Dana Incorporated
Q4 2018 Earnings Call Transcript

Published: 15 Feb 2019

[Operator:]

Good morning and welcome to Dana Incorporated, Fourth Quarter and Year End 2018 Financial Webcast and Conference Call. My name is Carmen and I will be your operator today. Please be advised that our meeting today, both the speakers’ remarks and the Q&A session will be recorded for replay purposes. There will be a question-and-answer period after the speakers’ remarks. We will take questions from the telephone only. [Operator Instructions]. 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, Carman and good morning to everyone on the call. Thank you for joining us today. You will find this morning’s Press Release and Presentation are now posted on our investor website. Today’s call is being recorded and the supporting materials are the property of Dana Incorporated. They may not be recorded, copied or rebroadcast without our written consent. As always, we will end our call with a Q&A session. To allow as many questions as possible, please keep your questions brief. 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 those factors that could affect future results are summarized in our Safe Harbor statement filed in our public filings, including our reports with the SEC. Presenting this morning are Jim Kamsickas, President and Chief Executive Officer; and Jonathan Collins, Executive Vice President and Chief Financial Officer. Jim, the call is yours.

[Jim Kamsickas:]

Thank you very much Craig. Good morning everyone. Needless to say, on behalf of the entire Dana team, I'm very proud to communicate that 2018 was a record year for sales, profit, and margin. We grew the business by nearly $1 billion with a very substantial portion of this growth being organic, and the team executed extremely well in this high demand market. We successfully launched new business and brought on our sales backlog to the market, thus driving nearly $800 million in profitable organic growth. Our profit came in right where we expected at $957 million, and adjusted EBITDA adding $122 million in profit growth over 2017. Strong execution drove a 20 basis point margin improvement as we overcame launch costs inherent in the business at the beginning of the year, and commodity cost inflation in the back half of the year. And as we committed to, we achieved significant improvement in free cash flow generating 51% higher returns in 2018, which is no small feat when considering that we again grew the business by double digits last year. Translating this success, we also achieved 18% higher EPS for our shareholders. Generating shareholder value will always remain one of our highest priorities. Perhaps the best part of accomplishing this outstanding year is at the same time we continue to increase customer satisfaction through new products, technology, and overall operational performance. As you can see on this page, we received over 30 significant Customer and Industry Honors last year. Of course, directly or indirectly, this enables us to communicate that our backlog is $700 million in committed net new business that will layer on over the next three years. In fact, finally on this page, what may have us most excited is all of the opportunities that we foresee in the future coming off an incredibly successful year of acquiring the industry leading e-Propulsion companies, TM4 and the SME Group. We have added great people and technology, and this will only exasperate once we complete the acquisition of the Oerlikon Drive Systems business at the end of this month. This acquisition will further balance our end markets and drive future growth and innovation as we evolve into the world of electrification. Please turn to page five, for a quick snapshot at Dana over the past three years. So I've been at Dana for approximately 3.5 years now, and I've often been asked what's changed over time. We used this slide in our outlook presentation last month as it tells the story very well. Over the last three years, sales were up 34% in EBITDA at nearly 50%, and free cash flow was up 66% while continuing to grow the business, and that's no easy task. And finally diluted earnings per share are up 71%. I really do appreciate the outstanding performance of our team, as they have executed our strategy and integrated seven acquisitions, but we still have a lot more to do and we strive towards in the future. Thank you for your time this morning. Jonathan will now walk you through some detail over last year and our outlook for 2019.

[Jonathan Collins:]

Thank you, Jim. Slide seven is an overview of the fourth quarter and full year of 2018 compared with the same periods in the prior year. These final results are in line with the preliminary results we provided last month. Fourth quarter sales were $1.97 billion, an increase of $136 million compared to the same period in 2017 for a growth rate of 7%, primarily due to the conversion of our backlog and strong market demand, which helped drive over $900 million of full year sales growth as we ended 2018 with more than $8.1 billion in sales. Adjusted EBITDA for the fourth quarter was $223 million, a $26 million increase from the prior year for a profit margin of 11.3%, which is a 60 basis point improvement over the fourth quarter of 2017. For the full year we generated record profit and margin with $957 million in adjusted EBITDA for an 11.8% margin; that’s a $122 million higher than 2017 and 20 basis points in margin expansion. Net income for the full year was $100 million compared to a loss of $104 million in the prior year, and for the full year 2018 net income was $427 million compared to $111 million in 2017. The results for the fourth quarter of 2017 included a $186 million charge related to U.S. Tax Reform. Adjusting for this charge, 2018 earnings were 44% higher than the prior year. Diluted adjusted EPS which excludes the impact of non-recurring items was $0.71 in the fourth quarter, $0.09 higher than 2017, and for the full year EPS was $2.97, $0.45 higher than the prior year. Strong cash flow generation in the fourth quarter led to full year free cash flow of $243 million, $82 million higher than 2017. Higher adjusted EBITDA and lower capital spending more than offset the higher working capital required to support the organic sales growth. Please turn with me now to slide eight for details on the fourth quarter sales and profit growth. Fourth quarter sales and adjusted EBITDA growth was driven by four factors

[Operator:]

Thank you. [Operator Instructions]. Your first question comes from the line of Aileen Smith with Bank of America.

[Aileen Smith:]

Good morning. Thanks for taking the question. Looking at slide 20 in your appendix around your underlying market assumptions, which generally appear flat to stronger for 2019 [ph], it’s no secret that there's been some questions around the accuracy of certain market and industry forecasts. So how much conservatism if any do you think you have baked into your financial outlook and these market assumptions, and more broadly what end markets or regional markets into 2019 have you most concerned right now?

[Jonathan Collins:]

Hey, good morning Aileen. This is Jonathan. Thanks for the question. One of the things we try to be clear about is that we do our best to corroborate what the industry sources are looking at, and we look at a number of different pieces of information. We do get pretty consistent releases from our customers and most of our end markets a few months out that we look at, and we also look at our customer build patterns, beyond that and their operating plans and generally we are comfortable with the results of the independent research, and we think they are in line with what we see. So we put those in as a reference, but we do our best to corroborate them and we think they are pretty comparable. I think with regards to each of those end markets, obviously we look closely at the North American end markets and that market remaining strong on a full frame truck basis continues to be there for us, and we think that it is going to be a good year there. And then, I think the other one that’s significant this year for us is the class 8 market in North America, and we continue to see strength there through most of this year, but I would say that’s a market that we continue to look at as very critical and important to us.

[Aileen Smith:]

Great, that’s very helpful. And obviously, the Wrangler was a huge launch for you guys last year, and you had costs that really hit in the front half as production was ramping up. As you think about 2019 and even into 2020 and some of the product launches that you still have coming, should we be thinking about significant launch cost headwinds associated with those new programs. And in terms of timing, have you incurred some of those costs already or should we be assuming that those will hit around the same time as production ramps up?

[Jonathan Collins:]

So we are continuing to grow, so the $350 million of backlog that we are bringing online this year is principally driven by the new Jeep Truck that's coming on, the Ford Ranger that's coming back to North America. The Rear Disconnecting System that we've launched with Ford in multiple regions, so we will have some launch costs associated with those, but the magnitude of those compared to the Jeep Wrangler program is just much smaller. So, we called that out and highlighted that because the Jeep Wrangler was the second largest platform in the company, and these other launches are just smaller. From a seasonality perspective, we do have some launch activity going on now. We’ll have launch activity through the balance of the year, but the financial impact we expect to be significantly muted just as a result of the scale and size of the programs.

[Aileen Smith:]

Great, that's very helpful. Thanks for the questions.

[Jim Kamsickas:]

Sure.

[Operator:]

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

[Brian Johnson:]

Good morning. Just a few questions. You know, first just following up on the comments you are making about Wrangler and their transition to their pickup truck. In addition around Wrangler, there seems to be high dealer inventories and Mike Manley called out some production downtime to both correct the inventories and get ready for a PHE version of the Wrangler. Is that fully – you know, not clear if that’s factored into consensus IHS forecast. I guess a couple of questions. Is that – do you think it is in those forecasts, and then kind of when you looked at your LV guide for the year, do you have to kind of factor that in? Is that part of the cadence?

[Jim Kamsickas:]

I’ll take it first. Hey, good morning Brian, this is Jim. Thanks for the question. I'm not exactly sure if it's baked in. What I can tell you is, kind of Jon was referring to answering a question a little bit earlier, we get pretty good, pretty long runway on our releases – our specific releases that come to our individual plants and so on and so forth, and everything that's in those releases right now we have baked throughout, in our overall plan that we provided to you and in our guidance that we provided you.

[Jonathan Collins:]

Yeah, when we look at IHS Brian, we think it's pretty close as well too. It accommodates for a little bit of downtime, and we are comfortable with the number we're putting out based on what we know.

[Jim Kamsickas:]

What I will say though since you offered it as a little bit, just to give the collective audience an update. You know, the Gladiator which is the truck being launched, it leads from all indications and I think many of you probably saw it at different shows or whatever, it looks very promising as it relates to consumer pull through and excitement. So we are pretty excited about that. We are prepping for that right now, and that will start to come through our system into the Q2, and we’ll start coming up the curve on that.

[Brian Johnson:]

And just a follow-on question there, any launch cost impact to worry about there or is it because similar I guess drive lines and plants that’s deminimus?

[Jim Kamsickas:]

You are very astute at this. You and I have talked in the past on this one, it -- it’s like Johnson said a minute ago. Last year was unfortunately – it was the double -- the kind of the carryover between JL and JK, and you can't build the church for Easter Sunday, so we had to share capital that made it really difficult this year. We don’t have that circumstance, so it's more of a typical launch cadence and we baked that in to our guidance.

[Brian Johnson:]

Okay, next question. You know you were expecting a 10% margin in CV, came in closer to 9%. Was that really just driven by commodity cost headwinds and if so, you know can you get to that 10% margin in ‘19 or are there other headwinds we should be aware of.

[Jim Kamsickas:]

There are actually a little bit other headwinds. So you touched on one of them for sure, which was commodity costs. Everybody knows where those were at, in the second half of last year. The other one was the demand pull through from our customers, as well as getting incremental out of our market share and being pulled more. The demand as I’ve said before, the biggest channel that we had wasn’t for our own plants, but it was getting the overall demand synchronized demand around the world was incredible, especially at the end of last year. So the good news is as we’ve been installing it, not ourselves, but having it through our supply base, deploying a lot more capital and that a lot of that supply bases came online and continues to come online. So we feel good about coming out in Q1 here and throughout the balance of the year. And as we put into our guide, yes I expect that it will back up into the double digits. We will reach double digits in our CV Group this year.

[Brian Johnson:]

Okay, thank you.

[Jonathan Collins:]

Thank you, Brian.

[Jim Kamsickas:]

Thanks Brian.

[Operator:]

Your next question comes from a line of Rod Lache with Wolfe Research.

[Rod Lache:]

Good morning everybody. I got a couple of questions. First, there’s some debate about how big products like the Gladiator and the Ranger could be in terms of volume. Obviously it's sounding very promising on both, but can you give us a sense of what your expectations are and what the content per vehicle for Dana would be?

[Jonathan Collins:]

Yes, so we are supplying the full driveline similar to what we do on the on the Jeep Wrangler program. As Jim mentioned, a lot of common equipment and incomparable design included in those vehicles. From a volume perspective, while we're not giving a number discreetly, we have been conservative on the number that we’ve assumed for this year. It's a new vehicle, we think it's going to do very well. And if it does as well as some of the other you know external sources that we are looking at we might do even better. But I would say that we've been a bit conservative on the new vehicle. We are also really excited about the Ranger coming back to North America this year, the Ford product that is launching in a comparable segment. Compact pickups that we think are going to continue to do well, so we're excited about the growth of that product.

[Rod Lache:]

So, you know Ford had planned something like 120,000 units originally for things like Ranger and obviously GM's already pushing 180,000 on Colorado Canyon and to call most like 250. If this thing gets to something like 200,000 units, is that something you could accommodate?

[Jonathan Collins:]

Yes, we are capacitized in line to support what our customers believe they can build, so we work with the customers on that. But I think you are going down the right path. We collectively looked at the segment and took a perspective on what we think the other segment can do and calibrated our volume expectations based on that.

[Rod Lache:]

Okay, and I also wanted to just ask if you can elaborate on one point you made. Obviously there was some inefficiency premium cost that you incurred in 2018 just given how strong production was. You made a comment suggesting there's some changes that you've made to address that. Could you just elaborate on what that is and what's the magnitude of the opportunity?

[Jim Kamsickas:]

Yeah thanks Rod, this is Jim. Most significant, I was trying to refer to anyway was really is our Tier 2 and Tier 3, every arguably Tier 4 capacity out there. The demand was just so high, particularly on the commercial vehicle side of the business, the demand was so high and I know you're aware of that, that there just wasn’t enough out there. But we didn't start the process of bringing it on. You don’t bring on demand for the type of things that we – or supply for the type of things we were looking for and you are going to just start just doing that in November or October. We did it last year fortunately. That good planning that we put in the early parts of last year, a lot of that supply capacity was coming on board in the last year and most of its up fully now in January and February this year. That’s the most important thing or most significant thing you should take from those comments.

[Rod Lache:]

What does that mean financially, just an elimination of premium frayed or what should we be expecting from that?

[Jim Kamsickas:]

Exactly! That’s probably the most significant, because we had a spectacular year and I'm not overcooking that word when I say it. We had a spectacular year supporting our commercial vehicle customers and they’ve rewarded us for that. But it cost us quite a bit of money in premium transportation to get parts from around the world to where we needed to make sure that we were predicting their lines and enabled them to be able to keep their assembly lines running.

[Jonathan Collins:]

And we though for example, it also affects the P&L in areas like labor efficiency. So the amount of premium time, when we have people standing around waiting for parts were not as efficient. So the addresses in the supply chain will help to make us more efficient in other areas as well.

[Rod Lache:]

It sounds like it's a significant number. Can you just give us a sense of what that means, you know what is the number that you guys incurred that you can address?

[Jim Kamsickas:]

Yeah, the conversion rate difference is reflected on the year-over-year watch schedule. So we converted it just under 20% last year. We expect to convert it about 30% this year. So that conversion difference is largely attributable to those efficiency improvements. The other thing that we did mention at your conference a month ago is the fact that we did take some structural cost actions last year as well too that will benefit us in the tune of tens of millions of dollars. That is also encompassed there. So the combination of those two things are what are driving that improvement in the conversion on the organic sales growth.

[Rod Lache:]

Great, thank you. That's very helpful.

[Jim Kamsickas:]

Sure. Thank you, Rod.

[Operator:]

Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.

[Emmanuel Rosner:]

Good morning, everybody.

[Jim Kamsickas:]

Good morning Emmanuel.

[Emmanuel Rosner:]

So just to follow up actually on these commercial vehicle margins and some of the actions you've put in there, so you know it deployed some more capital in the conversion rates will be you know considered really higher this year. I'm curious about how you'd be thinking about you know once served like the cycle, you know put some pressure on volumes or where would you see the detrimental margins at that point and do you flex down as a result of some of the structural cost reduction or at this point would we be looking at a you know 30% on the way down as well.

[Jim Kamsickas:]

Yeah, I’ll let Jonathan take the detrimental question more specifically, but I will – I do want to reinforce for the audience the key point in our strategy. We're also not in the business of building church for Easter Sunday and that you know the capacity, largely the capacity that we brought on was in our supply base, so with that Jonathan I’ll let you take the second one.

[Jonathan Collins:]

Sure. So I mean we have been heavily focused on driving our fixed cost down, the actions that we took last year are one of the examples of what we're doing to make sure that we are prepared to manage the detrimentals. The other thing I would highlight is take commercial vehicle for example. The most significant run off that we've seen in the last couple years of volume is in the class 8 market. We also have a significant presence in medium duty and in the aftermarket and the margins in both of those businesses, you know the medium duty and the aftermarket are more attractive than the heavy vehicle over the road. So from a detrimental standpoint we're comfortable that you'll see a conversion that's comparable with what we saw on the way up and we think we have an opportunity to do even better.

[Emmanuel Rosner:]

Okay, that's very helpful. And then just turning to slide 16, I'm curious if you could give us a little bit more color on how you're thinking about the targets beyond 2019. It looks like a very nice additional set up in margin is what you expected. Obviously you know revenue growth, we’ve got some improvement. Can you maybe go back over some of the puts and takes as we look and assumptions as we look into beyond 2019 please?

[Jonathan Collins:]

Sure, you know I'll give you a couple of things here, but this is one of the things that we're going to go into more detail on in a few weeks at the Investor Day, but a couple of highlights. From an adjusted EBITDA perspective, that last 50 basis points of margin expansion that we would expect to see is going to be attributable to two factors

[Emmanuel Rosner:]

Yeah, that's very, very helpful. And then a very quick clarification; you slide on seasonality on page 14, is it essentially just saying, look, this is the timing of the closing of the acquisition and therefore you get a little more contribution post you know March 1 or is there anything else in there for either in the production down time or destocking you know for some of the U.S. trucks.

[Jim Kamsickas:]

No, the other, it is absolutely trying to make sure that everyone noticed the 10 months, but also just to highlight that typically the first and the fourth quarter for us are lower from a sales perspective and lower from a margin perspective. So just wanting to make sure that everyone recognizes even without the Oerlikon business, the base business, it usually follows that curve where profit margins and sales peak in the middle of the year in the second and third quarter, largely as a result of the normal production schedule. It's not intended to intone any significant demand changes in either of those quarters.

[Emmanuel Rosner:]

Perfect, thank you.

[Jim Kamsickas:]

Sure.

[Operator:]

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

[Joseph Spak:]

Good morning everyone.

[Jim Kamsickas:]

Good morning Joe.

[Joseph Spak:]

So we spent a bunch of time on commercial vehicle, but if I look at off highway, it also looks like margins are maybe a little bit weaker than I thought and certainly versus the past couple of quarters. It looks like the flow through on volume is still strong. So the issues we talked about in terms of commodities and some of the performances, is that also what sort of drove with that in the off-highway segment.

[Jim Kamsickas:]

No, actually it's a little more of the former Joe. We, our highest recovery ratios in the business are in our have vehicle segments from a commodity perspective. So even if we recover most, if there is a bit of margin pressure, but I would note that some of the phenomenons that Jim was mentioning that we experience within the commercial vehicle space were also present in off highway. There continues to be a lot of cost that we do incur to make sure that we're delivering and meeting the customer's needs and delivering on time. So I would say it's a combination of both of those factors and the normal seasonality that you would see from that business in the end of the year. Those are really the drivers of the performance, not highway. As we look to next year, obviously we said that that market we think is going to continue to remain strong and there's further opportunity for margin expansion, largely coming from the benefit of the Oerlikon acquisition.

[Joseph Spak:]

Okay. And Jim and I'm sure I’ll hear more about this at the Analyst Day, but you talked a lot about and made acquisitions to sort of participate in the electrication of some of the heavier machines and off-highway and commercial vehicles. There's also been a lot of increased industry talk on electrifying pick-ups and I guess just given your business you figured it would be a good time to ask what you sort of see going on, what some of the discussions with the customers are like and how do you see that evolving on the light duty pick-up side.

[Jim Kamsickas:]

Yeah, thank you Joe for the question and thank you for setting up the nail that we will talk about this more you know in the conference coming up. But the punch line to it is there's not one of our segments you know, because you know very, very well. You know we go from the smallest recreational vehicle, up to the largest underground mining. There is not one of our segments and that would just by our definition could be directionally 12 different segments. There’s not one of our segments that we're not participating in one form or another in electrification. So I kind of keep it on a kind of a broad level, but just suffice to say that you are stalking specifically in the light duty area. Yes, there are two, there's plenty of activity, let's put it that way.

[Joseph Spak:]

And is it – I mean how would you classify those talks as sort of exploratory in terms of what your capabilities are, in terms of what an overall you know program could look like or I mean like just where are we in sort of the normal I guess indicators.

[Jim Kamsickas:]

I would say, I think exploratory is a pretty good question. I'd say it's a little bit beyond that. I mean if you think about some of the companies and you know these companies, like Workhorse for example, you could argue that in that segment. There's kind of some of those, may be more of the boutique type company they’ve been talking about and doing it for a bit of a time, but there's all of the other OEMs that certainly are going to ensure that they are ready for the future with that as the consumer demand in pull throughs is coming and they will. So we are ready for it as I often like to say. You know we positioned the company last year to be energy source agnostic. So we're okay if they go with the internal combustion engine, if they go with full electric or they do – you know they go hybrid in between. But yeah, there’s certainly plenty of activity, but it is like we've always said, it's further out in the cycle.

[Joseph Spak:]

Okay, thanks.

[Jim Kamsickas:]

Thank you.

[Operator:]

Your next question comes from a line of Colin Langan with UBS.

[Colin Langan:]

Oh, great, thanks for taking my question. Any color on power technology, I think it was one of the only segments we haven’t talked about it so far. The margins there, I think we’ve been drifting it down. What is there for the outlook for that inflecting and how should we think about that as we are going forward?

[Jim Kamsickas:]

Sure. Good morning Colin. It was a particularly soft year from a margin perspective in power technologies principally for two reasons. Number one, that is the segment with the lowest recovery ratio on commodities recovering less than half as they are further down the supply chain in a number of those systems. The second factor relates to the diesel gate phenomenon that we are seeing in Europe. We are predominately supplying ceiling thermal solutions for gasoline engines and when the diesel gate occurred and demand for diesels went down, we had to take more of our capacity to fill OE orders on a lot of those products and at the sacrifice of the aftermarket. So sales still remain high, but our product mix deteriorated, because we supplied more on a proportional basis to OE versus the aftermarket. We took some actions earlier last year to add some capacity into select places and we feel like we're in a better position to fill that demand moving into this year and we think margins will improve as a function of the product mix getting a bit better. But it was really a mix of the product mix issue, as well as the commodity cost that caused the lower margins there. But we see an opportunity for that business to get better in time and get closer to the margins that we've recognized in the past.

[Colin Langan:]

Got it. On Oerlikon I think you originally guided about $40 million in synergies. I mean are all of those going to be 2020 or some of them baked into you know three quarters of this year.

[Jim Kamsickas:]

Yeah, of the $40 million, $10 million is included in the $100 million number for this year, so that's where we found the road for this year. Obviously we will – as we did with Brevini to get in and identify the cost opportunities as quickly as possible. Now what we’re calling for right now is just the balance or the majority of that next $30 million will be recognized next year in 2020, and that ends up being a meaningful contributor to the overall margin expansion next year.

[Colin Langan:]

Got it. And just lastly, any color on tax? I think this year looks like it ended at more like a 26% rate. I’m not sure I’m getting that right, and then I think your guidance is $28 and it’s still a fairly high tax rate. Is there any potential to bring that down a percent?

[Jim Kamsickas:]

Yeah, I think what we saw this year may be a bit more normal moving forward. It's really a function of jurisdictional mix and where we're recognizing profits, where we're a taxpayer and where the rates are in those regions?

[Colin Langan:]

So 26% would be the normal rate?

[Jim Kamsickas:]

I think moving forward we’ll probably be closer to that and then we’ll probably give some color on that in a few weeks when we talk about the next couple of years.

[Colin Langan:]

Got it. Alright, thank you very much.

[Operator:]

And James, your line is open.

[James Picariello:]

Oh, good morning guys. So just on Oerlikon going back there, I mean can you discuss their current backlog and maybe just revisit the synergy actions that get you to the $40 million by the end of next year. I mean you clearly had success with the Brevini acquisition raising those targets. You know there are some parallels with Oerlikon. So just curious what your perspective is there. Thanks.

[Jim Kamsickas:]

Sure. From a cost synergy perspective when we announced the transaction, we mention that we see the opportunities in a few areas. First is within the supply chain. So our purchasing leverage increases significantly when the businesses are combined. We’re buying many of the same origins and cappings for our machine operations as the Oerlikon business is, so that’s a big piece of the cost opportunity that we see there. The same was true with the Brevini acquisition. The second area is clearly around our manufacturing operations. This provides us an opportunity to have some of the equipment that is fungible, be more utilized to make us more efficient across these areas and the potential opportunities to utilize our equipment more efficiently. And then finally obviously there are areas that are duplicative in the business, in the back office that we’ll be able to address to be more efficient as well too. So those are kind of the primary drivers. You know we have mentioned that this is a very well-run business and we should see the $40 million as being the costs that can only be achieved by putting them together, but we’ll continue to strive for more than that and certainly hope to get as much as we possibly can. From a backlog perspective, you know as we get into the business and I start to operate it, we will likely look to adjust our backlog to reflect the Oerlikon, but we typically do that on an annual basis. I will tell you they clearly have been growing the business in the past couple of years and we see that growth continuing as a combination of new programs that they have won and new content that they are delivering in increment of what they have today, so we are excited to have our backlog augmented by what they've accomplished.

[James Picariello:]

Okay, thanks. And then yeah I imagined you'll address this in full next month, but just on electrification, can you talk about the key programs or prototype applications that you are working on right now. How are things progressing and you know now that you have TM4 completely in house. How are you leveraging this business, what's the progress there? Yeah.

[Jim Kamsickas:]

Yeah, I mean you know there's a lot to talk about and it's one of the big reasons that we are getting everybody, inviting everyone to join us in a few weeks. But just as a preview, the integration of both, the TM4 business as well as the SME acquisition we completed last month is going very well. We see excellent opportunities to integrate these electrodynamics components inside of e-Propulsion systems, whether those are drive units, wheel end drive or electric axles for our customers. In a few weeks we're going to walk through a lot of that opportunity, help the dimension of what we think the growth opportunity is in the coming years and preview some of that technology. So I don't want to get too far out of what we'll have to do in a few weeks here.

[James Picariello:]

Understood, and just a housekeeping question, which of the higher equity income in the quarter, was it just timing involved with your DDAC JV or is there some strength to the point out there?

[Jonathan Collins:]

Yeah, DDAC was the primary driver, that while the sales in that business remain relatively flat the earnings improved and the cost structure improved, which drove higher earnings out of that joint venture in China.

[James Picariello:]

Thanks guys.

[Operator:]

And your final question comes from the lien of Rajat Gupta with JP Morgan.

[Rajat Gupta:]

Hey, thanks for taking my question. This is Rajat calling in for Ryan. On your $40 million commodity cost headwind for 2019, what’s the assumption there in terms of you know what you are expecting for repurchase price. I mean is there – is it assuming current spot prices or is there some there is an expansion expected in the year or it just kind of trying to understand how much conservative is baked in with that?

[Jonathan Collins:]

Yeah, it’s a combination of both. So we certainly look at where commodities have come so far this year in the first six weeks of the year. But we also look at the forward. I would say that we've indicated if things continue to move in the direction that they have, there could be some opportunity for us on an overall basis. But we’ll continue to monitor that closely enough at the end of the first quarter and we’ll recalibrate for the balance of the year. We’ll provide an update on how that's progress.

[Rajat Gupta:]

Just another question of free cash flow margin. You talked about the 5% potential in 2020. You have higher EBITDA margin expansion and working capital, but could you give us some more color on CapEx as to you know how do you see that trending, going to 2020 and maybe beyond?

[Jonathan Collins:]

Yeah, we’ve been pretty clear that we expect to operate around 4% CapEx as a percentage of sales on a go forward basis. At that level with all those other things I mentioned, we are able to get to that target. So you can basically assume that cash from operations would be about 9%, CapEx would be about 4% and that’s how we get to the 5% that we're expecting.

[Rajat Gupta:]

Got it. One last one from me, on line 20, I think you have APAC production outlook, you know a fairly decent size going into ’19. Is that something that you are seeing on the ground or because of I think IHS and third parties have a little be more for conservative outlook, just trying to get a sense of your visibility there?

[Jonathan Collins:]

Yeah, that doesn’t sound right now. I’ll have to go take a look. In general we indicated where we expected APAC to be. So the markets that are more important to us, which are the heavy duty section, we expect that to down next year. So medium and heavy duty trucks we've got it down high single digits. So the other markets like light vehicle being up as less relevant for us. So I would say where we are really affected we expect to be down next year.

[Rajat Gupta:]

Thanks a lot.

[Jonathan Collins:]

No problem.

[Jim Kamsickas:]

Okay, with that this is Jim; I’ll just close. Thank you again everybody for taking the time to spend some time with us. You know from the CEO's chair, I mean you hope that you know and you plan to for sure be in a position at the end of the year to do a recap and you are able to say things such as record sales, record profits, record margins, increased free cash flow while over 50%. The scoreboard doesn't lie, so I want to thank my entire team, our entire team for everything they've done, as well as our customers. And while I'm on the customer front, you know you think about it for a minute. We continue to do this with new organic growth and thinking even forward we'll go and it looks like in 2019 it will be the third consecutive years of over or nearly $1 billion of new revenue and while at the same time we completely filled out our electrification E-Propulsion portfolio for high voltage motors, the low voltage motors and all the inverters and everything else associated with being energy source agnostic as I mentioned a little bit earlier. As running a business, we can all appreciate this, it’s all about do what you say and then go execute on it. We said that we were going to go grow the business a few years ago, we said we were going to fill in the white space a few years ago though acquisition, through bolt-on and appropriate boutique acquisitions. We continue to do that. We look forward to a really exciting 2019, look forward to seeing each of you hopefully at the investor conference next month and thank you very much for your time today.

[Operator:]

Thank you again for joining today's call. This concludes today's webcast. You may now disconnect.