Good morning and welcome to Dana Incorporated’s fourth quarter and full year 2022 financial webcast and conference call. My name is Rob 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. For those participants who would like to access the call from the webcast, please reference the URL on our website and sign in as guests. There will be a question and answer period after the speakers’ remarks, and we will take question from the telephone only. To ensure that everyone has an opportunity to participate in today’s Q&A, we ask that callers limit themselves to one question at a time. If you would like to ask an additional question, please return to the queue. 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 Rob and good morning to everyone on the 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. It’s my pleasure now to turn the call over to Jim.

Good morning and thank you for joining us today. Please turn with me to Page 4, where I will discuss our business highlights for the last year and outlook for 2023. Starting on the left side, Dana achieved record sales of $10.2 billion last year, a $1.2 billion increase over the previous year driven by often erratic but solid customer demand, new business backlog in all of our end markets, and successful cost recovery efforts. While our top line has grown stronger, input costs continue to increase at a rapid pace due the global inflation and fluctuating industry demand. Adjusted EBITDA for the year was $700 million, down from 2021 as external cost pressures held back profit throughout the year. Despite the choppy operating environment and extreme inflation, I cannot be prouder of how our team managed working capital to generate free cash flow of $209 million, an increase of more than $420 million over the prior period. Lastly for our results, adjusted earnings per share for the year were $0.37. Moving to the middle of the page, you can see some of the key themes for 2022 that drove our industry. For the past year, we’ve been discussing the challenging operating environment that our industry has faced. This turbulence included generationally high inflation, customer demand volatility, supply chain disruptions and currency fluctuations that have created significant external headwinds to navigate and overcome. These challenges have led to persistent negotiations with all our customers as we work to recover these higher input costs. While we have been successful in our efforts to recoup a large portion of them, we were not able to recover all of the inflation and customer-driven inefficiencies, or offset the margin impact. Although our cost recovery actions fell a bit short of our expectations last year,…

Thank you Jim, and good morning. Please turn to Slide 15 for a review of our fourth quarter and full year results for 2022. Beginning with the fourth quarter, sales were $2.6 billion, a $282 million increase over last year, and for full year 2022, sales were a record high $10.2 billion, an increase of $1.2 billion. Higher sales were primarily driven by improved demand in all of our end markets and recovery of commodity and other cost inflation through pricing actions. Fourth quarter adjusted EBITDA was $176 million for a profit margin of 6.9%, which was 170 basis point increase over last year driven by better operating performance and customer recoveries, partially offset by higher input costs. Full year adjusted EBITDA was $700 million, $95 million lower than the previous year mainly due to cost inflation and customer and supplier-driven production inefficiencies. I will cover sales and adjusted EBITDA in more detail in a moment. The loss attributable to Dana was $179 million for the fourth quarter of 2022, compared with income of $27 million for the same period of 2021. The loss was mainly driven by a one-time non-cash adjustment of a valuation allowance on U.S. tax assets of $155 million. Full year net loss was $242 million compared to income of $197 million last year. The primary drivers of the loss were a one-time non-cash goodwill impairment charge of $191 million in the third quarter due to increasing interest rates and lower market capitalization and $157 million of tax valuation allowances. Finally, free cash flow was $202 million for the quarter and $209 million for the full year - that’s a $420 million improvement over full year 2021 driven by our efforts to effectively manage working capital. Please turn with me now to Slide 16 for a…

[Operator instructions] Your first question comes from the line of Noah Kaye from Oppenheimer. Your line is open.

Good morning and thanks for taking the questions. Maybe you can start by helping us understand some of the margin puts and takes for ’23. Maybe quantify what you’re assuming as a tailwind on the commodity front and then how you think about the incremental headwind from material cost inflation or otherwise.

Sure, I can take this one. On commodities, it will be about an $85 million tailwind on the EBITDA line, and then if you think about inflation, inflation should be about a $50 million net headwind to profitability.

Great, thanks. Then you called out the net investment spend on EV as a $30 million headwind year-over-year, I believe. Can you just refresh for us now relative to the target you put out at capital markets day, when you now think the EV business should be breaking even?

When you think about our EV business and where we see it becoming breakeven, it’s certainly within the nearer term, so within the 23 to 25 time horizon. A lot of what’s changed is as we think about where we were a couple of years ago to where we are today, we really did believe that there would be a lot more of the sales growth would be coming from the adoption of current EV programs, so think of direct drive in commercial vehicle. What we’ve seen happen much more quickly is a pivot to full three-in-one and four-in-one systems throughout the markets we serve, and that’s really caused the requirement for additional EV investment in the near term. We also continue to invest into programs that today really won’t come on and won’t see any major sales growth until outside of the backlog period.

That’s very helpful. If I could just sneak in one more, and this is sort of a housekeeping item, do you think that the capex would sort of stay in the $500 million range for at least next year, based off of what you said, and maybe you could expand a bit on the tax rate as well, what you think about as a normalized tax rate as we maybe move past this year and into ’24.

Yes, so I’ll take the tax rate first. I think the tax rate stays significantly elevated over the near to midterm, really based on having the valuation allowance up in the U.S. Then on capex, the capex we have currently in the plan supports what we have in the forecast and in the backlog for EV sales. To the extent we were to win significant additional business, that could change over the longer term, but pretty comfortable with the nearer term capex levels that we’re seeing in ’23.

Okay, thanks so much. I’ll turn it back.

Your next question comes from the line of Dan Levy from Barclays. Your line is open.

Hi, good morning. Thank you. Just wanted to follow up on that prior question, and I think you’ve sort of alluded to it already. The $500 million-plus of capex, that isn’t the highest annual amount you’ve ever done, so--and is all of this just really if near term and longer term programs that are requiring a significant step-up, and is there any catch-up in this capex, because I think the key question here is just on the path to free cash [indiscernible] and a lot of that is based on the capex.

There’s a very small amount that you’d think of as catch-up, maybe coming out of some of what we’ve seen, but most of it is being spent to support both the growth in the EV business but also the market share gains that we have in the business overall. If you just think about it, the EV business alone didn’t exist five years ago and now we’re seeing EV spend that is an exceedingly large percentage of our total capex spend.

Got it, thank you. Then my follow-up is on light vehicle, and maybe you can just help us unpack what’s going on there. Obviously ’22 was quite hard, just given all the stop-start and the impact, and that’s why your contribution margin was quite weak, but what is your visibility of these trends reversing, what is the path to getting back to a double-digit margin that you used to have? Then maybe you could also just talk to specifically from a program side, you’re losing Colorado Canyon but you have the Super Duty launch, where it looks like you have incremental content, so what’s the net of those launches? Thank you.

Good morning, thanks for the question - this is Jim. A couple things. Let me work maybe from the back forward on that. If you look at the offsets on that, hopefully it was picked up on, but Colorado Canyon did roll off. We refilled that plant with an electric that I didn’t announce, by the way, an electric program going in, so concrete for concrete, it’s net-net. Also, if you think about GM as an aside to that, I mentioned the [indiscernible] launch that’s launching right now, so all that sort of offsets. That’s comment one. Relative to the balance of it, how to think about light vehicle, you’re right - there was turbulence like you can’t imagine, turbulence in terms of schedule volatility and start-stop and mix change and trapped labor. It is what it is - you all understand it by now. It’s still chunky out there - there’s no doubt about it, but I will tell you it feels like, at least it seems like customers are being very, very intentional about working through the debugging of a lot of that stuff with their own supply chain and other challenges that are out there, so as I mentioned in my prepared remarks upfront, we see that subsiding on the back half of the year if the trend goes in that direction. Hopefully that answers your question, but certainly no one’s out of the woods for that, at least for the next few months in my view.

I’ll just add a follow-up on that. Are there any other levers that you can pull in light vehicle to help mitigate this, and I don’t know if there’s maybe applying learnings from off-highway, where you’ve done pretty well, but anything you can do to help to mitigate some of these pressures?

Yes, the most important thing we can do - I’m not going to ask you to do it right now, but go back to our--when you get a chance, go back to the launch slide, it just kind of reinforces the way the light vehicle business works. It’s different than off-highway. It’s different--they’re all a little bit different in their own way, as they should be. If you go back and you think about our book of business of, whatever - plus or minus $4 billion in that light vehicle segment, and then you think about the size of Super Duty which is launching this year, if you think about the Jeep Wrangler/Gladiator that’s launching this year, if you think about the size of the Ranger platform in Argentina, America and South Africa launching this year, I mean, it’s kind of a reset. It’s got the growing pains of launch costs that go with it, but that’s how you readjust and re-correct after somebody’s gone through the black swan events that our business has gone through, and hyper inflation and supply chain disruption and all that stuff. The Dana team has done a remarkable job preparing for these launches, and South Africa is going well and we’ll get it done, but you can’t speed up the clock to get through 2023. You have to let the programs roll themselves in.

Great, thank you.

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

Thank you very much, good morning. My first question is on the 2025 targets, which are extremely helpful, but then I’m trying to put them into context - you know, it still suggests probably only 9% EBITDA margins or so on these high revenues. I was just curious if you could just compare and contrast with your historical midterm target, which was looking for 12% at that $10 billion revenue range. What has fundamentally gotten worse? I understand that there is choppiness now and volatility, but this is a 2025 target, so I guess what is different and what would it take to essentially get you back into these higher margin targets?

Yes, hi Emmanuel, this is Tim. I think when you think about the targets that were put out, there was no thought or even consideration for the rapid amount of inflation that has come through and then the sales that have been generated off of those recoveries, which come not only with no margin but obviously come with a margin headwind. I think to get the business back to double-digit margins, all of those margin headwinds are going to have to be wrung out of the business, which is going to take some time as we continue to turn over programs across all of the end markets. Light vehicle is the one we think about currently, but certainly this is a--it’s impactful for margins across the entire business. I think that’s the first one to think about when you think about the prior targets, and we’re talking about billions of dollars in--or hundreds and hundreds of millions of dollars worth of sales that are not coming with any margin.

Okay, that’s helpful. Then I was hoping you can help us--give us a little bit more color around the profitability of your EV business and, more importantly, the trajectory ahead. It’s helpful to know that you’re still targeting breakeven within sort of the midterm horizon. When I’m looking at the amount of information that you’re giving us, so I think $700 million in sales in 2023, up about $150 million or so, and then it results in a negative $30 million swing in EBITDA, are your EV sales currently at target gross margin and it’s really just R&D that is essentially putting it into negative territory, and are you able to quantify the EV R&D for us?

Yes, so yes, we are--those sales do convert at what we would consider to be good margins. It’s really the investments that we’re making in engineering, but also really building an entire EV business and infrastructure, from program management to sales to engineering, right - all of that has to be put in place, and that has really ramped much, much more quickly than we had originally anticipated. When you think about just the number of quotes that the teams are working on and the amount of the backlog that’s now coming on that’s now EV, while we still have a full ICE business that we’re servicing, it’s an immense amount of investment that has to be made. But we’re--the business is converting well, it’s just that the amount that we’re investing in the infrastructure to bring those and all of the new programs to market is outpacing that.

Are you able to quantify for us the EV R&D or engineering, either as a percentage of the total or in dollar terms, and whether it’s at the right place as a percentage of revenues or if you would expect it to increase more over the next few years?

We would expect it to start to moderate. I won’t comment on the total dollar amounts or percentages, but obviously it’s higher today than we have historically had as a percentage of sales, only because we’re spending a lot of upfront dollars on new programs that haven’t started to generate sales.

Okay, thank you.

Your next question comes from the line of Colin Langan from Wells Fargo. Your line is open.

Great, thanks for taking my questions. Just to follow up on the prior midterm targets versus where you are now, I’m just trying to understand because the target used to be $10 billion in sales at 12% margin, which is like $1.2 billion, and now you’re at 11.5 at the midpoint for ’25 and just over a billion, so it does seem like something else structurally has gotten worse, more than just the inflation diluting the percent margin. Is there some other headwinds that are kind of baked into 2025 at the midpoint?

Well Colin, I think there’s two things. One, I can’t explain enough without going into an immense amount of detail the impactfulness of both inflation and the commodities on margin percentage. I think the other is that as our EV business continues to grow, and while we’ll get to breakeven, that pull ahead of EV investment and the growth in that business and not converting on a net basis at the same place as the mature ICE business is both impacting margins.

Okay, got it. Then the prior target was 5% free cash flow conversion versus now you’re talking about 3%. The difference is capex and just a lower margin assumption. Anything else that would be baked in there?

Yes, it’s a couple of things. One is obviously elevated levels of capex, but we also would anticipate with rising interest rates and other costs, that those would also be impactful as well, as well as from a tax perspective.

When I look at light vehicle and commercial vehicles, sequentially sales were fairly flat, down a bit, but margins were a lot worse. Any color on what’s happened in the quarter sequentially there that made the margins so much worse?

I’m sorry, on LV and--?

The light vehicle and commercial, yes.

Yes, so light vehicle, I think on both of those we were incurring higher than anticipated launch costs. We’ve got very large launches that we’re preparing for on the light vehicle side this year, right - we’ve got Super Duty and the re-launch of the Wrangler coming in, as well as current launches going on around the world for global Ranger. Then on CV, we continue to--and of course, all of them are still impacted by customer and supply chain issues. But I think the other thing on the commercial vehicle side is the teams are really preparing for market share growth and new business in the commercial vehicle side that we hadn’t originally anticipated were going to come in 2023.

Got it, and just one last one - when I look at Slide 21, I would have thought that some of your growth would reflect recoveries for some of the net inflationary costs, but if I look at traditional and/or EV growth, that $600 million, and I think your slide before said it was 300 market, 300 new business, so where would the benefit of price recoveries for inflationary costs fall in the sales walk?

Well, in the sales walk, it would primarily fall on traditional versus EV, because a lot of the EV is new business so those would already be currently priced. I think if you think about the profit conversion, if you just think about the impacts of inflation, the $60 million on 450 converts at, what, 12% or 13%. If you just add the $50 million which is primarily on the traditional organic side, we’d be getting a conversion that’s more like 25%, so, which would be much more what we--would be much more in line with where we would see the business convert at. But bear in mind, right, the inflation is still a net headwind both in terms of profit and in terms of margin, because what the implied inflation--what the $50 million inflation implies is that we’ve not recovered dollar-for-dollar cost.

Got it, but just if I add those two, so that when you talk earlier in the slides about $300 million of market, that also includes--is that where the expected recoveries are baked into, that $300 million piece of it?

It would be.

Okay, all right. Thanks for taking my questions.

Your next question comes from the line of James Picariello from BNP Paribas. Your line is open.

Hi, good morning guys. Just a follow-on to the last question, to Colin’s question, can you confirm what was Dana’s net pricing this past year and what is embedded from a net pricing perspective in the guidance for this year?

Yes, we don’t generally break out pricing. Obviously it’s a subject that is always a difficult one to have with the customer, and so we don’t generally break out pricing discussions or amounts in the walk.

Okay. Then just for the cadence for the year, it sounds as though it will be back half weighted here from a margin improvement standpoint. Just curious if you could put a finer point on how the first quarter is trending, how you’re thinking about maybe the first half or second half split. Any color there would be helpful. Thank you.

This is Jim. Thanks for the question. Like you said, just because it’s kind of out of our control, where the volumes are, launch acceleration cadence, all the other things associated with some supply chain stuff going out there, exactly what you just said right there. But the positive, I would tell you for sure, is that the pent-up demand, because we’ve been very intentional of which markets we participate in, as you know, so we’re not, for example, in the pass car business for good reason and we’re in obviously truck, SUV and above - plenty of pent-up demand there. We’re ready for the launches, we just can’t speed up the clock, per se.

Thanks.

Your final question comes from the line of Rod Lache with Wolfe Research. Your line is open.

Good morning everybody. I was hoping just to get a little bit more color on the bridge to your mid-decade target. You’re talking about $200 million of additional EBITDA from 2023 to 2025 on a billion of additional revenue. When I look at the backlog over the next two years, it looks like maybe $400 million of that billion dollar growth comes from EV business over those two years, and you did mention that that business is expected to get to breakeven and presumably it’s a $50 million loss right now, but maybe you can give us a little bit of color on whether this turnaround for the EV business, or overcoming the initial launch costs is a significant part of that $200 million of additional EBITDA that you’re targeting for mid-decade.

Yes Rod, good question. Yes, I think it’s a combination of a couple things. As you mentioned, right, the EV business gets larger and gets to breakeven over that period, so that’s obviously no longer a drag on overall profitability. I think the other is you’ve got additional roll-on programs, so we’ve got a lot of programs that are rolling on this year, they’ll obviously go through launch, we’ve got 120 launches, we start to see an abatement in the costs we’re spending there, and the obviously the new programs end up at full run rates post-’23, so into ’24 and then later, so those will help margins. The other is as the customers work out their issues and we get much more normalized production patterns into ’24 and ’25, one, the costs associated with that start to come out, and then also on the flipside, we’re able to be more efficient and drive cost savings in the plants from an operational perspective that we continue to have difficulty with as the customers run poorly. Then the last one would be we see inflation continuing to moderate throughout that period, which should be less of a headwind or perhaps--I wouldn’t call it a tailwind, but certainly no longer a headwind. I think the combination of all those is how you can bridge from sort of the $800 million in ’23 to the target of greater than a billion in ’25.

Thank you. Just secondly, I think you’re pretty clear on what the differences were between the old targets and the new targets. You absorbed $117 million of inflation last year net of recoveries, and $50 million is expected this year, so that’s crystal clear to me. What I was hoping you might just clarify, it sounds like you need to work through the roll-offs and roll-ons of backlog to offset a lot of that over time, but a lot of the backlog that you’re getting in 2023, 2024, these were things that were awarded a few years ago. Will that backlog reflect the current cost of doing business, or is it kind of things that you’re winning now that will come on in three years, that that gives you the opportunity to kind of get over the inflationary costs?

Hey Rod, thank you for the question - this is Jim. That’s a right on mark question, and the answer is yes. They’ve been reset, I would call it for, per se, current economics. It may not be exactly the same margin benefit we had before, but on total dollars, return on investment, and all of the critical characteristics of any program and hurdle rates, that’s how we’ve set up the business. Again, we just can’t speed up the clock, we just have to let them do it, doing it the right way, and at the same time, the same customers, we’re very thankful that they’re choosing us as their electrification partner moving forward. Yes, that’s all I can say, that the business is set up, it’s just a trough of the time of--if you look at Dana’s light vehicle business, obviously a lot of those programs were long in the tooth. They launched in 2015, they launched in 2016. When you think about how the world has changed - I mean, it’s out of our control, but we’re going to move forward and obviously we’ve positioned the company for great success in the future.

Great, thank you.

Okay, I’m just going to summarize real quick. Actually as a quick little change-up for you, I’m going ask a favor and that is to ask you to turn to Page 24 for just a second and just kind of recap. We kind of have to ground ourselves here a little bit. When you think about it, Dana manufactures all of--designs, engineers and manufactures all of the products that are on that picture, so you can see the full battery cooling, what you can’t see is thermal management cooling and a bunch of electronics cooling because they’re smaller in substance and size, but the full e-axle upfront, the full e-axle in the back, the motors, inverters, e-controllers, etc. We do all that today. Four years ago, we didn’t do any of that, right? In 2016, we had a vision and believability that electrification would in fact happen, then all of a sudden, of course, we had these, I’ll call them anyway black swan events of COVID, supply chain disruption and generational inflation that nobody could have seen, but on that same path we stayed the course and we positioned ourselves to make sure that not only are we going to sustain but we’re going to grow, and by now I think everybody gets the content per vehicle opportunity that we’ve been landing the plane on. A great example of it, of course, is we’re doing the thermal management on the motors and inverters, of course, but we’re also doing the battery cooling. Think about a gasket of the past of full battery cooling of the future - it could have gotten lost in the discussion today, the proud moment for me to say today is an example that we’re essentially doing all of the General Motors Ultium platform battery cooling when we didn’t know what it was six years ago, or we’re doing the Lightning or we’re doing the Rivian, or today’s announcement that we’re doing all of the global JLR programs. It takes money, it takes time, but I’d much rather be in a position that we put ourselves in the position of leading in disruption, the OEMs have to go through it and the power train suppliers have to go through it. I’d much be in a position of leading rather than following, and as the slide shows, it gets done by leading in customer satisfaction on your performance and it leads by having the right technologies. Yes, there’s a hockey stick of some costs that come with it, but as we have the traditional ICE programs roll on, they’re going to pay for it and we’re going to continue to move forward as a company. Thank you very much for your time and attention today. Look forward to talking to you very soon.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.