Good morning and welcome to Dana Incorporated third quarter 2018 financial webcast and conference call. My name is Angela 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, Angela. And good morning to everyone on the call and thank you for joining us for today’s third quarter 2018 earnings call. You will find this morning’s 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. As always, we will end our call with 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 the 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. With that, I’ll hand the mic over to Jim.

Thank you, Craig. Good morning and thank you for joining us today. I'm pleased to report that, in third quarter, Dana again achieved revenue that was just shy of $2 billion, a 15% increase in sales so far this year. Our adjusted EBITDA for the quarter was $240 million, 11% year-over-year growth, resulting in a 12% margin which is 10 basis points over the last quarter. Net income for the quarter was also very strong at $95 million, a 38% increase over the prior-year. Diluted adjusted EPS increased 31% over last year to $0.77 per share. We are affirming our guidance ranges for the year due to the steady end-market demand and conversion on our sales backlog. Jonathan will provide greater detail on this later in the presentation. Consistent with our strategy, we also remain focused on inorganic growth opportunities highlighted by recent announcement of a definitive agreement to purchase the Drive Systems segment of the Oerlikon Group. Combined with our acquisition of TM4, we are confident that these transactions will deliver significant long-term value by accelerating our commitment to vehicle electrification and strengthening the technology portfolio for each of our end markets. Lastly, we’ll continue to organically grow market share in two ways. First, through immediate takeover of existing business. In the third quarter, we gained commercial vehicle market share which we’ll retain on a go-forward basis by providing exceptional supply performance for our customers in this high demand environment. Second, as I will discuss in a few moments, we were also awarded significant new business through traditional business pursuit activities. Please turn to slide number 5 for Dana market update. One of the strengths of Dana is the balance between our light-duty and heavy-duty markets. Over the past few years, we have seen positive growth in all three…

Thank you, Jim. Slide 15 provides a financial overview of the third quarter and first nine months of 2018 compared with the same periods last year. For the third quarter, sales reached $1.98 billion, an increase of $147 million compared to the same period last year for a growth rate of 8%, primarily from the conversion of our backlog and strong market demand propelling us to nearly $800 million in sales growth so far this year. Adjusted EBITDA for the quarter was $240 million, a $24 million increase from the prior year for a profit margin of 12.1%, which is 30 basis point improvement over last year's third quarter and a 10-basis point improvement over the second quarter of this year. The margin result is slightly below our expectations due to higher raw material cost for which I'll provide more color on the next slide. So far this year, we’ve generated nearly $100 million more of adjusted EBITDA, a 15% increase. Results for net income and diluted adjusted EPS were both higher in the third quarter with net income of $95 million, a $26 million year-over-year improvement, and adjusted EPS of $0.77, an $0.18 per share improvement over last year's third quarter. Free cash flow is $34 million in the quarter, $65 million lower than last year as higher working capital offset the benefit of higher adjusted EBITDA. Please turn with me to slide 16 for further details regarding the third quarter sales and profit growth. Third quarter sales and adjusted EBITDA growth over the prior year of $147 million and $24 million respectively is attributable to four key factors. First, organic growth added $168 million in sales as we continue to convert our backlog and demand in our end markets remain strong. The organic growth delivered an incremental $38…

[Operator Instructions]. Your first question is from Brian Johnson with Barclays.

Yes. Good morning. I want to talk a little bit – a couple of things. First, on the Edge program you announced, part of the reason the CapEx went up and cash flow went down was the big Toledo plant that you're doing. Is that a program that is going to be produced at that plant or could you remind us of some of the other things coming online in that plant that will accommodate growth without additional CapEx, significant additional CapEx.

Good morning, Brian. This is Jim. Thanks for the question. A couple of things. First of all, that program for the all-wheel-drive disconnecting will be produced in our Columbia, Missouri facility, as well as this facility in China that we’re building right now, which is in Chongqing. Relative to Toledo specific, that plant, as you're well aware, is doing the Wrangler program. It’s done a great job launching that program and it's right on the front end now of the Ranger launch as well as the Bronco after that and perhaps another vehicle after that. So, that's kind of the big capital items, it relates to that. The only other thing I would remind you of the collective group is we’re also building a gear plant in Hungary right now, which will support that market for high-end precision gearing.

Okay. The subtext is then just how should we be thinking then about CapEx over the next couple of years.

Yeah. Brian, we continue to believe that CapEx going forward will be pretty close to 4% of sales on an annual basis that’s closer to our normalized replacement level. Once we've gotten past, as you noted, the major launch of the Jeep Wrangler, as well as the year before that, the long-due refresh of the super-duty program, the combination of those are what drove us into that mid 5% range for a couple of years.

Okay. Second set of questions is around power tech. Power tech margins have been at least below our models for two quarters in a row. When you go through all the commodity pressures, are those for whatever reason particularly concentrated in powertrain? I know you and your prior management and all the way back to John Devine spent a lot of time on the driveline units making sure that there was recoveries on commodities. Is power tech not in that same place or is there something different than commodities going on in power tech?

No, you're onto it, Brian. It's primarily commodity. So, when we’ve talked about our blended recovery, we do focus on the driveline business, but we also do include power tech. As you would imagine, there are different ranges of recoveries across our business. For example, our Off-Highway segment has the highest recovery rates of any of our business and power technologies has the lowest. The combination of their overall recovery rates being the lowest and the fact that aluminum is up substantially has had an impact on them in the past couple of quarters. We’ll continue to look at opportunities to improve that, other ways to recover going forward. We do think that business does remain positioned for profitable growth as engines become more efficient. We’re seeing higher content in both the ceiling and the thermal solutions. But, in the near term, some of the margin pressure we have experienced is related to commodities and specifically aluminum.

Okay, thanks.

Thank you.

Your next question is from Aileen Smith with Bank of America Merrill Lynch.

Good morning. Thanks for taking the question. The --

Good morning, Aileen.

The $40 million hit on adjusted EBITDA from commodities despite the $65 million in recovery that you're getting from your customers, is this your customers pushing more of the raw material cost burden back to you at all? And as you look forward into 2019, do you have any high-level for expectations for commodity costs and how they work into your P&L and how do you get comfortable if at all that commodity headwinds are not going to intensify further?

Yeah. So, to the first part of your question, the recovery ratio is not a reflection of the economic burden being pushed more towards us. The reason that we’re calling it out discreetly now is just because, now that we've hit over $100 million, the impact from a margin perspective is substantial. So, that recovery ratio is a little bit lower than our stated rate, largely because of the lag impact. As they continue to rise, we just don't get caught up until they plateau. So, that's why we’re a little lower than the 70% range that we have talked about. As we think about next year, we did try to intone that we think commodity cost will go up next year. From an intensity perspective, it's probably a bit early for us to call that, but we do think that cost will go up. We do expect to be able to continue to recover at these ratios and we think that it is going to be a headwind moving into next year. But as we noted, we've got a number of other things moving in our direction on the organic and inorganic growth basis, which is giving us confidence that we’re going to be able to continue to grow the business profitably and expand margins moving into next year.

Okay, great. And just as a follow-up to that, looking at slide 19 on the revenue and EBITDA walk relative to your 2Q 2018 slide deck, is the difference on the implied conversion of 19% in this slide deck relative to 15% in the last one, just a function of you breaking out explicitly now the impact of commodities or is there implicitly an assumption for improved conversion relative to your prior expectation?

No, it's primarily the former. So, previously, the impact of our commodities hadn't gotten to the point where we felt it was necessary to break it out discreetly, but the primary driver in the change is that – when you think about it from how that compares to the first half of the year, I did also mention that it has something to do with the launch efficiencies associated with the Wrangler, improving as we move throughout the year, but from a Q2 to Q3 comparison perspective, that's the primary driver.

Great. And last question, and I realize it’s early to give explicit guidance on 2019, but given the recent volatility from a macro perspective and specifically revisions from third-party sources on production expectations, can you remind us some of the industry data sources you are looking at to gauge future demand or strengthen your end markets? Are you looking at ISM or other economic indicators? Is it your customers’ backlogs or really just what you're seeing in terms of quoting and production on your key programs?

We’re typically looking at the same external guidance or external research that you look at as well. For example, we look at IHS for our light vehicle business, we look at ACT for our heavy commercial vehicle business. It’s a combination of looking at those as well as getting feedback from our customers as you note to get a sense of where we’ll be next year. I think some of the things we’re intoning, there’s relative consistency that we think it's going to be another strong year within the Class 8 market in North America, for example. Most sources look at medium-duty being strong next year. We continue to see calls for growth in the construction and mining segments as we move into next year in most places around the world. And then, as we look at light vehicle, again, remember, we’re focused largely on the truck segment and we continue to think that trucks will be stable next year. So, it’s a combination of those sources that are giving us the sense – the only factor that’s unique and internal to us is our backlog. So, our backlog, we have a buildup at a detailed program level of the incremental content in businesses that we've conquested to give us the confidence in that $300 million of growth next year.

Great, thank you. That’s very helpful.

Yep.

Your next question is from Joseph Spak with RBC Capital.

Thanks. Good morning, everyone.

Good morning, Joe.

Just turning the page a little bit to the lower free cash flow, it sounds like it's mostly from some of the lower EBITDA and that you're still sort of counting on this big working capital benefit in the fourth quarter. Is that the correct interpretation?

Yup. So, it's two factors. It’s being closer to the $965 million versus the $980 million. It’s about $15 million of it. And then, as you noted, when we have pretty good line in the sight of what inventory we’re going to have to have through the last 90 days, it will be a little bit higher than we expected. But as you'll know, we plan to generate all of our free cash flow in the fourth quarter, which is pretty normal in a year of growth that it happens in the second half of the year. It's just more acute to the fourth quarter based on what our customers build patterns were in the third quarter.

And then, you mentioned sort of progress towards your sort of longer-term targets. You've had this 5% free cash flow to sales target for 2019. Any sort of revised thoughts on that, especially you've maybe got a little bit of a deeper dive on Oerlikon and whether that impacts that ratio at all?

Yeah. So, when we think about our long-term financial guidance, I’ll first say that we do remain very confident that we will be able to get to 12.8% margin than a 5% free cash flow. The impact that we've seen on commodities in the second half of this year does put a little bit of question into the timing of getting there, but we are convicted that we’ll be able to get there. It’s just going to be an issue of the timing it takes based on commodities. And when I refer to those two numbers, I'm certainly referring to it on a pre-Oerlikon basis. Certainly, Oerlikon will have an impact more on free cash flow in its first year because of the fact that we will be making investments to achieve those cost synergies. But on the core business ex-Oerlikon, that's where I'm doing the comparison to the targets. And certainly, when we come out with our full-year guidance in 2019, early 2019, we’ll give a very clear view of what both of those pieces look like.

That's very helpful. And then, just lastly for me, as we've gone through earnings season here, we’ve been hearing, even some sort of companies maybe then reporting on the off-highway side some inventories building up. Are you seeing any of that? Or like, how would you sort of classify the channel on the off-highway side?

I would see our core segments, particularly construction as mining, the demand from an order perspective remains strong. The line of sight in communication that we have with our customers into what's driving that is continually their need to fill orders for their end customers. So, we are not seeing it in some of the areas that – in the most significant areas for us. And that's part of what affects our outlook moving into next year. We continue to expect pretty strong demand in our core segments.

Thanks.

Sure.

Your next question is from Rod Lache with Wolfe Research.

Good morning, everybody.

Good morning, Rod.

Wanted to ask, the new business that you talked about at the start of your prepared remarks, can you comment a bit on the timing? And it sounded like – I think you had mentioned some takeover business. So, does that affect the $300 million backlog that you have for next year? And any other color that you can provide? It sounds like it's spreading beyond just the light vehicle business into some of the other segments.

Thanks for the question, Rod. This is Jim. Just some color around that. Yes, I think everybody's quite aware of there is – especially in off-highway and commercial vehicle – a supply shortage and all sorts of things out there going on. We made a very, I’d call it, manufacturing strategy specific call back, I don't know, maybe a year ago even, about carrying some higher inventories, having the right capacity in place. We didn't need to repeat any history that people have dealt with and when you have these high spikes over the course of these cyclical markets. So, ultimately, we positioned ourselves really, really well. And fortunately, our customers have moved share. And you know how it works, particularly in commercial vehicle, to make sure protect supply and make sure that they can protect their customer. They moved quite a bit of share to us across multiple customers, and many of them with long-term commitments for go-forward basis. So, I don't really want to get into all the details other than to use a matter of example that we announce the medium duty standard position on Navistar as a surrogate example, but that's exactly what happened. And we’re seeing some of that to a less material perspective, but we see some of that in the off-highway segments as well. So, it is takeover, but it retains for years to come.

So, there's upside, in other words, to the $300 million? Is that fair?

Absolutely. Absolutely.

And could you just remind us of the performance of South America? I believe that you've said before that, even at sort of the trough of the market, that business has been kind of at breakeven. The real is appreciating now. There's a little bit more optimism about that region. Can you just speak to what the opportunity is for that in commercial vehicles?

Yep. We continue to see improvements within that segment for us. Demand has continued to move up. We are at a point that the operation has made money for us where, in the past, it has been closer to breakeven. So, we’re really encouraged by that. We’re also looking to the outcome of the political elections, in hopes to provide some stability and continued traction from an economic perspective. We've always pointed to the fact that that has the opportunity to have very strong conversion rates for us. So, as we look into next year, we’ll be very thoughtful about the opportunity that’s coming there to help potentially offset some of these other headwinds, like commodities, for example.

Great, thank you.

Sure.

Your next question is from Colin Langan with UBS.

Oh, great. Thanks for taking my question. [indiscernible] has been, I think, 15%. The guidance for Q4, unless I'm absolutely wrong, I think it’s only about 2% year-over-year. Can you just remind us of what are the key drivers of why the growth rate would suddenly crack so much downward?

Yeah. We saw a pretty good growth on a year-over-year basis Q4 of last year. It is going to be our smallest quarter from a sales perspective, which is normal due to the seasonal build patterns that our customers have. And we’re at the high-end of the guidance range. The market could be a little bit better. And then, the other factor you have to look at is FX. So, FX, we’re expecting it to be a bit of a headwind in the fourth quarter. So, the constant currency growth rate would be a bit higher than the 2% to 3% that you just mentioned. So, I would say it’s a combination of those factors.

Got it. And in terms of commodity costs, you highlighted steel. Can you remind us what the key grades of steel because steel has been up since the beginning of the year, so it’s surprising now? So, is it exposure that you have in particular to certain grades that suddenly spiked or any color there why this wasn't a bit more anticipated given the deal was up earlier?

Yeah. It has been up, but we saw it move up even more in the second half of the year. We try to illustrate the steel index that we used on the commodity page by the redline. And then, you do see a bit of a lag in the impact for us, but I would note that SBQ is a specialty steel that we called out as a separate category that is somewhat unique to us. Its movement has been up pretty significantly for us and we see an impact there as well too. So, I would say it’s a combination of both of those that are causing the impact.

Got it. And then, just lastly, tax guidance seems to have been brought down a bit and implies much lower rate in the second half. Why the improved tax guidance and how should we think about tax going forward more importantly?

Yeah. The only significant driver in our tax rate is just jurisdictional mix and the effective rates of where we’re incurring our profits. From a cash tax perspective, the third quarter has always been relatively high for us and our profit growth has been in regions where you would see tax payments being made in the third quarter normally. So, on balance, our full-year EPS reflects the expected tax rate based on where we see our jurisdictional mix.

And so, nothing has changed to the long-term tax outlook that we should be modeling in?

No, I think it would be pretty consistent.

Okay, all right. Thank you.

Sure.

And your last question is from Brian Colley with Stephens.

Hey. Good morning, guys.

Good morning, Brian.

So, given you've been pretty acquisitive over the past couple of years, I want to get your updated thoughts about the likelihood of additional deals going forward? Is it reasonable to expect you take a pause and digest some of the recent deals or is that not the case?

As we've mentioned before, we’re constantly looking for opportunities to augment our competitive position through a better footprint and better product technology. So, M&A has been a tool to do that. I would say, given the recent TM4 acquisition and the Oerlikon acquisition, we’re very focused in the near term making sure that the we’re prepared to integrate Oerlikon when that deal closes, which we expect would be early next year. We've been heavily focused on the integration activities with TM4 and some of that was evidenced in some of the slides that Jim walked through during the prepared remarks. We’re seeing that technology on road and we have a full suite of electric propulsion products available for all vehicle architectures. So, I would say our near-term energy has been heavily focused on integrating the deals that we've been able to sign up and are in the process of closing, but we are always looking for places to augment. We’ll continue to be disciplined from a pricing perspective and look for things that have a right fit and always keep our balance sheet in a strong position.

Further qualifying your point on it, to what Jonathan just said, from one thing you can you can certainly tell from us up to this point and for the future, we don't get the deal fever. Our acquisitions have been accretive. They’ll continue to be. And as I did mention on the last earnings call, there was a little bit of a gap, particularly software and controls. It’s one thing to have different product portfolio. It’s another thing to make sure that you can pull them together. And certainly, with Oerlikon, that's been a nice piece and it will continue to be a nice piece in the future. So, thanks for the question.

Got it. Thanks. And then, lastly, just wanted if you guys have any updated thoughts on buybacks going forward. Just wondering if maybe you guys have thought about getting more aggressive on that front, given the pull back in the stock.

Sure. That’s something that we constantly continue to look at. We had bought back some stock earlier this year. Certainly, we believe it's a good value, given some of the commitments we've made from an inorganic perspective and the commitment to the quality of our balance sheet, we’ll continue to monitor it, but there's been no significant change in our view there per se. We do have the authorization to buy back more. We’re operating under a $200 million authorization for this year and next, but we’ll continue to keep an eye on it. But no major change from our perspective at this time.

Great. Well, I appreciate the time.

Sure, thanks.

Okay. With that, thank you, everybody, for joining the call. I would just recap this one to take a second. Very proud of our team, in particular. We successfully completed the Wrangler JL launch. It's our largest and most complex program in the company. Team, well done. Thank you very much. As I mentioned a little bit earlier and in kind of addition to that, we've launched the first leg of the all-wheel drive. Exciting product that should go across the market. From my standpoint, our standpoint, we have strong demand in all of our markets, not just now, but on a go-forward basis. And at the same time, we’re performing in that market as our customers are continuing to make conscious decisions to elect and select Dana for their new business. We have a track record of acquiring and integrating companies. We’re really excited about Oerlikon coming on, starting at the beginning of next year, which positions the company not only for today, but the future. Very, very important. Thank you very much for joining the call.

This concludes our webcast and conference call. You may now disconnect.