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Text: 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.
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.
As we jump right in, I'd like to share a quick overview of our results for the third quarter.
Dana delivered $2.2 billion of sales, representing an increase of $210 million over this time last year as our customers continue to see strong demand despite several headwinds.
Diluted adjusted EBITDA for the quarter was $210 million, a $9 million improvement over last year.
Free cash flow was a use of $170 million as the semiconductor shortage drove significant and unplanned OEM demand reductions which, of course, led to substantial downstream component inventory accumulation across the company.
Diluted adjusted earnings per share was up slightly compared with last year at $0.41 for the quarter.
Moving to the key highlights on the upper right-hand side of the page.
Today, we will provide you with an update on how we're navigating through unprecedented supply chain constraints, raw material cost inflation, and labor shortages that are impacting the entire global mobility industry.
We'll also outline how Dana is well-positioned to capitalize on long-term cyclical growth as near-term issues begin to subside.
Finally, I'll provide a recap on our recent Capital Markets Day that we conducted last month at our world headquarters in Maumee, Ohio.
This event was intentionally focused on vehicle electrification and more specifically the tremendous progress we've achieved by executing the strategy that we initially announced in 2016 and refreshed in 2019.
Very clearly our success in e-Propulsion continues to accelerate across all mobility markets as Dana's cohesive and streamlined global team is generating significant value for our customers around the globe.
Please turn to page 5 and we'll begin our discussion with the ongoing supply chain challenges and how it is impacting our markets.
Whether it is the semiconductor shortages causing OEMs to idle vehicle manufacturing or dramatic shortages of labor, sea containers, truck drivers, raw materials or numerous other issues resulting from the global pandemic, companies across the mobility industry are having to navigate through unprecedented manufacturing constraints.
As we all know too well, supply chain disruptions have significantly reduced global auto production as OEMs are challenged to procure chips required to produce their vehicles and meet robust consumer demand.
This reduced vehicle output has led to historically low finished vehicle inventories in the light vehicle segment.
The commercial vehicle and off-highway segments are largely experiencing similar high demand.
For example, the current Class 8 truck sales backlogs have reached pre-pandemic levels, and finished vehicle inventory levels for construction and agriculture equipment are at the lowest levels in the last three years, resulting in unfulfilled end-customer demand.
On the right side of the page, we are illustrating the issues constraining supply.
The disruptions we are seeing continue to cause component, raw material shortages, and escalating prices across all of our end markets.
In addition to the chip shortages I mentioned, shipping congestion at the ports around the world is translating to delays, container shortages, and increasingly just a cost resulting in overall higher input cost.
Labor shortages, particularly in the United States, are also leading to production inefficiencies, plant downtime, and higher labor cost.
All of this has led to customers struggling to meet the strong end-market demand.
We're actively navigating through the unprecedented and challenging market dynamics by working to offset and recover higher input costs for commodities such as steel through our established mechanisms.
Though due to the ongoing price inflation and inherent lag in recoveries, we continue to see a substantial margin headwind that will remain until the input cost stabilize and turn the other way.
While we do expect these challenges to continue in the near term, when supply chain issues do finally lessen, we anticipate a sustained recovery period as suppressed end-market inventory levels, combined with high consumer demand for our key platforms, provides the opportunity for a strong volume tailwind for us.
We are seeing the dynamic across all three of our end markets.
The alignment of these three will provide further demand momentum across our entire mobility landscape and Dana remains well-positioned to capitalize on the cyclical growth opportunities.
Moving to slide 6, I'd like to share a recap with you of our recent Capital Markets Day.
Last month, many of you participated either in person or virtually in our 2021 Capital Markets Day, which we hosted at our Sustainable Mobility Center on the campus of our world headquarters.
The goal of this event was to share our perspective on how electrified mobility will evolve in the coming years and how Dana's class-leading innovation and global presence will help to drive outsized growth and financial returns for our shareholders.
As many of you may recall, we introduced eight key elements that we believe showcase how Dana has successfully built a substantial EV franchise.
First is our guiding vision toward a zero-emissions future that is at the heart of everything we do and is the overarching theme of our electrification pursuits.
Second, we examined how our total addressable market is going to rise dramatically over the next decade as electrification becomes commonplace in each of the markets we serve.
Third, we presented Dana's industry-leading technical competencies in e-Propulsion systems.
More specifically, we illustrated how we are leveraging our design, engineering, and manufacturing team members' depth and capabilities to provide the most advanced three-in-one electrified drivelines in-house across all mobility markets.
Fourth, we discussed that as the use of batteries and electrodynamics accelerate in the mobility markets, the driveline will remain, and Dana will be a clear beneficiary of this megatrend.
The combination of electrodynamics and mechanical systems will increase our content per vehicle potential by three times and compared to our historical ICE product portfolio.
This migration of mechanical powertrains to smart electrodynamic systems requires embedded software controls, designing and integrating these into the driveline, along with in-house production of high-value sub-components will create a significant margin expansion opportunity for Dana in the future.
Six, Dana is a unique and compelling investment because we serve both the established OEMs transforming their businesses and the emerging OEMs are just getting started.
Our e Propulsion systems are on a vast array of vehicles and, as a result, we are well-positioned to capitalize on our broad base of new and existing customers.
Seventh, we utilize our existing global footprint and asset base, established operating system, and deep industry know-how that most our other competitors do not have and will require decades to build.
We view this as a significant cost and strategic advantage for Dana.
And finally, Dana's financial profile will remain robust throughout our electrification journey, because our core ICE product will remain in demand through the transition, thus generating significant cash flow to the power EV growth.
Our core business is not in a state of secular decline, but rather grows through the transition with assets that will remain largely relevant.
The combination of these factors tells the story of how the ICE to EV transition is positioning us for above-market secular growth and demonstrating that Dana is a great investment within the EV growth landscape.
Turning to slide 7, I'd like to share some evidence of how and where this is already happening.
During our Capital Markets Day, we highlighted a significant number of electrification new business wins.
As the saying goes, the scoreboard always tells the truth, and our electrification strategy is working.
Our EV solutions are being utilized by our off-highway customers in construction, underground mining, material handling, and even some green shoots in the agriculture applications.
In commercial vehicle, it's not by accident that we've achieved a market-leading position as Dana's initial focus and commitment was to medium- and heavy-duty trucks and buses.
In the light vehicle market, we're extremely active supporting full-frame electric truck OEMs with both rigid and independent e-axle concepts and potential solutions leveraging not only our complete in-house e-Propulsion capabilities but also significant experience we have from markets that were early electrification adopters, such as buses, material handling, and last-mile delivery vehicle solutions.
And while we are on the topic of the light vehicle market, we also announced for the first time in addition to significant battery and electrification cooling wins, a major new business win for a hydrogen fuel cell metallic bipolar plates.
The combination of our past successes, present capabilities, application know-how, and clearly demand [Phonetic] strategy for the future enables us to partner with and create value for our customers at any stage of their electrification progression, ultimately leading to us winning our share of nearly $19 billion addressable market by the end of the decade.
Now, I'd like to hand it over to Jonathan to walk you through our financials.
In the third quarter of this year, sales were $2.2 billion, a $210 million increase over last year, primarily driven by improved demand in our heavy-vehicle end-markets and the recoveries of raw material cost inflation in the form of higher selling prices to our customers.
Adjusted EBITDA was $210 million for a profit margin of 9.5%, which was 60 basis points lower than last year despite the higher sales as margin compression from raw material cost inflation more than offset the margin expansion from organic sales growth.
Diluted adjusted earnings per share was $0.41, a $0.04 improvement from the prior year.
And finally, free cash flow though was a use of $170 million, which was significantly lower than the third quarter of last year due to higher working capital requirements this year as recent customer schedule volatility and supply chain challenges have mandated higher inventory levels to ensure on-time delivery.
Please turn with me now to slide 10 for a closer look at the drivers of the sales and profit change for the third quarter.
The change in third quarter sales and adjusted EBITDA compared to the same period last year is driven by the key factors shown here.
First, the organic growth increase of over $100 million was driven by improved demand for heavy vehicles in both our commercial vehicle and off-highway equipment segments.
The elevated incremental conversion of 40% was the result of targeted cost containment and cost recovery actions in the quarter, which helped to offset operational inefficiencies brought on by volatile customer production schedules, supply chain disruptions, and labor shortages.
Second, foreign currency translation increased sales by about $20 million as the dollar weakened against a basket of foreign currencies, principally the euro.
As usual, this did not affect our profit margin.
Finally, while we had expected commodity costs to level off in the second half of this year, unfortunately steel prices have continued to rise.
During the quarter, gross commodity cost increased by more than $100 million compared to last year.
We recovered nearly 70% of these cost increases in the form of higher selling prices to our customers.
This remains lower than a steady-state recovery ratio due to the timing lag caused by the continued rapid rise in commodity prices.
Rising steel costs are entirely responsible for the margin compression during the quarter despite higher production.
Please turn with me to slide 11 for a closer look at how the adjusted EBITDA converted to cash flow.
Free cash flow was a use in the quarter of $170 million.
This use was driven by higher working capital requirements, specifically production inventory, resulting from volatile customer production schedules and instability in the global supply chain.
A combination of unpredictable demand pattern for our products, longer lead times for raw materials, and the impact of slower-than-usual logistics channels have caused us to hold significantly more inventory than normal to ensure that we protect our customers across all end-markets.
Inventory levels increased by more than $100 million sequentially and more than $400 million versus the same time last year as, at the time, the industry was just ramping the supply chain back up coming out of the pandemic containment-related shutdowns in the second quarter of 2020.
We expect our inventories will gradually retreat toward a more normalized level in the next few quarters, but the cash flow benefit won't be recognized until next year.
I'll provide some additional information on this in just a few moments.
Please turn with me now to slide 12 for a look at how the changing market conditions are affecting our full-year outlook in the form of our revised guidance for 2021.
On our last two quarterly earnings calls, we outlined the key assumptions underpinning our full-year sales, profit, and cash flow guidance.
Raw material costs were anticipated to plateau, the supply chain conditions were expected to improve modestly, and the chip famine was presumed to progressively abate.
Unfortunately, none of these came to fruition and, as a result, our top- and bottom-line expectations for this year have declined, as you can see on the right of the page.
We now anticipate full-year sales to be $8.9 billion at the midpoint of our revised range, down about $100 million from the indication we provided during our Q2 earnings call as lower-than-expected market demand of, approximately, $170 million will be partially offset by $70 million in additional commodity recoveries.
Full-year adjusted EBITDA is now expected to be about $845 million at the midpoint of the revised range, which is down about $115 million from our previous indication.
Loss contribution margin from lower end-market demand and higher operating costs make up, approximately, $70 million of this profit headwind and increased commodity costs will further lower profit by about $45 million.
Profit margin is expected to be, approximately, 9.5% and free cash flow margin is expected to be about 1%.
Diluted adjusted earnings per share is expected to be a $1.85 per share at the midpoint of the range.
Please turn with me now to slide 13 where I will highlight the drivers of the full-year expected sales and profit change from last year.
First, organic growth is now expected to add nearly $1.4 billion in sales.
Incremental margins are expected in the mid-20s providing nearly 300 basis points of margin expansion.
Second, as was announced yesterday, the agreement to acquire Modine's automotive liquid cooling business for a dollar has been terminated as we were unable to reach agreement on revised terms that would gain the approval of the German regulator.
As a result, there will be no significant impact from organic growth this year.
However, this was never included in our full-year guidance.
Third, 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 material impact to our profit margin.
And finally, we now expect gross commodity cost increases to be about $350 million compared to last year as steel prices have continued to escalate.
We anticipate recovering about $235 million, or just below 70% of the increase, from our customers in the form of higher selling prices leaving a net profit impact of $115 million, which will compress margins by about 170 basis points.
Please turn with me to slide 14 for a look at the second half profit margin implied in our revised full-year guidance and the key drivers of the trend through this year.
Typically, profit margins in the first and second half of the year are relatively flat in our business as sales and profit are higher in the middle of the year, the second and third quarters, and relatively lower in the beginning and end of the year, the first and fourth quarters, as a result of normal production seasonality.
The quarterly sales and profit cadence of our revised full-year guidance for 2021 is atypical where we now expect second-half margins to be about 200 basis points lower sequentially.
A few anomalies are driving this year's trend, including: one, a continued volume deterioration associated with the chip shortage; and two, rapid commodity cost inflation.
At a cursory view of the trend, the first anomaly is only visible by highlighting the second.
Essentially, the increasing raw material cost recoveries included in our sales are masking the sequential volume deterioration and both are having a profound adverse impact on profit and are amplified by the poor condition of the global supply chain.
On the right of the page, you will note the expected sequential deterioration in fourth quarter profit on relatively flat sales.
It's important to note that as we move into next year we continue to anticipate a plateau in commodity cost leading to an eventual decline, which will allow our recovery ratios to gravitate toward normal levels, ameliorating the commodity impact, and the period cost associated with the labor agreement ratification will not recur.
Our full-year outlook for 2022, which we will provide at year-end earnings in a few months, as we normally do, will take both of these sequential improvements into account.
Please turn with me to slide 15 for more detail on how we expect this year's adjusted EBITDA will convert to cash flow.
We now anticipate full-year free cash flow margin to be comparable with last year at about 1%, which represents a modest improvement of about $30 million as $0.25 billion of higher profits are invested in working capital to navigate the current environment and higher capital spending to fuel our future growth.
The downward revision compared to our prior expectation is attributed to the lower profit I just outlined on the last few pages as well as the higher working capital requirements we experienced in the third quarter that will gravitate toward more normalized levels in the coming quarters as production schedules stabilize.
It's worth noting, we are pulling multiple working capital levers to mitigate the cash flow impact associated with the elevated inventory.
Please turn with me now to page 16 for our perspective on the near-term challenges on the backdrop of the long-term outlook for our business.
As Jim outlined at the outset of the call, the current mobility market dynamics are the most challenging they have been in over a decade with robust demand for vehicles and equipment substantially constrained by the supply of materials, logistics, and people, which has led to dramatic cost inflation and substantial profit and cash flow margin compression.
These are all represented by the icons on the left of the page.
As we look to the future, we want to remind all of our stakeholders that as challenging as the current environment is, these forces position Dana for robust and dramatic cyclical recovery this business has seen in quite some time.
This is illustrated by the chart in the upper right of the page where we affirm our conviction that our business will exceed $10 billion of sales in 2023, and this represents 45% growth over three years and will lead to substantial profit and cash flow margin expansion as we progress toward our long-term financial potential.
But the cyclical recovery in our business is only a piece of our growth story.
As we outlined at our Capital Markets Day last month, we're poised to substantially outpace the market growth rate as we capitalize on the secular growth trend that vehicle electrification represents for Dana.
We expect the sales of our electrified products to double in the next two years contributing to the greater than $10 billion of sales in 2023, but then quadruple by the end of the decade to deliver a $3 billion business that will expand our profit and cash flow margins and reposition the business for the future.
This bright future is made possible by the highly skilled and extremely dedicated team of more than 38,000 around the globe who day in and day out embody the spirit of our company, people finding a better way.

user
dana q3 adjusted earnings per share $0.41.
q3 adjusted earnings per share $0.41.
q3 sales $2.2 billion.
sees 2021 sales of $8.8 to $9 billion.

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