Dana Incorporated (DAN) Earnings Call Transcript

Good morning, and welcome to Dana Incorporated's Third Quarter 2026 Fiscal Webcast and Conference Call. My name is Fern, 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 a guest. At this time, I would like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations and Corporate Communications, Craig Barber. Please go ahead, Mr. Barber.

Thank you, Brian, and good morning, and welcome to Dana Inc.'s earnings call for the third quarter of 2026. Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from what we discuss today. For more details about the factors that may affect future results, please refer to our disclaimer and safe harbor statements, which can be found in our public filings and reports with the SEC. You will find this morning's press release and presentation posted on our investor website. As stated, today's call is being recorded, and the supporting materials are the property of Dana Incorporated. It may not be recorded, copied or rebroadcast without our written consent. With us this morning are Dana's Chief Executive Officer, Byron Palster; and Timothy Kraus, Executive Vice President and Chief Financial Officer. Byron, I'll now turn the call over to you.

Okay. Thanks, Greg. Good morning, everybody, and thanks for joining the call. I'm excited to share progress on our third quarter results. If you look at the business, continues to perform well, illustrated by solid third quarter results, really driven by continued focus on productivity gains, supply chain efficiencies and commercial discipline. Sales in the quarter came in just over $2 billion, which is an increase over Q3 of 2025 of $121 million. Our EBITDA was $218 million, which is up $56 million versus the same period last year. And our margin is at 10.7%, which is a 220 basis point improvement over the same period last year. So really proud of the team for delivering solid results here in Q3. Our cost savings program is on track to deliver $325 million here at the end of Q4. You'll remember when we launched the program in November of '24, our target was $200 million. We're going to come in at $325 million here by the end of the quarter. So far year-to-date, the team has delivered $60 million against that target, which brings us to $320 million program to date. So pretty much complete with that program with $5 million left to deliver here at the end of the quarter. I think this is also a great demonstration of the cost discipline and efficiency focus that the company continues to maintain. And it's really what gives us the strong confidence that we'll be able to deliver the synergy targets that we've put out there relative to the Eaton merger, which I'll come to here in the following slides. Regarding share repurchases, we've increased our repurchases for 2026 to a target of $469 million. In the quarter, we bought back 6.6 million shares or $200 million worth of capital that we've returned to shareholders. Year-to-date, that brings us to $369 million with $100 million left to complete here in the calendar year. Program to date, we are just over $1 billion at $1.2 billion of our $2 billion authorization, which we plan to complete in the first half of 2029. Regarding share repurchases post closing of the Eaton transaction, I know that will be a question for the folks on the call. We have yet to have a final decision on the post-close direction of buybacks. So we'll continue to keep you informed as that situation evolves. And then finally, the Eton Mobility transaction is on track and pre-closing share repurchases, as I mentioned earlier, have been increased. So if we go to Page 5, turning to the Eaton Mobility transaction. Look, we continue to view this as a highly strategic combination of Dana and Eaton. As we've shared, the companies have very complementary product portfolios, customers and manufacturing footprints. And we really see this combination as a great opportunity to accelerate our Dana 2030 plans that we've shared with you. As previously shared, the combination is structured as a split-off and Reverse Morris Trust transaction. It's intended to be tax-free for both the Dana and Eaton shareholders. And given the split-off structure of the transaction, we expect an orderly distribution of shares to both -- to Eaton shareholders that are interested in new Dana. Our target for synergies is $250 million of run rate within 24 months post close. The teams are working hard on the details around those plans. But as we've shared in previous calls, we feel really confident in the $250 million. And with each day of integration work that we're doing, our confidence only increases that we'll be able to deliver that type of value through the combination of these companies. In addition to the cost synergies, I have a slide to share a little bit of our thinking relative to sales synergies, but we are confident that the combination of these companies and the strong product fit and combined sales force is also going to deliver significant top line synergies for the combined companies. Through the transaction, we'll maintain an attractive net leverage of 1.6x, which is inclusive of the additional $100 million in share buybacks. The transaction is on track to close around the end of the first quarter of 2027. And all of our regulatory approvals have been achieved with only one outstanding, which we expect also to get closed here shortly. If we go to the next page, just to give you a visual of the time line. As I mentioned, here in Q3, we're pretty much through the regulatory approvals with only one remaining. Our focus throughout this time line is obviously on continuing to execute the business, which the team again has demonstrated with a solid Q3 result. December 7 is when we expect our special shareholder meeting to take place. And then mid-February, we'll obviously be back in front of you with our Q4 and total fiscal year results for 2026. And we're targeting the transaction to close around the end of Q1 2027. So very much still on track to deliver the combined companies here. If you go to the next page, again, I want to keep this framework in front of you in terms of how we're thinking about the value creation opportunity of Dana and Eaton coming together. So if you think about our Dana 2030 plan that we've shared with you in the 5 pillars, 3 of those around growth, 2 around efficiency and margin expansion. If we look at each of these pillars, we continue to see opportunities of the combined companies to accelerate the goals that we have in place, be it on traditional product growth through the expansion of the product line that Eaton brings to bear. Our aftermarket growth, I think we've shared with you that the combined Dana and Eaton will basically double our presence in the aftermarket, and we see ways to continue to grow that by leveraging the expanded product line as well as the expanded sales force in the field to help us drive top line growth. Or if you look at manufacturing excellence, which is another example where we've shared with you on the Dana 2030 plan, our activities around automation as one example. And we see great opportunities to take that strategy more broadly across not only the Dana footprint, but the Eaton manufacturing footprint as well. Again, our sales target of $14 billion to $15 billion through the combination is where we're driving. If you go to the next page, Page 8, just to give you a quick update on Dana 2030, our manufacturing excellence pillar and automation specifically. As we look into 2027, we have 11 plants that are executing various automation projects. And between those automation projects, and those could be robots, cobots, AMRs, et cetera, 38 have been deployed, and we see another 56 of those opportunities being deployed within the calendar year, delivering a run rate savings of $20 million. So if you just think about this activity within the scope of Dana, we very much see that the Eaton manufacturing sites are on the same journey kind of at the same starting point. And so our ability to take the capability we're building here to deploy automation and the lessons learned and deploy it not only across the broader Dana footprint, but the Eaton footprint is a huge opportunity for us. So that's just one example of the synergy opportunity through the combination of Dana and Eaton that we're actively pursuing. If you go to Page 9, just to talk a little bit about the growth opportunity and the top line synergies that we see. So beyond the cost synergies that we're focused on, we do see significant revenue synergies. And just to give you a bit of a flavor of what we're seeing from an aftermarket perspective, as an example, we have worked hard to grow our big box retail relationships on the Dana side. And I think we've shared several examples of our ability to expand the Spicer branded products into those big box retailers. Well, now with those relationships established, our ability to take a broader product portfolio to those customers and bring the eMobility products to bear is a big opportunity for us. Likewise, if you look in Europe, we have a much larger European aftermarket presence on the Dana side. And again, we see the same opportunity to bring the Eaton Mobility products to those channels and geographies. If you look on the commercial vehicle and light vehicle side, taking advantage of Eaton's fleet sales force and leveraging that team to also bring to bear the Dana Driveline product is a big opportunity for us. And then on the light vehicle side, our ability to leverage the global OEM relationships that we have and again, bring the Eaton Mobility product offerings to those customers, we see as a big opportunity. So as we continue to work the cost synergy detailed plan, we're also building the plans around how best to capture the top line opportunities that we see through this combination. And then lastly, if you go to Page 10, I did want to take an opportunity to give a brief update on the commercial vehicle market, where we are encouraged that we continue to see robust demand in both the Class 5 through 7 and bus markets as well as Class 8. And in both of those markets, we're seeing elevated demand and elevated backlogs, really driven by a number of things that we're seeing in the market, be it continued investment through infrastructure projects or replacement demand supporting growth on the Class 8 side. So we're obviously reacting to this demand and capturing these opportunities, and we're really encouraged that through meeting this increased demand that we're also have the opportunity for sustainable market share gains as a result. So with that, I'll turn it over to Tim to take us deeper into the financial results.

Thanks, Byron, and good morning. Turning to Slide 12. We delivered strong third quarter results with sales increasing $121 million to approximately $2 billion. The increase was driven by stronger commercial vehicle demand, backlog conversion and commercial and cost recovery actions. Adjusted EBITDA increased $56 million to $218 million, and adjusted EBITDA margin expanded 220 basis points to 10.7%. The improvement reflects strong operational execution, including favorable mix, material cost savings, commercial and cost recovery actions and the continued benefit of our structural cost initiatives. EBITDA increased $39 million to $92 million. Net interest expense declined $28 million to $16 million, reflecting the debt reduction actions completed following the sale of our off-highway business. Income tax expense was $64 million and included a $29 million charge related to the settlement of a foreign income tax audit, partially offset by a $12 million benefit associated with post Off-highway sale restructuring actions. The loss from continuing operations was $10 million, primarily reflecting the higher tax expense and a $24 million loss on the redemption of our 2031 euro notes. Adjusted net income increased to $44 million from a loss of $5 million in the prior year period, and diluted adjusted EPS increased to $0.41 compared with a loss of $0.04 last year. Overall, the quarter reflects continued progress in strengthening the earnings profile of the business through higher sales, improved operating performance and a more efficient capital structure. Please turn to Slide 13 for the third quarter change in sales and adjusted EBITDA. Starting with sales. Third quarter 2026 sales were $2.038 billion, up $121 million from $1.917 billion in the prior year period. Volume mix contributed $87 million, reflecting strong commercial vehicle demand, favorable mix and continued backlog conversion. Performance was neutral to sales, while tariff recoveries contributed $12 million. Foreign translation added $5 million in sales, driven largely by the Brazilian real and South African rand, partially offset by the Indian rupee. Commodity recoveries contributed an additional $17 million to our top line sales number. Turning to adjusted EBITDA. Volume and mix contributed $24 million of incremental profit, reflecting strong conversion on organic growth and commercial vehicle mix. Performance added $29 million, driven by operational efficiencies, commercial initiatives and cost recovery actions and the annualization of our cost recovery -- cost savings actions contributed another $6 million. Tariffs were a modest $3 million headwind due to the timing of recoveries. Currency and commodities were neutral to adjusted EBITDA in the quarter. Bringing those items together, adjusted EBITDA increased $56 million to $218 million, representing a 10.7% margin and an improvement of 220 basis points compared with the third quarter of 2025. Overall, the quarter demonstrates strong profit conversion on higher sales with operating performance and commercial actions and cost savings driving meaningful margin expansion. Next, I will turn to Slide 14 to look at adjusted free cash flow for the third quarter. We generated $66 million in the third quarter compared with $101 million in the prior year period. As a reminder, the 2025 comparison includes cash generated by both continuing and discontinued operations to align with the Off-Highway sales transaction structure. The prior year period included $113 million of adjusted EBITDA from discontinued operations. Adjusted EBITDA from continuing operations increased $56 million to $218 million, reflecting the strong operational performance discussed on the prior slides. Onetime costs improved $12 million as we completed most of our cost reduction programs. Net interest improved by $18 million, reflecting the timing of interest and lower average borrowing following the debt reduction actions completed after the Off-Highway sale. Taxes improved by $23 million, primarily due to the loss of the off-highway profit contribution as well as the timing of payment and jurisdictional mix. These benefits were more than offset by the absence of the prior year earnings from discontinued operations, a $20 million year-over-year use in cash from working capital and $11 million of higher capital spending. Working capital was impacted by the timing of inventory reductions and customer recovery actions, while higher capital spending supported new programs and automation investments that Byron mentioned earlier. Overall, the third quarter demonstrates the improved earnings and lower cash interest burden of the continuing business, while the year-over-year comparison reflects the absence of the divested off-highway operations. Now please turn to Slide 15 for our fully updated full year guidance. We are increasing our full year sales outlook while maintaining our earnings and adjusted cash flow expectation. We now expect sales of approximately $7.8 billion at the midpoint of the range, plus or minus $50 million. This represents a $50 million increase at the midpoint and reflects stronger commercial vehicle demand and higher commodity recoveries. We are maintaining the midpoint of our adjusted EBITDA outlook at approximately $825 million and maintaining the range to plus or minus $25 million due to some uncertainty on the cost inflation and timing of customer recoveries. At the midpoint, this represents an adjusted EBITDA margin of approximately 10.6%. We continue to expect diluted adjusted earnings per share of approximately $2, plus or minus $0.25. Our adjusted free cash flow outlook remains approximately $325 million at the midpoint, plus or minus $50 million. We continue to expect the benefits of our off-highway divestiture, including lower interest and taxes to substantially offset the loss of earnings from Off-Highway. Overall, the updated outlook reflects stronger sales, continued operating execution and confidence in our ability to deliver our earnings and cash flow commitments for the full year. Please turn with me now to Slide 16 for the drivers of the full year change in sales and adjusted EBITDA. As I mentioned, we are now expecting approximately $7.8 billion in sales and $825 million of adjusted EBITDA at the midpoint of our 2026 ranges. Beginning with sales, we expect approximately $300 million of year-over-year growth from the $7.5 billion reported in 2025. Volume and mix are expected to contribute $75 million driven by backlog conversion, commercial vehicle and aftermarket growth as well as favorable mix. Performance is expected to contribute approximately $15 million to sales. Tariff recoveries are expected to add approximately $65 million, while foreign currency translation and commodities are expected to contribute approximately $95 million and $50 million, respectively. Turning to our adjusted EBITDA. Starting from $610 million in 2025, volume and mix are expected to contribute approximately $60 million, reflecting higher-margin backlog conversion and aftermarket growth. Performance is expected to contribute approximately $95 million, driven by operating efficiencies, commercial actions and execution of our cost reduction initiatives. Cost savings are expected to contribute approximately $65 million as the remaining actions are fully realized of our $325 million program. Tariffs are expected to be neutral to adjusted EBITDA as costs are substantially covered within the year. Currency is expected to be approximately a $5 million tailwind and commodities are expected to be approximately $10 million headwind, primarily due to recovery on timing of recoveries. At the end of this year, we expect adjusted EBITDA of approximately $825 million, representing a margin of approximately $10.6 million -- or excuse me, 10.6% and an improvement of roughly 250 basis points when compared with 2025. Overall, the outlook reflects favorable mix, strong operating execution and the continued benefit of our cost actions. I will now turn to Slide 17 for our full year adjusted free cash flow outlook. We continue to expect approximately $325 million of adjusted free cash flow in 2026, broadly consistent with the $331 million generated in 2025. As a reminder, 2025 adjusted free cash flow included cash generated from both continuing and discontinued operations. Following the sale of the off-highway business, our 2026 outlook reflects the earnings and cash flows of only the continuing business. Adjusted EBITDA from continuing operations is expected to increase approximately $215 million to $825 million. Onetime costs are expected to improve compared to last year by approximately $40 million as most of our cost reduction programs have been completed. Net interest is expected to improve by approximately $75 million, reflecting the debt reduction actions completed following the off-highway divestiture. Taxes are expected to improve by approximately $60 million and working capital and other items are expected to provide an approximately $50 million in year-over-year benefit. Capital spending is expected to increase approximately $45 million to about $300 million, reflecting the timing of new business launches and the investments supporting operational improvements and automation. Overall, the outlook demonstrates the stronger earnings and cash flow generation profile of the continuing business, supported by lower onetime costs, interest taxes and improved working capital. I will now turn the call back over to Byron for his closing remarks.

Okay. Thanks, Tim. So in summary, on Page 18, it's really about 2 pillars of where we're taking the company. So first is obviously focused on delivering our 2030 plan and making sure that we stay focused on executing for our customers. You can see in the quarter, the team delivered profitable growth and expanded margins. We continue to execute at a high level operationally and deliver strong free cash flow while strengthening the balance sheet. Additionally, it's about bringing together 2 world-class companies in Dana and Eaton Mobility and creating a real market-leading global powertrain systems provider. As highlighted today, our transaction is on track to close roughly around the end of Q1 2027. and will be structured as a split-off structure and the synergy plan is well on track to deliver the $250 million. So with that, we're happy to take questions from those on the call.

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

This is Thomas Ido on for Tom. The first one is, so one of your D3 customers has been dealing with elevated inventory days in recent months, and we've seen some recent production forecast cuts for this customer by S&P Global. Is there any downside -- potential downside risk to your light vehicle production on some of these key platforms? Or generally, how should we be thinking about that going into 2027?

Yes. Thanks for the question. So yes, I mean, we do see some softness on a couple of the light vehicle platforms in North America, but we're also seeing some strength in a number of other ones, including Super Duty as they continue to ramp their launch in Oakville and continued strength in Bronco. So while there's -- some of which is contributing to some of the mix changes.

Yes. I would just add to Tim's point, as we've highlighted in the deck, the commercial vehicle market also remains robust. So if you kind of look at all that together, we see top line tailwinds.

Very helpful. And then if I can do a quick follow-up on -- is there any guidance you can give us as to how we should be thinking about some potential incremental costs post deal close? I know you guys have the synergy implementation costs of less than $250 million, but any additional cost buckets we should be thinking about potential restructuring or integration costs?

Yes. I mean we've called out that we'll end up spending -- so relative to the transaction itself, we will incur about $250 million worth of costs. Some of those are currently being incurred and will continue to be incurred through the end of this year and into next. And then cost to obtain the synergies are somewhere in the $200 million range. Now when you look at our our forecast or the view of the combined business. We have included both of those amounts in our 2027 view. And so we also think that the -- from a net perspective next year, we do see that the synergies will contribute about $75 million. But we do have that $200 million coming in over the 24-month period post closing.

The next question is from the line of Rajat Gupta with JPMorgan.

Just wanted to get a little better granularity on the maintained full year EBITDA guide. I'm curious how much -- are you able to quantify how much was the inflation or just overall commodity freight inflation hurting the third quarter number? And how much have you dialed in for the fourth quarter relative to your original expectation? Any clarification on that would be helpful. And I have a quick follow-up.

Yes. I mean commodities aren't the largest driver. It's general other inflation. So think of energy and freight are probably 2 of the larger ones. Now some of that's also included in some of the commodity indexes that we have. But generally, what we're seeing is a significant uptick. We saw that in the third quarter. Most of our agreements with our customers, while they provide for recovery on actual commodities relative to the index, they don't have general cost or inflationary recovery mechanisms. So we're in working to get recovery, which usually involves price increases or at least temporary price increases in order to get those recoveries. I would say we're maintaining our view that the midpoint of the range should be at $825. We obviously have a path to get there, but there's a lot of work that the team is doing to continue to execute to, one, offset those costs and to be able to get recoveries of some of those costs from the customers. Sometimes the timing on those recoveries is delayed, much like we have in a commodity business. But the team is laser-focused on making sure that we're able to address those cost pressures as they come.

Understood. That's helpful. And just to follow up on the '27 comments. I understand the revenue backdrop is still somewhat uncertain. I mean you clearly have the commercial vehicle recovery that's intact. Based on what you're seeing right now, and we understand some of the synergies that you've guided to. But just on the core Dana business, any early read into how we should think about just margin expansion for the core business? Are you able to size that at all based on what you're seeing or what you're expecting from a revenue outlook perspective?

Yes. So obviously, we think the commercial vehicle, if you look at Page 10, you can see kind of our view on at least North America, which for us is our largest market from a commercial vehicle perspective in terms of where we see the market. The slide is the same as what we showed in March during our Capital Markets Day. So there is a marked improvement in our view of what both the Class 5 to 7 as well as the North American Class 8 production volume looks like over the next 2, 3 years. And so some of that will be obviously in '27 and contribute to sales growth. Look, we still have a target that the combined company will be able to get to 15% margins by 2030. And next year's growth is part of that.

Yes. I think -- I mean, if you think about the levers in our Dana 2030 plan, be it aftermarket expansion, manufacturing efficiency. So all those drivers are obviously still in front of us and a key focus for the team, and we expect to see another step improvement in margin performance as we go into '27.

Yes, I would agree, right? We should be higher, obviously, than where we're at today at the 10.6%...

Your next question is from the line of James Mulholland with Deutsche Bank.

On the buyback, it's nice to see another $100 million guidance for fourth quarter. So rough math, that gets you to about $1.1 billion of the $2 billion outlined through 2030. I was wondering if you could give us some sense of perhaps what work, I guess, has to be done to ensure that you can stay tax-free RMT structure and also then restart the repurchase? Like what do you have to see to do that? And I guess, if you can't feasibly do it, could you remind us, are there other options for shareholder returns? You can do special and regular dividends? And I guess, would you look to be lever first? Or can you do both of those concurrently?

Yes. So in terms of the buyback post sale, so we're working with Eaton to get a plan that would allow us to do that. So we continue to work. They're constructive discussions. But at the end of the day, the decision is really they need to be comfortable with it. So I think we'll continue to update the -- all of you and the market in general as to where we stand with those discussions, but they continue to be ongoing. In terms of post transaction, the -- we can do -- we'll maintain our -- obviously, our regular dividend. We can do special dividends. And then to the extent we aren't able to restart those buybacks for those 24 months, we would use the cash to then delever. If you go back, we said, look, we would -- given the differential with the Eaton Mobility cash flows, we do believe -- regardless of when we can do the buybacks, we will complete those buybacks in 2029, and we would plan to then be able to do -- restart and do a substantial amount to finish off the $2 billion in 2029, if we weren't able to restart after closing.

Great. That's helpful. And I guess as a quick follow-up. As we think about the Eaton synergies, could you give us some sense of the breakdown of what that anticipated $250 million looks like? Now you have the $75 million next year. So is that going to be mostly duplicate SG&A functions, the lower-hanging fruit and then maybe I don't know, 50% of the remaining is manufacturing and purchasing and then the rest is engineering? Or is there a better way to think about it?

No, I think that's a good way to think about it, right? So there's going to be some, let's say, early opportunities, lower-hanging fruit, call it. So think about duplicative corporate structure that just won't come over, our ability to do integration on the IT side. Purchasing is a big lever for us. So some opportunities there in the near term. And then some of the things that take a bit longer, think about manufacturing footprint consolidations, consolidation of engineering sites, et cetera. So we see a significant step in '27. -- again, we're targeting roughly $75 million and then in '28, kind of getting at the rest of the opportunity.

Yes. If you go back, I think we laid this out last quarter in the deck, and you can see kind of -- we didn't find numbers, but you kind of have the Harvey balls. You can see the major buckets and then kind of how we're thinking about '27 versus '28 expected timing.

Your next question is from the line of Joe Spak with UBS.