DANA Inc Q2 2025 earnings call

Thank you. Good morning. Welcome to Dana Incorporated's earnings call for the second quarter of 2025. Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from what we discussed today. For more details about the factors that could affect our future results, please refer to our safe harbor statement found in our public filings and our reports at the SEC. I also encourage you to visit our investor website, where you'll find this morning's press release and presentation. As stated, 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. With me this morning is Bruce McDonald, Dana Chairman and Chief Executive Officer, and Timothy Kraus, Senior Vice President and Chief Financial Officer. I will now turn the call over to Bruce.

Thank you, Craig, and thank you all for joining, Craig, Tim, and myself for our second quarter earnings call. There is a lot of noise in our numbers as we've got to reclassify off-highway as a discontinued operation. In our earnings deck and in our comments, we'll sort of talk intermittently between new Dana, i.e., Dana from continuing operations, and the full Dana, which obviously is the basis of our previous guidance and things like that. I guess I'd sort of characterize the second quarter as another quarter of the Dana team delivering on our commitments with a solid Q2 beat, double-digit margins, and accelerating free cash flow. In terms of some of the highlights here on slide four, as everyone knows, we did announce in the quarter our agreement to sell the off-highway business to Allison Transmission for just over $2.7 billion, with net cash proceeds expected to be about $2.4 billion.

That closing is expected to occur here late in the fourth quarter. I think substantially all of the regulatory filings have been submitted, and the teams are working hard, both ours and Allison's, on effecting a smooth transition of the business over to Allison. In terms of our use of proceeds, we previously announced that we were going to take the proceeds from the sale of the off-highway business and return about $1 billion to our shareholders, as well as reduce our overall debt by a couple billion dollars. I'm pleased to announce this morning that as a result of strong free cash flow and our higher guide here for the year, we're raising the amount of capital return to our shareholders to $600 million from what was $550 million previously.

As things stand now, we anticipate using all of that to reduce our shares outstanding, and we're forecasting that we'll end the year with a share count of around 110 million, which would be about a 25% year-over-year reduction. In the quarter, we did buy back just over 10% of our shares, returning 257 million to our shareholders. As we look here into the third quarter, we anticipate buying back another 100 million-150 million shares. In terms of our cost reduction initiatives, this is where we sort of committed to a goal of $300 million run rate by 2026. We're upping that to $310 million as a result of some of the projects coming in better than Tim and I had expected. In the quarter, we delivered nearly $60 million of cost reduction, and $110 million to date.

I think we can kind of tie a ribbon around cost reduction. I think we're highly, highly, highly confident in the $300 million, and you know we don't really have a long way to go to get to that run rate here by the fourth quarter. In terms of tariffs and the tariff landscape, a lot's moving around lately here, but I'd say the takeaway on tariffs is we're in great shape in terms of tariff mitigation and tariff recoveries. Right now, we have some headwind here in the second quarter, about 80 basis points. That's worse than we expect it's going to be the impact for the full year because we have some timing-related catch-ups that we didn't get customer agreements in place by the end of the quarter. Overall, we expect over an 80% recovery for the year.

More importantly is the work that the teams are doing with our customers to mitigate the impact of the tariffs. This is critical for our industry because we don't want to just pass these costs along. We need to make them go away so that we don't impact end vehicle demand. In terms of our balance of the year outlook, I think when we were on a call at the end of the first quarter, there was considerable uncertainty around the impact of tariffs in terms of volumes. I guess what we've seen is very strong schedules holding up in the light vehicle side of our business. We have seen some softening in North America CV, which has been partially offset by a bit of better volumes coming out of South America and Europe.

In terms of our profit guide, and here I'm referring only to new Dana, we're upping our profits guidance for the year by $35 million. If you look at the whole company, it's up $15 million because off-highway is down $20 million. On a free cash flow basis, we're upping our target by $50 million to about $275 million at the midpoint of our guidance. Overall, a really strong quarter. I couldn't be more pleased with the results of the team. In terms of what new Dana looks like going forward, here's kind of an overall snapshot reflecting 2024 numbers, but you know we'll be much more of a light vehicle company. We'll be much more of a North American-centric company. We do have a nice split between commercial and light vehicle. Within commercial, we have a very strong aftermarket business.

You know we don't talk a lot about it, but our thermal and our sealing side of our business that we integrated into light vehicle continues to be a source of profit improvement going forward. In terms of the full year guide, I just want to spend a minute, a few minutes on this page because this is the first time we're sort of showing our numbers with and without the discontinued operations. Our guidance, and as we've talked at the end of the first quarter, we had indicated our sales were trending towards the higher end of our previous range. We're saying right now on a total Dana basis, our sales would have been about $9.9 billion. You can see on the discontinued operation side, sales down $125 million.

There we have seen softness in terms of the tariffs, particularly European product that's imported into the United States that's bearing a tariff. We've seen those volumes drop off. However, on the continuing operations side, we see sales being up $250 million. In terms of the guidance for the two parts of the business, if you think about the original guide at $975 million, you can kind of see the split. $600 million for continuing operations and $375 million for off-highway. Our revised guidance that I touched on in my previous slide, up $35 million for new Dana, down $20 million for off-highway for a net positive $15 million. Stranded costs are just a pocket switch between discontinued operations. Those are costs that we currently allocate to off-highway that remain with new Dana.

Just a point to note, that number is higher than the $35 million-$40 million that we've previously guided to. The reason is within that $60 million are variable costs allocated to off-highway that will go away upon the sale. Those are $20 million-$25 million, and that's how you get back down to the range that we've talked about before. In terms of cash flow, and I've seen a few notes where there's maybe a little bit of confusion about what's the cash flow split between discontinued and continuing ops. Under GAAP, we're required to report total cash flow inclusive of both pieces, and that's what we're guiding here today. What you will see when we publish our Q is cash flow split by operating, investing, and earnings split between the two, and that'll get us to the year-to-date actuals. With that, Tim, I'm going to turn it over to you to go through the financials in more detail.

Thanks, Bruce. Let's begin with how we will be presenting our results in the prior periods. With the signing of the agreement to sell our off-highway business, that business will now be considered as discontinued operations. We will be reporting continuing operations in our financial statements. Continuing operations contain our light vehicle and commercial vehicle systems reporting segments. The majority difference between these new reporting segments and the prior reporting segments is they now incorporate certain retained operations that were not included in the off-highway sale, as well as stranded corporate costs and prior intercompany sales to off-highway that are now treated as third-party sales according to the accounting rules. The net effect of the higher sales and increased stranded costs is to temporarily lower the profit margin of continuing operations until the sale closes and transition service payments begin.

Third-party sales agreements and stranded cost reductions should begin early next year. Finally, cash flow is the one metric that will include off-highway as we had previously. Since the sale transaction excludes cash, all cash flow will remain with Dana until closing. For continuing operations, sales were $1.94 billion, $112 million lower than last year, driven by lower in-market demand. Adjusted EBITDA was $145 million for a profit margin of 7.5%, 210 basis points higher than last year, as the benefits of our cost saving and productivity improvements more than offset the lower sales and impacts from tariffs. Earnings before tax attributable to continuing operations was a loss of $24 million, a $30 million improvement from 2024. Please turn with me now to slide nine for the drivers of sales and profit change.

In line with the new accounting and reporting method, we've revised our WOC presentation to include the impact of discontinued operations for the current and prior periods. The $691 million in sales and $136 million in profit removed from 2024 represents the off-highway sales perimeter and accounting treatment for discontinued operations. Moving to the right for this year's second quarter, the change in discontinued operations lowered sales by $7 million and overall volume and mix lowered sales by $173 million, driven by lower demand in both light vehicle and commercial vehicle end markets. Performance drove sales higher by $29 million due to pricing actions in commercial vehicle and/or aftermarket business, while tariff recoveries totaled $26 million for the quarter. Changes in adjusted EBITDA from continuing operations was $6 million for the quarter. The flow-through of sales from volume mix lowered adjusted EBITDA by $52 million.

This was a decremental margin of about 30%. Recall that breaking out performance now, which includes efficiency gains in manufacturing separately. Performance increased profit by $30 million due to pricing and efficiency improvements in commercial and light vehicle businesses. Cost savings added $59 million in profit through the various actions we have taken. This brings us to $110 million to date, and we are firmly on track to deliver our target of $225 million in savings for the current year. The tariff impact in the quarter was just $15 million. Since our tariff recovery mechanisms have a lag and the landscape continues to evolve, we expect to see a continuing headwind due to the timing, but we expect to recover the majority of the impacts this year. Next, I will turn to slide 10 for the details of our second quarter free cash flow.

As I discussed on slide eight, the accounting for cash flow includes both continued and discontinued operations, as shown on slide 10. Adjusted free cash flow for the second quarter of 2025 was a use of $5 million, which was $109 million lower than the second quarter of last year. Higher adjusted EBITDA in continuing operations was partially offset by lower earnings in the off-highway segment and higher one-time costs related to our cost savings and other improvement actions. Taxes were $22 million this year, mainly related to the sale of our joint venture interests, as well as jurisdictional mix of income. Working capital was a use of $115 million during the second quarter, as requirements normalized after an unusually strong first quarter this year. Finally, capital spending net of proceeds of sales of fixed assets and contributions from our customers was $70 million better than last year.

Please turn with me now to slide 11 for a summary of our updated guidance for 2025. As Bruce outlined earlier, our 2025 full-year guidance ranges have been updated for the impacts of discontinued operation. On page 11, we are summarizing the continued operations guidance, as well as showing an illustrative view of the prior guidance method for comparison. We are expecting sales from continuing operations to be approximately $7.4 billion at the midpoint of the range. This is about $250 million higher than our previous expectation, as you can see in the column on the right. Higher sales are primarily due to expected tariff recoveries, as well as tailwinds from currency rates. Adjusted EBITDA from continuing operations is expected to be about $575 million at the midpoint of the range.

This is approximately $35 million higher than previously anticipated, driven by cost savings and performance improvements after adjusting for accounting impacts of the discontinued operations. Full-year adjusted free cash flow is anticipated at $275 million at the midpoint of the range for the year. This is approximately $50 million higher than previously expected, driven by higher profit and working capital efficiencies. Please turn with me now to slide 12 for the drivers of sales and profit change for our full-year guidance. As with the quarterly WOC, we showed earlier, our full-year guidance WOC adjusts 2024 for discontinued operations and walks forward our guidance for continuing operations. Beginning on the left, discontinued operations reduced 2024 sales by approximately $2.5 billion. We begin with 2024 at $7.7 billion in sales for continuing operations.

Adjusted EBITDA from discontinued operations was $498 million, reducing 2024 adjusted EBITDA to $387 million, resulting in about a 5% margin on sales. Discontinued operations this year is expected to further reduce sales by $100 million due to the lower sales between discontinued and continuing operation, but adds approximately $15 million to adjusted EBITDA due to lower unallocated costs. Volume and mix are expected to lower sales by $425 million, driven by lower demand across both light vehicle and commercial vehicle markets. Adjusted EBITDA from volume mix is expected to be lower by about $90 million, a decremental margin of about 20%. Performance is anticipated to increase sales by approximately $80 million, with $90 million in EBITDA impacts, mostly through pricing and efficiency improvements. Cost savings will add $225 million in profit, as I mentioned earlier.

The tariff impact for the full year is expected to add about $150 million to sales and lower profit by about $35 million. The majority of this profit headwind will be recovered next year. Foreign currency translation is still expected to decrease sales by $45 million, driven by a mix of currencies with no margin impact. Finally, commodity cost recovery should be about $10 million higher in sales and an equal amount headwind to profit. The net result will be about a 280 basis points margin improvement in continuing operations when compared to last year's, as performance and cost saving actions overcome the headwinds we are experiencing in the business. Next, I will turn to slide 13 for the details of free cash flow guidance.

We anticipate full-year 2025 adjusted free cash flow to now be about $275 million at the midpoint of the guidance range, $50 million higher than our previous guidance. We expect about $105 million of higher free cash flow from increased adjusted EBITDA when compared to 2024. One-time costs will be about $70 million, $25 million higher than last year as we invest in our cost saving program and other restructuring actions. Working capital will be about $30 million source of cash, about $100 million better than last year as we continue to lower the requirements in the back half of the year for working capital. Capital spending net is expected to be about $325 million this year, which will be $45 million better than last year. Lastly, please turn with me to slide 14 for a look at our balance sheet and capital allocation priorities.

On the left side of the page, you will see that we have ample liquidity of about $1.35 billion at the end of the second quarter. During the second quarter, we returned over $250 million to shareholders through share repurchases in addition to our regular dividend. As we look to the end of the year, we expect to close the off-highway sale in the fourth quarter and expect our net debt leverage to be about 0.7x expected EBITDA. We expect to continue to execute on our $1 billion capital return authorization and repurchase a total of $600 million of our stock this year, which could result in having about 110 million shares outstanding at the end of the year at the current share price.

As we look forward, our capital allocation priorities are first to drive organic growth as we will continue to be selective with where we spend capital to drive proper growth within the light vehicle and commercial vehicle segments. We will aggressively lower debt as we look to achieve our one-time net leverage target over the business cycle. As we have demonstrated this quarter, we will return cash to shareholders while increasing the overall value of the company. Thank you for listening, and I will now turn the call back over to Bruce for his final comments.

Thank you. Thank you, Tim. In terms of 2026, again, a fair bit of comments I've seen from the street around how do we get to 10% for next year. I just wanted to sort of focus on the way that we're looking at it. Start off with our cost reduction savings plan. We expect that to be $310 million run rate for 2026. That's a good news story for us and gives us a strong tailwind as we start the next fiscal year. Just starting off in terms of a WOC, if you use Tim's guidance at the midpoint, we're at about 7.8% for new Dana as we're going to report our numbers here in 2025. First item is the annualization of the cost savings. This just basically is reflecting the fact that in Q1 and Q2, particularly, we weren't tracking to a $310 million annual cost rate savings.

That number you can kind of think about in the bag, and just annualizing that would take our 7.8% up to 8.8%. If I just look at the flow-through of our backlog, we expect that to add about 60 basis points. In terms of stranded costs, to get this extra 50 basis points, we have to eliminate the variable costs that go away on day one, which is a gimme. We're assuming we're going to offset 50% of the stranded costs here. I would tell you that I'd be highly disappointed if that's where we end up. I would expect a combination of TSAs and continued focus on those stranded costs that we should be able to do much better than that. Lastly, operational performance, we'll factor in 40 basis points to get there.

What I would just point out on that one is that's about half of the operational performance benefit that we've delivered in 2025. I really don't look at the 2026 target here of 10%-10.5% as being the stretch. I think of this as a commitment that I have just as much confidence in delivering as I did when we committed to the $300 million cost savings. When you take that margin and apply it to our sales for next year, you factor in lower cash taxes and interest that we've talked about for some time that we will benefit from once the off-highway business is gone. We see free cash flow being in the 4% of sales range, which if you do the math is higher than this year.

In terms of our share authorization, the capital return of $1 billion, we will continue as cash flow improves as we focus on sale of non-core assets, expanding the timing of that to deliver more quickly to our shareholders in addition to our existing dividend. Lastly, we probably haven't done ourselves a disservice here in terms of our top-line story. I do think Dana has an underappreciated growth story here. We have a solid backlog that we'll be reporting next year, and we continue to be having very productive discussions with both our light vehicle and commercial vehicle customers on gaining share and winning new business. With that, I'll open it up to Q&A.