Dana Inc at Bank of America Global Automotive Summit (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Great. Jonathan, that's a really great place to start. And I would kind of commend you guys, this is a manifestation of what has been a broader strategy that was outlined back at your Investor Day in 2019. So the electrification emergence, let's say, in the Dana portfolio is less so kind of what's been the past 6 to 12 months of acceleration on the EV front broadly and more so a very coherent-driven strategy coming down from the top for you guys. So kind of sticking with that, I'd love to kind of focus our early questions on the strategy element and specifically around EVs. So you recently disclosed your 2021 to 2023 backlog that is impressively split about 50%, 50% between ICE and EV. Do you have a rough approximation of how this EV backlog splits out across your end markets? And specifically, is it more driven by commercial vehicle and off-highway where electrification is taking off first? Or is there a significant portion that's coming in on the light vehicle side as well? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 30, 2021 / 6:10PM, DAN.N - Dana Inc at Bank of America Global Automotive Summit (Virtual)

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : When you look at then the -- there was $150 million year-over-year increase in your next 3-year backlog versus the estimate that you disclosed last year. Is that primarily attributable to electric vehicles? Or is it a function of adjacent products or certain end markets being stronger relative to what you were perhaps assuming last year?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : That's helpful. And to follow on one of your earlier comments is as you think about the light vehicle market, and specifically where the position that you guys occupy in body-on-frame light trucks, the initial thought process is that's probably one of the last segments to electrify just given the customer necessity for payload and torque and everything else. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 30, 2021 / 6:10PM, DAN.N - Dana Inc at Bank of America Global Automotive Summit (Virtual) But has that outlook changed at all as some of the incumbents and newer entrants have been in a race to introduce electric pickup? You've got companies like Lordstown and Canoo, Rivian as well, which have, I think, ignited a competitive response from the likes of GM and Ford to get an EV pickup out in the market. So are these -- is it fair to look at some of these electric pickups as perhaps more niche and lower volume for now, whereas the segment that Dana operates in and that ICE body-on-frame pickup still remaining combustion at least from a major or high volume side of things?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : I think the last estimation or disclosure that you guys had provided on the content opportunity front in the shift from ICE to EV was for full frame light trucks was something like more than 2x, medium and heavy-duty trucks also more than 2x, and off-highway equipment about comparable. Has this estimation changed, if at all, as electrification adoption has accelerated or perhaps as you've been active on the M&A front to commercialize some of the newer EV technologies like the Ultium battery thermal system?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Given the -- you bring a really good point. Given the quadrupling of content wins on some of the recent programs that you brought through, is it fair to say that, that 2x may ultimately -- that target that had been established years ago ultimately be a bit conservative? Or is there something specific around these recent program wins that you would say 4x is probably an asymtotic limit and maybe a little bit more unique than what would be your standard content increase on some of these newer EV programs coming to market?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : I'd love to kind of expand on that just a little bit. Across each of your end markets, how -- what do you see as the in-sourcing versus outsourcing opportunity developing for electrification components and systems? Do you think it's going to look substantially different than the standard ICE supply chain?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Great. To take it in a little bit different of a direction and specifically looking at the number of newer entrants that have come to market recently, would you assess or look at the newer EV automakers as a massive opportunity or a risk for Dana? And specifically, what content opportunity do you have for some of the skateboard architectures that have been referenced by differentiating factors for many of these players?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : You bring up a really interesting point that I've certainly received questions on more so recently. So a number of the Tier 2 plus suppliers that have been working with these newer EV entrants have unveiled architectures where the electric motor is integrated directly into the 4 wheels, which would eliminate the need for axles and drive fast content, like you described. Do you see this technology as something that can be democratized more broadly? Or rather, is it very specific to that unibody architecture and where you see applicability for your products is more so on larger vehicles that will still require axles and drive fast content?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Got it. And a few more questions on the kind of strategy and electrification element. Can you talk a little bit about how the competitive landscape has changed for ICE powertrain and driveline versus EV, powertrain and driveline? And specifically, what is Dana's competitive advantage in the quoting process as you go up against a competitive set that's probably been expanded to include engine and transmission suppliers as well as your standard kind of axles and driveshaft peers?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Fantastic. And it appears that some of the incumbent suppliers are looking to expand the breadth of their product portfolio across EVs and potentially go further, I guess, up in the value chain to battery cell and pack, and I'm going to use BorgWarner's recent acquisition of AKASOL as an example of this. Are there any technology areas for EVs where Dana could become more acquisitive and, let's say, where you think you have a right to play given the technology and the manufacturing expertise that you have on driveline, powertrain and thermal products across a variety of different end markets?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Great. That's all extremely helpful. I think switching gears a bit because we're certainly getting some questions in from the audience on this side on some of the near-term market dynamics. If you could comment on how is the ongoing chip shortage and what appears to be growing supply chain disruption for the value chain, whether it's seat foam or the Suez Canal impacting your expectations for production in the first half of the year. And are you seeing similar pressure in the commercial vehicle market as light vehicle? Or are there any other end markets that are starting to be more impactive than others?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : I do want to clarify that a little bit. Relative to your own, I guess, internal conservatism or cautiousness on production expectations, one of the dynamics that I think is important to mention is that semiconductors are relatively fungible across models. And as such, automakers have responded to some of the shortages by allocating chips towards higher-mix and higher-priced vehicles in an effort to preserve margin. Given Dana's overexposure to those higher-margin vehicles, light trucks and SUVs, has that dynamic perversely supported your volumes relative to the broader industry, meaning if you stack up customer releases and production schedules versus maybe what you see in IHS, you're outperforming a little bit just given your end market mix?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : As we think about the second half of the year, maybe being on the other side of this, perhaps not just given some of the indications, would you expect that mix shift to continue or even potentially reverse in the second half of the year? I mean at some point, automakers are going to have to start rebuilding inventory in their lower mix segments. So are you seeing that in terms of customer releases at all? Or is it still automakers can't make enough cars, trucks and SUVs and it's -- crossovers, trucks and SUVs, excuse me, and they're going whole hog down that effort, and there is no signs of stopping?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : And the last kind of question I'll ask around the supply chain disruptions, whether it's the semiconductors or disruptions in Mexico or foam shortages coming out of the Texas market. Has that influenced your strategy for inventory orders at all? And do you have plans to increase inventory or perhaps stockpile to reduce potential negative impact of supply chain disruptions going forward? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 30, 2021 / 6:10PM, DAN.N - Dana Inc at Bank of America Global Automotive Summit (Virtual)

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Great. And another kind of near-term dynamic that is certainly top of mind for folks, raw material prices have inflated materially over the past year. Can you remind us of your major commodity inputs as well as your economic exposure versus your customers in terms of what is being passed through, index or escalators and other programs?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Great. And how do you think about your ability to pass on that raw material pressure to your automaker customers versus perhaps push it down to your suppliers?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Great. In the 10 minutes or so that we have remaining, I do want to touch upon some financial questions, and I won't tie you guys to the -- commenting on the 2021 outlook, specifically. But I would like to talk a little bit about that quarterly progression that you outlined at 4Q reporting for 2021. Has that shifted more towards the second half as you look at some of the production disruptions in the front half of the year? Or would you expect kind of normal seasonality still holds? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 30, 2021 / 6:10PM, DAN.N - Dana Inc at Bank of America Global Automotive Summit (Virtual)

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : And as you think about the visibility that you guys have on production releases, whether it's kind of 8 to 12 weeks out or beyond the next month, since you guys provided your 2021 outlook at 4Q -- excuse me, reporting back in February, would you say that your visibility over those customer releases has improved or deteriorated as the chip shortage has developed?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Great. And switching gears just a little bit. At 4Q reporting, you cited specifically some accelerated investment in electrification, which you described as being primarily attributable to commercialization of the products as start of production has been somewhat accelerated. As 2021 probably just marks the beginning of the EV push across the industry, would you expect this investment to only ramp further? Or was there some outlier element in terms of industrialization that caused 4Q spending to be higher?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : And as a follow-up point to that, the $400 million that you mentioned, to get that, that significant backlog to come through, when you think about accelerated investments in electrification, it's fair to say that the significant investment has already been incurred on the technology and product development side, correct?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Fantastic. And I think in the 5 or so minutes that we have remaining, I do want to focus on the 2023 targets that you guys have laid out there for the midterm. Your $10 billion revenue target for 2023, based on my calculations, implies a revenue CAGR of about 10% from 2021 to 2023. That's on underlying production volume growth, potentially in the low to mid-single-digit range depending on what your assumptions are, which implies growth above market in the mid- to high single-digit range. Do you think that, that's a good benchmark to think about in terms of sustainable growth above market for Dana over the kind of intermediate to longer term?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Great. And to pick upon one of the other targets that have been established for you guys for 2023, that 5% of the cash flow as a percent of sales, that's been a long established target by you guys that's proven a bit out of reach for the past several years as you've accelerated investment in acquisitions. What gives you confidence that this is achievable by 2023, specifically as investment for EVs and newer technologies continues to ramp up? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 30, 2021 / 6:10PM, DAN.N - Dana Inc at Bank of America Global Automotive Summit (Virtual)

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : And as we think about that free cash flow in terms of capital allocation, debt repayment, at least for the next year plus has been outlined by you guys as a priority. I guess, first question, can you talk about the parts of your capital structure that you'd be looking to pay down first? And then as a follow-on to that, is there a certain leverage threshold above, which you would likely refrain from M&A, meaning you're trying to get to a leverage threshold that you can then turn the tap back on for acquisitions of technology and things that you can commercialize?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : That's some really good color. I think the question that we'll close with, particularly because it's been very relevant over the past 5 years is the inorganic growth strategy. So over the longer term, do you expect more opportunities around M&A will be vertical acquisitions of technology and, let's say, smaller Tier 2 plus suppliers in the value chain? Or rather, do you think that the industry could or should go -- undergo more horizontal M&A and consolidation to create larger, global, more diversified suppliers?

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Fantastic. I think at this point, we are now at the mark on time. I do want to thank Jonathan. Thank you very much for your time today, Craig, as well, and for the continued support of our summit year after year. I'm hoping this is the last year that we'll do this in virtual, and maybe we'll get back to in-person someday. I'd also like to thank everybody on the call for taking the time to listen.

Question: Aileen Elizabeth Smith - BofA Securities, Research Division - Analyst : Thanks, guys.