Good morning, and welcome to Dana Incorporated’s Second Quarter 2023 Financial Webcast and Conference Call. My name is Josh, 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. 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, Josh and thanks to everyone on the call. Thanks for joining us today for our second quarter 2023 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. I’ll now turn the call over to Jim. Jim?

Good morning. And thank you for joining us today. Please turn with me to page 4 where I will discuss our highlights for the second quarter of 2023. Starting on the left side, we're pleased to report the Dana achieved record second quarter sales of $2.7 billion, a $162 million increase over the same period last year. Driven by continued strong customer demand, the rollout of our new business backlogs across all of our end markets and our ongoing cost recovery efforts. Adjusted even after the quarter was $243 million, up $81 million or 50% over the second quarter of last year, driven by our strong operational execution and improving customer schedules. Free cash flow was $134 million, which is a good second quarter performance driven by higher profit and our working capital efficiency. Lastly, for our results, adjusted earnings per share for the year were $0.37, an improvement of $0.29 per share. Dana remains on track and extremely focused on the execution of our company wide transformation that is securely positioned us to be a leading supplier to the world's most prolific ICE and zero emissions vehicle manufacturers. While this ongoing transformation has not been easy in light of the challenges that continued to impact the mobility industry between 2020 and 2022, it was necessary to completely reposition the company for long-term profitable growth as the industry transitions to a zero emissions world. Dana recognized that this industry transition early on and took measures actions to enhance our product portfolio and ensure that we have an extremely cohesive and aligned organization spanning all markets to drive forward our technology excellence, with the goal of being a leading energy source agnostic mobility supplier, with the capability to design, engineer and manufacture fully electric power trains in house across all mobility…

Thank you, Jim, and good morning. Please turn to Slide 9 for a look at Dana's second quarter 2023 results. Sales were $2.75 billion, a $162 million increase over last year, primarily driven by strong demand in our driveline segments and recoveries of cost inflation. Adjusted EBITDA was $243 million for a margin of 8.8%. That is $181 million higher and a 250 basis point increase over last year. While we still experienced some lingering customer-driven production inefficiencies, our profit improvement was driven by lower net manufacturing costs, strong operational execution and the timing of EV investments. The net income attributable to Dana was $30 million compared with $8 million last year, driven by higher operating income. Diluted adjusted earnings per share was $0.37, a $0.29 improvement over the second quarter of last year. Lastly, free cash flow was $134 million, down $33 million from last year, driven primarily by higher capital spending. Please turn with me now to Slide 10 for a closer look at the drivers of sales and profit change for the second quarter of 2023. Beginning on the left, Traditional organic sales growth of $137 million was driven by higher demand, improved pricing, recoveries as well as product and market mix. Adjusted EBITDA on higher sales was $45 million, which improved margin by 130 basis points. Cost inflation was offset by customer recoveries in the quarter and improved operational execution muted cost headwinds from inefficiencies driven by volatile customer production, which, while lessening and intensity was still an issue early in the second quarter, primarily in our Light Vehicle segment. Next, EV organic sales were $36 million higher in the second quarter versus last year. Adjusted EBITDA was $4 million higher for negligible margin impact. As we noted last quarter, our electrification business remains profitable on…

[Operator Instructions] Your first question comes from the line of Tom Narayan with RBC Capital Markets.

Hi, thanks for taking the question. I just had a question on the guidance raise EBITDA bridges. If I compare the Q1 bridge you guys provided it to the Q2 bridge. Obviously, the traditional EBITDA moves higher. You called out more efficient operating environment and mix? Just would love to hear more kind of details there. And then the timing of investment shift on EVs creating the reason why that piece of the bridge is moving higher. That sounds like you're just saying, if I understand it correctly, just shifting the investments to 2024. Is that fair to say? Or is there anything more behind that? Thanks.

Yes, I'll take the EV first. This is Tim. So yes, I think what we're seeing in the business is on the EV side just a little bit of slipping on the investment, a little bit that will flow into 2024. So we're about $15 million less now than we were originally, but we still expect to invest significantly in that business as we continue the transformation. On the traditional, what you're really seeing is some of what we've been talking about, right? A lot of work has been going on in the operating level of the business to become more efficient and to drive those improvements. Some of that's been held back by these bottle demand patterns and supply chain issues. As those start to abate and we start to see that late in the quarter, you start to see the operating improvements in the plant start to flow through, and that's really what's being reflected when you look at the improvement in the flow-through and conversion on our traditional business.

And then on mix?

Mix. Yes, so obviously, you're seeing some higher mix relative to our off-highway business that tends to come with higher margins and offset in other parts of the business.

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

Great. Thanks for taking my question. When I look your implied second half versus the first half, you have slightly down sales, but margins, I think, something like 70 basis points down, which is a pretty high decremental. I think most suppliers are indicating things get better in the second half, so you seem to be bucking that trend. What would drive the weakness in the second half versus the first half or are the factors we just thinking about that caused margins to kind of road from here?

Colin, this is Tim. Thanks for the question. Yes, it's a couple of things. So a big driver on sales. So sales are down about $80 million first half to second half. That's driven by recoveries and commodities with a little bit of offset those for FX. I think -- and then on the EBITDA side, and those recoveries don't forget, don't come with any margin. And then the commodities kind of flow through with very high margin. And if you look at our EBITDA, it's down 40-ish million between first half and second half. That's evenly split, right? If you think about it, we made money or on an incremental basis, had through profit on EV, which we're now showing as an overall loss for the year still showing as an overall loss, slightly lower. So, that differential is about half of that. The other is really just the lower flow-through from commodities that we were expecting to continue to decrease, which now we don't see. You really look at the base traditional business, it's down on sales and about breakeven on profit. So when you look at those, that decremental is actually really, really good. So when you kind of parse it apart, I would say the business still in the back half, we show a pretty sizable improvement on a base organic sales level.

Got it. That's helpful. Then all of the segment margins were really good, except Power Technologies seemed to be a pretty weak margin there. What's going on in that segment? Is that some of the EV investments? And how should we think about the trajectory of that?

Yes. So it's two things. So that business, we continue to launch and bring up to scale on the battery and electronics schooling. So, we expect that to improve in the back half as our customers continue to move through that launch cadence. On the traditional side, right, so, the difference in our Power Tech business versus some of the other businesses, that's a very diverse business from a commodities perspective, and from just the sheer number of part numbers we have versus, say, the light vehicle driveline business. Some of this is also driven by our ability to continue to have and get the recoveries. We see that those recoveries and things continue to work. We'll see some more of that benefit coming in and catch up in the back half of the year. So we do expect that the margin profile and the conversions in that business will improve in the second half versus the first half. .

Your next question comes from the line of Noah Kaye with Oppenheimer.

Hey, thanks. I guess first, just a follow-up to Colin's question around the second half. And I just want to unpack it a little bit further. Excluding commodity, what are you actually assuming in terms of second half versus first half on organic sales? Are you assuming basically flat organic sales first half to second half? Is it getting a little bit better? It will be because, based. Yes, go ahead.

I'm sorry. Yes. Organic sales will be down a little bit first half to second half, but that's primarily driven by lower recoveries on lower gross inflation in markets more or less flat.

Okay. All right. I'll take that offline. But congratulations on the e-Axle award. I'm just curious a little bit about the content there. I know you can't name the manufacturer, yes, it sounds pretty significant. So I just would love to understand your full content on this. You're supplying the Rigid Beam axle. Does this potentially include motor and inverter, is that sort of an option to add on? Maybe you can talk a little bit about the content and how this is leverageable.

Noah, thanks for the question. This is Jim. As you allude and I mentioned, I really can't go too far out there in terms of specifics on the customer for sure, but even the content for clarification, and for reference for everybody and the key with us is when it's in-house supply of electrodynamics there's a lot of opportunity for people to back into potentially what the technology would be, and we're not going to get out in front of any of our customers, probably more than most suppliers. So, what I can tell you is that as I go through -- as I went through in my prepared remarks, our suite of electrified products, the only thing I'd add to it is the e-Thermal piece, and we call it the 4-in-1 system. There are strong elements of those perform one, I just can't be specific on which ones today. So it will be definitely the mechanical as well as portions of thermal and electrodynamics.

Okay. Great. I mean maybe just the second part of my question about how you see this is leverageable to future RFP activity to get this high-volume award to be designed in. What do you think this might mean in terms of the growth of the EV business from here?

Well, starting -- kind of as a starting point. What it certainly does is it confirms what we all know by now, but I'm going to say it anyway, is that customers like they have for years in the axle business and the seat business and all sorts of other businesses, they're going to have a bit of a pivot table of what's going to produce in-house and what they're not going to produce in-house, et cetera, et cetera. So as we've been saying since 2016, we doubled down in 2018, we had high confidence with our partnerships with our customers that there was going to be a place for our e-Axle business, e-transmission business, but you had to have the full capability to create value. What it means to us is that as we're across all of the end markets, the scaling on certainly on engineering, the scaling on components, the scaling on how to launch the product, the scaling on having a global footprint to support global programs that I could go on and on and on. That's what the whole thesis was from the very beginning. And obviously, the thesis just came together directly like we expected it to. The most important thing is the institutional learnings of our company. I mean our company now versus where we were six or seven years ago when it was pure mechanical very, very good mechanical engineering company. Now you kind of go across our company, and it's almost figuratively half and half when you think about electric dynamics and mechanical that you have those capabilities. Why is that important? When you're facing off with your customer and you're trying to create value for them to help them sell more vehicles in the long haul, you put them in a much better position because by now, we're taking all the lessons learned of all the bus market products we have in the field, all the medium-duty truck products we have in the field, off-highway products we have in the field, and this is just a good representative example as the inflection point came to the light vehicle truck market, which is where we participate, we don't participate in pass car is that we were prepared and were able to create value with our customers to give them high confidence that they were going to win in the market with their electric vehicles and specifically electric truck vehicles.

Your next question comes from James Picariello with BNP Paribas.

Hey, guys. This is Jake filling in for James. First, if you could just talk through the net cost inflation dynamics. It looks like everything was fully offset in the first half, and you have about a $50 million headwind in the second half. Am I thinking about that right?

Yes, that's correct. I mean we had a little bit of net inflation in the first half, just kind of rounds away. But -- so yes, we are expecting to see the net $50 million in the back half. So the big driver is in the first half of the year, we continue to see over recoveries from the prior year coming through. And we don't expect that obviously to continue in the back half. And so what's showing through in the back half is sort of the net unrecovered inflation number that we expected for the year despite the lower overall gross cost.

All right. Thanks. And then just a follow-up on the e-beam or the beam axle win. Could you give us some more color on the timing from when you expect this to launch and the overall investment required to support a higher volume program like this?

Yes. So we can't talk specifically about timing, but I can tell you that it would be outside of our traditional three-year backlog window. And then obviously, an award such as this does come with an increased amount of investment, both on the period cost side and on the fixed capital side. .

Your next question comes from the line of Ryan Brinkman with JPMorgan.

Good morning. And thanks for taking my questions. It seems like you're winning more of these light vehicle driveline awards as opposed to a couple of years ago. I thought it looked like maybe you'd benefit more from electrification on the commercial vehicle driveline side or from hybrids or maybe battery cooling plates on the light vehicle side. So where would you say that the -- either the light vehicle e-beam axle or the light vehicle, call it 3-in-1 or 4-in-1 electronic drive unit opportunity? Were those sorts of fit in kind of rank ordered in terms of the electrification opportunities for the whole company.

Great question. A little bit difficult to answer, to be honest with you, but I'll give it my best shot. The best way to kind of -- I hope, illustrated for to the audience today and yourself is that if you took a snapshot in time like 5 years ago, where a company like Dana would have been having the various RFI that turned into an RFQ with our customers that turned into an internal combustion engine or diesel engine type of driveline sourcing situation. It's essentially the same thing for electrification today. Almost everything that comes at us has an element of mostly electrification, maybe some hybrid to it, but it doesn't matter. The point I'm trying to make is it doesn't matter anymore end market that we're participating in. All of them are coming. It's just a matter of -- are they -- do they set up, for example, in the commercial vehicle segment did some of our commercial vehicle customers have first-mover position, get some stuff out to the market using what we call a direct drive solution, which basically is a bridge off of a traditional architecture for an ICE vehicle and they got that, and maybe that's okay for 2 to 3 years. And therefore, no incremental new sourcing has happened since or anything that we want to talk about this happens since. In the light vehicle standpoint, there -- maybe they're going a little bit faster directly to a full e-Axle solution, which, by our definition, and e-transmission, depending on which application will be the most efficient solution. Therefore, the sourcing pattern seems like it's more prominent right now, but it's really not. It's all of the end markets are sourcing and electrification these days. That's just how it's going.

Okay. Great. Very helpful. And maybe just lastly, I'd like to ask about 2 of these kind of related comments on the slides. One is on Slide 12, pertaining to higher sales in '23 due to cost recoveries, hindering margin? And then the other comment on Slide 13, referencing gross inflation and related recoveries are now expected to be lower than the prior estimate, but the net impact from inflation on the full year profit being the same. So with margins for the whole sector, lower -- the supplier sector lower than where they were pre-pandemic in part given this phenomenon. If I to ask like, is lower inflation because we hear about these headlines about lower inflation. Is that the answer really to restoring supplier margins? Or would that just simply be offset by lower related recoveries such that you need to rebuild margin by some other means, such as fixed cost leverage or a pivot toward intrinsically higher-margin products, et cetera? Or should investors not even be too bothered about getting back to pre-pandemic margins because margins might be structurally lower now because of all this low or no margin pass-through of higher cost and maybe inside we should focus on return on invested capital or cash and cash returns? Or just kind of how are you thinking about that? .

Yes. Ryan, I think you hit it right on the head. So I think as you think about the inflation effect on the business. It has -- even if you were to recover 100% of your inflationary costs, which would keep your total profitability the same, you're going to have a margin squeeze because the customers are not paying any margin, any profit on those costs. And in fact, if you look at us this year, right, we still expect to see a $50 million net headwind. So that not only do we have the margin impact of just -- if we were to recover dollar for dollar, we haven't recovered dollar to dollar. So I think when you think about the supply base, I think it's going to be more important over the longer term. Over the longer term, as all the programs turn over and things get repriced, and all the costs get built in, I think you'll see margins start to move back to where they may have otherwise. But I think that's a long road. I think the better metric to be thinking about is total profitability, total amount of dollars generated and what that return is. Because, our view is as we move through, especially as these large programs are now rolling on and we're seeing them come through and we get them repriced, while we're recovering those added costs, we're not recovering all that margin. But what we are doing is getting these programs back to an equal or better economic return. So I think as you think about return on invested capital, that's a really good way to think about these programs and the way we are continuing to think about them because margin as a percentage is, I think, going to be -- continue to be lower than what it was pre pandemic.

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

Hi, good morning. Thanks for taking the question. Jim, I want to start with a high level, please. I think the theme that we're seeing from some of the legacy automakers on EVs, seen this week in earnings is it's just a tougher environment for them on the EV. This EV euphoria has dissipated, volume targets are getting pushed out for just pushing out some of the volume targets on EVs. There's an increased push to be a bit more efficient on spending, maybe more reuse of architectures. How does this impact. Are you seeing automakers change their focus on the light vehicle side on vertical integration? I mean, this used to be very heavily focused on vertical integration. But perhaps with the idea that if there just isn't enough volume those volume targets are getting pushed out, does that maybe change the way that some of the automakers are looking at vertical integration maybe opens up more opportunity for you?

That's great questions. A lot to unpack there, but I'll do my best. The way I see it, first of all, in terms of the volumes, I absolutely follow the same commentary that you follow as it relates to that. But at least from our line of sight, at least in the truck business, and I think we have to remind ourselves of that quite regularly. Truck business versus car business is two different things, right? And at least from the truck business and where we see electrification going, at least from our line of sight with our customers, I think they see it going as well. It still is nothing but green shoots and positive. So I'm not trying to market a positive story there. That's just the facts as I see it based on a bunch of other data points. As it relates to running the company and how Dana operates as well, the beauty of the way we've set the company up, as you know, over the last 6 to 7, 8 years is this leverage the core strategy the priority of the enterprise strategy is to leverage not only people capacity, but also equipment capacity and engineering capacity and so on and so forth. And a lot of our products and components and so on and so forth, we will be able to balance, I'll call it almost like balancing a line balance in a plant, you can line balance your capacities for all the things I just referred to. -- protect the company and actually benefit the company moving forward. So maybe you weren't going so directly down that the way I see it is there's plenty of opportunity for us to move forward, and we're very bullish that there's going to continue to be the same balance, if I can remind the audience perhaps the same balance on axles being in-house versus outsourced. There's going to be some form of balance of that for years to come. And what's the important point to remind everybody, it's been that way for decades. There's plenty of axle business that's been in-house across end markets in the past. There'll be plenty of that in the future. But there will be plenty on the outside because there's plenty of use cases, companies such as Dana that has such a reputation and capability, especially in areas such as the off-road enthusiast market, the truck business, truck business and the commercial vehicle segments, the consumers and dealers in the fleets. I mean, they don't just pick us because we're a commodity. They pick us because we help them sell trucks. So that's not, in my view, is not going to change. If anything, we're going to benefit from it. Because of what we've done in electrification. We're not guessing at it. We've been doing it now 3, 4, 5 years in production. So I feel very strong about it.

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

Thank you very much. So my first question as we start thinking about 2024. I'm curious if you share your thoughts on what is sort of like a good starting point or a good pace to sort of like build our initial forecast? I guess it's more the first half where 2023, we've had some better-than-expected margins? Is it more the second half because you would have, I guess, the full impact from the EV investments as well as some net unrecovered inflation whereas like in the first half, you recovered some inflation related to last year? Or is it sort of like the full year? I'm just curious to what extent you think the exit rate that you're essentially implying for this year? -- is sort of like the right way to think about the business? Or is it would it be better than that?

This is Tim. We're just trying to get through 2023 here before we get into 2024, but I'll try to do my best for you. I think the way to think about this is really from our full year forecast and sort of how it implies us coming out of '23 and into '24. Earlier this year, we gave a longer-term view. We still see that view as being where we want to get the company. And I think the company's performance and the raise in guidance here out of '23 just reiterate the -- makes us more confident in our ability to get there if that helps you in sort of planning around '24 .

Yes, it does. I guess another way to ask maybe is it seems slow out the way you're sort of guiding now what will be left by the end of 2023 in terms of unrecovered inflation both material and nonmaterial, and what would be sort of like the path forward to or I guess, the likelihood of recovering those in 2024?

Yes. So in terms of unrecovered inflation, we continue like this year, we'll have another $50 million on recovery, inflation. So that -- again, until we sort of see all of the programs really work their way out, I don't think you could say that, hey, we've gotten everything recovered. I think we continue to work with all the customers to go get recoveries, but that's going to be with us for a little while. On commodities, they tend to ebb and flow through the regular business and those, the agreements and processes that we have in place are working extremely well and would expect that to continue.

Great. Thank you.

Okay. Well, hey, thanks, everybody. This is Jim. Thanks, everybody, for joining the call. As always, we appreciate your attendance and interest in Dana. Obviously, as a continuation from the strong Q1 results, you can see from today's update that Dana is not only trending extremely well. We're progressing to a trajectory of the company record financial performance similar to what we delivered in 2018, 2019 and had financially guided to 2020 prior to the COVID shutdowns, which commenced obviously, in March of 2020. What's important to note, though, is Dana is very unique. Dana over the same period of time, not only was the first mover in establishing in-house e-powertrain electrification capability, we had the courage to never waver from this commitment throughout the -- from the -- what I argue was the three-year black swan event in the B2B mobility supply industry. Wavering from the enterprise strategy and de-committing from electrification would have been the easy answer. However, as we can tell now, it definitely would not have been the right answer. Today into addition to the tremendous revenue growth we've had over the last six years, improving our earnings intensity, Dana is clearly a winner in electrification and a supplier of choice for all mobility segments. As electrification volumes continue to accelerate and they will, Dana will continue to be energy-source agnostic, partnering with our partner customers in both internal combustion engine and electrified vehicle manufacturing for years to come and to win. With your -- again, thank you for your time and attendance. We look forward to talking to you next month -- or next quarter. Thank you.

This concludes today's conference call. Thank you for joining us. You may now disconnect.