Good morning, and welcome to Dana Incorporated's Third 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. [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.

Thanks, Dennis. And thanks to everyone on the call for joining us today for Dana's third 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. Jim turn the call over to you.

Thank you, Craig. Good morning, everyone, and thank you for joining us for Dana’s third quarter earnings call. Today, we will update you on our strong results, how we're progressing on our shifting into overdrive enterprise strategy and Dana's outlook for the rest of this year as well us some color on how we see next year shaping up. It was another strong quarter for Dana with sales of $1.8 billion. That's a 32% increase over last year, 21% of which was organic growth. This is our third consecutive quarter that we've achieved double-digit year-over-year organic growth. Our strong sales backlog, combined with recent acquisitions and improved end market demand, continue to drive our profitable growth. Our adjusted EBITDA came in at $216 million or 11.8% margin in line with the previous quarter. Diluted adjusted EPS increased 20% over last year's third quarter to $0.59 per share due to stronger earnings. Free cash flow was also strong at $99 million, driven by our higher earnings. And again, this quarter, we are raising our full year 2017 financial targets from our prior guidance, including an additional $200 million in top line growth. As we've done in previous calls, I would like to take a few minutes to update you on the advancements we continue to realize relative to executing our enterprise strategy. This quarter, we will specifically appraise you of our progress regarding customer-centricity, electric vehicle program developments and our expansion in China where we're leveraging our core assets and technology. Before we get started, I usually do not reference application pictures we use on the Highlights slide. But this quarter, we thought we would change things up a bit by illustrating a few unique vehicles that you may have seen but didn't know that they utilize Dana product solutions. Starting…

Thank you, Jim. Slide 11 is an overview of the 2017 third quarter and year-to-date financial results. Sales of $1.8 billion were up $447 million versus the same period last year, representing growth of 32%. On a year-to-date basis, sales are up nearly $1 billion compared to the first nine months of last year. As with last quarter, the majority of our growth was organic as we continue to convert our sales backlog and benefit from strong end market demand, ending the third quarter with double-digit organic growth of 21%. Adjusted EBITDA was $216 million for the second quarter, a $48 million increase from the prior year. Year-to-date, adjusted EBITDA was $638 million, up $144 million over last year. Margin in the second quarter was 11.8%, which, on the surface, is 30 basis points lower than last year. But the third quarter of 2016 included gains in a now-divested entity, which I'll cover in a few moments. Margin for the first nine months of this year was a 60 basis point improvement over the comparable period last year. Net income was $69 million, a $12 million improvement over the same period last year. For the first nine months, net income was $60 million better than 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-related expenses. Diluted adjusted EPS, which excludes the impact of nonrecurring items, was $0.59 per share in the third quarter, an improvement of $0.10 per share compared with last year, and on a year-to-date basis, was up $0.54, driven primarily by higher earnings. Free cash flow of $99 million was $125 million higher than the same period last year, driven by growth in…

At this time, we would like to begin the Q&A session. [Operator Instructions] And your first question from the line of Brian Johnson with Barclays. Go ahead.

Yes. Just a couple of questions. Over in the off-highway segment, is there any way to mentioned how much of the year-over-year growth was the prior businesses, end markets expanding in market share, how much were Brevini’s end markets expanding and how much were new synergy – revenue synergies that you’ve realized there?

Hey Brian, this is Jonathan. At this point, the latter two that you referenced are relatively small numbers. The majority of the impact in the growth that we’re seeing within the off-highway segment, that’s market related. It is coming from our traditional markets within the off-highway. So really to a lesser extent, agriculture but primarily, construction and mining, those are the primary drivers. And it’s really the existing business that’s been most of the increase year-over-year.

Okay. And second issue, one of my favorite topics that I discussed with one of your customers, Mr. Marcionni, a couple of days ago. Can you give us your perspective on, a, the changeover from old Wrangler to new Wrangler, how that’s ramping at the Toledo North facility? I assume they have made more than 200 – or they’re on track to make more than 260 in the first month unlike certain next-best OEM. Second, just how long do you think the existing factory is likely to run out the old JK Wrangler platform for export? And then thirdly, he did mention something about a Wrangler pickup truck down the road – if you're going to be involved with that and kind of the timing you're preparing for it.

Good morning, Brian, thanks for joining the call. This is Jim Kamsickas. First, let me start with the changeover. I would say everything, from our standpoint, is on schedule. As you know, in this business, we have different build events that we have to supply to, to get to production vehicles. We're in line with that. I mentioned earlier in the call that we actually opened the Toledo facility and all of our plants are in very good position. So by that, that's all we can speak to relative to the status on the overall Wrangler launch, very, very good situation. How long the old – the next generation Wrangler is going to be produced – still stays in line with what they have been communicating publicly. So we're staying in line with that. And as it relates to the pickup, as you're well aware, we have been on the regular jeeps for 75 years. We'll continue to be in play, I'm sure, with any jeep vehicles with our partner customer, Fiat Chrysler.

Okay, thanks.

Your next question is from the line of Joe Spak with RBC Capital Markets. Please go ahead.

Thanks, good morning and congrats on the quarter. First question, I know – I think it was a couple of – quarter ago in the segment walks you provide – you've got rid of that performance line. But if we look at LVD segment, the sales were very strong. I guess, the incremental margin was a little bit below where it's been in prior quarters. And I'm wondering if that's because you started to incur some of those start-up costs for the Wrangler that you mentioned would be in the back half. If so, if you could quantify that and then how we should think about that into the fourth quarter because it would seem like it might accelerate a little bit.

Yes. So you're right on both accounts. This is Jonathan, Joe. On the first, the Wrangler startup costs in the third quarter have been material. We do expect those to continue ramp up. But the only reason that we're not seeing a stronger conversion within that space is because of the Wrangler startup within the period. A couple of factors – we mentioned, we do have a new facility that we just opened yesterday, as Jim mentioned. So we're carrying a fixed cost for that as we start to install the equipment, do all the builds, as Jim mentioned, and train employees in advance of having any meaningful amount of sellable units that we're shipping. You're also correct that we do expect that to increase as we move in the fourth quarter. So if you look at the overall sales and margin profile based on the guidance we have given, you can see that we expect a bit of margin compression in the fourth quarter compared with the third quarter on a sequential basis. And that's virtually all due to the rampup in the Wrangler cost that we'll incur within the fourth quarter.

All right. So if we didn't have the Wrangler ramp, it looks like on the volume mix flow-through at least in the first half was closer to the mid-teens. So that delta is maybe, like, what, $5 million, $6 million in the quarter. Is that ballpark?

Yes – a little bit more than that, it's probably closer to $10 million.

Okay. And then in off-highway, the data points in the commentary from a lot of the players here seems to continue to get better, right, as it relates to really all the end markets within that off-highway segment. But I guess, what I struggle with sometimes is sort of layering on sort of the recovery with any sort of seasonality that may occur there. So I mean, should we – you've been running sort of this high 300 levels basically in the past two quarters, and it does seem like trends have, if anything, maybe gotten a little better. Is that a reasonable level of sales to assume?

Yes. I think the one thing on the year-over-year comp is that in softer years, because a lot of our production for the global markets comes out of Europe, the month of August can be very soft for us. The reason you saw such a strong period here is there's so much demand that we ended up building through a lot of the third quarter this year and meeting customer demand, where, in the past, we may have utilized that as downtime. So I think you do see – in the year-over-year comps, there's a bit – a little bit of the seasonal impact associated with last year. As far as the run rate goes, I think the best we can do there is just continue to indicate that we see signs that this is still in the early innings of a recovery. And we’re very encouraged by what we see in the customers' build patterns and releases. There's more improvement to come prospectively.

Okay. And just one housekeeping. Can you just remind me, the Dana company impact that you talked about, how does that play out through the segments? Or where does that show up?

It doesn't. So it was not allocated to any of the segments.

So it's just in the corporate line?

You got it. Yes.

Okay, thanks.

Your next question is from the line of Emmanuel Rosner with Guggenheim. Please go ahead.

Hi, good morning everybody.

Good morning.

Hi, Emmanuel.

First question on the commercial vehicle margin. Obviously, the sales growth was very, very robust. I would have maybe expected to the extent that some of these factories may or would not be running full utilization to see maybe better conversion on these sales growth. So I guess, what happened in quarter? But I guess, more importantly, going forward, what is the path towards improving these commercial vehicle margins from the single digit through something that's more comparable to your other businesses?

We'll kind of split that one up a little bit here, Emmanuel. This is Jim. Just I do want to remind you a couple, and I'll let Jonathan get into the numbers. Largely speaking, our margins are improving, but we still have the headwind in Brazil. Brazil, flat to negative depending on mix and everything else. So it really – I can't over accentuate the importance of that. They're all down there, but it's tough, that's for sure. As it relates to kind of on the go-forward, I'll let Jonathan to talk about anything else more specifically on the conversion, is I will say this is a positive market for us, for sure, as we see the day book kind of pretty full – more full than normal at this stage of the year. So that's really a good sign for us leading into next year.

Yes. No, I'd just echo, Emmanuel. There are a couple of factors that have to happen for us to get that vehicle to, or that portion of the business, to double-digit margins. And as Jim mentioned, a more robust build in North America, and that's certainly starting to transpire. But really, a lot of the higher incremental operating leverage we're going to get is when we start to see some modest recovery in Brazil. We have seen a little bit. It's off from a very low base. It all appears to be due to exports at this point. So we continue to look for a pickup in that area, and a modest impact will come at a pretty attractive set of incrementals to help boost the margins of that business.

Okay. That's helpful. And I guess, a question just on your free cash flow and the guidance. So free cash flow guidance was improved by more than the EBITDA guidance. CapEx was sort of maintained at the same level. So what's sort of driving the better – the improvement here? And I guess, when we sort of like look forward, I think part of the free cash flow improvement story here over the next few years was moderation in CapEx. When you think some of these end markets recover faster, some of these revenues coming stronger, does that put some upside pressure on the CapEx needed in the next couple of years?

So to your first question on 2017, of the $15 million increase, above $30 million that was adjusted EBITDA. The balance of the $20 million was essentially working capital. So our working capital efficiency improved. We’ve had some initiatives underway. We got more traction from those than we expected in the third quarter that we expect to flow through on a full year basis. You can certainly see that in the year-over-year comps. But we had originally anticipated working capital would be a modest use of cash. But now it appears that working capital levels are going to remain relatively constant in spite of the fact that we have all of this incremental growth. So we are – we’re encouraged by that. In terms of the longer-term outlook, the profile of our cash flow improvement does still defend on a reduction in capital expenditures. We still remain very confident in that. Last quarter, we mentioned that as we move into next year, we have these major program launches behind us. We expect CapEx to move closer to a replacement level of our new level of depreciation and amortization and we do not believe that the increased volumes that we were seeing now and that we expect to continue into the future will put additional pressure on our capital expenditures. We have the infrastructure to supply our markets at a higher level of volume, in particular in off-highway and in the commercial vehicle space. So we feel comfortable that we still have a very bright outlook of improving free cash flow as we move forward.

That’s very helpful keep it up thanks.

Your next question is from the line of Brian Sponheimer with Gabelli. Please go ahead

Hi good morning

Good morning Brian

Jim, I have a question, more about capital allocation and M&A. Obviously, Brevini, was a very big step in accomplishing which you are wanting to accomplish. I’m curious as to whether from a strategic perspective, you’re seeing a lot of other opportunities that may be similar down this path. And I guess, we can start there.

Thanks for the question, first of all. Kind of – I’d go back to maybe the first time we met. Many of you on the call, the first time we met 2.5 years ago or whatever it was, I used the term white space. And if you just kind of set the table here for a minute. If you look at the four acquisitions we’ve done, one each is falling into each one of our business units because they were pretty natural. Those type of opportunities, they’re always out there in one form or fashion. It’s how much do you need them in terms of fit and filling in the white space. We feel very comfortable with kind of the ancillary pieces that we bolted on for obvious adjacencies that we have. So I would tell you, our focus right now is much more on integrating these – that we did do, opening up the new commercial channels that come with it. Some of them, as you know, come with cross-selling across either the mobility market and industrial mobility, and really focusing on the execution. And we believe, anyway it’s falling through to the bottom line. So right now, I would tell you that’s less of a priority than it was 2.5 years ago when we first met

All right. Secondly, within Power Technologies, clearly, the last six months has seen an increase in headlines regarding vehicle electrification. Regarding your own battery-cooling technology, have you begun to have those conversations follow through with the OEMs? I’m curious as to how much is real versus headline.

Another great question. Thanks. I’ll take that one. I don’t know that there’s an OEM we’re not talking to relative to battery cooling in one form or fashion. Not to overcook it, but as we’ve mentioned in here today, the fact that we’re putting capacity and capital into China, because we got that much demand to go be able to support domestically, is a really good sign. The way I would look at it or suggest that we look at it, for electrification or not comes faster or slower is important, but the reality is hybridization is coming fast. And with that, it’s going to require battery cooling. So therefore, in the sweet spot or near term, there’s a lot of discussion, a lot of actions that we’re taking to support the hybrid play in between over – I would call it over the course of the next 10 years.

Thank you very much.

Thanks Brian

Your next question is from the line of Brian Colley with Stephens Incorporated. Please go ahead.

Hi, good morning and congrats on other strong quarter.

Good morning thanks

So first, I just wanted to ask if you guys could just parse out what specific end markets outperformed your expectations the most from a demand perspective versus where you outperformed from an operation perspective or just on the margin front.

Yes. So I think in the light vehicle space, a couple of our flagship platforms have at a rate higher than we originally expected. We were very bullish on the Super Duty platform that it had done a couple of decades since that had been refreshed. However, we have even been surprised by the sales of that vehicle and the amount of time that customer has had to run or be up in the plants to be able to satisfy the demand. So certainly, that’s the bigger driver across light vehicle. Within the CV market, if you go back to our original expectations, we were in the low 200s from a Class 8 built in North America. We have raised that significantly, and that’s certainly been a driver. Brazil has been a little bit better than we had expected. We’re seeing higher single-digit growth rates compared to what we would have expected in the mid-single-digit growth rate range, off of a very low base. So the sales aren’t significant, but it is notable that outside of Brazil, in that region, we’re seeing increases for demand. So the content we’re supplying is being exported to other markets. Within the off-highway space, certainly, the mining segment. Underground mining, which is where we play has come back at a rate much more rapid than we had expected. On replacement vehicles, we believe, is where the demand is initially. And then also, I would say, to a lesser extent, the construction market has performed at a higher rate than we expected. So broadly speaking, it’s most of the major areas in which we’re operating have been better than what we had called here. In most of those places, it’s substantiated with third party forecast if you go back six, nine months as well to.

Great. That’s really helpful. And then secondly, just given the significant improvement in your free cash flow outlook this year, I just wanted to ask how you’re thinking about capital allocation and what your plans are for the extra cash.

Yes. So our first priority has been to continue to fund the organic growth within the business. So $400 million of capital expenditures is the highest that we’ve seen in this business. So that’s the first place it’s going. We did use an opportunity to have an opportunistic refinancing in the third quarter of this year on our debt. We were able to retire remaining $350 million of bonds with a Term Loan A at $275 million. So some of that cash will go to effectively de-levering and taking advantage of a much lower interest rate in that place. As we look forward to next year, our priorities will remain constant even though capital expenditures should subside. As Jim mentioned, we’ll be focused on looking at these acquisitions, and we’ll continue to be thoughtful about what may be out there. And then we’ll look at what we may need to do to repatriate cash to shareholders as a third-level priority, either in the form of buybacks or potentially something different with our dividends. So we’ll be continuing to look at that, and we’ll communicate more on that as we move forward.

Got it, thanks for time.

Your next question is from the line of Brett Hoselton with KeyBanc. Please go ahead.

Good morning.

Good morning, Brett.

Conceptual question. As we kind of move into this era of more hybrid and electrical vehicles and so on and so forth, I’m thinking about the different potential architectures of the vehicles themselves. And there are some architectures that require an axle, some architectures that combine the axle and the electric motor and other architectures that have, let’s say, the electric motors at the wheel ends and don’t require an axle. And obviously, you’re a big player in this and you have a big vested interest in this. What are you seeing, whether it be on the light vehicle side or the commercial vehicle side, in terms of the direction that the OEMs are taking? Is there a particular favorite methodology that you’re pursuing?

Good question, Brett, and this is Jim. Nice to hear from you. The answer is no one answer. Let me start there. I think that is important that we frame up Dana as it relates your question first. Remember that we’re largely just in the trucks and SUVs. So anything on the passenger car business that we do in the future is all upside to us. Now think about a vehicle from this standpoint. You’re going to have to have the strength, the durability and kind of infrastructure to still carry the loads of a truck and the SUV all the way through our portfolio even into our off-highway products, okay? That’s kind of an important setup, I think. Anyway, so as you move forward, that – what am – I’m talking about when I talk infrastructure, that’s the full axle going across, so on and so forth. There are all those different solutions. But big picture speaking, although we would, especially with the Brevini technology planetary hubs if we wanted to go down the road. Or it seems like it would be the most efficient solution for an OEM, we could do that. That's basically an electric motor hookup to a planetary hub. You drive the four wheels. We do that today, by the way, obviously, an area work platforms, teleboom handlers, all that kind of stuff. Okay, fine. But as it relates to where do they go in the future, it's going to be some – I believe it's going to be some time of axle configuration. We happen to believe that a fully integrated axle with electronics, motors and rotors and so forth is the most efficient by our early days. And that's where we're going with most – like I mentioned earlier on the call, that's where we're going with the bus market in China right now that we will launch by the end of this year. But as – just to speak with examples because I'd like to do that, not any one configuration is always the same. You also notice that electric truck in Great Britain that actually had its prop shaft. So it's driving the power from the front of the vehicle, which is the battery back to the rear vehicle – rear of the vehicle with the prop shaft. That's a lot of words to say there's no one real answer to it. The reality is you have to have solutions to whichever configuration makes sense for the road, makes sense for the market. And I think we're in a really good position to do that because, like I said earlier, is you think about Dana, maybe your first thought is an electric vehicles. But – the reality is we've been doing it for decades, and we've been doing multiple other electronic-like components at Dana for decades. So we're ready to roll.

And as you think about the configuration that you're favoring, let's say, which would be the integrated axle, electric motor. How do I think about that configuration versus the other configurations relative to initial costs but also ongoing costs of maintenance?

Yes, it's great question. I'm not going to be able to quote you numbers specifically on it, but I can certainly paint a visual for you. If you think about the motors on all four of the wheel ends, first of all, the cost of batteries – we all know the cost of batteries. You can extrapolate that. That's going to be expensive. Number two, you think about all the weight associated with doing that, that's expensive, and the packaging is very difficult to do that. So that's where that equation is very difficult. If a customer for whatever reason believes that something they want us to do, we can do that. I'm going to have you do the own math and what you know about battery costs and everything else like that, but that's where it comes back to, will it be much more cost-effective and packaging-effective and efficiency-prospective to be more of an integrated play. That's what we find. And then by the way, if you think about it, not to overcook it, it comes back to my opening comment: You still need that rigidity. You still need that foundation underneath of a truck and SUV, so on and so forth.

Excellent, thank you very much.

You’re welcome. Thank you for the question.

Today's final question will come from the line of Colin Langan with UBS. Please go ahead.

Great, thanks for taking my question. Just a follow-up. I think you've kind of indirectly talked about this. But if I look at your midpoint of your sales guidance for the year, it would actually imply that sequentially, sales would fall from Q3 and normally, seasonality would indicate that Q4 would pick up a bit. Are there any sort of headwinds that we should keep in mind from a sales basis in Q4?

No. Colin, in our case, if you go back a few years, it is typical that the fourth quarter is a bit softer than the second and the third. It's usually more in line with the first quarter. Last year was a bit anomalous because of the launch of the Super Duty, which came on part way for the year and they ran at a normal – abnormal amount of volumes, which made a pretty big impact on our sales with that. So you are right, we do expect it to dip down, but that bell shape – or bell curve-shaped for our sales with a softer first and fourth quarter compared to the second and the third is more normal for our typical seasonality.

Got it. And to circle back on the earlier question on free cash flow, what are the long-term drivers outside of CapEx, what other factors are going to drive higher free cash flow conversion? I think you maybe talked about in the past. Just maybe remind us.

Sure. The primary driver being the growth in our adjusted EBITDA so as we have the backlog come online, we talked about the $300 million we expect next year. As we see market recovery, we expect continual improvement in the conversion margins associated with that. So we're quite excited about the incrementals are coming and that adjusted EBITDA will essentially be cash flow. And then the other piece being the step-down in capital expenditures over that period is expected to be pretty significant associated with getting the two largest programs in the company has now relaunched their refreshes, the Ford Super Duty and the Jeep Wrangler. That's going to be a big driver. And then you have a couple of other factors. We've incurred some costs associated with our strategic acquisitions and the transaction work that we've done. And I'll just remind you, we had that one anomaly this year related to the USM acquisition, which actually sits in free cash flow. That $25 million working capital hit that we took to settle those trade payables, and that became part of Dana, is something that won't recur. So it's not unreasonable to think that under normal environment, you'd see a modest use of cash in working capital as we are growing. But aside from that, all those other factors point us to an increased free cash flow.

And lastly, just a follow-up on Brett's question. In terms of your electronic axle, E-axle position. Can you remind us, do you supply the electric motor in the axle? Or is that a sub-supplier? Just wondering if that's an in-house capability or whether you're outsourcing it and then putting axles together. And then if so, what is the value-added difference between an E-axle and a traditional axle?

So thanks for the question. We do not do motors ourselves. We find it to be more efficient at least for us right now. It seems more efficient to grow that to be a bi-component for us. And really, from a motor standpoint, we could probably stand a call for another hour relative to the different motor configuration, sizes, voltage, et cetera, et cetera. There's no one answer for that as well. So I wish I could give you a better answer there. But at least for us, we're moving forward with a really strong supply base. There's plenty of supply. Let's put it that way. So we're going in that direction.

Got it. Thank you very much.

Thanks, Colin.

Okay. Thank you, everybody, for joining the call. Really, really appreciate it behalf of the entire leadership team here, we're actually very happy with our results. We appreciate your support on it. A lot of companies stir around the term high-performance company. In my view and the team's view here, that's more talking about our results. To get really to the high-performance company, you have to have a high-performance culture that starts with having the right diversity test to deal with having the right safety perspective on safety, having the right perspective on customer focus. And we believe we're doing the right things in that area. And hopefully, we'll continue to – or we will continue to provide those same results because of the built-in process changes we've made, and we'll move forward from here. So thank you very much. Look forward to talking to you soon.

Ladies and gentlemen, thank you for joining Dana Incorporated's third quarter 2017 financial webcast and conference Call. You may now disconnect.