Q3 2022 Dana Inc Earnings Call
Speaker 1: network of suppliers, market expertise, and EV technical centers, we leverage these capabilities across all markets. Whether it's the light vehicle delivery vehicles, mining or electric access equipment, or Class 8 long-haul trucks, Dana assists in determining how these systems are best integrated into a fully electric vehicle no matter the application. Our customers across all markets turn to us to help them accomplish their EV goals and rely on our strong institutional knowledge in the EV space to provide them with full turnkey solutions. From identifying market needs to design technology development and full integration of complex systems that make up today's zero-admission vehicles, we are able to help our customers meet their needs. Please turn with me to slide 7. Slide 7 highlights the proof points of our ability to serve the customers at all levels and across all markets as making a direct and substantial impact as we deliver the next generation of electric vehicles. To date, we are providing world-class and award-winning components and systems to some of the world's leading manufacturers across light vehicle, commercial vehicle, and off-highway markets. Combined with our vehicle integration capabilities, Dana has a multitude of electric vehicle platforms currently in production with many more under development. In fact, we are in the process of securing a number of confidential new programs that we will share in greater detail early next year. Whether it's long-established global OEMs requiring full customized integration to non-traditional vehicle manufacturers in the market who may prefer an off-the-shelf solution from Dana's established and validated product of electrodynamic products, we are able to provide the capabilities and solutions for their specific needs. In doing so, we are creating opportunities to provide value to our customers for decades to come.
Speaker 1: Please turn with me to slide 8 where I will share some exciting news about a new business award that will serve as one of Dana's foundational programs for years to come. While it's very clear the mobility industry is rapidly moving towards electrification, internal combustion engine powered vehicles remain very prominent, dependent on end market and application. In fact, some OEMs recently communicated with the media their intent to not electrify large full frame vehicles.
Speaker 1: I have the privilege on behalf of the Dana team to announce that we've been sourced the next generation Jeep Wrangler and Gladiator programs beginning for the model year 2024. This program has been and will continue to be one of Dana's largest programs.
Speaker 1: Both multi-year programs will launch next year and will feature Dana's award-winning driveline including axles and driveshafts, which deliver on parallel performance allowing Jeep enthusiasts to handle some of the most extreme off-road conditions. In fact, Dana has provided high quality driveline and aftermarket products for this historical Jeep brand since it was first manufactured 81 years ago.
Speaker 1: The Jeep vehicle concept was born in answer to the US Army's call for design of an easily transportable 4x4 general-purpose vehicle during World War II. Many historians acknowledge that the Bantam general-purpose vehicle was the original inspiration for the design that eventually became the Jeep and its production version used the Dana Model 25 front axles, Model 27 rear axles, Spicer prop shafts, and a Dana 18 transfer case.
Speaker 1: Today our products continue to enable Jeep owners around the world to tackle some of the most extreme conditions whether that is on or off-road. Thank you for your time today. Now I'd like to hand it over to Tim to provide you a financial update. Please go ahead, Tim. Thank you, Jim. Please turn to slide 10 for our third quarter results compared to last year. Sales were 2.54 billion dollars. That's that is three hundred and thirty one million dollars higher than last year's third quarter driven by strong demand across all of our end market.
Speaker 1: transportation and raw materials as well as operational inefficiencies resulting from continued volatile demand patterns. Net income attributable to Dana was a loss of $88 million in this year's third quarter compared to income of $48 million last year. The loss was entirely driven by a non-cash goodwill impairment charge in our commercial vehicle segment triggered by higher discount rates and the impact of sustained cost pressures from commodities, inflation, operating inefficiencies driven by industry supply disruptions.
Speaker 1: We generated $77 million in free cash flow in the third quarter compared with the use of $170 million in the third quarter of last year. The higher free cash flow was driven by improved working capital management. Please turn with me now to slide 11 for a closer look at the drivers of the sales and profit change for the third quarter. The first driver is traditional organic sales growth of $263 million driven by higher demand in each of our segments and inflationary cost recoveries..
Speaker 1: A JASA DIVA on the increased organic sales was a loss of 19 million, a margin headwind of 180 basis points. This loss was driven primarily by net cost inflation of approximately 10 million and operational inefficiencies caused by the volatility in our customers' production schedules resulting from continued supply chain disruptions. Sequentially, profit improved over the second quarter of 2022 due to increased cost recoveries partially offsetting higher gross inflationary costs. The JASA DIVA on the increased organic sales was a loss of 19 million, a margin headwind of 180 basis points. Sequentially, profit improved over the second quarter of 2022 due to increased cost recoveries partially offsetting higher gross inflationary costs. Sequentially, profit improved over the second quarter of 2022 due to increased cost recoveries partially offsetting higher gross inflationary costs.
Speaker 1: Second, EV product sales increased $73 million over last year's third quarter. We continue to see profitable contribution from new EV sales. However, investment in engineering to bring these new technologies to market and cost inflation drove a $4 million loss in the third quarter, a margin headwind of 35 basis points.
Speaker 1: Third, foreign currency translation headwinds accelerated this quarter and reduced sales by $139 million as the dollar increased in value against a basket of foreign currencies, notably the euro, bot, and rupee. This lowered profit by $16 million and a margin impact of 20 basis points.
Speaker 1: Finally, the recovery of commodity costs added $134 million in sales and a net profit benefit of $21 million. On a gross basis, we are still experiencing higher input costs, primarily steel, this year compared to 2021, but we are seeing material costs decline from a peak earlier this year. Due to the lag in recovery mechanisms, the lower commodity costs this quarter, our recovery rate has ticked above 100%.
Speaker 1: Please turn with me to slide 12 for detail on our third quarter free cash flow.
Speaker 1: This quarter we again generated significantly higher free cash flow compared to last year as we actively managed our working capital. In the third quarter we generated free cash flow of $77 million which was $247 million higher than the previous year even with lower adjusted EVTA and higher interest in taxes.
Speaker 1: Net interest was $20 million higher this quarter due to timing of interest payments resulting from debt refinancing actions taken last year. Similarly, taxes were $20 million higher due to the jurisdictional mix of earnings and the timing of payments during this year's third quarter.
Speaker 1: Working capital was a source of $55 million of free cash flow. That is a $300 million improvement over the third quarter last year as we continue to manage inventory and align commercial terms with our suppliers and customers.
Speaker 1: We remain on track to meet our target range for this year as our business traditionally generates the majority of our free cash flow in the fourth quarter.
Speaker 1: Please turn with you now to slide 13 for a full year outlook which remains unchanged from our last earnings report.
Speaker 1: We are reaffirming our full year guidance as shown on slide 13. Demand for our products remains strong and our outlook for sales remains unchanged at $10.1 billion at the midpoint of our guidance range. Adjusted EBITDA is expected to be about $720 million at the midpoint of our guidance range. Demand margin is expected to be between 7 and 7.3 percent.
Speaker 1: Free cash flow margin is expected to be in the range of 1.8 to 2.2 percent of sales.
Speaker 1: Diluted adjusted EPS is expected to be 75 cents per share at the midpoint of the range. Please turn with me now to slide 14 where I will highlight the updated drivers of the full year expected sales and profit changes compared to last year. Beginning with organic growth, compared to last year we expect an additional $900 million in sales from traditional products through a combination of new business, market growth and recoveries. This is about $20 million higher than our previous estimate as we adjust our expectation
Speaker 1: recoveries more than offsetting higher input costs.
Speaker 1: Inflation, lower cost savings from suppliers, customer order patterns, supply disruptions, and launch costs are all primary drivers of the lower than normal profit flow through from organic sales.
Speaker 1: Also included in the organic element is the headwind to profit due to the sale of higher value inventory driven up
Speaker 1: by the commodity costs over the last several quarters. This headwind is now forecast to be about 60 million dollars for the year, which is 10 million dollars higher than our previous estimate reflecting the stabilization of our commodity forecast. 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 evade.
Speaker 1: We now expect $270 million in added EV product sales this year, about $40 million higher than our previous estimate. We are also expecting a slight uptick in our investment for development and commercialization of the new EV business, which will offset the profit benefit from higher sales.
Speaker 1: Our expected EV adjusted EVITA on the incremental sales will be a loss of about $10 million.
Speaker 1: We now anticipate a greater headwind from foreign currency translation on sales, which should be about four hundred and seventy million dollars with a profit impact of about fifty five million dollars.
Speaker 1: Finally, our commodity outlook has stabilized and we anticipate recovering about $455 million from our customers in the form of higher selling prices, while lower prices for steel and other commodities will resort in a net profit tailwind of about $20 million.
Speaker 1: Please turn with me to slide 15 for our outlook on free cash flow for 2022.
Speaker 1: Our full year free cash flow outlook remains unchanged. We anticipate full year free cash flow to be about $200 million at the midpoint of our guidance range, an improvement of over $400 million compared to last year.
Speaker 1: The year-over-year improvement is being driven by lower working capital requirements as we actively manage inventory levels and negotiate customer supplier terms that are better aligned with the current market conditions.
Speaker 1: Capital spending outlook remains unchanged as we are on track with our investments to support our substantial new business backlog of both traditional and EV products.
Speaker 1: Thank you all very much for listening today. I will now turn the call back over to Lisa for your questions.
Speaker 2: Thank you. If you would like to ask a question on today's call, please press star one on your telephone keypad. If you would like to remove yourself from the queue, you can press star one again. Please limit yourself to one question at a time. And if you would like to ask additional questions, please return to the queue. Once again, everyone, that is star one on your telephone.
Speaker 2: We'll take our first question from Noah Kay with Oppenheimer.
Speaker 3: Good morning, thanks for taking the questions. Nice to see a little bit of incremental benefit from pricing. I guess if you just look at the impacts of pricing actions that you've been able to get year to date, just how much of an impact to growth?
Speaker 3: would price be as we think about 2023? Because there's clearly some tailwind into next year from that.
Speaker 1: Thanks, this is Tim. So certainly going to be some growth into next year as we anticipate some of the inflationary costs that we've seen this year won't retract, think of labor. I think the other part that you have to think about in terms of pricing into next year as some of our programs turn over and relaunch we'll be resetting economics within those programs and those would be reflected.
Speaker 3: in pricing as well. Alright, terrific. And then actually, please, I have a next question just around the timing of launches. Can you comment on timing, any slivage in you know, expected program dates and just your level of confidence and being able to stand up those launches smoothly at this point?
Speaker 1: Hey Noah, good morning, it's Jim Kamsiskis. Good question and good question different than maybe other times in our respective careers because it is much more difficult to launch now than it historically would because of trying to get all the components for equipment and labor constraints that don't allow equipment suppliers to get things done, whatever the case, but I can tell you at least from our line of sight for our major launches, and I'm pretty sure you're aware of them such as we're just coming up the launch crew right now and the new Range Rover Sport with Jaguar.
Speaker 3: Seems like virtually every OEM is coming out with a new battery electric or electrified product. So Jim, I don't know if you're there or if you've heard from your folks on the ground there, but what are you hearing about the rate of quoting activity and the adoption trends in off-highway? And can you comment a little bit on your positioning there?
Speaker 1: Another really solid question. Obviously you understand all different markets have the different pull-through and I guess just to answer it for momentum for the broader audiences, you know Dana took a strategy in 2016 to get in front of it because we knew there were going to be various pull-through markets that were going to come first and so when the bus market came we were ready. You know then the last mile delivery came and we were ready and then kind of the rest of the story, you all know the story, but we always knew given considering the use case that the off-highway markets would be more towards the end of that.
Speaker 1: you about a month ago where you're seeing a lot of the lawn mowing equipment is out there because not only the emissions but the noise factor of that so we're seeing quite a bit of success in that area and by the way proud of the team our team's done a remarkable job because that wasn't necessarily one of our core areas within within our off-highway group but the team's done a great job with the full propulsion system there so those are pulling through faster we are in all sorts of dialogue with all of the customers
Speaker 3: Thanks, and nice quarter.
Speaker 4: Thank you. Thanks.
Speaker 2: We'll take our next question from Colin Lengen with Wells Fargo.
Speaker 1: Oh, great. Thanks for taking my question. Just to follow up on the decline in inflationary costs of the 20 million, you held guidance. So just broadly, what are the buckets that sort of offset that sort of offset that good news.
Speaker 1: Is I'm trying to do the math from what you've indicated before it kind of implies not much of a headwind left for Q4 is that correct?
Speaker 5: And then just for those that overall 125, I mean, how should we think about that recovery into 2023? Do you expect to get all of this back eventually or some of it's just you're going to be stuck with?
Speaker 1: Sure, Colin, this is Tim. On your first one regarding, you know, sort of the decline in the buckets, so, you know, gross cost we don't see having declined much. It's really on the recovery side. The offset that we're seeing there is still, you know, within the, you know, from an operating and also from a volume and mix perspective as we move into the fourth quarter, as well as a little bit more headwind on the decaps.
Speaker 1: in 2023 related to those inflationary costs. So I think most of the customers, we're not seeing it built in necessarily to base piece price. It depends on the end market, but obviously from a commercial recovery perspective, we'll continue to go after those and recover them. We do think that the gross inflation will probably be smaller next year than it was this year.
Speaker 1: I'm sorry, what was your last question? The Q4 impact, is there much left? I thought the 125, I feel like we've almost seen a 120 so far. Yeah, if you did the math, there's about $30-35 million of headwind in the fourth quarter on a quarter over quarter basis.
Speaker 1: From inflation.
Speaker 5: Lastly, years ago you were looking at GKN, they announced the spin of their auto division. I guess it makes you want to ask. Is that an asset that you would still be interested in or is it that you find the technology and scale that you need outside of that at this point? Any sort of color or thoughts there?
Speaker 1: Yeah, I'll take that one Colin. Just real quick, you know, we I would say you're gonna expect the next comment We're not gonna we would never comment in any potential acquisition or merge or anything like that ever period. So there's the public service announcement of the day, right? But separately with that says, you know, we one thing I take great pride in what this team has done over the years. There is a
Speaker 1: There was a latency of almost two decades before Dana had done an acquisition prior to 2017 or something to that effect and we built the team out to make sure that we were very open to considerations and looking at opportunities and obviously we went on a fast horse and acquired the 12 electrification assets post the Considerations which you can't so but long and short to that is is that you know we pivoted and we pivoted hard into making sure that we accumulated the skill sets and
Speaker 1: that would say Dana is not ready for electrification based on what we're doing now, so we went about it a different way. So like I said, everybody's always open to everything, and we have the capability to do anything, but we are very proud of the portfolio we put together and the capabilities that we put together by doing up the roll up of all of the other assets since then.
Speaker 5: Thanks for taking my questions.
Speaker 1: Okay, with that, I'm actually going to jump in and just do a brief close. And not a lot today other than to say the team really did an excellent job in the corner. It's rocky roads out there for sure. There's a, you know, to use the phrase we all know, it's like playing whack-a-mole when you talk about container shortages and energy increases and customer sporadic builds and all the other things associated with it. But if you're cohesive and you're running your company as a system, you're going to be able to navigate.
Speaker 1: delivery and other and sourcing you for having a global footprint, sourcing you for having a trustworthy relationship, trust sourcing you for multiple things. So on behalf of the entire team, we continue to do a good job of balancing by winning foundational internal combustion engine wins as you witnessed today with the Jeep Wrangler, but also plenty of great opportunity that we continue to execute on the electrification side. So thank you for your time and attendance today. We look forward to providing you an update I think in early February . Thank you everybody.
Speaker 2: And that concludes today's presentation. Thank you for your participation. You may now disconnect. And we'll see you soon at another context.
Speaker 6: Please wait, the conference will begin shortly. Please wait, the conference will begin shortly.
Speaker 6: The pro pro.
Speaker 6: you
Speaker 6: Please enter your conference ID and press the pound key. Please enter your conference ID and press the pound key.