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Text: Today's call is being recorded and supporting materials of the property of Dana Incorporated.
They may not be recorded, copied or rebroadcast without our written consent.
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.
A quick review of our financial results for the quarter highlights significant improvements over last year's pandemic-impacted second quarter.
In reverse of last year, when we were discussing shutdowns and lower sales, this year's second quarter, we delivered a strong $2.2 billion in sales representing a $1.1 billion improvement as our customers continue to see strong market demand and in many cases, outpaced production as supply chain challenges continue to hamper their operations.
Our adjusted EBITDA for the second quarter was $233 million, a $238 million improvement over last year.
Net profit margin was again tempered by high raw material costs and supply chain challenges.
Adjusted free cash flow was of slight use on the quarter, but was an improvement of $120 million over last year, driven by higher earnings.
Diluted adjusted earnings per share was $0.59 for the second quarter of 2021, an improvement of $1.28 per share compared to 2020.
Moving to the key highlights on the upper right-hand side of the page, we'll provide you an update today on how we're managing through the key challenges facing the mobility industry.
Additionally, we're excited to talk about a few new business wins, including electrification programs.
Lastly, I'll highlight our recent announcement to further accelerate our commitment to reduce greenhouse gas emissions and our adoption of science based targets.
Please turn to page five, and we'll begin our discussion with the ongoing supply chain challenges and how it's impacting the current cycle.
We continue to actively manage through the challenging commodity and supply chain environment as we face four key issues: higher raw material costs; semiconductor shortages impacting the production schedules of our customers; logistics constraints and higher transportation cost; and, of course, labor shortages related to COVID restrictions.
These challenges are not specific to our company but are impacting the entire mobility industry, which is seeing high demand, but production is being constrained, resulting in finished vehicle inventories for our OEM customers.
First, high input costs for commodities such as steel driven by high demand and limited supply are inflating prices across all of our end markets.
We're working to offset and recover these higher costs through our established mechanisms, but the inherent lag in those recoveries is creating a substantial margin headwind until the input costs stabilize and turn the other way.
Jonathan will highlight the financial impacts in just a moment.
Second is the semiconductor shortage that is leading to lower production volume at our OEM customers or reducing model availability, particularly in the light vehicle segment, but more recently in commercial vehicles as well.
However, end customer demand remains strong, leading directly to finished vehicle inventory imbalance.
Shipping delays and higher logistics costs continue to impact the industry and are driving higher input cost.
We're seeing this around the world to varying degrees.
Lastly, all three of the end markets are being affected by labor shortages, leading to production inefficiencies, plant downtime and higher labor cost.
We're taking the necessary actions to capitalize on this unique market dynamic of low inventory and high demand as a future opportunity for a stronger and longer duration recovery, as the input challenges subside.
Moving to slide six.
I'd like to talk to you about how we continue to successfully launch our new business backlog programs despite the challenges facing our industry.
In North America, we're excited to be supplying our Spicer SmartConnect all-wheel-drive system to a new compact pick-up truck, slated to go on sale next year.
Vehicles with our disconnecting all-wheel drive systems are designed to transition to all-wheel drive automatically and seamlessly when the vehicle system predicts slipping.
It not only enables impressive gains in performance and safety, but is also more fuel-efficient and perfect for the growing market for small pickup trucks.
Turning to slide seven.
I want to talk about new partnership for us in the electric commercial vehicles.
Dana announced the signing of a strategic agreement with Switch Mobility, which is an Ashok Leyland subsidiary focused on manufacturing electrified commercial vehicles.
The agreement positions us as their primary supplier of electric drivetrain systems, including e-axles, gearboxes, motors, inverters, software and controls for light commercial vehicles and buses in India and Europe.
Light commercial vehicles continue to present significant opportunities that lead the commercial vehicle segment shift to fully electrified platforms.
We are very excited about the partnership and will enable us to have direct positive impact on the delivery of sustainable urban e-mobility.
Please turn to page eight.
Continuing on the transition to electrified vehicles, slide eight highlights an exciting collaboration with Pierce Manufacturing and Oshkosh airport products on their new revolutionary Volterra platform of electric vehicles.
When the first vehicle rolled off the assembly line, they will feature an electric drivetrain with two Dana TM4 motors, coupled with a Dana-manufactured electromechanical, infinitely variable transmission pictured here in exploded view.
The Volterra platform of electric vehicles is engineered to channel mechanical power and battery power to maximize driving and pumping performance while helping reduce fuel consumption.
Depending on the usage and mission profile, the fuel savings could be significant.
The Volterra platform of electric vehicles not only reduces emissions in EV mode, but more importantly, are designed to help save lives.
Every second matters when responding to an airport emergency and the newly Striker Volterra.
ARFF is capable of achieving 28% improved acceleration when fully loaded with the new EV technology.
As an added benefit, the Striker Volterra vehicle results in 0 emissions driving during entry and exit of the fire station ion EV mode, so that there's no longer a need for expensive ventilation systems, within the station.
During the next several months, despite the Striker Volterra performance hybrid will be showcased at airports across the United States allowing firefighters to experience the firsthand, the revolutionary Volterra technology.
At Pierce Manufacturing, the first Pierce Volterra zero emissions pumper was placed in service in June of 2021 with the city of Madison, Wisconsin Fire Department, making it the first electric fire truck in service in North America.
The Volterra pumper is serving frontline duty at Station 8, the city of Madison's busiest fire station.
To date, the city of Madison has responded to over 500 active emergency calls with this new electric pumper.
This collaboration with Pierce Manufacturing and Oshkosh Airport Products enables Dana to expand our presence in the specialty vocational vehicle market while also opening doors to leverage these capabilities across other markets as well.
This success is in our Power Technologies Group.
Several electrified lifestyle and sport trucks have recently been announced.
Earlier this year, we highlighted our battery cooling technology with a global light vehicle OEM and mentioned that there would be more announcements coming.
To that, we're pleased to be showcasing our capabilities by supplying our advanced battery cooling technology.
Unfortunately, we can't yet mention the name of the OEM.
Our extensive range of long ThermaTEK battery cooling product sets the industry standard for innovation.
The award-winning customer design, cooling -- custom design cooling solutions feature lightweight aluminum construction, resulting in ultra clean products that stabilize the battery temperature and enable faster charging.
Turning to my final slide.
At Dana, we believe that leading the way in sustainability directly aligns with our leadership and vehicle electrification and is critical to supporting our customers as they work to achieve their sustainability goals.
That passion is reflected in our desire to advance our emissions reduction targets by developing new zero-emission technologies, delivering innovative products and driving operational efficiencies around the globe.
That is why earlier this month, we announced plans to reduce our annual Scope one and two greenhouse gas emissions by at least 50% by the year 2030, which is a five year pull ahead of our original target of 2035 that was announced last fall.
To help accomplish this aggressive goal, we signed a commitment letter with the Science Based Target Initiative, or SBTi, which aligns resources and incorporates best practices to accelerate emissions reductions.
This partnership between the Carbon Disclosure Project, United Nations Global Compact, the World Resource Institute and the Worldwide Fund for Nature, focuses on partnering with companies to guide emissions reductions initiatives using the science-based targets.
As we continue our sustainability journey, collaborating with organizations like SBTi will support us as we establish ambitious targets and identify key areas where we can further drive sustainability across our operations and our products that enable zero-emissions mobility.
Now I'd like to hand it over to Jonathan to walk you through our financials.
Please join me on slide 12 for an overview of our second quarter results compared to the same period last year.
In the second quarter of this year, sales topped $2.2 billion, delivering growth of over $1.1 billion compared to the prior year.
The doubling of sales is entirely attributed to the recovery experience across all of our segments from the height of pandemic-related shutdowns last summer, despite continuing to fuel the aftershocks in our supply chain today.
Adjusted EBITDA was $233 million for a profit margin of 10.6%, which represents a dramatic improvement over last year's nearly breakeven results, even as this performance is hampered by dramatic material cost inflation and continued supply chain challenges.
Adjusted net income in the second quarter of this year was $86 million, $185 million higher than the same period of 2020.
The diluted adjusted earnings per share was $0.59, $1.28 improvement from the prior year.
And finally, adjusted free cash flow this quarter was a use of $13 million, an improvement of $120 million over the second quarter of last year as higher profit more than funded increases in working capital and capital expenditures to support the growth.
Please turn with me now to slide 13 for a closer look at the drivers of the sales and profit growth for the second quarter.
The change in second quarter sales and adjusted EBITDA compared to the same period last year is driven by the key factors shown here.
First, overwhelmingly, the increase is attributed to the organic growth of nearly $1 billion, as our business laps the trough in sales caused by the onset of pandemic-containment measures last spring and summer.
The incremental conversion of 26% exceeds the decremental conversion from the same period in the prior year by about 200 basis points.
Second, foreign currency translation increased sales by nearly $90 million as the dollar weakened against a basket of foreign currencies, principally the euro.
As is typical, this has no impact on our profit margin.
Finally, steel prices have continued to rise at a rate much higher than anticipated.
Gross commodity cost increased by $70 million, and we recovered $45 million of this in the form of higher selling prices to our customers for a recovery ratio of about 65%.
This remains lower than our normal steady state recovery ratio due to the timing lag caused by the rapid spike in commodity prices.
These increases compressed our profit margin by approximately 180 basis points and represented the primary impediment to achieving 12% margins in the quarter.
Please turn with me to slide 14 for a closer look at how adjusted EBITDA converted to cash flow.
Free cash flow was a slight use in the quarter at $13 million.
This was a substantial improvement of $120 million compared to the same period last year and was entirely attributed to higher profit, which more than funded the higher capital requirements to support the increased volumes.
Please turn me now to slide 15 for a closer look at our revised full year guidance for 2021.
Given strong market demand in the second quarter despite the impact of the chip shortage, we now anticipate full year top line results toward the high end of our guidance range.
This represents a $250 million improvement from the previously indicated midpoint of the range and is driven by higher commodity recoveries, stronger foreign currency exchange and higher demand across all three of our end markets.
However, we still expect profit near the midpoint of our range, implying a margin of between 10.5% and 11% as the additional contribution margin from the higher demand is offsetting the higher commodity cost net of recoveries.
This also implies an adjusted free cash flow margin of approximately 3% of sales.
Diluted adjusted earnings per share is expected to move toward the higher end of our range at $2.45 per share due to lower interest and income tax expenses.
Please turn with me now to slide 16, where I will highlight the drivers of our expected sales and profit changes for the full year.
This chart highlights the key factors driving the change in expected sales and profit for 2021 compared to last year.
First, organic growth is now expected to add nearly $1.6 billion in sales, including our new business backlog of $500 million and the slightly higher end market volume increase mentioned on the previous slide.
Incremental margins are expected to remain strong in the mid-20s, providing about 350 basis points of margin expansion.
Next, we anticipate the impact of foreign currency translation to now be a benefit of approximately $150 million to sales and about $15 million to profit, with no impact to margin.
Finally, we now expect gross commodity cost increases approaching $250 million as steel prices have continued to rise.
We anticipate recovering about $180 million or 70% of the increase from our customers in the form of higher selling prices, leaving a net profit impact of $70 million, which will compress margins by more than 100 basis points.
Please turn with me to slide 17 for more detail on how we expect this year's adjusted EBITDA will convert to cash flow.
We expect full year adjusted free cash flow of about $275 million, representing an improvement of more than $200 million compared to last year.
The growth is entirely driven by the profit I just outlined on the prior page and is partially offset by the higher capital requirements to fuel the sales growth.
Please turn with me now to page 18 for an overview of the debt refinancing we completed in the second quarter.
In April, we were the first major mobility supplier to launch a green bond here in the U.S. The proceeds were allocated to finance green projects, driving our stated sustainability and social responsibility initiatives including; reducing greenhouse gas emissions; expanding the use of energy-efficient production processes; and designing, engineering and manufacturing products that enable the electrification of the world's mobility fleet.
Then in May, we launched our debut bond issuance to the European debt capital markets with a EUR325 million placement to refinance our 2026 dollar notes that had been swapped to euros.
Both of these actions lowered our borrowing costs, extended our maturities and will serve as more permanent components of our debt stack as we deleverage in the coming years.
This hands-on interactive technology experience will be held at our world headquarters in Maumee, Ohio, and broadcast virtually.
The event will feature our industry-leading EV products as well as a selection of electrified vehicles and equipment powered by these systems.
Our goal for the event is to provide further insight into how we see the transition to electrified mobility unfolding in the coming years and how Dana's leadership in this evolution will drive outsized growth and financial returns for our shareholders.

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dana inc q2 adjusted earnings per share $0.59.
q2 adjusted earnings per share $0.59.

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