Good morning, and welcome to Dana Incorporated's Second Quarter 2017 Financial Webcast and Conference Call. My name is Dennis, 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. There will be a question-and-answer period after the speakers' remarks, and we will take questions from the telephone only. 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.

Thanks, Dennis. And thank you to everyone on the call for joining us today for Dana's second quarter 2017 earnings call. Copies of our press release and presentation have been posted on Dana's 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. We will end our call today with a Q&A session. In order 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 the factors that could affect future results are summarized in our Safe Harbor statement. These risk factors are also detailed 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. With that, I'd like to turn the call over to Jim.

Thank you, Craig. Good morning, everyone, and thank you for joining us for our Q2 earnings call. In addition to highlighting our very strong financial results, I'm also appreciate having this opportunity to briefly communicate how the Dana team continues to deliver on our commitments and progress towards our long-term targets. In the second quarter, we delivered strong results with sales of $1.8 billion, which was a very robust 19% year-over-year increase, 11% of which was organic growth. This is our second consecutive quarter that we have achieved double-digit year-over-year organic growth. This strong organic growth is a result of relentless perseverance to provide innovative products and outstanding service to our customers leading towards strong sales background. This, coupled with our recent acquisitions and improved end-market demand, continues to drive our top line revenue growth. Our adjusted EBITDA came in at $217 million or 11.8% margin, a 30 basis point improvement over last year. Diluted adjusted EPS increased 28% over last year second quarter to $0.68 per share primarily due to our improved operating results. Free cash flow was strong at $96 million driven by higher earnings. And finally, we have significantly increased our full year financial targets from the prior guidance including an additional $0.5 billion in top line growth. Coming back to the operational activities, last quarter I updated you on the progress we are making relative to executing our enterprise strategy by specifically highlighting the first two elements – leverage the core and customer centricity. This quarter, I would like to provide you a brief update on the balance of the three elements – expanding global markets, commercializing new technology, and accelerating hybridization and electrification. Please turn your attention to slide 5 as I would like to briefly describe how Dana is leveraging our expanded global footprint…

Thank you, Jim. Slide 12 provides an overview of the financial results for the second quarter of 2017. Sales of $1.8 billion were up $294 million versus the same period last year, delivering growth of 19%. On a year-to-date basis, sales were up over $0.5 billion compared to the first half of last year. The majority of the growth was organic as we continue to convert on our sales backlog and benefit from strong end-market demand, resulting in double-digit organic growth of 11% in the second quarter. Adjusted EBITDA was $217 million for the second quarter, a $39 million increase from the prior year. Adjusted EBITDA was $422 million for the first half, up nearly $100 million over last year. Margin in the second quarter was 11.8%, a 30-basis-point improvement over last year. And the margin in the first half of this year was 100 basis points better than the first half of last year. Net income was $71 million, an $18 million improvement over the same period last year. For the first six months, net income was nearly $50 million better than the first half last year as higher adjusted EBITDA was partially offset by higher depreciation expense due to the increased level of capital spending, higher tax expense due to stronger earnings, as well as higher acquisition and restructuring-related costs. Diluted adjusted EPS, which excludes the impact of nonrecurring items, was $0.68 per share in the second quarter, an improvement of $0.15 per share compared with last year. And the first half was up $0.44 driven primarily by increased earnings. Free cash flow of $96 million was $12 million lower than the same period last year as the growth in adjusted EBITDA only partially offset increased investments to support our organic and inorganic growth. However, free cash flow…

At this time, we would like to begin the Q&A session. And your first question comes from Joseph Spak and RBC Capital Markets.

Thanks. Good morning, everyone.

Good morning, Joe.

I guess the first question I had just on maybe a little bit more color on commercial vehicle and power technology margins, didn't seem to get maybe as much leverage there as sort of hoped. So, I was wondering if you could detail anything that went on in those segments this quarter.

Sure. With commercial vehicle, Joe, it's important to remember that the growth that we saw there was related to the SIFCO acquisition. Given the depressed volume levels that we're at in Brazil, those sales are coming on without any incremental profit at basically breakeven. So, that's the primary driver. There was a bit of a headwind on currency for the Commercial Vehicle segment which also primarily related to Brazil. But those are the primary drivers for CV. As it relates to Power Tech, it's a little bit of a different story in that you will remember we had a really strong first quarter in Power Tech off of a pretty poor comp from last year. A little bit of a different scenario in the second quarter. We had a pretty strong comp Q2 of last year and we didn't get as much profit conversion on the incremental sales as we would have liked or preferred. Combination of product mix and a few small performance challenges put us in a position where we really didn't yield the margin in that segment that we would like. However, we do expect more from that business and we expect better things to come in the balance of the year in particular from Power Tech.

Okay. And then just on the guidance. If we think about first half versus second half, I know cadence can be difficult when you're dealing with a number of different markets all recovering at different paces, but the guidance does imply second half EBITDA a little bit below first half which is, I guess, a little confusing just because of some of the improving end-markets you're talking about. Seems like we're still in the earlier stages there. So, I guess, can you provide a little bit of color there? Is that a level of conservatism just based on still early in the recovery or is there something else we should be thinking about?

Sure. I'll just point to a couple of things. You are right, the lower profit in the second half is a result of expected lower sales. So, at the midpoint of our range, we're expecting the top line to be a couple hundred million dollars lower primarily on the organic side, a little bit of a lift inorganically from having a full six months of both acquisitions. And just in terms of the drivers of profitability, it's also important to note that we have a major vehicle launch in the Jeep Wrangler in the second half of this year, which will put a little bit of pressure on margins. That program has been ramping up but most of the activity is going to take place within the second half of the year. Relative to our call on the top line, I think there are a couple of things worth noting. On the Light Vehicle segment, the Ford Super Duty program performed particularly well. I mentioned that in the remarks earlier. And what you will see is the normal seasonal shutdowns that we would expect in the second half of the year really across that segment. So, we think that in Light Vehicle, it's largely a seasonal impact. In Commercial Vehicle, we still remain cautious, and you'll note we're in at about 220,000 to 240,000 on the North American Class 8 market. Based on what we've seen, I think we're just a little bit cautious there compared to what you've seen some other external sources be at. So, to the extent that their call is right and ours is wrong, there could be some upside in the balance of the year on CV. And then I think there is probably a bit of cautiousness in the Off-Highway space. We saw really strong improvements in the aftermarket and in the production market in the first half of the year. There is some seasonal downtime embedded there in that market as well too, but we're just keeping an eye on that. So, I think hopefully that gives you a little bit of sense of how we're looking at the top line and then the combination of the lower overall sales and the increased launch costs associated with the Wrangler are really the drivers on the margin.

And just a quick follow-up, sort of the more end-market specific with the backlog for the new business you've won that's coming on. Is that fairly evenly split through the year or was that also a little bit more 1H versus 2H?

Yeah. That was a little bit frontloaded. So, you will see a modest impact associated with the timing of backlog year-over-year as well.

Okay. Thanks. Congrats guys.

Yeah. Thanks, Joe.

Your next question comes from Ryan Brinkman and JPMorgan.

Hi. Good morning. This is Samik on behalf of Ryan Brinkman. The first question I had is if you could sort of help us understand the better organic growth guide or the stronger organic growth guide that you have. You're raising your guidance there. How much of it is probably more from some of the light vehicle platforms that you're on doing better versus the industry light commercial truck and off-highway markets doing better? If you can sort of split that up for us, that will be helpful.

Sure. So, the overall performance versus prior year certainly is aided by our platform mix. So, we've highlighted the fact that if you look at the Ford Super Duty sales on a year-over-year basis or production levels, excuse me, our sales, we've got a lot of strength there in that platform. The overall market has held well in Light Vehicle. I think we had expected a little bit softer but it's done quite well. Relative to what has changed from what we thought previously, certainly all of our markets are doing well and we highlighted that, but in particular the off-highway market in the construction and agriculture segments are performing much better than expected. You'll note if you go back to the last couple calls, we've continued to say that we expect the off-highway market to start to recover, but it's very challenging to be able to get a feel for when that's going to come back and how quickly it's going to come back. So, we're in a position now later in the year to see greater strength in that end-market. It's also worth noting that we were probably on the more pessimistic side for the North American Class 8 market. At the beginning of the year, we were closer to 200,000 units. You've seen us bring up our guidance on the 220,000 to 240,000 range. So really it's strength across each of our end-markets and some acute strong performance on a platform within the Light Vehicle segment that have helped to drive a higher conference and higher sales on a full year basis.

(30:31). A quick follow-up on margins. Some of the acquisitions you mentioned are compressing margins on a pre-synergy basis this year and then you're sort of looking at a 48 basis points margin expansion. Can you remind us of your synergy targets and what your margins are probably – what are the implied margins for full year 2017 on a post-synergy basis?

Yeah. So, a couple of things important to note, and it's primarily the Brevini acquisition that has a margin-dilutive effect on the Off-Highway segment. You'll notice we included some materials in the appendix to provide more detail there. But in that, there are two things. One, that business is still – well, coming out of trough is that historically low volume levels and the margin profile was lower than our business. They did not have as much success before. We bought the business in flexing their fixed cost structure. So, that's one driver. The second driver, as you noticed, is the synergies. When we announced the transaction, we indicated that we have $30 million worth of cost synergies. So, Jim had mentioned some of the cross-selling we're doing that all represents upside. But the cost synergies alone were $30 million, and we're right on track with those. We track them very carefully on a monthly and quarterly basis and plans are progressing well there. So, that and the improved market demand will be the factors that help to elevate the margin profile of the Brevini business within the Off-Highway segment.

Okay. Thank you. Thanks for the clarifications.

Yes. Thanks.

Your next question is from the line of Brian Sponheimer and Gabelli.

Hey. Morning, everyone.

Hey, Brian.

Good morning, Brian.

A couple of questions here. One, first of all, great quarter and the guidance that you're looking at really kind of gets you close to your 2019 targets, two years ahead of schedule. Is there anything about what you're doing now relative to maybe what you talked about in April that would cause you to reconsider those 2019 targets as effectively a baseline with nothing but upside from there?

Yeah. We're not necessarily in a point yet in the year we'd be comfortable putting out formal guidance for 2018 and we'll revisit our longer term target as we get closer to that point. But as you know, the market has come back much stronger than we expected. So, when we talked about where the $1.4 billion of sales growth was expected to come from at Dana from 2016 to 2019, acquisitions played a role at about $450 million. Backlog paid a role at about $750 million. And then market recovery was expected to be about $200 million. And you'll note, we've seen more than $200 million of market recovery. It's really been about $400 million in this year already. So, we were a little bit surprised by how well the markets responded in particular within the off-highway space. We thought that this downturn in commercial vehicle, particularly in North America, was going to be longer, more protracted and at a lower level. Seems that that's a less likely to be the case the more that we see. So really those factors are driving the improved performance for this year and we're just keeping an eye on the next couple of years as we get closer to it.

Okay. Within your commercial vehicle and off-highway facilities, can you give us a sense as to what production capacity utilization is now relative to maybe a year ago?

Hey, Brian. Thanks for the question. Good morning. It's Jim. I would say if compared to a year ago, it's slightly better. Slightly better because we may have mentioned before, we're close to a very sizeable plant or near closure of a very sizeable plant and we've exhausted some inefficient old capital, more specifically the equipment itself. So, we're slightly better utilized than we would have been a year ago.

Okay. And just, Jonathan, any bite from steel in the quarter and any issues passing that along?

No. Negligible impact from a margin perspective. And we've continued to work with our customers to remedy that, which is consistent with the vast majority of our contracts.

All right. Terrific. Congratulations.

Thanks, Brian.

Thanks, Brian.

Your next question comes from Justin Long and Stephens.

Good morning and congrats on the quarter. So, maybe for my first question just to drill down a little bit more on an earlier question on the 2017 guidance. If I look at the adjusted EBITDA expectation, you know that it went up by about $80 million. I think $10 million of that was currency, $5 million was Brevini. So, the rest was organic. Is there any way to look at that organic change of $65 million or so and allocate that across the different segments? I just wanted to get a better sense for how your expectations have changed across the four segments of the business.

Hey. Good morning. I guess, Justin, I would indicate the improvement from a top line perspective in the balance of the year is pretty consistent on a percentage basis across each of the businesses. So, we tried to highlight the fact that Light Vehicle market overall is doing better than we expected. Class 8 in North America is up and, in particular, the construction and mining segments within Off-Highway are doing considerably better than expected. Probably a stronger performance compared to expectations for Off-Highway relative to the others, but on a percentage basis, we're in the same neighborhood. From a margin perspective, we would expect that the Light Vehicle business is probably going to be in the same ballpark, potentially a slight lower due to the fact that we have the launch cost in the balance of the year. We expect CV to do pretty well, maybe a bit better. And then Off-Highway, we'll see a little bit of improvement. And in Power Tech, pretty consistent. So, when you look throughout the business, the margin profile we would expect between the first half and the first half to be pretty consistent except for the fact that from a seasonal basis and really from, we think, where demand is going to be, we think sales are going to be a bit lower than the first half of the year.

Okay. That's really helpful color. And I know it's a bit early to talk about 2018, but I did want to circle back to one of your comments on the expectation for significant margin expansion next year. This year, your conversation rate on organic growth is expected to be around 20% in the guidance. Is that the right way to think about the conversion rate next year as well if you're ballparking it or is there potential to be higher than that?

Yeah. Again, unfortunately we're not in a position at this point to give you specific numbers. But we have indicated and continue to have strong conviction that the incremental margin profile on the growth will continue to improve. So, by no means, do we believe that 20% is the best we can do on incremental sales both in backlog and in market recovery. That's a lot dependent on where the growth come from, which segments, which parts of the business, but also the fact that – the major launches we refreshed, the two largest platforms in the company have refreshed and undergone major launches within about a 12-month to 18-month window. When we look at 2018, those launches will be behind us. We really expect to have better yield and return on sales going forward. So, we have conviction that the margin profile can continue to improve in this business as we convert our backlog and see our markets do even better.

Okay. Great. I'll leave it at that. I appreciate the time.

Thanks, Justin.

Your next question comes from Brett Hoselton and KeyBanc.

Good morning.

Good morning, Brett.

So, if you could talk a little bit about capital deployment, your expectations as we move to the next year to two years, and specifically I'm most interested in M&A, what's your appetite continues to be from an M&A standpoint?

We've been pretty clear on our capital allocation priorities. In the near term, we are heavily focused on successfully integrating the four acquisitions that we've made within the last year. So, spending a lot of time and energy across each of the business segments and the leadership team, focused on making sure that the investments we've made there yield the returns that we have expected. The other thing that we're heavily focused on is growing the business organically. So, you've seen us take the vast majority of our incremental profit growth and put it back into the business to make sure our cost structure is inline in the form of restructuring investments. The integration associated with the acquisition but largely the organic growth through capital expenditures. On the M&A front, we continue to take a look and keep our eyes out and I suspect Jim wants to share a comment or a thought or two on M&A as well.

Yeah. Brett, thanks for the question and joining us today. I think you should expect us to keep our eyes open of course. But keeping our eyes open and executing both multiple levers, not only have we completed the acquisitions we've talked about here today but we haven't been shy about pulling levers to move some assets out that didn't make sense such as data companies such as Nippon Reinz in Japan, et cetera, et cetera. So, we'll keep our eyes open to it. We're obviously we have very strong balance sheet but we're going to make sure it stays that way too.

Thank you very much, gentlemen.

Thank you.

Sure.

Your next question comes from Brian Johnson and Barclays

Hi.

Hi.

Good morning, Brian.

A couple of things. It looks like on the off-highway mining side you're going to change your gross revenue production assumptions. Does that mean that the upside is mainly coming internationally, and if so where?

Yeah. I think the recovery within off-highway mining has been seen primarily outside of the Europe – or outside of the U.S. Europe has been very strong. And I think you'll remember that the majority of our production comes from Europe. And while we service other parts of the world, I would say that I can point to Europe. We've also seen Asia Pac and in specific, China. And, I think, Jim mentioned Australia as well, too. They performed better than expected on mining. So, I would say while there's been some modest improvement domestically, the markets I mentioned are the ones that have seen the more dramatic increases.

And given that's oftentimes short cycle business, is there any developing visibility of that towards 2018, much less 2019?

I'm sorry Brian, I didn't catch that first part. Can you try that again?

What's your visibility of the mining demand into 2018 in terms of the backlog or (41:58)?

I think that's a market that we're very cautious about looking much further out. So I think I would candidly say that we don't have a lot of strong visibility into mining beyond the next few months and balance of the year. I think we have some thoughts of where it's headed, but beyond that it's a little bit tough to call.

Okay. Second question. Driver of the increase in capital expenditure. Is it just volumes on the Light Vehicle side or something else?

It's a little bit of program timing on the Light Vehicle side which is causing us to spend a little bit earlier. And then in a couple of our other business segments we had some pretty attractive investment opportunities, a combination of growth and margin-enhancing activities that we saw and decided to green light in light of the better performance on the top line and on the bottom line.

Any way to bucket how much of that is pull ahead of future CapEx as we kind of think about capital allocation (42:54).

It's a minority of it. So, a smaller portion of the incremental $25 million to $30 million is associated with timing.

Okay. So mainly growth capital. Okay. Thanks.

Sure.

Your next question comes from Emmanuel Rosner with Guggenheim.

Hi. Good morning, everybody.

Good morning, Emmanuel.

Just a quick follow up on Brian's question on CapEx. So, when you sort of look at your plan over the next few years, obviously the plan has been to see that shrink pretty considerably once you're over the hump on the launches. Is that still the expectation or can some of the strengths you've seen in your various end-markets require more CapEx?

So, Emmanuel, this is Jonathan. We still have very strong conviction that this will be a 5% cash flow business by 2019. And still believe that a meaningful reduction in capital expenditures will be a big piece of that for us. So, again I mentioned refreshing two of our largest platforms within the last couple of years has certainly driven CapEx. There is a – the CapEx is a leading indicator of the backlog conversion. So, the backlog growing and remaining very high has been a driver. But we still have conviction. And I think I indicated in the comments that we would expect by next year you'll start to see CapEx fall in line with what our new level of depreciation and amortization will be once we're on the other side of this investment spike.

Okay. That's helpful. And then you were mentioning obviously the Brevini potential revenue synergies. Now that you're a few months into the acquisition, would you be willing to give us some dimension of what the opportunity is?

Yeah. We're not going to be in a position to give you any specific numbers. But as Jim indicated, we have spent a lot of time and energy with our customers demonstrating our broader range of capabilities and have been very pleased by the response that we've gotten from our customers, the opportunity to be included in RFPs that we weren't previously. And Jim also mentioned a handful of wins that we've secured in the last few months. So, we are excited about that. It does represent incremental margin upside to the $30 million of cost synergies but we're still not in a position where we're going to discretely identify that individual element.

Okay. I understand. And then just one quick final one. So, there was 16% conversion on organic growth in the quarter. You're looking for 20% for the full year. What is sort of like the drivers of improved conversion going forward?

Yeah. A little bit of seasonality. But if you step back just from the second quarter and look at the first half, the conversion on the sales growth organically in the first half has been more like 25%, which actually means second half conversion will be lower than the first half to be able to get to the 20%. And the seasonal impact of lower sales has a bit of an impact on that, so you have less growth. And then the other element is the JL Wrangler launch that we have within the second half of this year. So, those are really the drivers as to why the conversion will be slightly lower in the second half versus first half. But we have confidence that we will be able to get to about the 20% mark by the end of the year.

Understood. Thanks for the color.

Sure.

Your next question is from the line of Rod Lache and Deutsche.

Good morning, everybody. Just following up on that last one. The incremental margin on organic growth was 34% in Q1 and 16% in Q2, and it looks like if I just back into this, you're looking for $29 million of EBIT growth on $258 million of organic revenue growth, so about 11%? Can you just give us a sense of what specifically some of those launch headwinds might be if you've quantified may be that new facility for the Wrangler axles? How large of a drag is something like that?

Yeah. It makes up the majority of the gap there that you see, Rod. So, we built a brand new large facility. We are ramping up the fixed cost within the facility during the period that's coming up to the balance of the year. So, we're adding cost. We'll have some inefficiencies with the launch. And we really don't start to recognize the new sales on a launch really towards the end of the year or early next year. So, that's really the primary driver and it makes up most of the gap that you see there.

Okay. Thank you. And you mentioned that there were some issues that affected Power Tech in the quarter, so you didn't get that conversion on the organic growth. Could you just explain what the challenges are in that business and how you see that evolving going forward?

Yeah. You have a bit of product mix on the quarter, when you do the year-over-year comp that was part of the factor and on the performance side. They're just some of the challenges that we see running at such a high level of demand on a sustained basis. So, stepped our toe on a couple of places. But we see opportunity to improve that and still get an attractive yield or improved margins with Power Tech as we move forward. So, as we mentioned, we expect more and then we know that business will do a bit better in the balance of the year.

Okay. Great. Thank you.

Sure. Thanks, Rod.

Okay. Thank you, Craig. This is Jim again. Just to close real quick, I feel very good about our practice of making reasonable commitments and living to those commitments. Why? Well, because the Dana team continues to do an excellent job. They're focused on the customer, they're focused on technology, they're focused on cross-company teamwork, all important ingredients. When you kind of zoom back for a minute, growing at the rates that we're growing at while at the same time completing and integrating four acquisitions, of course, is no small feat. So, I really couldn't be more proud of the Dana team for everything they've recently done and will continue to do in the future. Thank you for attendance in the call today. Looking forward to seeing you or talking to you very soon.

Ladies and gentlemen, this does conclude the Dana Incorporated's second quarter 2017 financial webcast and conference call. You may now disconnect.