Good morning, and welcome to Dana Incorporated’s Second Quarter Financial Webcast and Conference Call. My name is Lisa, and I’ll 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. [Operator Instructions] 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.

Thank you, Lisa and thanks to everyone joining us on the call today for our second quarter 2022 earnings call. 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. Allow me to remind you that today’s presentation includes forward-looking statements about our expectations for Dana’s future performance. Actual results could differ from those suggested by our comments today. Additional information about the factors that could affect future results are summarized in our Safe Harbor statement found in our public filings, including our reports with the SEC. On the call this morning are Jim Kamsickas, Chairman and Chief Executive Officer; and Timothy Kraus, Senior Vice President and Chief Financial Officer. Jim, will start us off this morning.

Good morning and thank you for joining us today. Moving on to Slide 4 and our update for the second quarter, Dana had another quarter of strong sales totaling $2.6 billion, a $381 million increase over last year, driven by robust customer demand in all of our end markets, including $60 million incremental EV sales. While the strong demand in the recovery commodity costs continued to fuel sales growth for us in the second quarter, profitability was impacted because of record cost inflation and ongoing supply chain disruptions driving volatile customer demand schedules that are affecting the entire mobility industry. We generated strong free cash flow this quarter of $167 million, an increase of $180 million over the prior year driven by lower working capital requirements as we effectively manage inventory and customer receivables. And finally, our diluted adjusted earnings per share were $0.08 per share. Tim will go into greater detail about our financial performance later in the presentation. Moving to the right side of the page. Some of the key areas we will discuss today include an update on the critical market drivers, we will also highlight some of our current and upcoming key launches across our business that support the light vehicle end market and we will share a customer update centering around electrification and our heavy duty product lineup. Lastly, I will take a moment to walk you through a topic we have often received questions regarding, how do we transform the legacy Power Technologies business over the past five years to meet the growing requirements for mobility electrification? Please turn to Page 5, where we’ll provide an update on prevailing market conditions. The mobility markets we serve continue to be driven by three main factors. First, on the left side of the slide, all commodity…

Thank you, Jim. Please turn to Slide 11 for our second quarter 2022 results, compared to last year. Sales were 2.6 billion, that's $381 million higher than last year's second quarter driven by stronger demand across all of our end markets and recovery of commodity costs, partially offset by currency impacts. Adjusted EBITDA was $162 million, profit margin of 6.3% in the quarter was 430 basis points lower than the same period last year. This margin compression was due to the benefit higher sales being more than offset by inflationary costs, including labor, energy, transportation, raw materials, and operational inefficiencies resulting from continued volatile demand and supply patterns. Net income attributable to Dana was $8 million for this year's second quarter, compared to $53 million last year, mainly due to lower operating earnings. We generated $167 million of free cash flow in the second quarter, compared with a use of $13 million in the second quarter of 2021. The higher free cash flow was driven by lower working capital requirements and interest more than offsetting the lower adjusted EBITDA, and slightly higher capital spending. Please turn with me now to Slide 12, for a closer look at the drivers of the sales and profit change for the second quarter. The first driver was traditional organic sales growth of $278 million, driven by higher demand in each of our segments. However, adjusted EBITDA on higher organic sales was a loss of $54 million, a margin headwind of 320 basis points. This loss was driven primarily by input cost inflation, which was $38 million of the total organic change in profit, lower cost savings from suppliers, and operational inefficiencies from the supply chain driven volatility and our customers' production schedules. Second, EV product sales grew by $59 million over the same period…

Thank you. [Operator Instructions] We'll take our first question from James Picariello with BNP Paribas.

Hey, good morning, guys. Just on the earnings bridge, within the 115 million core EBITDA decline in the guidance versus the prior guidance. So, we know 10 million of that attributes to electrification. We know another 25 million is driven by the additional net cost inflation versus your prior outlook, what's the difference, what really comprises that 80 million right? The 80 million is the difference. Is that just essentially operational efficiencies? Yes, any color there would be great.

Yes, sure. Yes, a couple of things. Obviously, higher inflationary costs are in that number too, as well as additional inefficiencies operational that are being driven by both the supply chain and by customer production patterns.

Okay. So, maybe just – maybe a clarification then. What is captured then in the net cost inflation bucket of 145 million? Like, what would be captured there versus this separate new bucket?

Well, so the 145 million is a net number, which represents the – just the inflationary costs related to things like labor, transportation, and energy that are coming through the contribution. The inefficiencies that are driven due to supply chain and customer demand patterns, those would be affected just in the general amount of these costs that are being incurred, not the base cost for them.

Okay, understood. And then just, as we think about next year, obviously, you're not going to provide guidance, but as we think about the earnings bridge for next year, you've got this 145 million in net cost inflation. You now also have this additional 80 million of operational efficiencies and the 80 million is just the change in the guidance that's probably a bigger number just in terms of the net for the full-year for the inefficiencies. What portion of these costs are temporary and could be addressed or partially recovered for next year versus what really sustains for next year?

Obviously, a lot of the costs have been driven by the erratic supply and demand patterns that we have. So, we're in a need to have some of those impacts abate in order for the cost to come out of the system. In terms of the core inflationary, we continue to work with the customers and the commercial teams to work with the customer to provide recoveries on those. So, those are ongoing and we're obviously – it's obviously a long process given that these are not costs that are contractual or typical in terms of recovery. So, we do believe that we'll be able to be successful as we go through in working with the customer to offset some of these costs.

Okay. Appreciate the color. Thanks

Sure.

We'll take our next question from Rod Lache with Wolfe Research.

Good morning, everybody. Just following up first of all on James' question, the impact from supply chain and production patterns for this year, it is large, but those kinds of things do sound transitory. And I'm wondering if you're actually characterizing this as something that you see as reversing or are there other factors that you see building that could affect 2023 as well? And then just secondly, the consensus lease and light vehicle production is that if there is a recession, it wouldn't be typical, but we wouldn't see as much risk to volume. I was hoping that you could maybe just give us some color on the leading indicators, the longer time leading indicators that you see in commercial vehicle and off highway and how those are, sort of starting to shape up?

Sure. Ryan, I'll take the first one and then Jim can answer the second part of your question. On the financial impacts of the erratic demand, that's really driven by what we see coming out of our customers and out of the supply chain. We would think that this would start to abate next year. Obviously, we've got five months left in 2022 and we'll be watching it very closely as we begin preparations for planning for next year, but that's really going to be driven by both customer and then our working with the customer to [obtain] [ph] compensation or offsets for perhaps some of the productivity we generally give back to offset some of the inefficiencies that we're seeing that are driven by the way that they're building the vehicles these days.

And Rod, this is Jim. Just on your second question. As it relates to the customer demand, it truly is what I think others are saying out there that there's all indications that this demand that we have across every one of our markets is still going to stick. We, I mean every single – and we break ours down into more than just light vehicle, commercial vehicle, off highway. As you know, we break it into construction and agriculture and material handling all the others. And to a person, every one of them is still pulling significant [amount of man] [ph] due to lack of inventory in the field. So, we feel good about it going into the year. I mean, obviously, the recession could have some impact on that, but there is a lot of vehicles out there that are in demand. So, feel pretty good about that. The challenge for us is, kind of what Tim just alluded to, the mix change in late, late minute changes and schedule across our markets. So, I've never seen anything like it. And I like to believe that that's going to start to calm down, but we're not calling that for the back half of the year like we thought it would be earlier in the first half of this year for the back half.

Thank you.

We'll take our next question from Emmanuel Rosner with Deutsche Bank.

Thank you very much. Just wanted to follow-up again on the, I guess, the change in guidance and trying to understand it a little bit better. So, I think if I compare your walk, EBITDA walk this quarter versus what you had expected, maybe a quarter or so ago, looks like the traditional organic bucket would be a 35 million headwind versus a 75 million tailwind before. So, maybe worse by about $110 million, but obviously the inflation expectation has only gotten worse by about 20. So the rest of it, that $110 million [worse] [ph] from traditional organic factors, ex-inflation expectation? Is that just volatility in production schedules? Is it labor, like I guess where, how would you describe it?

Well, so yes, so we've got increased base – we've got an increase in the base inflationary cost. So, the buckets would be energy, labor, really all of the conversion costs that go in. Obviously, that's more acute in Europe than in other places that we're seeing. When you breakdown the rest of it, the rest of it is inorganic. There's a piece of it that's driven by additional investment in EV. And then the balance is really the inefficiencies that we see due to the last minute changes, the stranded labor that comes in from changing the demand patterns. The changeover costs in the plant when our customers change out what they're going to build, unfortunately, it's really gotten to the point where they're building what they can versus what they really want to and it varies quite dramatically from what they originally schedule. And so that's having a pretty dramatic impact on our ability to run the plants effectively and efficiently. Most of our products have large amounts of – sorry, large amounts of variability, but in the product mix. So, it has an acute impact.

Yes. Okay. Now, can you help us with some directional puts and takes for a first half to the second half EBITDA walk. The stuff that I'm trying to understand basically you're at midpoint for the second half. Your implied guidance is probably about flat versus the revenues that you did in the first half. So, essentially stable revenues first half to second half, but EBITDA implicitly is guided quite a bit higher. So, I guess what gets better, you know first half to second half at the bottom line?

So, I think there's a couple of things built in there. So, with the additional inventory that's going to be coming down. We've got additional headwinds in the back – or pick up in the back half of the year. Customer recoveries, we expect to continue to be strong. And then we do think we'll be able to get some additional improvements in the plants in the back half of the year versus the first half.

In the plans, you mean in terms of predictability and stability of production schedules?

Correct. Right. Well, and I think us being able to cope with them a little bit more. And then the other big driver is that the amount of our cost recoveries should be going up as well.

These are for non-materials inflation or what are those?

So both material and both material commodity recovery, as well as some other pricing with the customers.

Okay. Thank you very much.

Our next question comes from Colin Langan with Wells Fargo.

Great. Thanks for taking my question. Just a little clarification. I think you mentioned 50 million of an inventory impact like a mark-to-market of inventory. Can you just talk about that a bit and then is that coming in the second half or is that already been occurred in the first half?

So, we've occurred some of that in the first half, principally in the second quarter as we saw inventories come down, and the balance of it is in the back half of the year.

And any color, is that an equal impact, first half, second half when we kind of look at that walk?

Yeah. I mean, it's probably balanced. I don't have it by hand off the top of my head by quarter, but obviously we saw, you know as we continue to bring commodity cost down and inventory down, it'll flow through based on those two factors.

And what's causing this? It's just the lower raw material prices or causing the market lower?

Yes. So, historically this hasn't been a particularly large issue, mostly because as you think about it right as commodity costs increase the material we're buying, we're putting on the balance sheet and we're selling out inventory, right? So, what caused this probably dramatic change is that we had both a very large increase in the cost of the material over a very short period of time. At the same time, we actually built a much larger amount of inventory. Those two things combined caused us to have high value of inventory. Now, as you turn around and you move through this year as the operations teams drive us to much more efficient inventory management, we're getting that inventory out and selling this much higher profit or higher cost inventory than say in last year, where it was all from prior periods. That headwind on the EBITDA conversion is flowing through. And so, we wouldn't anticipate this to continue when you move out of 2022 for two factors. One, we're seeing commodity costs come down and two, we're seeing the amount of inventory we're holding coming down.

And you don't get recovery from your customers for the value, the mark-to-market inventory at all?

Well, so that recovery would be sitting in the – as part of the – like if you look at our year-over-year that $475 million of recoveries, it’s just sitting in that line?

Okay. And then can you just remind us the 145 of inflationary cost? I mean, how does that cadence through the year?

So, if I remember correctly, we had about 45 million in the first quarter and I think 38 million in the second, so those two. So, it's about – it's a little higher in the back half than the front half of the year, if my math is correct?

Okay. I mean, but so how do you get your incrementals stronger in the second half. How are you, sort of on flattish sales growing EBITDA? I thought it was getting some of those recoveries? And isn't that a net number? So, It would include…

So, it's recoveries and then the efficiencies we should be driving into the plant.

Okay. All right. Thanks for taking my question.

We'll take our next question from Noah Kaye with Oppenheimer.

Thanks for taking the questions. Actually, I just want to frame a strategic question for you. I think multiple times you referenced product developments and business wins leveraging the core across segments and clearly leveraging those core competencies across multiple end markets has been a key element of the growth strategy. It just seems like in full appreciation of the hard work the company is doing in this challenging operating environment. I mean there parts of the portfolio that today are significantly underperforming on profitability relative to prior expectations and it could be said to the peers. And so, the question is, do you see these results warranting a more comprehensive strategic response? I mean, do you really view these as transitory, and if not, what actions do you need to take to raise the structural profitability of the business?

Thanks for the question. This is Jim. Thinking about them in the two pieces and you're most referring to light vehicle elements of the business, right, which Power Technologies is largely light vehicle and of course light vehicle driveline is as well. When you think about the businesses, the key and let's take Power Technologies in the first segment of it, we just kind of just nibbled at the edge of it today, but just talking about the transformation of the business that's coming online, which is all the battery cooling and all the other things associated with it, which is a significantly higher amount of content per vehicle and will obviously contribute a lot more profit associated with it. I think we're on a really good journey there to just – we just can't speed up the clock and that will start to roll in as you know those programs, as well as anybody else does the [indiscernible] or the lightning or whatever program you want to talk about. So, those will come together. As the light vehicle side of the business is similar nature that wasn't by happenstance or accident that we talked about, those program roll on a large portion of the light vehicle programs on the driveline side, meaning the ICE are kind of what you'd call long in the tooth in our business and they're all refreshing and there's – I'll put it this way, there's more to come. And with the more to come, they start to refresh and we get to where we want. And then back to your overarching comment, I mean, everything's open for consideration, but I will tell you the scale benefit and the competency benefit with our people from one business unit to another business unit, supporting our customers, supporting communication, supporting validation testing, supporting the other things, there's a huge benefit as it relates to having credibility and capability with no matter the end market. So, I mean, never say never about anything you might consider doing. What I would tell you is the plan comes together, yes, there's – we can't speed up the clock on the two things I referred to relative to the two segments, but as things come together, I'm very confident that they'll, like I said, come together and we'll reap the benefits of it. I mean, it's just unfortunate for us. We're trying to be because it's the drive line business and we're trying to be a disruptor at the same time is working through these crazy macro conditions. It's a tough spot today, but certainly from a building and infrastructure for the future and ensuring that we're a longtime winner, I think we're still doing the right things.

Really appreciate the thought, full response, Jim. Thank you.

And the last question will be from Joseph Spak with RBC Capital Markets.

Thanks, everyone. I'm going to try to take another shot here at, sort of the go forward here. So, in late 2021, when you had your Analyst Day, you were basically calling for $1.2 billion of EBITDA in [2023] [ph]. So, we think about what's changed and what you, sort of laid out here, inflation, right is at least 145 million, looks like currency is another 50 million, you know the inefficiencies we could argue are transient. It does sound like maybe there's some higher EV investment, but I guess what I'm wondering is, unless you think inflation reverses or you get better at recoveries, is that 200 million that comes off just sort of the new right base to think about 2023, so closer to a billion versus [1.2 billion] [ph]?

Yes. I guess you can kind of draw the conclusion, Joe. We're not really in a position to make a call on 2023 at this point. So…

Okay. But I mean, if we just bucket stuff into more trends in versus potentially more structural, right? I guess, is that – are the – you know what – because you, sort of talked about the inefficiencies and the stranded labor, right? I mean if schedules do get more steady, it would seem like you'd be able to recover those where it seems like there could be more difficult work to recover that additional 145 million.

Yes. No, I think you're thinking about it in the correct buckets from a transitory versus perhaps the ones that are more or less transitory, I guess.

Okay. On recoveries, 104% for the year, can you give us a little bit of a sense for the relative recoveries by segment because it seems like if our math is correct, like it's been stronger in commercial vehicle and off highway to date or year to date, which makes sense, but to get it up to, sort of what you're talking about for the year, it would also seem like you got to have – you start to have better recoveries in those other two segments that are more – that have more light vehicle exposure. Is that right?

That's correct. I mean, those are the segments where we have the largest amount that is contractual, but it's also significantly lagged. And so, as the commodities begin to abate later in the year, we'll start seeing the benefit of that lag starting to help are starting to flow through in those other segments and they'll look to be being over recovered.

Okay. So – but it's fair to say that there's been more real time recoveries in commercial vehicle going off highway than in light vehicle?

Yes, that’s correct. That's fair.

Okay. Last one for me. Just on the Super Duty, obviously an important program and you talked about the fourth quarter launch, can you just like – do you have to make and ship those – the products for the new Super Duty ahead of when Ford actually starts producing those? And I guess related, when do you stop making the product for the outgoing Super Duty?

Yes. Good question. There's [indiscernible], first of all, don't – and you're not, but don't complete my answer on this to every other launch out there in Light Vehicle or any of the end markets for that matter, everyone's a little bit different. This one, there will be a, kind of a migration. Towards the end of this year, we'll be starting to supply some of the early launch vehicles so on and so forth and the old product will still definitely be required from us. As we migrate from – in the first quarter from January forward, that that will start to flip over time. And obviously at a point, I don't know where that is, I don't have it right in front of me when we'll get it to full volume of the new product, if that's March or whatever it is, that's how that sort of comes together.

And those are, I guess, two separate lines or – and then like you, sort of – you convert from one to the other over time and then that frees up the existing line for some other capacity?

Not to make it confusing at, kind of a combination of both, it all depends in that. Some of them dependent on the product design, product capabilities, all sorts of different things. We would have new lines for some others that you can transition directly from one, the old product to the new product. So, kind of a combination of both. And then to your last point there though, could we transition when we can free up the capacity that do those transition into the next new program? Yes. The answer is yes.

Okay. Thanks so much.

Okay. They're waving to me saying it's the last question. I would just summarize with, obviously, Dana is a very unique position as we are launching complex high volume programs or largely existing through the end of the decade. We're also reengineering the business, leveraging the integrated electrification companies that we've acquired to possess the complete in-house e-Propulsion capability across all mobility markets in full four-in-one systems, which of course secures the future of the business through the replacement and new business growth and we're doing it while we're navigating unprecedented market dynamics and related cost pressures. Candidly, operationally, Dana has never been stronger. The pan Dana operations team, manufacturing, supply chain, purchasing, product engineering program and launch have done a remarkable job overcoming the barrage of macro issues that have been coming at them. Our very intentional investment and the disruptive efforts we've done to position Dana for the future is a little bit choppy right now, but I can tell you for sure that as we continue to integrate these and we continue to get the new growth as the new ICE programs, electrification programs roll in our backlog, we're going to be strong for years to come. So, thanks very much for your time and attendance today and we'll talk to you soon.

And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.