Q2 2023 Dana Incorporated Earnings Call
My name is Josh and I will be your confidence.
Peter.
Please be advised that our meeting today speakers remarks and Q&A.
Action will be recorded for replay purposes.
That's helpful.
Following the webcast.
The U R L. A on our website.
Yes.
There'll be a question and answer period.
And we will take questions from the telephone.
To ensure that everyone has an opportunity.
Xie Xie.
Yeah Colin.
One question.
If you'd like to ask an additional question he's a chunk of the queue.
At this time I would like to begin the presentation by turning the call over to Dana Senior director of Investor Relations and strategic planning.
Okay.
Thank you Josh and good morning, everyone on the call. Thank you for joining us today for our second quarter 2023 earnings call. You'll find this morning's press release and presentation are now posted on our Investor website. Today's call is being recorded and supporting materials are property of Dana incorporated they may not be recorded copied or rebroadcast without our written consent.
Allow me to remind you that today's presentation includes forward looking statements about our expectation for Dana as future performance actual results could differ from those suggested by our comments today additional information about the factors that could affect future results are summarized in our safe Harbor statements found in our public filings, including our reports with the SEC.
Call. This morning are Jim <unk>, Chairman, and Chief Executive Officer, and Mr. Crouse, Senior Vice President and Chief Financial Officer.
I'll now turn the call over to Jim Jim.
Good morning, and thank you for joining US today. Please turn with me to page four where I will discuss our highlights for the second quarter of 2023.
Starting on the left side, we're pleased to report that Dana achieved record second quarter sales of $2 $7 billion, a $162 million increase over the same period last year.
And by continued strong customer demand the rollout of our new business backlog across all of our end markets and our ongoing cost recovery efforts.
Adjusted EBITDA for the quarter was $243 million up $81 million or 50% over the second quarter of last year, driven by our strong operational execution and improving customer schedules.
Free cash flow was $134 million, which is a good second quarter performance driven by higher profit and our working capital efficiency.
Lastly.
Our results adjusted earnings per share for the year were 37.
An improvement of 29 cents per share.
Dana remains on track and extremely focused on the execution of our companywide transformation that is securely positioned us to be a leading supplier to the world's most prolific ice's and zero emissions vehicle manufacturers. While this ongoing transformation has not been easy in light of the challenges that continued to impact them.
The industry between 2020 in 2022, it was necessary to completely repositioned the company for long term profitable growth as the industry transitions to a zero emissions world.
Dana recognized this industry transition early on and took measures actions to enhance our product portfolio and ensure that we are extremely cohesive and aligned organization spanning all markets to drive forward, our technology excellence within all of being a leading energy source agnostic mobility supply.
Here with the capability to design engineer and manufacture fully electric powertrains in house across mobility markets.
That's why I'm very proud of how the Dana team has continued to relentlessly drive operational efficiency exceed customer satisfaction expectations and leverage our best practices and technology capabilities across the entire organization to ensure that we can meet whatever needs our customers have in this quickly changing market.
Moving to the right side of the slide I.
I will be highlighting the following key items today as we reached the midpoint of the year.
First is an update on the current operating environment and outlook for the remainder of the year, while we continue to navigate numerous challenges, including inflationary pressures customer demand volatility supply chain disruptions and currency fluctuations market conditions have begun to stabilize and we expect them to continue improving through the <unk>.
Back half of the year.
I'll also give you a brief update on a few of the key high volume new business launches that have just concluded or are now underway and gradually accelerating serial production volumes.
Moving to the lower left we are excited to report that Dana continues to win new electrification business partnering with the world's largest Oems or some of the most mark key programs in our industry.
Lastly, we will highlight another example of our Dana is intentionally leveraging our expertise to develop the most advanced E propulsion systems in this case he transmissions across all three mobility markets.
Please turn with me to page five where I will walk you through an update on our operating environment.
As we shared with you last quarter, we are anticipating an overall improved operating environment as we go through the second half of 2023.
Beginning with commodity costs and currency impacts on the left side of the left side of the slide we continue to see steel prices moderating compared with 2022.
And though we expect commodities to remain a tailwind for the rest of the year prices have not fallen quite as fast as we have previously expected.
Commodity recoveries continued to continue what are returning to a more normal pace as base material prices fall.
And finally for this section foreign currencies has translated to U S dollars were a headwind in the second quarter, but we expect that will moderate in the back half as the relative strength of the dollar weakens.
Moving to the center of the slide cost inflation can you choose continues to be an issue as many input costs remain high including labor and European energy pricing actions are muting, the impact of inflation, but will not completely offset it in the second half.
There has been a sequential improvement starting late in the second quarter and customer production volatility and customers are indicating that their supply chains are improving which should help us to reduce production volatility and scheduled disruptions through the rest of the year.
Moving to the right of the page demand across all end markets remains strong as vehicle manufacturers are working to restock inventory.
Like everyone in the industry, we continue to monitor the possibility of an OEM labor disruption.
With approximately 120 active program launches this year, including a great balance of EV and IC program spanning all of our markets globally, the preparation and efforts our team members committed to over the prior years have paid off as all of our launches continue to progress exceptionally well.
We are successful we are successfully through the launch of the Ford Super duty and are currently ramping up the GM OPM and beginning the launch of the new Jeep Wrangler programs.
We also expect higher EV volumes to benefit battery and power electronics cooling product sales in the second half of the year, primarily impacting our power technologies segment.
As we move into the back half of 2023, we expect to see the benefits of decreasing production volatility somewhat offset by higher net inflation.
Let's now turn to page six where I'm excited to share with you another new and transformative transformative EV program with a major OEM.
Okay.
Dana has been at the forefront of developing and manufacturing electrified vehicle powertrains for some of the world's most recognized brands across the entire mobility market.
Previously we had shared with you how electrification adoption is rapidly accelerating in the light vehicle segment and that there are a number of new programs that Dana is working on with major customers.
Today I am pleased to announce that Dana has been selected as the electrification supply partner or an all new high volume electric vehicle program with a major North American OEM.
While I'm not able to name the customer or the vehicle yet we will be supplying our rigid beam E axles for a highly anticipated light and medium duty truck program.
The first models are slated for production in the next few years.
And we will include Dana is designed and manufactured rigid E beam that will include Dana as electrodynamics and ether mill management components.
Consistent with our commercial vehicle and off highway customers, our light vehicle customers recognize and are turning to Dana complete in house E propulsion capabilities, including Motors Inverters E thermal software controllers and of course E mechanical capabilities to differentiate their vehicles for the future.
It is another great example of how the transformation to electrification is providing dana and opportunity to supply three times the vehicle content versus traditional ICD draglines programs big and small.
Stay tuned and we'll be able to provide you more details about this major EV program award in the coming months.
Please turn to slide seven where I will talk about how Dana is successfully leveraging our class leading E transmission capabilities across all three of our end markets and multiple applications.
If you recall I shared that Dana would have a prominent presence at the advanced clean transportation Expo known as act Expo or ICT, which features some of the world's leading Oems and commercial transportation technology provider showcasing the latest products and solutions designed to Decarbonize transportation.
And paved the road to a zero emissions future.
The show was a huge success with countless industry leaders taking part during.
During the week Dana announced the expansion of our Spicer electrified E. Powertrain offerings to include a family of E transmissions for a wide variety of medium duty electric vehicle applications.
Dana Superior engineering, and technical expertise in EV and hybrid transmissions provide us with the inherent capability are leveraging our proven expertise across all the markets that we serve.
If you recall last quarter I shared how our E transmission capabilities are driving some of the world's most notable and advanced high performance vehicles, such as Aston Martin Audi Harare, Lamborghini and Mclaren.
In addition to the Supercars and commercial vehicles R. E E power shift technology is translating translating to our off highway market as well, where we are already leveraging it across numerous numerous vehicle types, including wheel loaders, and rough terrain cranes and construction large lift trucks empty container handlers.
Reached actors internal tractors and material handling load haul dumpers in underground mining and fourth forwarders in forestry as the markets continue to evolve we are in a leading position to provide solutions that fit our customers' unique needs whether it's for light vehicle off highway or commercial vehicle applications. Thank you.
For your time today now I would like to turn it over to Tim who will walk you through the financials.
Thank you Jim and good morning, Please turn to slide nine for a look at Dana as second quarter 2023 results sales were $2 $75 billion $162 million increase over last year, primarily driven by strong demand in our driveline segments and recoveries of cost inflation.
Adjusted EBITDA was $243 million for a margin of eight 8%.
That is $181 million higher than a 250 basis points increase over last year.
While we still experienced some lingering customer driven production inefficiencies or profit improvement was driven by lower net manufacturing costs strong operational execution and the timing of <unk> investments.
The net income attributable to Dana was $30 million compared with $8 million last year, driven by higher operating income diluted adjusted earnings per share was 37 of 29 improvement over the second quarter of last year.
Lastly, free cash flow was $134 million down $33 million from last year, driven primarily by higher capital spending.
Please turn with me now on slide 10 for a closer look at the drivers of sales and profit change for the second quarter of 2023.
Beginning on the left traditional organic sales growth of $137 million was driven by higher demand and improved pricing recoveries as well as product and market mix.
Adjusted EBITDA on higher sales was $45 million, which improved margin by 130 basis points cost inflation was offset by customer recoveries in the quarter and improve operational execution yielded cost headwinds from inefficiencies driven by volatile customer production.
While lessening in intensity was still an issue early in the second quarter, primarily in our light vehicle segment.
Next <unk> organic sales were $36 million higher than the second quarter.
In the second quarter of.
Versus last year, adjusted EBITDA was $4 million higher for a negligible margin impact as we noted last quarter, our electrification business remains profitable on a contribution basis, but we will generally show negative profit and margin. When we factor in continued investment we are making to bring EV business up to scale. However.
This investment is variable and this quarter our required investment was lower than it was last year, which is why the walk shows some profit growth.
This is just a matter of timing and we expect investment will ramp up in the second half of 2023.
Third foreign currency translation lowered sales by $21 million as the dollar increase in value against several foreign currencies.
This lowered profit by $5 million for a margin impact of about 20 basis points finally.
The recovery of prior period commodity cost increase increases added $10 million in sales and net profit benefit of $37 million driven by lower commodity costs compared to last year. This resulted in a 140 basis point margin benefit.
Next I'll turn to slide 11 for a closer look at the drivers of free cash flow change in the second quarter.
Free cash flow was $137 million in the second quarter higher profit this quarter was offset by smaller incremental improvement.
Improvement in working capital and higher capital investments.
A few items of note Catherine cash interest was $5 million higher due to higher interest rates and an accelerated payment relating to our debt refinancing working capital improvement was $74 million lower in this year's second quarter, primarily driven by increased sales and higher inventory to support new program launches.
And finally capital spending was $32 million higher than last year to support our backlog of new business. Please.
Please turn with me now to slide 12 for our revised guidance for 2023.
We have revised our full year guidance ranges due to solid first half results and our expectations for a stable second half.
We now expect sales to be approximately $10 7 billion at the midpoint of our guidance range. This is an increase of $100 million from our prior outlook and an increase of 400 or $545 million over 2022.
The sales increase is being driven by lower currency headwinds and higher expected commodity.
Recoveries as material prices have remained elevated longer than previously expected.
Adjusted EBITDA is expected to be about $850 million at the midpoint of our revised guidance range, which is up approximately $50 million from our prior outlook and a $150 million higher than last year. The increase in guidance is driven by improving operational efficiencies slightly lower <unk> spending and a beneficial.
Product and market mix.
Profit margin is now expected to be approximately seven six to eight 2% a 40 basis points improvement at the midpoint of that range from our last guidance and 100 basis points improvement over last year for.
Free cash flow is expected to be approximately $75 million at the midpoint of the range, which is a $50 million increase from our prior guidance.
Okay.
Diluted adjusted EPS is expected to be <unk> 80 per share at the midpoint of the range a <unk> 30 improvement.
Please turn with me now to slide 13, where I will highlight the drivers of the full year expected sales and profit changes from last year.
In line with our revised guidance ranges, we are updating the drivers of our year over year change in sales and profit for 2023.
Beginning with traditional organic growth compared to last year, we now expect $380 million and additional sales from traditional products through a combination of new business market growth market share gains and customer recoveries. This revised estimate is about $50 million lower than our previous outlook due to anticipated lower gross.
<unk> and subsequent recoveries from customers.
Adjusted EBITDA increases over the last year for traditional organic sales growth is now expected to be about $125 million or about $45 million higher than our previous estimate due to a more efficient operating environment and beneficial product and market mix note that net cost inflation compared to last year is still estimated to be.
About a $50 million headwind.
Our outlook for EV organic sales remains unchanged as we expect about $150 million in incremental EV product sales. This year. However, the timing of investments we are making for development and commercialization of this new technology has shifted out a portion of the costs, meaning our expected <unk> sales to be about $20 million decrease in <unk>.
Justin EBITDA this year compared to our prior estimate of a $35 million decrease.
Foreign currency translation on sales is now expected to be a slight tailwind of approximately $15 million, primarily due to the relative strength in the euro and Brazilian real.
However, due to the blended basket of currencies in which we contract we still expect a slight profit headwind of about $5 million.
Finally, our revised commodity outlook.
Is expecting material prices to remain elevated longer this year than previously planned meaning that our prior estimate of $35 million lower sales due to lower recoveries has been revised upwards. So that recoveries will be equal to last year as we continue to recover the higher costs.
We still expect total material prices to be lower than last year. Our revised outlook is a net profit tailwind of about $50 million. This is about $20 million lower than our previous estimate.
Please turn with me to slide 14 for our outlook on free cash flow for 2023.
Our revised full year free cash flow outlook is 70 about $75 million at the midpoint, primarily due to higher profit, we expect about $150 million of higher free cash flow from increased profit on higher sales and lower input costs.
Lower onetime costs will offset higher taxes due to the increased profit.
Working capital remains unchanged and our current outlook as we continue to improve capital efficiency, our sales growth and launch cadence. This year will likely result in about $190 million less in free cash flow generation compared to last year.
Capital spending remains unchanged to support our sales growth in technology transformation, we are expecting to invest about $70 million more in capital expenditures as compared to last year. Finally, turning to page 15 for an update for our strong balance sheet and our second quarter refinancing actions.
On the left side of the page you can see that we have ample liquidity of about $1 6 billion at the end of the second quarter. Our maturity profile as is illustrated on the right side of the page during the quarter, we took proactive actions to bolster our debt capital profile by extending maturities and balancing our geographic borrowings in may.
We issued $425 million in new Euro notes maturing in 2020 or excuse me in 2031 proceeds of this issue were used to redeem half of our U S bond maturing in 2025, the remainder was used to repay outstanding borrowings on the revolving credit facility.
We expect to redeem the remaining 2025 bonds over the next 12 months.
Our balanced liquidity attractive long term debt maturity profile and free cash flow generation to continue to give us a sound foundation to continue to transform our business for an electrified world. Thank you for listening on this Friday I will now turn the call over to Josh to open for questions.
At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of Euro.
Again with RBC capital markets. Your line is open.
Hi, Thanks for taking the question.
I just had a question on the.
On the guidance raise.
EBITDA bridges, if I compare to Q1 bridge you guys provided today to the Q2 bridge.
And obviously the traditional EBIT moves higher you called out more efficient.
Operating environment and mix, just would love to hear more kind of details there.
And then the timing of investment shift in Evs.
Is creating the reason why that piece of the bridge is moving higher that sounds like Youre, just saying as I understand it correctly, just shifting the investments to 2024.
Is that is that fair to say.
Is there anything more.
Behind that thanks.
Yeah I'll take the EV first this is Tim.
So yes, I think what we're seeing in the business is on the AG side is just a little bit of slipping on the investment a little bit that will flow into 2024, So we're about $15 million.
Less now than we were originally but we still expect to invest significantly in that business as we continue the transformation.
On the on the traditional <unk>.
You're really seeing is some of what we've been talking about right a lot of work has been going on in.
In the operating level of the business to become more efficient and to drive those improvements some of Thats been held back by these volatile demand patterns and supply chain issues as those start to abate and we started to see that in late in the quarter you start to see the the.
The operating improvements in the plants start to flow through and that's really what's being reflected when you look at the the improvement in the flow through and conversion on our on our traditional business.
Yes.
And then on mix.
Mixed so.
Obviously, youre seeing some some higher mix relative to our our off highway business that tends to come with <unk>.
With higher margins.
And an offset in other parts of the business.
Okay got it thanks, a lot I'll turn it over.
Yes, thanks, Rob.
Your next question comes from the line of Colin Langan with Wells Fargo. Your line is open.
Oh, great. Thanks for taking my question.
When I look at your implied second half versus the first half.
Slightly down sales, but margins I think something like 50 to 70 basis points down, which is a pretty high tech or a rental.
I think most suppliers are indicating things get better in the second half that would seem to be bucking that trend.
What would drive the weakness in the second half versus the first half what are the factors. We're just thinking about that cause margins to kind of road from here.
Hey, Collyn. This is Tim Thanks for the question, Yes, it's a couple of things so big driver on sales. So sales are down about $80 million.
First half to second half thats, driven by recoveries and commodities with a little bit of offset those for FX I think.
And then on the EBITDA side and those recoveries don't forget don't come with with any margin.
And then the commodities kind of flow through with very high margin and if you look at our EBITDA, It's down 40 ish million dollars between first half and second half that's evenly split right. If you think about it we made money or on an incremental basis had.
Through profit on EV, which we're now showing as a as a.
Overall loss for the year, which will still showing as an overall loss slightly lower so that that differential is about half of that and the other is really just the lower flow through from from commodities that were expecting to continue to decrease which now we don't see you really look at the base traditional business. It's.
It's down on sales and about breakeven on profit. So when you look at those those that decremental is is actually really really good. So when you kind of parse that apart.
I would say the business still in the back half we show pretty sizeable improvement.
On a on a base organic sales level.
Got it Thats helpful.
And then all of the segment margins for really good except power technologies change pay a pretty weak margin there what's going on in that segment is that some of the investments.
How should we think about the trajectory of that.
Yes, it's two things so so that business, we continue to to launch and bring up to scale on the battery and electronics cooling. So we expect that to improve in the in the back half as.
As our customers continue to move through that launch cadence on the traditional side right. So.
The difference in our power tech business versus some of the other businesses. That's a very diverse business from a commodities perspective and from a from just the sheer number of part numbers, we have versus say the light vehicle driveline business. So some of this is also driven by our ability to continue to have.
And get the recoveries, we see that those recoveries. The teams continue to work, we will see some more of that benefit coming in and catch up in the back half of the year. So we do expect that the margin profile in the conversions and that business will improve in the second half versus the first half.
Got it alright, thanks for taking my questions.
Sure.
Our next lesson comes from the line of Noah.
Oppenheimer Your line is open.
Hey, Thanks, I guess.
First of all to follow up to Collyns question around the second half.
Just want an impactful but further.
Excluding come.
Commodity.
What are you actually assuming in terms of second half versus first half on organic sales.
Are you, assuming basically flat organic sales first half the second half and are getting a little bit it'll be as base, yes correct.
I am sorry, yes, organic sales will be down a little bit first half to second half, but that's primarily driven by.
Bye bye lower recoveries on lower growth growth gross inflation in markets more or less flat.
Okay Alright.
I'll take that offline.
But congratulations on the E axle award.
I'm, just curious a little bit about.
The content there I know you can't name note the manufacturer yet, but it sounds pretty significant so just would love to understand your full content on this youre supplying a rigid beam axle.
Does this potentially include motor.
Is that sort of an option to add on maybe you can talk a little bit about the.
The content and how this has left principal.
Hey, good morning. Thanks for the question this is Jim.
As you alluded and I mentioned I really can't go too far out there in terms of specifics on the customer for sure, but even the content.
For clarification.
And for reference for everybody in the key with US is when its in house supplier of electrodynamics.
There's a lot of opportunity for people to back into potentially what the technology would be and we're not going to get out in front of many of our customers probably more than most suppliers. So what I can tell you is is that as I go through as I went through in my prepared remarks, our suite of electrified products and the only thing I'd add to it as the thermal piece and we call. It the four in one system there are strong.
Elements of those foreign one I, just can't be specific on which ones today.
So it will be it will that will be definitely the mechanical as well as portions of thermal and electrodynamics.
Okay, Great I mean, maybe just.
Second part of my question about how how you see this as leverages bullet to future RFP activity.
To get this high volume award.
To be designed and what.
What do you think this might mean in terms of the growth of the business from here.
Well, starting at kind of as a starting point what it certainly does as it confirms what we all knew by now, but im going to say it anyway is that customers like they have for years and the actual business in the seat business and all sorts of other businesses, there theyre going to have a bit of a pivot table of whats going to they're going to produce in house and what they are not going to produce in house et cetera et cetera.
So as we've been saying since 2016 and double down in 2018, which we had high confidence with our partnerships with our customers that there was going to be a place for our actual business E transmission business with but you had to have the full capability to create value what it means to us is that as we are across all of the end.
Markets the scaling on.
On certainly on engineering, the scaling on supplies and components the scaling on how to launch the product the scaling on having the global footprint to support global program.
On and on and on that's what the whole thesis was from the very beginning and obviously the thesis was came together directly the way we expected it to the most important thing is the institutional learnings of our company I mean, our company now versus where we were six or seven years ago. When it was pure mechanical very very good mechanical.
Engineering Company now, it's you kind of go across our company and it's almost figuratively half and half when you think about electric dynamics and mechanical that you have those capabilities why is that important.
When you are facing off with your customer and you are trying to create value for them to help them sell more vehicles on long haul you put them in a much better position because by now we're taking all the lessons learned of all of the off market products. We have in the field, while the medium duty truck products, we have in the field and off highway products. We have in the field and this is just a good representative example, as the <unk>.
Flexion point came to the light vehicle truck market, which is where we participate we don't participate in pass car is is that we were prepared and we were able to create value with our customers to give them high confidence that they were going to win in the market with their electric vehicles, and specifically electric truck vehicles.
That's great context.
Tim.
Congratulations again on the award and a great quarter.
Thanks, Noel for both thank you.
Okay.
Your next question comes from JMP developed with BNP Paribas. Your line is open.
Hey, guys. This is jake filling in for James.
First if you could just talk through.
Net cost inflation dynamics it looks like everything was fully offset in the first half.
Hugh.
Have about <unk>.
$50 million headwind in the second half of my thinking about that right.
Yes, that's correct I mean, we had we had a little bit of net inflation in the first half just kind of rounds away, but so yes, we are expecting to see the net $50 million in the back half. So the big driver is in the first half of the year, we continued to see.
Recoveries over recoveries from from from the prior year coming through and we don't expect that obviously to continue in the back half and so what's showing through in the back half is sort of the net unrecovered inflation number that.
That we expected for the year.
Despite the lower gross.
Overall gross costs.
Alright, Thanks, and then.
To follow up on the.
E beam beam axle win.
Can you give us some more color on the timing for when you expect us to launch and the overall investment required to support higher volume program like this.
Yes, so we can't we can't talk specifically about timing, but I can tell you that it is it is it would be outside of our traditional three year.
Backlog window.
And then obviously at an awards such as this does come with an increased amount of of investment both on the period cost side and on the fixed capital side.
Alright, thanks for taking my questions.
Your next question comes from the line of Ryan Brinkman with Jpmorgan Your line.
Good morning, Thanks for taking my questions.
It seems like you're winning more of these light vehicle Driveline awards as opposed to a couple of years ago I thought it looked like maybe you had benefit more from electrification of commercial vehicle driveline side or from hybrids are maybe battery cooling plates in the light vehicle side, So where would you say that.
Either the light vehicle E beam axle or the light vehicle call. It ran one or 401 electronic drive unit opportunity, where those sort of fit in kind of rank ordered in terms of the electrification opportunity for the whole company.
Great question, a little bit difficult to answer to be honest with you, but I'll give it my best shot at the best way to kind of I hope illustrated for the to the audience today and yourself.
Is is that if you took a snapshot in time with like five years ago, where a company like Dana would've been having the various RFID that turned into an RF Q with our customers that turned into an internal combustion engine or diesel engine type of driveline sourcing situation. It's essentially the same thing for electrification today almost.
Everything that comes at Us.
Element of electric mostly electrification, maybe some hybrid to it but it doesn't matter the point I'm trying to make is it doesn't matter anymore. What end market that we're participating in all of them are coming it's just a matter of.
Are they did they set up in for example in the commercial vehicle segment did some of our commercial vehicle customers have first mover position get some stuff out to the market using what we call a direct drive solution, which was basically as a bridge off of a traditional architecture for an ICU vehicle and they got that and maybe thats.
Okay for two to three years, and therefore, no incremental new sourcing has happened or anything that we want to talk about has happened.
In the light vehicle standpoint, they are just kind of maybe theyre going a little bit faster directly to a full <unk> solution, which by our definition any transmission, depending on which application will be the most efficient solutions. Therefore, the sourcing pattern seems like it's more <unk>.
Prominent right now, but it's really not it's all of the end markets are sourcing in electrification. These days, that's just how it's going.
Okay. Great. Thanks, very helpful. Maybe just lastly, I want to ask about two of these kind of related comments in the slides on slide 12 pertaining to higher sales 23 due to cost recoveries hindering margin and then the other comment on slide 13, referencing gross inflation and related recoveries now.
Expected to be lower than the prior estimate the net impact from inflation on the full year profit being the same so with margins for the whole sector lower aspire sector lower than where they were pre pandemic and part given this phenomena if I could.
Affleck is lower inflation, because we hear about these headlines about lower inflation is that the answer really to restoring.
Supplier margins are or would that just simply be offset by lower related recoveries, such that you need to rebuild margin by some other means such as fixed cost leverage or a pivot toward intrinsically higher margin products et cetera, or should investors not even be too bothered about getting back.
Back to pre pandemic margins because margins might be structurally lower now.
Because of all this low or no margin pass through of higher cost and maybe instead, we should focus on return on invested capital or cash.
Cash and cash returns are just kind of how are you thinking about phone.
Yes.
Brian I think you hit it right on the head so I think.
As you think about the.
The inflation effect on the business. It has a even if you were to recover 100% of your inflationary cost of which would keep your total profitability.
Same youre going to have a margin squeeze because your customers are not paying any any margin any profit on on those costs and in fact, if you look at US. This year right. We still expect to see a $50 million net headwind so that not only do we have the margin impact of Av.
Just if we were to recover dollar for dollar we haven't recovered dollar for dollar. So I think when you think about the supply base I think it's going to be more important over the longer term over the longer term as all of the programs turnover and things get repriced and all the cost get built and I think youll see margins start to move back to where.
They may have otherwise been I think that's a long road I think the better metric to be thinking about is is total profitability total amount of dollars generated and what that return is because our view is as we move through especially these large programs are now rolling on and we're seeing that come through when we get them re priced well.
We're recovering those added costs, we're not we're not recovering all that margin, but we are doing is getting these programs back to an equal or better economic returns. So I think as you think about return on invested capital. That's a really good way to think about these programs and the way we are continuing to think about them because margin.
As a percentages is I think going to be continue to be.
Lower than what it was pre pandemic.
Very helpful. Thank you.
Sure.
Your next question comes from the line of Dan Levy with Barclays. Your line is open.
Hi, good morning, Thanks for taking the questions.
Jim will start with a high level. Please.
I think the theme that we're seeing from.
Some of the legacy automakers on Evs payment. This week in earnings is it just a touch.
Copper environment for them on the Evs EV for anticipated.
Volume targets are getting pushed out for just push out some of the volume targets on Tvs.
There is an increased push to be a bit more efficient on spending maybe more reuse of architectures.
How does this impact you are you seeing automakers changed their focus on the light vehicle side on vertical integration and that used to be very heavily focused on vertical integration, but perhaps with the idea that there just isn't enough volume that the volume targets getting pushed out does that maybe change the way that some of the autos.
<unk>, we're looking at vertical integration, maybe opens up more opportunity for you.
Thats great questions a lot to unpack there, but I'll do my best.
The way I see it first of all.
In terms of the volumes.
I absolutely followed the same commentary that you follow as it relates to that but at least from our line of sight.
At least in the truck business and I think we all react to remind yourself of that quite regularly truck business versus car businesses, two different things right and at least from the truck business and where we see electrification O&M at least from our line of sight with our customers I think they see it going as well as still is nothing but green shoots and positive so im not trying to market.
Positive. So are there that's just the facts as I see it based on a bunch of other data points as it relates to running the company and how Dana operates as well the beauty of the way we've set the company up as you know over the last six to seven eight years is this leveraged the core strategy.
The priority of the enterprise strategy is to leverage not only people capacity, but also equipment capacity.
In engineering capacity, and so on and so forth and a lot of our products and components and so on and so forth, we will be able to balance I'll call. It almost like balancing.
Line balance in a plant you can line balance sheet capacity for all of the things I just referred to to protect the company and actually benefit the company moving forward. So maybe you werent going so directly down that relative to the way I see it is there is there is plenty of opportunity for us to move forward and we're very we're very bullish that there is going to continue to be the same balance.
And the audience, perhaps the same balance on actuals being in house versus outsource theres going to be some form of balance of that for years to come and what's the important point to remind everybody. It's been that way for decades now theres plenty of axle business. That's been in house across the end markets in the past there'll be plenty of that in the future, but there'll be plenty.
On the outside because theres plenty of use cases companies such as Dana that has such a reputation and capability, especially in areas such as your off road enthusiast market the truck business truck business in the commercial vehicle segments, the consumers and the dealers and the fleets I mean, they don't just pick us because we're a commodity.
Pick us because we help them sell trucks. So that's not in my view is not going to change if anything.
We're going to be we're going to benefit from it because of what we've done in electrification, we're not guessing at it we've been doing it now 345 years in production, so I feel very strong about it.
Great. Thank you.
Your next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is open.
Thank you very much.
So my first question.
We start thinking about.
2024.
Curious if you could share your thoughts on what is sort of record goods starting commentary base to serve like built in there.
Our initial forecast that gives us more.
The first half for you.
20 phase III, we have some.
Better than expected and the margins as if it's more the second half because you would have I guess, a full impact from these investments as well as some net unrecovered inflation on the words that can go first half you recover some inflation related to last year.
Or is it sort of like the full year I'm, just curious to what extent using the exit rate that you're essentially implying for this year is sort of like the right way to think about the business or is it.
Or would it be better than that.
This is Tim Hey, we're just trying to get through 2023 here before we get into 2024, but but I'll try to do my best for you I think the way to think about this is really from our full year forecast and sort of how it implies us coming out of out of 'twenty three and into 'twenty four.
Earlier this year, we gave a longer term.
View.
We still see that view.
As being where we wanted to get the company and I think the company's performance in the raise in guidance here out of 'twenty three.
Just to reiterate.
Makes it makes us more confident in our ability to get there if that helps you.
Sort of planning around 24.
Yes, It does I guess another way.
To ask maybe as you think slipped out of the way you're guiding now.
What will be left by the end of 2023 in terms of <unk>.
Unrecovered.
Inflation, both material and nonmaterial and what would be sort of reflects the pass forward to or I guess, the likelihood of recovering those in 2024.
Yeah. So in terms of Unrecovered inflation, we continue like this year, we will have another $50 million of Unrecovered inflation. So.
That.
Again until we sort of see all of the programs really work their way out I don't think you could say that hey, we've gotten everything recovered I think we continue to work with all the customers to go get recoveries, but.
That's going to be with us for a little while on commodities.
They tend to ebb and flow through the regular business in those.
So the agreements and processes that we have in place are working extremely well.
And.
And would expect that to continue.
Great. Thank you.
Sure.
Okay, well. Thanks, everybody. This is Jim thanks, everybody for joining the call and as always we appreciate your attendance and interest and Dana obviously is a continuation from the strong Q1 results you can see from today's update that Dana has not only trending extremely well, we're progressing to a trajectory of the company record financial.
Performance similar to what we delivered in 2018 2019 and had financially guided to in 2020 prior to the Covid shutdowns, which commenced obviously in March of 2020, what's important to note. Though is Dana is very unique Dana over the same period of time not only was a first mover in establishing in house E powertrain electrification.
<unk> capability, we have we had the courage to never waver from this commitment throughout this time from what I would argue was the three year Black Swan event, and the <unk> mobility supply industry.
<unk> from the enterprise strategy and committing from electrification would've been the easy answer however, as we can tell now it definitely would not have been the right answer today. In addition to the tremendous revenue growth we've had over the last six years, improving our earnings intensity Dana.
<unk> is clearly a winter in electrification and a supplier of choice for all mobility segments as.
As electrification volumes continue to accelerate and they will Dana will continue to be an energy source agnostic partnering with our partner customers in both internal combustion engine and electrified vehicle manufacturing for years to come and to win with your again. Thank you for your time and attendance. We look forward to talking to you next month or next quarter. Thank you.
This concludes today's conference call. Thank you for joining US you may now disconnect.
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Yes.
Okay.
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