Dana Incorporated
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

[Operator:]

Good morning, and welcome to Dana Incorporated's Fourth Quarter and Full Year Financial Webcast and Conference Call. My name is Regina, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session, will be recorded for replay purposes . At this time, I would like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations and Strategic Planning, Craig Barber. Please go ahead, Mr. Barber.

[Craig Barber:]

Thank you, Regina, and good morning, everyone, on the call. Thank you for joining us today for our 2020 fourth quarter and full year earnings call. You will find this morning's press release and presentation are now posted on our investor Web site. 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. Also, allow 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 as usual are James Kamsickas, Chairman and Chief Executive Officer; and Jonathan Collins, Executive Vice President and Chief Financial Officer. Jim, you start us off this morning.

[James Kamsickas:]

Good morning, and thank you for joining us today. As we move into the new year, I think we can all agree that 2020 was unlike any year we've experienced. The challenges brought about by the global COVID-19 pandemic tested everyone's resolve to the deepest levels. I cannot be prouder of how the Dana family responded through it all. We were able to quickly pivot and take the necessary measures to ensure the long term success of our business. As you can see on the left side of Slide 4, Dana achieved sales of $7.1 billion for the year, significantly impacted by the global pandemic. As a result of the extraordinary commitment from our team and their dedication to executing our plan, coupled with aggressive cost flex actions taken during 2020, we achieved our adjusted free cash flow target of $60 million. Adjusted EBITDA was $600 million and diluted adjusted earnings per share was $0.39. Jonathan will walk you through our results in more detail, but first, I'd briefly like to recap some of the actions we deployed over the past year to ensure the safety of our people and the communities we call home, as well as our efforts to continue executing for our customers and shareholders. I will also share why I'm excited about Dana's future and we'll update you on our sales backlog, which includes several new EV business wins. And finally, we'll review several key achievements for the year and provide you a look at our noteworthy and arguably unique initiative as we continue to execute towards a carbon free future.

[Jonathan Collins:]

Thank you, Jim, and good morning, everyone. Slide 15 provides an overview of our 2020 fourth quarter and full year results compared to the prior year. In the fourth quarter of this year, sales topped $2.1 billion as we experienced strong demand for our key full frame truck platforms in North America. Profit margin in the quarter was lower than the same period last year despite higher sales as; one, a $17 million indirect tax recovery in 2019 did not recur in 2020; two, we continued to incur premium costs, primarily in the form of expedited freight to meet the elevated demand in our light vehicle segment as our supply base struggled to keep pace with the dramatic production ramp up coming out of the pandemic shutdowns; and three, we accelerated our investments in electrification to bring to market some of the new business wins that Jim highlighted just a few moments ago. Fourth quarter adjusted free cash flow was $46 million as earnings combined with a considerable source of cash from working capital surpassed interest, taxes and capital expenditures. For the full year, sales were $7.1 billion, a decrease of $1.5 billion compared to 2019, driven by the production shutdowns caused by the global pandemic. Adjusted EBITDA was $593 million for a profit margin of 8.3%. The net loss attributed to Dana was $31 million and resulted entirely from the goodwill impairment charge recorded during the onset of the global pandemic. Diluted adjusted EPS was $0.39, a $2.67 decline from the prior year due to lower adjusted EBITDA as well as higher depreciation and interest expenses. And finally, adjusted free cash flow was $60 million, below the prior year but in line with our expectations given the lower sales in 2020.

[Operator:]

Our first question comes from the line of Noah Kaye with Oppenheimer.

[NoahKaye:]

I guess first one, James, just following up on your commentary around continued EV investment. Is there a way to kind of frame out what that impact might be, are you thinking this primarily organic or are you referring to inorganic as well? And I guess as a related question, we saw one of the major Tier 1 powertrain suppliers recently announce they were integrating into commercial vehicle battery packs. I'm just wondering how you're thinking about gaps in your portfolio and the electrification side as they exist and where you want to focus your efforts and resources? Thanks.

[JamesKamsickas:]

I'll take tag team in this one a little bit with Jonathan, the first part of your question was more on allocating capital and investment on electrification. The latter was relative to strategy on battery management and the such. From the standpoint, I'll just remind the audience, I guess, I would say, as it relates to battery management capabilities and what we do, we had integrated into that already. We had been in that with a couple of our acquisitions. So we're doing that. If you just think about some of the key platforms, in fact, platforms that are launching here in 2021 as it relates to the PACCAR programs, et cetera, that is full battery management, et cetera. So we see what our competitors are doing. We're going to have good competitors and that's fine. But we see it, we have been very selective. We haven't kind of pushed all the chips or overly saturated our investment in one direction or another in our EV strategy. We put it into the right pockets and then build it up from there organically with the great people and assets that come with it. So from that standpoint, we're in pretty good shape there. Jonathan?

[JonathanCollins:]

Noah, in terms of the investments we referenced, that's really on the organic side. So these would be increases in spending in program management, core engineering, application engineering to deliver a lot of these programs and continue to stay ahead of the technology curve in terms of developing new products. So we'll think about dimensioning that going forward. But as the market is moving faster, we are certainly in a position where it makes sense for us to accelerate the rate of investment.

[NoahKaye:]

I guess just a follow-up on production assumptions. Clearly, I think the customer base is like people prioritizing the type of vehicles that you produce content for full frame trucks, et cetera. But just any thoughts on potential impact to production cadence from the semiconductor shortage or any other supply chain issues that you're seeing across the industry?

[JonathanCollins:]

We're certainly watching that carefully. And when we constructed our guidance, we're optimistic about the way the market is heading but we're also cognizant that we're not entirely out of the woods on the pandemic. We're encouraged by the vaccine distribution. And obviously, we think the economy is moving in the right direction to recover. But also as you noted, we're in the midst of a chip salmon. We are starting to see our customers affected. You are right, it's early on. It's affected us less because a lot of our programs are critically important to the customers, and they seem to be preserving those. But we're watching those carefully and we'll keep an eye out going forward.

[Operator:]

Your next question comes from the line of Aileen Smith with Bank of America.

[AileenSmith:]

To ask another question around electrification investment, the call out of it being a margin headwind in the quarter because I think the first time that it's been explicitly referenced by you guys, but it's not really surprising given the strategy from you over the past several years and acquiring and investing in EV technologies. So to understand it correctly, this is just the dynamic of commercialization investment rather than technology development as the backlog is finally ramping up with customer buy-in? And as you think about the margin bridge from 9% in the fourth quarter to 11% in 2021. Is that outlook based on the assumption that the electrification investment burden moderates in any way, or it's just offset by operating leverage on the broader volume and your revenue recovery?

[JonathanCollins:]

To the latter part -- or I guess, I'll take the first part. In terms of the first time being called out, that's correct. And you are right, it's largely due to the commercialization of project or the products, but we're also spending a bit more in product development for new products. So the success that we're having in winning programs, like Jim outlined, is leading us to a decision where we can capitalize on these opportunities by continuing to advance the technology. So I think your characterization there is correct. And then from a quarter-over-quarter margin perspective, we're going to continue to keep the rate high. There is some seasonality of the spending based on customer launch cycles of vehicles. So there’s going be a little lift from Q4 to Q1 on the spend. But a lot of it has to do with the operating cadence in particular as we continue to get the supply base in a better position. We anticipate some of the premium costs that we incurred in the second half of last year abating in the first half of this year.

[AileenSmith:]

And then wanted to touch upon one of the comments in your prepared remarks that you're going to be supplying the cold plates for GM's Ultium batteries. Are you able to provide us with an estimate for the total related content that you're going to have on that platform? And as a reminder, will you be on the entirety of that platform, for example, the 1 million by 2025 target that GM has established or will it be for specific models?

[JamesKamsickas:]

Aileen, I'm going to give you half an answer on that one, but at least I'm transparent when I say that. We will be on the full platform for sure, but I can't give you a content per vehicle or anything like that. And I think you respect that.

[AileenSmith:]

Yes, understood. Thanks for taking the questions.

[Operator:]

Your next question comes from the line of Dan Levy with Crédit Suisse.

[DanLevy:]

I wanted to start by asking a question on your margin guide for 2021, rather. And I recognize you're guiding to a 30% conversion but end markets are strong. And if I look at the margins you put up in your segments in prior periods with better end markets, I would have thought some upside to your guiding 11% is still below the 12% pace you had in '18 and '19. And I just would have thought offside given synergies, better cost efficiency. Maybe you could give some color on the margins and specifically the segment margins as to why there's maybe not as much upside. Is it investment in R&D or is it still a function of end markets? Just a little color on the segment margins why it's higher. Thank you.

[JonathanCollins:]

So I guess the one thing I'd point to is we're still a few hundred million short of where we were in 2019. So obviously, the conversion on those extra sales would be helpful in getting us back up closer to that 12% margin. So that's probably the biggest driver of the difference there. But I'd also highlight the comments we made and just discussed on a question, we are giving ourselves a bit of room to continue to ramp up and spend very thoughtfully in electrification, given the success we have, not only in book business but also the really robust pipeline of opportunities that we're working through with our customers right now. So I would just say, still being a few hundred million dollars short in volume from where we were in 2019 as well as the electrification spending are the only reasons that we're sitting around that 11 versus closer to where we were a couple of years ago.

[DanLevy:]

And any comments on the margins by segment?

[JonathanCollins:]

From a segment perspective, on the CV side is one area where you'll see some concentration on the electrification investment. So obviously, the medium duty segment is moving quickly. We now have the heavy duty win. That's coming to market in the next few years. So I would say that's going to get a disproportionate amount of the EV spend and put a little pressure there. And then really, the off highway business has got really great margin potential on the upswing. We're still highlighting mid single digit growth. But if that market starts to move further, we're really excited about the incrementals you could see in off highway after the integration of the Graziano and Fairfield businesses and the cost synergies that we achieved there.

[DanLevy:]

And second question is a bit more existential. We saw GM, and we've now seen a few automakers actually in the last week, really put a line in the sand about outlining a target being fully electrified, given time period, GM talking about 2035 and Ford being fully electric in Europe by 2030, Jaguar fully electric. I'm sure there's going to be other announcements out there on a similar transition and time line. I realize there's a lot that can happen between now and 2030 or 2035. But my question for you on the light vehicle side, and I guess I would maybe decline it more broadly is, as you think through all the things you need to do to transition to a fully EV world, be it on the product or manufacturing side. Is 15 years a reasonable period of time to make that full transition? And I guess that would be more focused on light vehicle, but we could even extend that to commercial or off highway as well. But to light vehicle where I think we're really seeing this transition aggressively.

[JamesKamsickas:]

I would say they use your word reasonable. I think it is reasonable. But yes, I can tell you from the way we've designed the company and our strategy and everything else, we assume everything is going to come twice as fast as it's going to -- than it was originally anticipated. No, by the way, either lucky or good, I would say, back to even when we rolled out the strategy in 2016, there's a lot of people that thought maybe we had lost our mind. And frankly, I think we are closer to reality than maybe most. But whatever the case, that's not a victory lap, other than just to reinforce with example that, that's how we look at the business and that's how we established our strategy. The key is and use good examples out there of various light vehicle customers and what they're doing and their commitments. But as you also know is that they're going to continue to make the vehicles that are in pocket today. In some of those, given where their uses are out in the field, if it's out on farms or in our case, out in farms or construction sites and a bunch of other things. It's very natural that they're going to still be in the IC world for a period. The point is, that we are very much structured for success to be able to -- they're going to continue to make those vehicles. We're not going to say to them, of course, hey, I got a great idea. We're not going to continue to supply you the drivelines on them. We are going to supply the drivelines on them. But as you can see, we can have two swim lanes at Dana because we have the full in-house capability. And hopefully, that was very much represented today in the presentation. So I feel very comfortable if it's a 15 year transition or it's a seven year transition or it's a 80-year transition, at the end of the day, we're able to run the company that way because we've been structuring that way for essentially four or five years.

[Operator:]

Your next question comes from the line of Brian Johnson with Barclays.

[BrianJohnson:]

Couple of questions, and again, to kind of hit the electrification theme kind of as you look at that 5% electrification goal and then on Page 6, the backlog slide, 50% EV. Directionally, what's the mix between light vehicle and commercial vehicle image and it's kind of heavy on the commercial vehicle side?

[JonathanCollins:]

We didn't provide the breakdown, Brian, whether for the whole backlog or the other, but I would say the electrification portion is certainly skewed to the heavier vehicle markets. And in particular, commercial vehicle. We tried to give some of the representative platforms on that page that are launching. And as you can see in commercial vehicle, most of the big wins are hybrid or full electric vehicles. So just to give you a general sense, I think the way that chart represents the number of programs is pretty representative of the balance between the three end markets.

[BrianJohnson:]

And then you did mention that it could be greater than 5% electrified in 2023. Is there any reason you haven't taken that number up or directionally how far that could go?

[JonathanCollins:]

Yes, I think we're just saving it for later this year. What we wanted to indicate this morning is based on the book business that we do have, we're running well ahead of that number. So more to come on that, I would say, later this year.

[BrianJohnson:]

And if you just think of that as $500 million at minimum of EV revenue and we're to put a spac multiple on it, call it, 4 times '23 revenue. You get a market cap of $2 billion, kind of two follow ons. One, your overall market cap is $3 billion, any comments and two, that $400 million, I don't know if that includes every tuck-in acquisition you did, but what is your real cost basis in EV business given that you and Jim were out buying these little EV companies when they were still affordable and not unicorns.

[JonathanCollins:]

Yes, I guess for the first component, your logic on valuation makes a lot of sense, and that's probably why our comments around the upside we see moving forward we're pretty excited about those. So today, we're putting some more concrete proof points that the strategy is working effectively. So I think the confidence in the growth in our EV business should continue to improve moving forward. So we are pretty excited about the valuation potential there. And then I would say the second piece is you're right, we still paid reasonable values for the businesses that we acquired but we were a bit early. So you're right, as we start to see the appreciation of our EV business be recognized in our valuation, it should create really attractive returns for our shareholders because of the timing that we bought in on the electrodynamic components.

[Operator:]

Your next question comes from the line of James Picariello with KeyBanc Capital Markets.

[JamesPicariello:]

If I'm reading Slide 6 correctly, it looks like electrification spend will trend at around $400 million over the next three years. What portion of that is included within your 2021 guide? Because if we bridge 2021 guidance to the 12% plus EBITDA margin trajectory for 2023, implied incrementals are somewhere in the high teens. Just wondering what level of conservatism is baked in, how much of the $400 million in spend is included in 2021, that might help bridge everything. Thanks.

[JonathanCollins:]

Just as a point of clarification on that slide, that $400 million number is a look back through the last three years. So it includes the acquisitions that we made of the original TM4 business, the SME business, also Nordresa, Ashwood. So all of these assets are included in that number as well as post acquisition, the organic investment that we've been making. So that number includes a lot of those upfront costs kind of to Brian's point just a moment ago, what it took to get electrodynamics in house. Moving forward that annual run rate, we expect it will continue to step up to support new business, and we'll continue to provide updates moving forward as we continue to make these investments.

[JamesPicariello:]

Yes, because that would kind of indicate the high teens incrementals might be more conservative, but it will depend on what the quantification of that. It's additional spend. So just to clarify, the capital allocation plan over the next three years, the company doesn't have any debt maturities until 2024, but will likely deploy another $650 million or so toward debt repayment before then. Is that right? And then just from an M&A pipeline standpoint, as you think about Dana's electrification portfolio. Are there any areas that make the most strategic sense to explore? Any color there would be helpful. Thanks.

[JonathanCollins:]

Those two go hand in hand. So obviously, that pie excludes any opportunistic M&A. And as we've demonstrated, even in the last year, we'll continue to be on the lookout for really attractive values like in the Modine case to create value for shareholders that way or like in the case of the investment we made in Pi Innovo to build out further our electrodynamic capabilities, particularly in the area of software. So we've continued to highlight that. We have an opportunity to differentiate our systems from a performance perspective based on the software that controls them. So we'll continue to look at those. But to your point in the absence of that, there's quite a bit available for debt paydown. Obviously, the term loan we have is prepayable without any penalties. And then the first tranche of bonds here will become callable pretty soon at a pretty small cost. So there's plenty of opportunity in the debt stack to be able to delever in a very efficient way.

[Operator:]

Your next question comes from the line of Joseph Spak with RBC Capital Markets.

[GarrettKlumpar:]

This is actually Garrett Klumpar on for Joe. Just going back to the backlog all rolling on by 2022. So I understand Colorado Canyon ways on 2023, but given kind of the increased content in some of the EV wins and those just ramping up as we get into 2023, I guess, a little surprised that that came in flat. So just any color on what the potential is for some upside just based on sourcing activity. And then, I guess, more of a clarification question. So you said you'd be on the entire Ultium platform, but is it only the Hummer included in that backlog number, or also some of the other Ultium nameplates that have been announced also included in that backlog?

[JonathanCollins:]

I'll take the second part first. The answer is the backlog includes the platform, not just the individual vehicle badge that we highlighted today. To the first part of your question as it relates to the backlog, I guess the best thing to point to in that case is what happened with the 2021 tranche of our backlog, which last year when we reported, we expected to be about $350 million and now it's $500 million. So our backlog is pretty conservative in that the business has to be awarded with production volumes during the period. So there is ample time, particularly in the electrification landscape to win business that launches in a shorter window than you might normally expect for our program life cycle. So that's the thing I would point to on the second and third years of our backlog, and we tried to indicate that there's some opportunity there for that number to improve as we drive towards that $10 billion sales target.

[Garrett Klumpar:]

And then I guess just on CV margins as we think about next year. I mean, I think kind of historically, the sweet spot for the commercial vehicle margins has been kind of with North America Class 8 kind of in that 250,000 unit range. I think ACT has it well above that for next year. So I understand that medium duty is a little more important than Class 8. But how are you thinking about the potential for premium cost to come in as Class 8s get above that replacement level?

[JonathanCollins:]

Yes, it's a great point. If it works out on paper or as it is on paper right now, I think you're right, it's real close to that sweet spot. And we've said that the traditional business within commercial vehicle is going to hone in on that double digit margin with that. The thing that will pull that back a little bit next year is the investment in electrification. As I mentioned a few minutes ago, a lot of the new wins coming in the medium duty and now starting in the heavy duty space are coming through, and there's going to be some spending there to bring those online. So the combination of those two will probably pull it back a bit, but we would expect certainly margins to improve compared to last year.

[Operator:]

Your final question will come from the line of Ryan Brinkman with JP Morgan.

[RyanBrinkman:]

I just wanted to check in with you with regard to your latest thoughts of the attractiveness and normalized growth of the Power Technologies business in light of the new e-thermal award and electrification generally. Can you remind us of what your average traditional thermal versus e-thermal content per vehicle is? How much headwind there might be from the transition away from internal combustion? How much tailwind there might be from the move to battery electric? And any thoughts on sort of where hybrid fits in, if that might be a sweet spot, et cetera?

[JonathanCollins:]

We have indicated before that hybrid is the sweet spot because you have the thermal content in the combustion engine that's cooling the fluids, as well as the sealing products and insulating products, the thermal acoustic protective shield. So all of those. And then when you add the potential on the battery cooling side and even potentially battery enclosures, that becomes really the most attractive space. We've not specifically dimensioned in the Power Technologies business the content upside from ICE to EV as we have with our three drive systems business. But certainly, based on what we're seeing in early programs for the battery cooling, there is a content uplift opportunity as we move from ICE to EV.

[RyanBrinkman:]

And then maybe a little bit of a related note. Would you say that there are any kind of go to market advantages as a result of having electrification capabilities from both a thermal and a driveline perspective? I mean, if nothing else, I guess, it allows you to have content on Ultium batteries, whereas Ultium drive might be more vertically integrated. But just curious if a thermal offering can enhance driveline or vice versa, in your view?

[JamesKamsickas:]

Great question, by the way, outstanding question and not because I like being able to give you the answer to it because it's just very in depth. And the reality is there is, I'll use a different word. There's a lot of synergies. Let's talk what are we talk when we think about synergies, think about commercial synergies. Commercial synergies, you're talking to the same customers that are right in front of the forefront of the electrification movement and how we can help them in the full system approach to their vehicles. So maybe we're talking about to the e-drive type of product over here and it helps on the cooling and thermal management over there or vice versa. So it's a very big deal as it associates with that. The other part of it is, as you go talk to any electrification engineer at any OEM that's out there, I'll guarantee you that you won't get past the second paragraph or the second sentence, whatever you want to use, and they're not talking about the criticality of thermal management around the full e-Propulsion system. So just the pure fact that we have the associates that have been doing it for decades in house to be able to help us manage through the e-Propulsion system and being able to do the trade offs for integration and capabilities to be able to support our customers, I can't even put it into words. So great question.

[RyanBrinkman:]

And then just finally, are you seeing that the commercial vehicle industry is not being impacted by the semiconductor shortage issue? I mean we've heard as much about I guess, commercial on-highway trucks that maybe they're using like one generation older of chips, which aren't as short of supply. But you serve a number of other end markets as well, and just curious what you're seeing if there's any impact on other parts of the business.

[JamesKamsickas:]

I would use the word very low compared to the balance of the end markets that we participate is the simple answer.

[RyanBrinkman:]

Okay, very helpful. Thank you.

[James Kamsickas:]

Just real quick. I'll give you a quick summary if that's okay. Thank you very much for the privilege of your time and your continued support. It really helps. Just real quick, if today didn't resonate with you or it hasn't resonated with you before that Dana doesn't provide components and systems for light vehicle, commercial vehicle or off-highway, but instead, we provide solutions for customers. I would think that, that's the key point. Why do I say that? It's not by accident when you think about our enterprise strategy and what we all talked about together five years ago, four years ago, et cetera, that the starting -- the tip of the spear was what we did is we went and balanced our business to be 50% heavy and 50% light across the board. And then on top of that, we parlayed in the solutions that we can cascade across all of our end markets. We are going to be successful in all three of the markets. There is no question about that. I have no concern to that in the slightest, but then we're just going to continue to proceed as the markets come our way. Last but not least, like I like to say it all the time. We are not perfect. Oh, by the way, companies may tell you that they're perfect, but nobody is, and they're not real. We're going to continue to work on continuous improvement and driving performance and doing all the things that we've been trying to do for quite some time now. And you should continue to expect that out of Dana. But I will say this before we leave. And as I said in my prepared remarks, it's all about bringing forward, and I'm very excited about where we go from here. Last but not least, I conclude with, we all caught close to the business and the priorities of the business, and it is, everybody, please be safe because it's still out there, and we're going to get past COVID together. Thank you very much, everybody.

[Operator:]

Ladies and gentlemen, that will conclude today's call. Thank you all for joining, and you may now disconnect.