Dana Incorporated (DAN) Earnings Call Transcript

Good morning, everyone. My name is Rajat Gupta. I'm a member of the Automotive Equity Research team at JPMorgan. Very pleased to have with us Byron Foster, President and CEO of Dana Corp. Byron has a few slides that we would like to run through, and then we'll get into Q&A. Thanks, Byron.

Great. Thanks for having me. Excited to be with you today. I promise I won't bore you with a 100-page PowerPoint, but I had a couple, 3 slides that I thought might be helpful to frame the discussion today. So starting with our second quarter, we reported second quarter results a week ago, had a really good quarter. Team remains focused on execution. We obviously have a lot going on with the company, and we'll talk about that, I'm sure, in today's conversation. But team remains focused on delivering solid results. You can see sales of just over $2 billion and margins came in at 10.3% or $207 million. Cost savings has been a big part of our story over the last 1.5 years or so. We delivered $19 million of incremental cost savings in the quarter, working towards our overall commitment of $325 million that we put in place at the start of the program and continuing to work on some of the stranded costs that will be a result of our off-highway spin. So making good progress there. Share repurchases was a big part of our story. When we announced the Eaton deal, we also announced that we would have to pause our repurchase program for 24 months. We were excited to announce that we are restarting the repurchases that will take place between now and the close of the deal. So that will be worth roughly $200 million that we will execute between now and the end of the calendar year. And that will put us on track to our commitment of $2 billion by the end of 2029. There's a second piece of the repurchase story, and that's our ability to repurchase stock post-closing of the Eaton deal, and we're working on a solution there to see if we can restart that part of the program. So more news to come on that front. And then also in the quarter, we gave an update on our Dana 2030 plan, which is a plan that gets the company pre-Eaton to a $10 billion top line and margins in the kind of 14% range. So we gave some updates on some wins on the aftermarket side as well as some work we're doing on the defense side of the business. So overall, a solid quarter and really appreciate all the hard work from the team to deliver that result. Next, just to talk a little bit about Eaton Mobility. That's obviously a big news for us and excited about the combination of Dana and Eaton Mobility. We expect that transaction to close in Q1 of 2027. Post close on a pro forma '26 basis, that will make the company $11 billion in top line and 15% EBITDA margins. As part of the transaction, we've announced $250 million of run rate synergies at the end of the second year of closing. So we gave a little bit more color in the earnings call on that $250 million and how we expect that to be delivered. And then another big part of the message around the combination is the -- in our aftermarket position, we'll have a $1.7 billion aftermarket business with the combined companies. And then just in the graphic there, you can see the picture of the truck, really wanted to highlight the complementary products that come together as part of this combination with the blue driveline products being traditional Dana product lines. And then in the green there, you can see the transmission business that is coming as part of Eaton. And then it's not shown here, but also as part of the engine, we both supply various components into the engine system. So we really see this combination as complementary on many fronts, but from a product and technology standpoint, a lot of synergy between the 2 groups. And then my last slide is just kind of the key messages and the key focus for Dana. So one is staying focused on execution and delivering our Dana 2030 plan. That plan is about top line growth, top line profitable growth in our traditional markets as well as aftermarket and some of the adjacencies that we see in the business. It's also about execution and continuing to drive more efficiency in the business on the cost side. And then obviously, getting ready for day 1 with the Eaton transaction closing in Q1 of '27, working on the share repurchase plan. The deal, I should highlight, will be structured as a split-off, which we think will minimize the churn in the stock as the transaction closes in Q1 and then making sure we're ready to deliver on what we think will just be a fantastic combination between Dana and -- so I appreciate you giving me a couple of minutes to kind of set the stage on the slides and happy to get into the conversation.

Got it. That was a very helpful quick overview. Maybe let's get right into just the combination. The business -- the mobility business is close to complementary right across the driveline, transmission, engine components, sitting alongside what you already do in axles, driveshafts. Could you walk us through why this is the right combination? And what it delivers that the organic plan perhaps could not? I mean is this -- is the biggest unlock to scale in commercial vehicle, aftermarket, level selling or maybe faster margin?

Yes, great question. I would say -- so first of all, I think the core Dana 2030 plan, we remain committed to and we believe that there's real opportunity in the improvements that we will continue to make in the core Dana business. I think the combination of Eaton only accelerates those Dana 2030 plans. If I think about aftermarket as one example, we have aspirations in the Dana 2030 plan to grow our aftermarket business, which requires investments in sales teams on the ground serving the market. Those teams we were going to have to put in place and grow organically. Those groups are in place at Eaton. So we can leverage that outreach, if you will, and provide those folks on the ground with a broader portfolio to serve those customers. So that's one example. I think the other thing is it brings a better balance between our light vehicle and commercial vehicle segments. We remain focused on those 2 core markets. This grows our position in CV, which we believe is good for the company and the overall balance in the portfolio. It brings added scale. So when we talk about synergies, purchasing is one example, where we see significant purchasing synergies by bringing the 2 companies together just via the added scale. And so there are just a number of complementary pieces. When we look at the products, and I showed kind of the graphic of the commercial truck and where the products physically connect to each other and how we can now think about and look at that more as a system opportunity to provide more efficient powertrains and drivelines to our customers.

Any initial conversations like with customers where you're starting to see some of those cross-sell opportunities? What's...

Well, we're still in a stage with the transaction where we can't gun jump and really get into the specifics with our customers. But I would just say that the transaction has been met very favorably by our customers as we obviously have had conversations about the deal and why we're doing it. And I would say there's a lot of support from the combination of the companies.

Understood. Maybe like since you're on the Eaton Mobility topic, just going into the synergies a bit more detail. $75 million year 1, $200 million realized by year 2 and then $250 million into year 3. Year 1 seems to be some of the low-hanging fruit around ERP integration, back office redundant overhead costs and just lowering redundant expenses. And year 2 seems a bit of a lift, particularly around automation, procurement, logistics. Obviously, nothing is easy, but maybe you could draw some parallels from the cost saves improvements in core Dana over the last couple of years and that can provide a comfort of the execution.

Yes. I would say just -- and I mentioned it in my opening comments, but we have taken $325 million. We'll have taken $325 million of cost out of the Dana business over the last 1.5 years. So -- this is a muscle that we have developed as a company in terms of lean operations, rethinking the way we do business, rethinking the way we organize ourselves to deliver for our customers. And so this is something we know how to do. We have set up the work streams, and you mentioned the areas, right? So it's about corporate overhead structures. It's about purchasing synergies, it's about manufacturing footprint, automation improvements in the plant. So we have set up the work streams with the targets and an initial set of action plans, which are being refined and ready to execute from day 1. So we are highly confident in the $250 million of synergies that we can deliver as part of this combination. And we obviously have goals in place for a higher number that we're striving for internally because everything we obviously put on the initial plan won't bear fruit. So we're shooting for a higher number to ensure we deliver the $250 million.

Got it. Okay. And we look forward to hearing more on that once the deal is closed. Maybe just to close out on some of the dynamics tied to the transaction. Obviously, one of the biggest concerns when you announced this back in June was just some of the pause in capital return. And you have since then obviously reintroduced the buyback. Maybe help us understand what needs to get resolved to maybe restart that buyback post-close? What are the moving pieces we should keep in mind? How much is like just a tax structure question? How much is it just negotiation with Eaton? I mean, can you just help us on that?

Yes. No, that's a fair question. Again, we've restarted the buyback, and we'll buy back $200 million between now and closing or now and the end of the year, and we'll continue that buyback up until closing, which will be sometime in Q1. In terms of post-closing and this 24-month pause that we're working to eliminate, it's really a question of our legal teams and our tax teams making sure that if we reinstitute the buyback that we don't inadvertently trigger a tax event for the Eaton shareholders or the Dana shareholders in that case. So that is being worked and studied, if you will, and we expect feedback on that work in the coming kind of days and weeks. And then we'll get together with our Eaton colleagues and make a final decision. But I would say from a Dana-Eaton standpoint, we're both hopeful that we can get the buyback restarted, and it's not really going to be a negotiation between us. It will be, hey, can we do this in a proper way that doesn't trigger a tax event? And if the answer is yes, I think we'll have good news to report on that front.

Got it. I'll just pause there for a second to see if any questions from the audience here. Not at this time. So going back to like just recent results, just recapping second quarter, margins expanded again. The cost program is now within $15 million of the core Dana target, which kind of raises the question of what's the path on margins from here? Could you shed some light on what's driving the improvement at this point, pricing, mix, efficiency, automation? How much of that is structural versus still in like a catch-up phase?

Yes. So we're proud to continue to deliver expanded margins kind of quarter-over-quarter as part of the improvement plans that we've put in place over the last 18 months or so. And we've obviously talked a lot about the cost reduction effort and the $325 million. But I would say the improvements in the business are much deeper than that. So if I think about our in-plant productivity as one example and the things we're doing in automation. So that's a big work stream for us in Dana 2030. Those projects are live and being implemented kind of as we speak, and we're seeing the benefits of that begin to flow through. When I think about our product line focus on product line profitability, I showed a slide in our Capital Markets Day back in March, where we had an example of a plant where we make 80% of our margin on 20% of the parts. So the classical, hey, what are we doing with the bottom end of the tail from a profitability standpoint, and we're either fixing those operationally or engineering or design-wise or commercially. And if we don't have a path to fix, then we're exiting those product lines. So I think you're seeing the combination of all those efforts on multiple fronts come through in the results. And that's what gave us confidence to raise our guide for the back half of the year, combined with the fact that we're getting some tailwind in terms of the commercial starting to rebound and seeing some better volumes in that part of our company.

Understood. And maybe can you double-click on China a little bit. What is it the drivers of the equity income revision in the region? Obviously, it's been a tough market for many companies. Just any -- if you could shed some more light on just the weakness areas or customer mix, whether this is more temporary, cyclical.

Yes. I wouldn't see it as a really big issue for us because China is a relatively small part of our business with the majority of it being North America focused and then Europe following. So not a big piece for us, but we just saw some softness in the quarter around certain customers and vehicle platforms where the returns are pretty good for us. And so when we see the volumes softening in the period, it can have a bit of an impact. But I don't see anything structural there that we're really concerned about.

Understood. And since we are like now in the second half of '26, and this is a point in the year when people are starting to look at '27 and just the puts and takes.

Summer's over, it's crazy. So yes, we're starting to look at '27 for sure.

Sure. So what are some of the puts and takes for '27 for us to keep in mind? Any key regions, somewhat of the China piece, any key programs for us to track to keep in mind? There's obviously the whole commercial vehicle cycle.

Yes. I would say a couple of things. So we expect the commercial vehicle market to continue to improve for us. So that will be something to look out for. On the light vehicle side, we have a couple of new launches and programs that will begin to take hold in '27, be it the Super Duty volume expansion should really take hold as well as a couple of new vehicle launches. And then I would say we highlighted a couple of the applied technologies work streams where we talked about defense. We talked about powersports. So I would say you'll begin to really see some of that begin to take traction. We're already seeing some uptick in volume on the defense side for the second half of '26. That should continue into '27 and working to gain new programs in the defense space as well as powersports. And then aftermarket is another piece where you should keep an eye out for improvements in that part of our business. We talked a lot about some of the national chains where we've won some orders and expanding our footprint in North America with the Victor Reinz sealing brand. So that should continue to gain momentum. And then obviously, at the end of Q1 of '27, we're going to close on. So that will be a whole new piece. So we're excited about '27. We're obviously finalizing our plans and look forward to sharing the plans for '27 here shortly.

Yes. Maybe we can double-click on some of those items. Maybe starting with commercial vehicle. It was the largest driver of the '26 guidance raise. But it also -- I mean, just to make sure the audience is aware, I mean, sometimes like Dana's exposure is not a clean read to like just headline Class 8 builds. It skews more towards medium-duty and bus. So could you just help recalibrate the recovery for Dana's new margins?

So I would say on both the light vehicle and commercial vehicle side, you really kind of have to double-click to understand what's going on with our business compared to what the headlines may say. So on the commercial vehicle side, Class 8 is obviously improving, and we have some tailwind there, and we participate in that space. But we also participate in kind of medium-duty and bus segments, right? And we're seeing some softness in those spaces. South America is another big region for us from a commercial vehicle side, not kind of seeing the same kind of robust growth that we're seeing in the North America commercial vehicle space or Class 8 space. So you kind of have to take all that equation into account. And net-net, we are seeing an improvement, maybe not at the same clip as just the Class 8 headline. Same on the light vehicle side, right? When you look at the light vehicle build, you really have to double-click into the full-frame truck space, which is where we focus our efforts and sometimes you can have different mix implications, if you will.

Got it. Has anything changed? I think at a conference in June, you talked about some positive trends you were seeing. And obviously, it led to like the guidance raise, but anything that's changed in more recent months around the trajectory? Or is it still pretty much on track?

Yes. I think we -- I feel great about the trajectory, and it's because we're putting in the work at the detailed level to improve the business on the shop floor. And that's why you're seeing the results you're seeing, and that's why we feel good about improving the margins in the back half of the year because we are a more focused, more efficient company, focusing on the products and the customers and the spaces where we think we can bring value and create the kind of returns that we deliver for our shareholders.

Right. And with Eaton Mobility coming in, obviously, that exposure becomes a lot bigger now with commercial vehicles. So how should we think about the combined cyclicality now when you have Eaton on board?

Yes. It becomes a larger part of our story for sure, the commercial vehicle piece, which we think net-net is a good thing, a bit overweighted to light vehicle today. And from a customer concentration standpoint, this also adds diversity to our customer base, which is a good thing. And the growth in the aftermarket piece, which will become a larger and larger part of the Dana story, I would say, is interesting and attractive for us because of the margin profile in that segment of the company as well as the fact that it tends to be more stable from a cyclicality standpoint, the aftermarket.

Right. Makes sense. Just digging into the other pieces like on light vehicles, you mentioned the Super Duty ramp next year. Given like this was not like a big incremental capital investment needed on your side given the extra capacity coming on from Ford. Could you give us a sense of the content and margin profile on just incremental volume for a program like this, which requires not a lot of extra capital at your end?

Yes. So look, this is -- you don't get many more interesting opportunities than growing one of your core platforms, incremental volume that you can flow largely through the capital structure you have in place. There was some level of incremental capital, but nothing like launching a new program. So the contribution margin on that volume should be good for us. And I would say keeping in line with what you typically see from our ability to convert incremental volume.

Understood. Just lastly, on the light vehicle programs. The incumbent base looks pretty well protected with major body-on-frame and light truck programs anchoring the business. And it also carries a meaningful like meaningful part of the walk to 2030. Could you walk us through how much of the revenue base is now committed, you would say, through the end of the decade? And what the cadence looks like for converting the additional bucket into...