Q2 2022 Dana Inc Earnings Call
Good morning, and welcome to Dana Incorporated's second quarter financial webcast and conference call. My name is Lisa 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 for.
For those participants who would like to access the call from our webcast. Please reference the URL on our website and sign in as a guest.
There will be a question and answer period after the Speakers' remarks, and we will take questions from the telephone only to ensure that everyone has an opportunity to participate in today's Q&A. We ask the callers limit themselves to one question at a time, if you would like to ask a question. An additional question. Please return to the queue. At this time I would like to begin the presentation by turning the call.
Over to Dina <unk> senior director of Investor Relations and strategic planning Craig Barber. Please go ahead Mr. Barber.
Thank you Lisa and thanks to everyone joining us on the call today for our second quarter 2022 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 the supporting materials are the property of Dana incorporated they may not be recorded copied or rebroadcast without our written consent.
Hello Me to remind you that today's presentation includes forward looking statements about our expectations for dana's future performance actual results could differ from those suggested by our comments today additional information about the factors that could affect future results are summarized in our safe Harbor statement found in our public filings, including our reports with the SEC.
On the call. This morning are Jim <unk>, Chairman, and Chief Executive Officer, and Timothy Crouse, Senior Vice President and Chief Financial Officer, Jimmy Stars off this morning.
Good morning, and thank you for joining us today.
On to slide four and our update for the second quarter Dana had another quarter of strong sales totaling $2 $6 billion of $381 million increase over last year, driven by robust customer demand in all of our end markets, including 60 million incremental E. B sales well the strong demand and the recovery of commodity costs continued to fuel.
Sales growth for us in the second quarter profitability was impacted because of record cost inflation and ongoing supply chain disruptions driving ball to customer demand schedules that are affecting the entire mobility industry.
We generated strong free cash flow this quarter of $167 million, an increase of $180 million over the prior year driven by lower working capital requirements as we effectively managed inventory and customer receivables.
And finally, our diluted adjusted earnings per share were each pursue eight cents per share Tim will go into greater detail about our financial performance later in the presentation.
Moving to the right side of the page some of the key areas. We will discuss today include an update on the critical market drivers. We will also highlight some of our current and upcoming key launches across our business that support our light vehicle end market.
And we will share a customer update centering centering around electrification and our heavy duty product lineup lastly, I'll take a moment to walk you through the topics. We have often receive questions regarding how do we transform the legacy power technologies business over the past five years to meet the growing requirements for mobility electrification.
<unk>.
Please turn to page five where it would provide an update on prevailing market conditions.
The mobility markets, we serve continue to be driven by three main factors first on the left side of the slide.
All commodity costs, but especially steel remained elevated in the first half of the year as.
As Tim will cover in more detail in a few moments we have made significant headway in recovering commodity cost increases, albeit with a lag in timing.
And just as importantly, steel grade indexes look to be moderating in the back half of the year after reaching a peak this past quarter.
This is a change from our last outlook as the most recent forecast for the North America scrap steel a key leading indicator is down about 30% from the earlier this year.
Lower input prices combined with recovery actions should be asleep profit tailwind in the back half of the year.
The situation is not as positive for all other cost inflation, which is the second factor in the middle of the page. We continue to see prices rising four operational costs, such as energy labor and fuel used to transport goods.
The China Covid shutdown, while not material to our sales resulted in supply delays and drove incremental transportation costs.
For our latest inflation forecast, our net cost are expected to be approximately 20% higher for this year compared with what we included in our last outlook.
Unlike the well worn path to recovering commodity cost increases the recovery of all other cost inflation continues to be communicated and negotiated across our customer base. It is unlikely we will see a dollar for dollar recoveries. This year, but we are having success in renegotiating the base elements of the agreements gaining contract renewals in an improving commercial terms.
There will be a long term benefit to working capital.
In addition to cost inflation, we're also facing macro headwinds from currency translation as the U S. Dollar has continued to strengthen against the basket of foreign currencies, most notably the euro the Thai baht and Indian rupee.
Our off highway business is most heavily impacted as its most exposure to the euro.
Moving to the right of the page the end customer demand in all of our markets remain strong while at the same time vehicle inventories remain at historically low levels. Many of our OEM customers are still experiencing issues in their broader supply chains and this continues to disrupt their order patterns and negatively impact our production efficiency.
Other words OEM production stability is somewhat improving compared with the beginning of the year and customer downtime, it's becoming less frequent however, operational demand volatility is far from resolved. Hence our current outlook is the volatility continuing for the remainder of the year dependent upon end markets geographical regions and specific end customers.
Such was the case in China with the recent Covid lockdowns that many of our customers mainly the heavy vehicle markets and disrupted our production in the second quarter since the Lockdowns have been lifted production is ramping back up and most of our customers expect to make up production during the remainder of the year.
Moving to slide six I would like to provide you an update on our extremely high volume of new business launches over essentially at 12 months span across our light vehicle end market.
Yeah.
Okay.
It has been and will continue to be a very busy launch year for light vehicle and power technology teams as we are in the process of launching 22 programs globally spanning 16, Dana Assembly locations Dane.
Dana is three year $800 million sales backlog includes a good balance of traditional IC programs as well as EV programs as we have communicated time and again.
This balance is important as our core markets as markets are transitioning from internal combustion engines or ICD to electric propulsion at varying rates the transition of our business to electrified powertrains will be supported by the continued sale of drive lines of conventional conventionally powered light vehicles and thermal management products and early adopting <unk>.
Markets, such as passenger cars and Suvs.
The example, the example vehicle program shown on this slide include new and replacement business and spanned major global global Oems in our industry that Danny Dana has worked closely with for many decades.
The top of the slide you will see high profile launches.
Some of which we've talked about during investor day, or recent calls starting with the 2023 Toyota Tundra pickup truck. We have successfully launched the U S and the U S. This popular program featuring Dana's drive chefs in Europe , the new range Rover and soon to launch range Rover sport are being assembled in Birmingham UK and include our class.
Leading front and rear independent axles as well as a number of technologies to enhance engine and thermal management performance, including gaskets thermal acoustic protective shielding and engine coolers moving to the bottom row towards highly anticipated Bronco Raptor is on track and should shouldn't be a big seller among the off road enthusiasts.
We have a long storied relationship with this iconic vehicle, which leverages dana's Richard beam axle design, perhaps shift in independent front axle to deliver unique on and off road experience for the end consumer.
We are also pleased to report that refreshed Ford Super duty truck preparation is well underway and going well as you can imagine. This is an extremely important high volume program for Ford and as one of our largest programs with significant Dana content on this vehicle. We have 12 facilities completing the industrial preparation to ensure a smooth and successful launch.
In addition to the global Port Ranger shown above which has launched in Thailand and will soon launch in South Africa and Argentina. We're also supporting the upcoming launch of the North America Ford Ranger as well as the Ram pickup truck a very important program forced Atlantis.
Many products processes and supply chain activities are required to help customers to achieve successful vehicle launch launches. We believe one of the key benefits. We can offer is the breadth of our global footprint.
To be a true global partner to our customers, especially in the challenging supply chain environment. Our global presence is a real advantage for Dana because we can produce products, where our customers are anywhere in the world.
Moving to slide seven I will share some exciting news about the all new electric heavy truck featuring Indiana E transmission that will be moving freight at the worlds largest retailer soon.
Recently, Walmart shared news about the hydrogen electric thermal truck.
Are often referred to as a yard truck that will help to support their commitment to greater sustainability. This terminal tractor from hyster, Yale and partnership with the Truckmaker capacity features and Dana E transmission, which comes in a single or dual electric motor design and delivers high efficiency superior performance in a compact package.
Walmart will be the first company in the United States to test the capabilities and performance of the second generation hydrogen fuel cell yard truck manufactured in Longview, Texas is expected to have up to 10 hours of operating time on a single Retool and addition to faster refuel time and less dependence on the electric charging grid it can offer.
We utilize the same infrastructure as its hydrogen forklifts, while producing little to no emissions as you may recall last fall at our Investor Day, we shared a prototype of this vehicle and now we're excited to announce the first vehicles are being delivered to Walmart This month.
This is another great example of how Dana can successfully leverage our capabilities across all of our businesses.
In this case, our CV and off highway businesses, we're able to share a number of synergies, which help us to quickly transform our capabilities to meet the fast changing demands of the market.
As we continue to transition to greater adoption of EV. These programs with high volume customers will drive greater profitable growth as the content per vehicle increases anywhere from 10% to 40%, while helping our customers bolster their sustainability objectives moving.
Moving to slide eight I would like to change gears and talk about how Dana is able to continue to push forward boulding, our business to be a leader in mobility industry as it rapidly transition to electrification.
Yeah.
A core element of our strategy has been to adapt our businesses to meet the needs of electrified mobility nothing shows transformation more clearly than the success, we've achieved with our power technologies segment historically as shown on the left side of the page our power technologies business was built on providing industry, leading sealing and thermal solutions for traditional ice.
Powertrains.
Early on in our electrification journey, we leveraged the natural overlap of our thermal management technology for use in EV battery cooling.
We have not stopped there today, we continue to merge the best core capabilities and technologies from our sealing and thermal businesses to create new and highly attractive product categories for powertrains and expand our addressable market. The middle of the slide shows a few examples of this including battery enclosures, which pull from our legacy sealing.
<unk> to create a protective shell around the EV battery and seal it against the environment.
We then merged our material engineering and forming capabilities from sealing products with our expertise in thermal dynamics and created battery cooling products, including cold plates that can be integrated into the battery enclosure shown above dana's best in class coal play technology combines superior thermal performance in a thin and light.
Way package and feature sophisticated channel path for optimize optimized coolant flow, resulting in more stabilized battery temperature and faster charging.
The thermal management of power electronics, and electronic Motors is critically important in the operation of a battery electronic vehicle.
The ability to retain a consistent and even temperature plays an important role in delivering efficiency and range within these vehicle applications.
The bottom line by merging our core capabilities, we have successfully transitioned as part of our business internally without utilizing a great deal of capital to go to market with solutions to support our EV growth across all end markets more importantly, we position Dana to capitalize in the quickly evolving EV segment that will increase our content per vehicle.
<unk> by up to three times and versus conventional product technology.
Yeah.
Turning to slide nine you can see a great illustration of how our four in one system. All works together to provide our customers with a complete in house E. Propulsion system. This system includes electronic Motors electric motors, mechanical gearboxes power electronics, and thermal management, which regulates to the operator.
Environment of the system the.
The most important benefit of our approach to E propulsion systems as they are engineered from the Dana component level, all the way up through Dana's authored software to function at peak efficiency and power output and integrated thermal management is a key element to achieving that goal today, our form one E propulsion system.
<unk> Dana as the only supplier that has in house capability to deliver all four elements of a complete E propulsion system across all mobility markets. Thank you for your time today now I would like to hand, it over to Dana CFO , Tim Kraus, who will walk us through the financials. Please go ahead Tim.
Thank you Jim Please turn to slide 11 for our second quarter 2022 results compared to last year sales were $2 6 billion, that's $381 million higher than last years second quarter, driven by stronger demand across all of our end markets and recovery of commodity costs, partially offset by currency impacts adjusted EBITDA was one.
Hundred $62 million profit margin of six 3% in the quarter was 430 basis points lower than the same period last year. This margin compression was due to the benefit of higher sales being more than offset by inflationary costs.
Including labor energy transportation raw materials, and operational inefficiencies, resulting from continued volatile demand and supply patterns net income attributable to Dana was $8 million for this year's second quarter compared to $53 million last year, mainly due to lower operating earnings.
We generated $167 million of free cash flow in the second quarter compared with a use of $13 million in the second quarter of 2021, the higher free cash flow was driven by lower working capital requirements and interest more than offsetting the lower adjusted EBITDA and slightly higher capital spending. Please turn with me now to slide 12 for <unk>.
12 for a closer look at the drivers of the sales and profit change for the second quarter.
The first driver was traditional organic sales growth of $278 million driven by higher demand in each of our segments. However, adjusted EBITDA and higher organic sales was a loss of $54 million a margin headwind of 320 basis points. This loss was driven primarily by input cost inflation, which was 38 million.
Of the total organic change in profit lower cost savings from suppliers and operational inefficiencies from the supply chain driven volatility in our customers' production schedules.
EV product sales grew by $59 million over the same period last year, while the incremental EV sales are profitable continued investment in engineering to expand and commercialize these new technologies and input cost inflation drove a $4 million reduction in contribution in the second quarter, a margin headwind of 40 basis points.
Third.
Foreign currency translation was a significant headwind and reduced sales by nearly $100 million.
As the U S dollar increase in value against foreign currencies, principally the euro but also the bot and Ruby this drove a slight profit margin impact of 10 basis points as our largest exposure is in our higher margin off highway business.
Finally commodity costs, primarily steel continued to rise in the quarter gross material costs were $145 million higher in this years second quarter compared to 2021, our commodity inflation recovery mechanisms continue to function well and we are recovering approximately 98% of our commodity cost increases from our customers through higher pricing.
<unk>.
Net impact of rising costs and higher recoveries resulted in just a $3 million profit headwind of 60 basis points of margin compression. Please turn with me to slide 13 for detail on our second quarter free cash flow for 2022.
As we indicated earlier this year, we expect to generate significant free cash flow as our working capital requirements are actively managed down this year progresses.
In the second quarter, we generated free cash flow of $167 million of which which was $180 million higher than the previous year, even with lower adjusted EBITDA net interest was $20 million lower this quarter due to timing of interest payments, resulting from debt refinancing actions taken last year working capital.
Was a source of $156 million, a $230 million improvement over the second quarter of last year due to focused management on our inventories and receivables.
Slightly higher capital spending this quarter was due to our launch cadence and new business, including continued investment in our electrification business. Please turn with me now to slide 14 for an updated outlook for the remainder of the year.
There have been substantial several substantial changes in our market environment that Jim outlined earlier, most notably higher cost inflation and the strength of the U S. Dollar Accordingly, we are updating our full year 2022 financial profit guidance.
While we are seeing higher cost pressures demand for our product remains strong and our outlook for sales remains unchanged at $10 1 billion at the midpoint of our guidance range of $230 million of additional currency headwinds are expected to be offset by cost recoveries in demand for EV products.
Due to the higher cost pressures adjusted EBITDA is now expected to be about $720 million at the midpoint of our guidance range, which is lower by about $100 million from our prior guidance primarily due to the three drivers listed at the right page on page 14.
First profit on organic sales will be down about $115 million about a quarter of that is due to higher net inflation with the remainder due to further customer and supply chain inefficiencies in the business and higher launch costs as well as higher net investment in our <unk> business.
Our previous guidance had anticipated customer order patterns and supply disruptions would ease in the back half.
We now believe that these headwinds are likely to continue for the remainder of the year.
Second the additional profit impact of foreign currency translation will be about $25 million and lastly, as Jim mentioned prices for commodities are falling so our revised adjusted EBITDA estimate includes a benefit of $40 million in commodities implied margin is now expected to be 7% to seven 3% free cash.
<unk> margin is expected to be approximately one eight to two 2% of sales diluted adjusted EPS is now expected to be 75 per share at the midpoint of the range with the change due to lower earnings.
Please turn with me now to slide 15, where I'll highlight the drivers of the revised full year expected sales and profit changes from last year.
Beginning with organic growth, we expect an additional $880 million in sales from traditional products through a combination of new business market growth and recoveries adjusted EBITDA on higher sales is now expected to be a loss of about $35 million.
Included in the organic element is the impact of inflationary costs, including labor energy and transportation. We are now estimated at these inflationary cost increases will total $145 million net of recoveries about $25 million higher than our previous estimate inflation lower cost savings from suppliers customer order.
Turns supply disruption and launch costs are the primary drivers of the lower than normal profit flow through from organic sales.
However, in our full year comparison, there is an additional headwind of about $50 million due to the sale of higher value inventory driven by the run up of commodity costs over the last several quarters.
As commodity prices fall and inventory levels decrease inventory valuations will return to normal as the more expensive goods are shipped from inventory and the headwind will abate.
We now expect $230 million and added EV product sales this year about $30 million higher than our previous estimate.
Due to the required investment for development and commercialization, we expect EBITDA to be an incremental loss of about $10 million.
Next we now anticipate the impact of foreign currency translation to be a headwind of approximately $430 million to sales. This additional headwind is primarily driven by a weaker euro with a margin impact of $50 million. Finally, our commodity outlook continues to improve we anticipate recovering about 407.
$5 million from our customers in the form of higher selling prices, while lower prices for steel and other commodities rose art and the net profit tailwind of about $20 million.
Please turn with me to slide 16 for outlook on free cash flow for 2022.
We anticipate full year free cash flow to be about $200 million at the midpoint of our guidance range. This was slightly below our previous estimate due to lower earnings, but still an improvement of over $400 million compared to last year. The year over year improvement is being driven by lower working capital requirements as we actively manage inventory levels and negotiate term.
They are better aligned with current market conditions and finally.
Please turn to page 17 for a brief look at our balance sheet and liquidity.
Okay.
On the left side of the page you can see that we have maintained strong liquidity throughout this challenging business environment at the end of the second quarter, we had approximately $1 $3 billion of liquidity.
We are maintaining our liquidity mix of approximately one fourth cash and three fourths available borrowings.
The maturity profile of our debt is illustrated on the right side of the page we are in a very desirable position as we have no meaningful debt maturities for the next few years.
Our robust and balanced liquidity long term debt maturity profile and free cash flow generation provides a solid foundation as we navigate the current headwinds and further transform our business to compete in an electrified future I'd like to thank all of you for listening this morning, and I'll now turn the call over to Lisa to take your questions.
Thank you if you would like to ask a question on the phone lines. Today. Please press star one on your telephone keypad. If you would like to remove yourself from the queue. You May Press Star one again as a reminder, please limit yourself to one question at a time and if you would like to ask an additional question. Please return to the queue.
Okay.
We'll take our first question from James Picariello with BNP Paribas.
Hey, good morning, guys.
Just on the on the earnings bridge.
Within the 115 million.
Core EBITDA decline in the guidance versus versus the prior guidance.
We know $10 million of that attributed so thats vacation.
Another $25 million is driven by the additional net cost inflation versus your prior outlook whats the difference.
It really comprises that $80 million $80 million and the difference is that just essentially operational inefficiencies.
Yes, any color there would be great.
Yes sure.
Yes, a couple of things obviously, it's a higher inflationary costs are in that number too.
As well as additional inefficiencies operational that are being driven by both both the supply chain and by customer production patterns.
Yeah.
Okay. So maybe maybe just maybe a clarification then.
What is captured in the into net cost inflation.
Bucket of $145 million and what would be captured there versus.
That's separate.
Can you bucket.
Well so the $145 million is a net number which represents the just the caught in the inflationary costs related to things like labor transportation and energy that are coming through the contribution.
The inefficiencies that are driven due to <unk>.
Supply chain and customer demand patterns, but those would be affected just in the general amount of these costs that are being incurred not not the base cost for them.
Okay.
And then just as we think about next year, obviously, youre not going to provide guidance, but as we think about the earnings bridge for next year.
You've got the $145 million and net cost inflation.
Now also have this additional $80 million.
Operational inefficiencies and we had $80 million is just the change in the guidance Thats, probably a bigger number just in terms of the net for the full year for the inefficiencies.
What.
What portion of these costs are temporary and can be addressed or partially recovered for next year versus what really sustains for next year.
Yeah, you know obviously a lot of the costs are being driven by the the erratic supply and demand patterns that we have so we're going to need to have some of those.
Those impacts abate in order for the cost to come out of the system in terms of the core inflationary we continue to work with with the customers and the commercial teams.
Two to go to work with the customer to provide recoveries on those so those are on ongoing and.
We're we're obviously.
It's obviously a long process given that these are not costs that are either contractual or typical in terms of recovery. So we do believe there will be be able to be successful as we go through and working with the customer to offset some of these costs.
Yeah.
Okay I appreciate the color. Thanks.
Sure.
We will take our next question from Rod Lache with Wolfe Research.
Good morning, everybody.
<unk>.
Following up first of all on James's question that the impact from supply chain and production patterns for this year.
It is large but.
Those kinds of things do sound transitory and I'm wondering if you're actually characterizing that is something that you see as reversing or are there other factors that.
You see building they could affect 2023 as well and then just secondly.
The consensus at least in light vehicle production is that if there is a recession. It wouldn't be typical like we wouldn't see as much risk to volume I was hoping that you could maybe just.
Just give us some color on the leading indicators the longer time, leading indicators that you see in commercial vehicle and off highway and how those are sort of starting to shape up.
Sure Ron.
I'll take the first one.
When you Jim Jim can answer the second part of your question.
On the.
The financial impacts of the erratic demand.
That's really driven by what we see coming out of out of our customers and out of the supply chain.
<unk>.
We would think that this would start to abate next year, obviously, we've got.
Five months left in 2022, and we'll be watching it very closely as we begin preparations for planning for next year, but that's really going to be driven by both customer and then.
Our working with the customer to obtain compensation or offsets for perhaps some of the productivity. We generally we get back to offset some of the inefficiencies that we're seeing that are driven by a by the way that they're they're building the vehicles. These days.
And Rob This is Jim just on your second question as it relates to customer demand. It truly is what I think others are saying out there that there's all indications at this demand that we have across every one of our markets is still going to stick.
Every single and we break ours down into more than just light vehicle commercial vehicle off highway as you know we break it into construction and agriculture and material handling all the others and to a person. There every one of them is still pull insignificant amount of manned due to lack of lack of inventory in the field. So we feel good about it going.
The end of the year I mean, obviously the recession could have some impact on that but there is a lot of vehicles out there that are in demand. So feel pretty good about that the challenge for US is kind of what Tim just alluded to the mix change in late late minute changes in schedule across our markets I've never seen anything like it and I like to believe that that's going to start to.
Calmed down, but we're not calling that for the back half of the year like we thought we thought it would be earlier in the first half of this year for the back half.
Thank you.
We'll take our next question from Emmanuel Rosner with Deutsche Bank.
Yes.
Thank you very much.
Just wanted to.
Follow up again on the I guess the change in guidance and try to understand a bit better. So I think if I can tell you walk EBITDA walk this quarter versus what you had expected maybe a quarter or so ago executive traditional organic bucket.
$75 million headwind.
Versus a 75 million tailwind before so may be worse by about $110 million, but obviously the inflation expectation is on the worst by about 20, so the rest of it.
$110 million worse.
Traditional organic factors ex inflation expectation is that just <unk>.
Volatility in production schedules is it labor I guess, how would you how would you describe it.
Well so yes, so we've got we've got increased base.
We've got an increase in the base inflationary caso.
The buckets would be.
Energy Labor really all of the conversion costs that go in obviously that's more acute.
In Europe than in other places that we're seeing.
When you break down the rest of it the rest of it inorganic theres a piece of it is driven by additional investment in EV.
And then.
The balance is really the inefficiencies that we see due to.
The last minute changes the stranded labor that comes in from from changing the demand patterns.
The changeover costs in the plant.
When when our customers.
Change out what theyre going to build.
Unfortunately, it's really gotten to the point where there.
They are building what they can versus what they really want to and it varies quite dramatically from from what they originally schedule and so that is having a pretty dramatic impact on the our ability to bundle the plant.
<unk> inefficiently.
Most of our products have to have large amounts of.
Okay.
Oh, sorry.
Amount of.
Ah variability, but in the product mix. So it has an acute impact.
Yes, okay.
No.
Can you help us with some alright.
Alright personal crusade.
Puts and takes for a first half to second half.
EBITDA walk.
The stuff that Tom.
Trying to understand basically your.
At the midpoint for the second half implied guidance is probably about flat versus the revenues that you did in the first half so essentially stable revenues for SaaS to second half but.
EBITDA implicitly guided quite a bit higher.
So I guess what gets better.
First half to second half.
At the bottom line.
Okay.
So I think there's a couple of things built in there so.
With with the additional.
Inventory, that's going to be coming down.
Got additional headwinds in the back or.
Pick up in the back half of the year.
Customer recoveries.
We expect to continue to be.
Strong and then we do think we will be able to get some.
Additional.
Improvements in <unk> in the plants in the back half of the year.
Versus the first half.
In the plants and in terms of <unk>.
Predictability and stability of production schedules.
Correct right.
Well and I think us being able to cope with them a little bit more and then the other big driver is that the the amount of our cost recoveries should be going up as well.
<unk>.
These are for non materials inflation or what.
What are those are both both both material and both.
Material commodity recovery.
As well as.
Some other pricing with the customers.
Okay.
You very much.
Yes.
Okay.
Our next question comes from Colin Langan with Wells Fargo.
Oh, great. Thanks for taking my questions.
Just wanted a little clarification, I think you mentioned $50 million of an inventory impact like a mark to market of inventory can you just talk about that a bit and then is that coming in the second half or is that already been occurred in the first half.
So we've occurred some of that in the in the first half principally in the second quarter as we saw inventories come down and the balance of it in the back half of the year.
Okay and any color that.
It will impact <unk>.
First half second half when we kind of look at that work, yes, it'll worse.
Got it.
It's probably balanced I I don't have it by hand off the top of my head by quarter, but.
Obviously, we saw as we continue to bring commodity costs down in inventory down it'll it'll it'll flow through based on those two factors.
Okay.
And what's causing this is just the lower raw material prices are causing the market lower yeah. So if you historically this hasn't been particularly.
A large issue, mostly because as you think about it right as commodity costs increase.
The material we're buying.
We're we're putting on the balance sheet and we're selling out.
Inventory right. So what caused this probably dramatic changes that we had both a very large increase in in the cost of the material over a very short period of time at the same time, we we actually.
Built a much larger amount of inventory.
So those two things.
Bind caused us to have high valued and <unk> of inventory now is you turnaround and you move through this year.
The operations teams drive us to much more efficient inventory management, we're getting that inventory out and selling this much higher profit or higher cost inventory than say in last year, where it was all from from prior periods.
That headwind on the EBITDA conversion is flowing through and so we wouldn't anticipate this to continue.
When you when you move out of 2022 for two factors one we're seeing commodity costs come down and two were seeing the amount of inventory, we're holding coming down.
And you don't get recovery from your customers.
The value of the Mark to market inventory at all.
So that recovery as it would be will be sitting in your in the as part of the like if you look at our year over year that $475 million of recovery. It's just sitting in that in that line.
Okay.
And then can you just remind us.
The 145 of inflationary costs I mean, how.
How does that cadence through the right through the year.
Okay.
So.
If I remember correctly, we had about $45 million in the first quarter and I think 38 in the second so that.
Those two so it's it's about it's.
It's a little higher in the back half than the front half of the year. If my math is correct.
Okay.
So how do you get your Incrementals.
Stronger in the second half how are you sort of on flattish sales growing EBIT. So I thought it was getting some of those recoveries and isn't that a net number. So it would include so it's recoveries and then and then the efficiencies we should be driving into the plant.
Okay, all right. Thanks for taking my questions.
We'll take our next question from Noah Kaye with Oppenheimer.
Thanks for taking the questions actually I just wanted to frame a strategic question for you you know I think multiple times, you referenced product developments and business wins, leveraging the core across segments.
Clearly leveraging those core competencies across multiple end markets has been a key element of the growth strategy.
It just seems like in full appreciation of the hard work. The company is doing in this challenging operating environment. I mean, there are parts of the portfolio that today are significantly underperforming unprofitability relative to prior expectations and and it could be said to the peers.
And so the question is do you see these results.
Warranted a more comprehensive strategic response, I mean do you really view these as transitory and if not what actions do you need to take to raise the structural profitability of the business.
Thanks for the question.
Jim.
Thinking about them in two pieces and you are most referring to light vehicle elements of the business right, which power technologies is largely light vehicle and of course light vehicle driveline as well when you think about the businesses. The key let's take power technologies and the first segment of it we just kind of just nibbled at the.
You are at today, but just talking about the transformation of the business Thats coming online, which is all the battery cooling and all the other things associated with it which is a significantly higher amount of content per vehicle and we'll will obviously contribute a lot more profit associated with it I think we're on a really good journey there to just we just can't speed up the clock in that.
We'll start to roll in as you know those programs as well as anybody else does the ultra mom or the lightning or whatever a program you want to talk about so those will come together as the light vehicle side of the business is similar nature that wasn't by happenstance or accident that we talked about those program rollout of a large portion of the light vehicle programs.
On the driveline side, meaning the ICD or kind of what you'd call long in the tooth in our business and are all been refreshing and there's well I'll put it this way there is more to come.
And with more to come they start to refresh and we get to where we want.
And then back to your overarching comment.
Everything's Everything's open for consideration, but I will tell you the scale benefit and the competency benefit.
With our people from one business unit to another business unit supporting our customers supporting communications supporting validation testing supporting the other thing it's a huge benefit as it relates to having credibility and capability.
No matter the end market. So I mean never say never about anything you might consider doing but I would tell you is the plan comes together, yes. There is.
We can't speed up the clock on the two things I referred to relative to the two segments, but as things come together I am very confident that they will like it like I said come together and we will reap the benefits of it I mean, it's just unfortunate for us we're trying to be because it's a it's the driveline business and we're trying to be a disruptor at the same time is working through these <unk>.
Macro conditions, it's a tough spot today, but certainly from a building and infrastructure for the future and ensuring that we're a longtime winter I think were still doing alright. Thanks.
Really appreciate the thoughtful response, Jim Thank you.
And the last question will be from Joseph Spak with RBC capital markets.
Thanks, everyone.
I'm going to try to take another shot here at.
Sort of the go forward here. So in late 'twenty. One when you had your analyst day, you were basically calling for $1 $2 billion of EBITDA in 'twenty. Three so we think about what's changed and what you sort of laid out here.
Inflation rate is at least a 145 million it looks like currency is another 50.
The inefficiencies we could argue our transient it does sound like maybe there's some higher EV investment, but I guess, what I'm wondering is.
Unless you think inflation reverses or you get better at recoveries.
Is that $200 million.
That comes off.
Just sort of the new rate base to think about 2023, so closer to $1 billion versus 1 billion sale.
Yeah.
I guess, you can kind of draw the conclusions you want and we're not really.
In a position to two.
To make a call on 23 at this point.
So.
Okay, but I mean.
If we just bucket stuff into.
More transient versus potentially more structural right I guess.
Is that are the.
Because you sort of talked about.
The inefficiencies and the stranded labor right I mean, if schedules do get.
More steady it.
It would seem like you'd be able to recover those where it seems like there could be more difficult work too.
Recover that additional $145 million, yeah, no I think youre thinking about the correct in the correct buckets buckets from a transitory versus.
Perhaps the ones that are more or less transitory I guess it was about.
Okay.
On the recoveries.
104% for the year can you just can you give us a little bit of a sense for the relative recoveries by segment because it seems like if our math is correct.
It's been stronger in commercial vehicle and off highway to date or year to date, which which makes sense.
But.
To get it.
To sort of what you're talking about for the year. It would also seem like you've got how you start to have better recoveries.
<unk>.
Those other two segments that are more that have more light vehicle exposure is that is that right yes.
Yes, that's correct I mean.
Those are the segments, where we.
We have the largest amount that is contractual but it's also significantly lagged.
And so as the.
As the commodities begin to abate later in the year, we will start seeing the benefit of that lag starting to help are starting to flow through in those other segments and they'll look they'll look to be being over recovered.
Okay. So.
So, but it's fair to say that Theres been more real time recoveries in commercial vehicle and off Highway then and then in light vehicles.
Correct that's fair.
Okay last one for me just on the Super duty.
Obviously, an important program in.
You talked about the fourth car launch can you just like.
Do you have to make and ship those.
The products for the for the new Super duty ahead of when forward actually starts producing.
Producing those and I guess related when do you stop making the product for the outgoing super duty.
Yeah.
Good question there is a.
Every lockdown first of all don't and you're not but don't conflate My answer on this to every other launch out there in light vehicle or any of the end markets for that matter every once a little bit different. This one there will be a kind of a migration.
The end of this year, we'll be starting to supply some of the early launch vehicles, so on and so forth and the old product will still definitely be b BB required from us as we migrate from them in the first quarter from January forward that debt that will start to flip.
Over time and it is something obviously at a point I don't know where that is I don't have it right in front of me when we'll get the full volume of the new product if thats March or whatever it is thats when thats, how that sort of comes together.
And those those are.
I guess two separate lines are.
And then like you.
Sort of.
You convert.
From one to the other over time, and then that frees up the IP.
Existing line for some other capacity.
Okay.
Not to make it confusing a kind of a combination of both it all depends in that some of them dependent on the product design product capabilities or <unk>.
It's a different things we would have new lines for some others. They are actually you can transition directly from one of the old.
Old product to the new products, so kind of a combination of both and then to your last point there, though could we transition when we can free up the capacity that do those transition into the next new program. Yes. The answer is yes, okay. Thanks, so much.
Okay. There waving at me, saying this the last question I would just summarize with.
Obviously Dana is a very unique position as we are launching complex high volume programs largely.
Ex existing through the end of the decade, we're also reengineering the business leveraging the integrated electrification companies that we've acquired to possess the complete in house E propulsion capability across all mobility markets and full four in one systems, which of course secures the future of the business through the replacement and new.
Business growth and we're doing it while we're navigating the unprecedented market dynamics and related cost pressures candidly operationally Dana has never been stronger the pandean operations team manufacturing supply chain and purchasing product engineering program and launch have done a remarkable job overcoming the barrage of macro issues that are.
<unk> been coming at them.
Our very intentional investment in disruptive efforts, we've done to position Dana for the future.
A little bit choppy right now, but I can tell you for sure that as we continue to integrate these and we continue to get the new growth as the new ICT programs electrification programs rolling our backlog, we're going to be strong for years to come. So thanks very much for your time and attendance today and we'll talk to you soon.
And that does conclude todays presentation. Thank you for your participation and you may now disconnect.
Okay.
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Thank you.
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