana we believe the leap that leading the way in sustainability directly aligns with our leadership in the vehicle electrification.
<unk> and is critical to supporting our customers as they work to achieve their sustainability goals that passion as reflected in our desire to advance our emissions reduction targets by developing new zero emission technologies, delivering innovative products and driving operational efficiencies around the globe.
That is why earlier this month, we announced <unk>.
Plans to reduce our annual scope, 1 and 2 greenhouse gas emissions by at least 50% by the year 2030, which is a 5 year pull ahead of our original target of 2035 that was announced last fall.
To help accomplish this aggressive goal, we signed a commitment letter with the science based target initiative or SPT.
Which aligns resources incorporated best practices to accelerate emissions reductions this partnership between the carbon disclosure project, the United Nations Global compact the World Resources Institute and the worldwide fund for.
For nature focuses on partnering with companies to guide emissions reductions initiatives.
Using the science based targets.
As we continue our sustainability journey collaborating with organizations like Spi will support us as we established ambitious targets and identify key areas, where we can further drive sustainability across our operations and our products that enable zero emission mobility. Thank.
Thank you for your time today, and now I'd like to hand, it over to Jonathan to walk you through our financials.
Thank you Jim. Please join me on Slide 12 for an overview of our second quarter results compared to the same period last year and.
In the second quarter of this year sales topped $2.2 billion delivering growth of over $1.1 billion compared.
<unk> to the prior year the doubling of sales is entirely attributed to the recovery experience across the all of our segments from the height of pandemic related shutdowns last summer despite continuing to feel the aftershocks in our supply chain today <unk>.
Adjusted EBITDA was $233 million for a profit margin of 10, 6%, which.
It presents a dramatic improvement over last year's nearly breakeven results. Even as this performance is hampered by dramatic material cost inflation and continued supply chain challenges adjust.
Adjusted net income in the second quarter of this year was $86 million of $185 million higher than the same period of 2020.
Diluted adjusted EPS was <unk> 50.
The 9 <unk>.
28% improvement from the prior year and finally adjusted free cash flow. This quarter was a use of $13 million an improvement of $120 million over the second quarter of last year as higher profit more than funded increases in working capital and capital expenditures to support the growth. Please.
Please turn with me now to slide 13 for a <unk>.
Closer look at the drivers of the sales and profit growth for the second quarter.
The change in the second quarter sales and adjusted EBITDA compared to the same period last year is driven by the key factors shown here first overwhelmingly the increase is attributed to the organic growth of nearly a $1 billion as our business laps the trough in.
Sales caused by the onset of pandemic containment measures last spring and summer the.
The incremental conversion of 26% exceeds the decremental conversion from the same period in the prior year by about 200 basis points.
Foreign currency translation increased sales by nearly $90 million as the dollar weakened against the basket of foreign.
Currencies, principally the euro as is typical of this has no impact on our profit margin.
Finally steel prices have continued to rise at a rate much higher than anticipated gross commodity cost increase by $70 million and we recovered $45 million of this in the form of higher selling prices to our customers for a recovery.
The ratio of about 65% this remains lower than our normal steady state recovery ratio due to the timing lag caused by the rapid spike in commodity prices.
These increases compressed our profit margin by approximately 180 basis points and represented the primary impediment to achieving 12% margins in the quarter.
Please turn.
Foreign cried 14 for a closer look at how adjusted EBITDA converted to cash flow.
Free cash flow was a slight use in the quarter at $13 million. This was a substantial improvement of $120 million compared to the same period last year and was entirely attributed to higher profit, which more than funded the higher capital requirements to support the increased volume.
With me.
Please turn with me now to slide 15 for a closer look at our revised full year guidance for 2021.
Given the strong market demand in the second quarter. Despite the impact of the chip shortage. We now anticipate full year top line results towards the high end of our guidance range. This represents of quarter $1 billion.
<unk> from the previously indicated midpoint of the range and is driven by higher commodity recoveries stronger foreign currency exchange and higher demand across all 3 of our end markets. However, we still expect profit near the midpoint of our range, implying a margin of between 10, 5 and 11% as the additional contribution margin.
From a higher demand is offsetting the higher commodity costs net of recoveries. This also implies an adjusted free cash flow margin of approximately 3% of sales diluted adjusted EPS is expected to move towards the higher end of our range at $2.45 per share due to lower interest and income tax expenses.
Please turn.
All of them how to slide 16, where I will highlight the drivers of our expected sales and profit changes for the full year.
This chart highlights the key factors driving the change and expected sales and profit for 2021 compared to last year.
First organic growth is now expected to add nearly $1.6 billion in sales, including our new business.
With me out of a half a billion and the slightly higher end market volume increase mentioned on the previous slide incremental margins are expected to remain strong in the mid twenties, providing about 350 basis points of margin expansion.
Next we anticipate the impact of foreign currency translation to now be of benefit of approximately $150 million to sales.
<unk> and about $15 million of profit with no impact to margin.
Finally, we now expect gross commodity cost increases approaching a quarter of $1 billion.
As steel prices have continued to rise, we anticipate recovering about $180 million of 70% of the increase from our customers in the form of higher selling prices.
Leaving our net profit impact of $70 million, which will compress margins by more than 100 basis points.
Please turn with me to slide 17 for more detail on how we expect this year's adjusted EBITDA will convert the cash flow.
We expect full year adjusted free cash flow of about $275 million, representing an improvement of more than 2.
<unk> $200 million compared to last year. The growth is entirely driven by the profit growth I just outlined on the prior page and is partially offset by the higher capital requirements to fuel the sales growth.
Please turn with me now to page 18 for an overview of the debt refinancing we completed in the second quarter.
In April we were the first.
Of your mobility supplier to launch of Green bond here in the U S. The proceeds were allocated to finance green projects, driving our stated sustainability and social responsibility initiatives, including reducing greenhouse gas emissions expanding the use of energy efficient production processes and designing engineering and manufacturing.
<unk> products that enable the electrification of the world's mobility fleet.
Then in May we launched our debut bond issuance to the European debt capital markets with a $325 million Euro placement to refinance our 2026 dollar notes that had been swapped of euros. Both of these actions lowered our borrowing cost ex.
Standard our maturities and will serve as more permanent components of our debt stack as we deleverage in the coming years.
And finally on page 19, I'm extremely excited to announce this morning that we will be hosting an electric vehicle technology day for capital markets participants on Tuesday September 28th this.
Hands on interactive technology experience will be held at our world headquarters and Mommy, Ohio and broadcast of virtually.
The event will feature our industry, leading EV products as well as a selection of electrified vehicles and equipment powered by the systems. Our goal for the event is to provide further insight into how we see.
See the transition to electrified mobility unfolding in the coming years and how Dana is leadership in this evolution will drive outsized growth and financial returns for our shareholders.
I'd like to thank all of you for listening in this morning, and I'll now turn the call back over to Regina to take your questions.
At this time, we would like to begin the Q&A session.
If you would like to ask a question press the star key and the number 1 on your telephone keypad. Our first question comes from the line of Brian Johnson with Barclays.
Yes.
2 questions first financial and then second kind of strategic competitive on the financial side.
Just looking at the incremental margins.
I was struck by very high Incrementals in our tech and.
Mid teens in CVD can you, perhaps elaborate a bit Jonathan.
Sure from a power technologies perspective, most of the economic impact that we're seeing is on steel so thats largely being.
<unk> impacted in our 3 driveline businesses.
Less of an impact in that segment. So it's not been as big of a headwind.
<unk> continued to see pretty decent volumes in that segment.
Across the various end markets and continued improvements in the operational performance that really shone through because they won't.
<unk> werent overshadowed by the.
Of the material economics as much as the other businesses.
As far as the the commercial vehicle business that you mentioned the real driver of margin there is.
Pretty continued strong volume so we expected the heavy vehicle markets in the medium duty markets to do reasonably well the aftermarket has continued to perform.
From reasonably well so those are principally the drivers of helping to deliver a a reasonably solid performance across the segments.
And second on the strategic while we're on power Tech the.
The battery cooling win.
I just wanted to get a sense the.
As much you can give us.
1.
1 how should we be thinking about the CBD versus the typical power Tech product and then 2 what was really unique about your solution because the picture looks like a piece of metal. It's obviously a much more complex of that and then if you kind of went through the RFP.
On a few assets what did the customer feedback to you as some of the key differentiators of our new product.
Sure maybe I'll touch on the content piece, and then I suspect Jim I want to highlight some of the technology. That's embedded in the system. So first from a content perspective, Youll remember within our thermal management system of power technologies today, we principally.
Happily cool engine oil and transmission fluid so of that ability to dissipate heat in that system as the core competence and we've been able to leverage that into cooling batteries in the form of the battery coal plate win that we announced which is very similar to the 1 that we announced with GM earlier this year.
Year on their Altium platform, so as it relates to the content, that's something Brian that we plan on giving a bit more color on here in a couple of months, but all indicate that battery cold place given the size of the batteries and the system have a dramatically higher content per vehicle than the engine and oil transmission coolers that we produce today.
I don't have only of a lot to add to that Brian. Thanks for the question. This is Jim of course the.
The is 1 thing that can't be lost in the mobility industry is the importance of the longstanding relationships customer confidence trust global footprint, none of those touched on the technology side, that's but that's a pretty pretty critical ingredients so with.
With the customer we're referring to today I don't know how long we've been doing business with them, but for decades, let's keep it at that level.
What's the I would almost call it the special sauce of Dana is the fact that battery cooling can very much be correlated to our PT business on both sides, both thermal technology as well as ceiling. It takes both to be able to to do the battery cooling the way.
We're doing it so it's certainly differentiates us from the competition and our customers see the besides the fact of pure that they had the confidence in us to go deliver launch products from appropriately and create value for them.
Okay, Thanks, and congrats on all of these wins.
Thanks, Brian.
Your next question comes from the line of Colin Langan with Wells Fargo.
Oh, great. Thanks for taking my question.
Just on the off highway business the quarter over quarter incremental margin seemed quite high pretty dramatic improvement.
The improvement of margin anything unique driving that is the margin level here of sustainable any color there.
Yeah.
<unk> of calling just a couple of things from an off highway perspective, we highlighted earlier in the year that AG had been really strong and that was driving a lot of the growth we're starting to see a better recovery across our other segments in off highway which include construction material handling and mining we've always indicated that those segments.
Liver a bit better margin profile, so that ends up being 1 of the drivers that's helping to overshadow the impact of some of the premium cost as well as the commodities that we're seeing in that business.
Okay.
And then just strategically.
There's a lot of talk.
Particularly on the light vehicle side about in sourcing parts of the drivetrain on some of these EV trucks light trucks that are coming out.
Any color on sort of how you see the in sourcing risk for things like the the drivetrain in OXXO.
Just remind us of the light vehicle side, what the offsets the okay.
<unk>.
Thanks for the question. This is Jim the couple of things on this but just for not so much for you but for the broader audience. Just as a reminder, a majority of the let's stick to axles for imminent are in sourced today out in the world I mean, it's just the reality to it but that doesn't mean that there's not a huge addressable market and a good business for Dana case for over.
The 117 years. So that's that's the starting point to it as it relates to the balance of the year light vehicle question in totality as we've always said for our pull through electrification light vehicle started more in the passenger car smaller SUV et cetera, we're always going to be where we're supposed to be and we play we don't try to be everything to everybody.
We're in the full frame truck business and we expect certainly that the pull through will come as those markets continue to evolve we will talk more about this in September 28th for sure, but I will arrest.
The rest assure when I say this the value creation that we are providing across the all the markets that were providing electrification pull systems if thats.
The commercial vehicle markets, the off highway markets and light vehicle for that matter.
Light vehicle customers still see the same value proposition that comes from Dana that it's it's a full stop supplier, meaning they get the whole thing to get the full mechanical full electric for software field controls for cyber full everything so there is value creation.
Creation, there on both sides and we fully expect to be a quite a big participant like we have for the last 100 years.
Okay. Thanks for taking my questions.
Thanks Carl.
Your next question will come from the line of Aileen Smith with Bank of America.
Good morning, everyone.
That's the question related to the semiconductor shortage as you look at your different business segments is there anything in the underlying market dynamics of commercial vehicle and off highway businesses that would structurally lend itself to automakers or supplier of being better able to evade pressures from the semiconductor shortage, particularly.
Early versus the light vehicle and power technologies businesses, meaning perhaps those vehicles machines are less complex of require less that means or alternatively, those businesses rely less on production schedules and more on take rate. So you can avoid of intermittent downtime that's been plaguing the light vehicle about that.
Yes.
The.
The question. It's a good question, but I would have to answer it like this maybe other suppliers, who would want to get beyond their skis and answer that question for the Oems, but I don't pretend to be of vehicle manufacturer I pretend to be of supplier I hopefully more than support.
So I can't really speak for it in any granular detail, but I can say that as you know from the various companies you cover.
For et cetera that there's going to be an impact on all of them. It's just the different different degrees in how they get through it will be they'll have their own solutions for that so I'm, sorry, I can't give you a direct answer to your direct question, but that's just not where I feel it's appropriate to participate.
Okay, and then focusing a little bit on the electrification portfolio in the the battery.
<unk> for the North American pickup truck.
Frankly for the light vehicle market your core competency of Ben on the body on frame the truck market and clearly you have compelling product on the EBIT side to continue winning business in that segment, whether either E D. But as you think about technologies like cooling plate. These can be applicable for body on frame vehicles.
All of us as well as unit body architectures. So when you think about the discussions you're having with your customers for plans new EV products would you still characterize the truck segment as the key market, where you're really winning and have a right to play or are you also seeing significant progress in wins across other segments.
Good question.
Question Theres, 2 kind of 2 answers I would I would provide you on that 1 if you go back to and you'll remember this very well very good and on top of your job for sure as you remember the optimum presentation for GM the ultimate.
That form that we announced earlier this year, you could define that and probably outside of the full frame type of area and so thats I think.
Its representative example of how you are right. We have participated in the power technologies side of our business not just in the full frame truck, but across the light vehicle spectrum of vehicles further years for the second part of your question is as of the same capabilities competencies capacity et cetera, do they present, the same opportunity to across the other end markets.
Light commercial vehicle and off highway of the answer is absolutely yes.
Okay, Great. That's very helpful. Thanks for taking the questions.
Thanks Aileen.
Your next question comes from the line of Joseph Spak with RBC capital.
Thanks, so much.
First question just going back to.
Actually.
Question on <unk>.
Commercial vehicle light.
You know this business used to do sort of 9% to 10% margin. It seems like we're trending still well well below that.
And I know you mentioned stuff like steel headwinds that actually looks like this the segment, that's a little bit less impacted by steel because of the some of the recoveries. There. So can you just talk.
Brian the trajectory of margins, there and what's going to get them back to those prior levels.
Sure. Thanks for the question Joe It's Jonathan in.
In the commercial vehicle space the biggest constraint to margins is the outsized investment in electrification. So much of the activity is very much concentrated in this segment.
About the a lot of the investments that we're making are to deliver products for these you know this year and many coming in the next year. So I would say if we think about the overall investment that we highlighted earlier in the year and the step up that we've made in the last couple of years, it's disproportionately in the commercial vehicle business. So that's the place where we see that's.
And continue for a while so even as volumes increase in the traditional business kind of gravitates back more towards that higher single digits approaching 10%. The investment that we make in electrification is going to pull that back we do believe within a couple of years and we're going to get into a bit more of this detail here on the in.
The September at the inverse.
We do see the opportunity for that segment to start to see margin expansion. As we are delivering these systems, which are smart systems, and our software controlled and I'll come at a more attractive margin profile than the historical business, but we're at that point right now where we're heavily in the investment phase on the contribution margin is still relatively small.
Esther day on those products, but as the volumes ramp up we see that being the catalyst for this business, having a more attractive long term margin profile.
Thanks for the maybe just to quickly follow up on that so if we look back at prior years, where.
Maybe these commercial vehicle end markets were similar.
Similar levels of demand.
Is the delta between the margin in those years of now sort of of the level of investment is that like a good proxy or.
So just a couple of hundred basis points or yes, I think that's fair. It's also important to remember you did highlight we have some of our better recovery ratios in our heavy vehicle business on commodities, but even as we recover a higher portion of that is.
Still does constrain margins when our top line goes up in the bottom line goes down a little bit, but yes, I think the EV investment is is the most meaningful component.
And then maybe a good segue into the second question just.
If you could talk a little bit more about the.
The investment in switch.
Maybe maybe how much.
Trend wise when when is.
When should we expect.
Some of that product.
To start hitting.
Hitting the market in.
Maybe we'll hear more about this at the.
Electrification day, but.
What does this do to sort of your EV backlog.
Yes.
And in terms of the investment more color to come on that but it's something that's going to be consistent in quantum compared a couple of the other ones that we've done in the space. So it's mean.
Meaningful but relatively modest hasnt.
As it relates to the technology as Jim mentioned, we're pretty excited it's a very broad range of technology that will be partnering with them on we featured some of the.
Our products on the right hand side of the page they are going to leverage our electrified axle within a portion of that fleet and other areas, they're going to use drive technology that utilizes our electrodynamic components of the motors and the Inverters were really excited about what we can bring them from a electronics and software control perspective with the capabilities we acquired.
And all of those acquisition. So you are right, we're going to get into a bit more detail on this in September but were needless to say, we're very excited about taking this very long term partnership with Ashok Leyland and moving that into the future of mobility in their other switch business.
And just any comment on when that when revenues.
And part from that or.
Yes, but more to come on that when we're together next we're going to lay out with greater specificity when the volumes for a lot of these key wins are going to start to come in.
I appreciate it sure no problem. Thanks, Joe.
Your next question comes from the line of Noah Kaye with Oppenheimer.
Can start hi, good morning, and thanks for taking the questions.
Kind of understanding the commercial vehicle Oems have been waiting to open their 2020 of order book and I think thats, partly so the grid just calibrate the magnitude and duration of some of these inflationary pressures.
In thinking about their 2022 pricing so just in your customer conversations.
With that segment how of the conversations around pricing and your ability to pass on not only the higher metals commodities costs, but other supply chain costs over a longer period of time of those conversations are productive do 1 of them basically getting out here is you know is there a set up for just improve recovery.
These costs as we get into next year.
Good question, obviously, you know the commodity piece of it relative to materials is pretty pretty.
I won't say rigid, but pretty clear on both sides of no matter what end market, we're participating in and how we get through that for the rest of the related court.
The related costs I would tell you. It's all on a case by case basis communication with all customers about different things as I've said many times on earnings calls as the.
1 thing that our customers have learned over the course of the year No tell me. This is look we all lived through 2008.2009.
Healthy supply base is pretty critical.
Of all of the the success of the overall mobility industry. So I think we will continue to have the partnerships. We've had industry has evolved over the last couple of decades. So that's the best way I can answer the question right now.
Okay I appreciate that.
And then can you talk a little bit about signs.
Signs of life in construction you know, we've obviously started to see.
For some favorable momentum indicators.
Buildings around.
Dodge and Abi and some of the other forward indicators.
Just to what extent do you think that can drive continued sequential improvement in off highway and then if I could ask you a it's obviously a moving piece of legislation but.
Some of the thoughts on the compromise infrastructure Bill is the potential driver.
Yes. This is Jonathan I think you certainly touched on some of the key leading indicators of continued demand in this category I think 1 of the interesting observations about.
Our customers not only in the construction.
The segment, but across all.
All end markets is there a desire to build.
More vehicles than they can right now so we continue to see of weight situation, where demand is power.
Facing the capability of the supply chain to keep up so we're in a position where were we think that's going to continue across all of our end markets and we're just hopeful that we continue to see improvement in the.
Health of the overall global supply chain. So we can start to meet that demand, but I think you touch on some great points that are good indicators that this is a likely to be of longer extended cycle across many of our end markets.
And I would just add to your second part of the question is is that certainly of the infrastructure builds is only is only positive for us.
And it's not I know, we're talking about the United States for that specific question, but I'll just say that it is.
Quite ramp it around the world in terms of infrastructure activity. So I'll leave it at there.
Alright, I appreciate the color and thank you. Thanks.
Thanks Neil.
Your next question comes from the line of Rod Lache with Wolfe Research.
Hi, everybody I was I'm also going to ask you about the electrification of investment in commercial vehicles can you maybe provide some just.
Just some indication of the magnitude of the impact in that business and.
It makes sense that the initial.
As.
Of contribution are going to be relatively small.
Do you think we should be anticipating that that phenomenon.
Would also occur as electrification starts to become more meaningful in light vehicle or are you more able to just transfer the technology over.
Sales in V to L. The given the the segments that you're focusing on.
Yeah, that's an excellent point Rod this is Jonathan thanks for the question. So just a couple of things I think when you think about the margin pressure that we see in the CV space. We've got good demand, but we have record high material costs, we obviously still have challenges and disruptions.
From sins in the supply chain commercial vehicle happens to be 1 of our businesses with the effectively.
Effectively the longest supply chain. So those things are pressures, but the EEV investment is substantial.
Can you give a bit for color on that.
The the technology experience day here in a couple of months, but we did indicate earlier in the year. When we were trying to give an exam.
Eruption of how we thought 2021 would turn out compared to 2019 that we're talking about tens of millions of dollars of incremental investment a meaningful impact on our margin profile.
But I think you highlight a very interesting point because a lot of the early technology developments are being applied to commercial vehicle.
Example, I think the impact to them will be disproportionate compared to the off highway in the light vehicle segment. So certainly as we really ramp up application engineering investments.
There will be some impact in those segments, but a lot of the product engineering to get the core technology ready.
Happening.
Nicole market, that's moving first and fastest for Dana which happens to be commercial vehicle in medium duty and now moving into heavy duty. So yes, I do expect the other businesses to have to make investments as the volumes really start to pick up but I think the.
The point about it being more concentrated in CV because it's moving first is it really fair 1.
Okay. Thank you and on.
On the point of.
Everyone is facing logistics and various supply chain challenges and it's and it's understandable that there's a lag.
And the raw material recovery mechanism.
Hum.
Are you guys feeling like or Cigna.
Signaling that.
The we should be expecting maybe better incrementals than would ordinarily see next year as some of those mechanisms start to.
Either get implemented or some of these things are presumably by then start to abate.
Yes, I think that's a very.
Fair point, I mean, we see the environment, we're in as being pretty unique the.
The prices are just.
So high on on so many measures that we would anticipate at some point that they're going to abate as they do youre right, that's really going to help push the incrementals of the business and we think at a more.
Simple commodity level, you don't even higher than it may have been in the past, but not quite at the levels. We are today, we still have strong conviction that the margin potential of the business is going to exceed 12% cash flows are going to continue to grow so.
A lot of confidence that in the longer run all of these demand indications that we're getting are just.
Very strong encouragement that the.
Of the cycle is going to move in the right direction and should stay there for a while which is really going to help the overall margin and cash flow profile of the business.
Okay, and just to clarify in the longer run.
You anticipate recovering 100% or is that something negotiated and.
Just lastly can you just give us maybe just the magnitude of bidding opportunities. What are you seeing in the light vehicle side of an easy at this point.
Yeah, I mean for your question on commodity of cover I think the way to think of it is that during the period of a program average program life. We would say is probably in the 4 to 5 year.
Hey.
Youre going to get those incremental recoveries that are going to be less than 100%, but at some point as programs rolled over and you move to the new program. There is ability to build in the reality of where.
Commodity prices are so in the long run, yes, I think we have the ability to effectively recover that.
And.
Our range I think that's an important piece of I'm, sorry, Rod that second piece was.
The magnitude of bidding opportunities so your yeah.
Can you just give us some scale of what you're looking at at this point on the EBIT side.
Yes, I mean, I think I would say that we continued to see of record pace in the second quarter. So we thought activity.
<unk> levels were incredibly high in Q1, which they were.
But the pace of responses in the activity of quoting increased in Q2, so it's the highest its ever been and.
Interestingly, we're seeing it across all of our end markets. So we're really encouraged by that sign and we'll continue to focus on.
Getting the highest win rate.
Activity and more to come on that when we are when we get together in September right.
Great looking forward to it thank you.
Your final question will come from the line of Dan Levy with credit Suisse.
Hey, good morning, Thank you.
First just wanted to ask on the light vehicle industry.
We can I think we all know there is very large.
Inventory rebuild of hub.
Especially in North America, so as that inventory rebuild starts to play out I think.
Some of them related to Ron's question slightly different approach.
What type of incremental margins should we expect.
On the light vehicle side as well.
And the inventory rebuild and I think I know, there's a bunch of moving pieces in there.
Yeah, I think Dan on a year.
Year over year basis, theyre going to be pretty consistent with what we've seen in the past.
Sequentially, they may be a bit higher than that 1 of the things that were challenged with.
In the near term is we're probably flexing more closer to a direct variable profit then of contribution margin because of the labor shortage situation.
We're holding onto people as much as we possibly can but I think generally speaking you know aside from commodities, we would expect a pretty normal contribution for.
We're getting the vehicle, which is kind of in that 20% range.
Great. Thank you.
And then just a follow up.
An easy and I'm sure you'll get more of it here he'd be day in a couple of months, but you've obviously done you know.
A number of acquisitions to boost your capabilities in engineering.
For light, where so I just want to understand all of these capabilities specific to.
<unk> efforts in certain end markets or can they be of apply it across your end market exposure.
Specifically to the light vehicle.
It's the right question. Thanks. This is Jim they absolutely are.
Are interchangeable with all of the markets at the end of the day as I often say.
Yeah, I don't sell parts for living and of shell capacity for a living off so human capacity, so well equipment capacity. So that type of thing because if you come back to that arent, let's take a more recent you used some of the organic piece of it but we've done plenty of it.
But you won't use.
Soft drink, but we'd been plenty of organic as well take the final the acquisition vehicle control units et cetera, et cetera. The same vehicle control unit software capabilities product development et cetera, et cetera will go across the commercial vehicle off highway markets light vehicle all dependent on where our customers think we could help create.
The internally for them.
So, yes, I mean the.
The.
The PCB board doesn't see a difference between the commercial vehicle and off highway vehicle or whatever the case, so and of the same goes for motors Inverters software complete vehicle integration in all of the other things, we do and of course of the obvious is on the power Tech the battery cooling and electronics cooling there all the all interchange.
Great belt. So thanks for the question.
And on the the light vehicle side has that capability of giving you an entry point on discussions.
That maybe didn't exist in the past.
Well for sure. However, I'd say our first entry point is that we've been partnered with our customers for 100 years.
The change of that gets you to the table to start with.
There's a fairly significant value of that in today's world can kind of get lost in this long word called electrification, which is you still need to understand your end market pull through your customer sentiment at your customer needs et cetera, et cetera, So take us as it relates to full frame truck what is what.
As the Super duty truck consumer need or what does it work many of what does somebody needed in the commercial vehicle. So that gets you see the at the table in the first place because you need to understand the voice of the customer certainly the OEM voice of the customer, but really if you're worth your salt you better know what the ultimate consumer needs as well. So that's from the number 1 thing, but the fact the okay. Now you are at the table.
If you're trying to fake it that you you know you can talk software controls or whatever it might be they're going to figure. It out really really quick so that was really of our strategy of doing it both organically and inorganically, which as we have for the full capability across the Dana engineering community and others is completely off the curve now.
Now on electrification because we started at 4 to 5 years ago and that gets you at the seat at the table. The have the right discussions so maybe it's a little bit of a long winded answer, but we certainly are always in discussion with other customers because I think they see us as I know they see us as somebody that can create value for them to sell vehicles.
Great. Thank you.
Thanks, Dan.
Sure.
I'll now turn the conference back over to management for any concluding remarks.
Well as always thank you very much for your attendance today.
Interesting times out there I know you for your other calls that you're on and so forth.
Never personally in my 15 year career as the CEO of seen the dynamics.
That we're dealing with right now, but I can we will take this opportunity to thank to thank our customers for going through it with US together I think we're doing a spectacular job in thinking all of the Dana associates around the world for their incredible dedication and commitment to the overcoming the challenges of which we're all dealing with we look forward to be in communication with you in September.
The few with the picture worth a thousand words to think about Dana as you remember its not in front of you right now, but the picture of all of the end market vehicles of which we participate in electrification, we're going to try and provide some incremental color as to you can see the synergies that go across and how we're participating in each 1 of those I think there is 2 or 3 of the out there.
Timber similar a similar question relative to are there synergies are there is there a bridge between 1 to another and there absolutely is and it didn't happen by accident, though it's been our strategic vision of at least since I've been around so we're just continuing to execute that and we appreciate all your interest and support over the last years. Thank you very much of a great day have a great weekend.
Thank you all for participating in today's meeting you may now disconnect.