James Kamsickas - President, Chief Executive Officer Jonathan Collins - Executive Vice President, Chief Financial Officer Craig Barber - Senior Director, Investor Relations and Strategic Planning.

Joe Spak - RBC Capital Markets Aileen Smith - Bank of America Merrill Lynch Colin Langan - UBS Brian Johnson - Barclays Emmanuel Rosner - Guggenheim Brian Colley - Stephens Brian Sponheimer - Gabelli David Kelly - JP Morgan Christopher Van Horn - B. Riley FBR.

Good morning and welcome to Dana Incorporated Second Quarter 2018 Financial Webcast and Conference Call. My name is Dennis and I will be your conference facilitator. Please be advised that our meeting today, both the speakers’ remarks and our Q&A session, will be recorded for replay purposes.

There will be a question and answer period after the speakers’ remarks, and we will take questions from the telephone only. If you would like to ask a question during this time, press star then the number one on your telephone keypad.

To ensure that everyone has an opportunity to participate in today’s Q&A, we ask that callers limit themselves to one question at a time. If you would like to ask an additional question, please return to the queue.

At this time, I would like to begin the presentation by turning the call over to Dana’s Senior Director of Investor Relations and Strategic Planning, Craig Barber. Please go ahead, Mr. Barber..

Thanks Dennis, and thank you to everyone on the call for joining us on this busy earnings day for Dana’s second quarter 2018 earnings call. A copy of this morning’s press release and presentation have been posted in Dana’s investor website. 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. We will end the call with a Q&A session. As Dennis just mentioned, please keep your questions brief so we can get in as many as possible. Today’s presentation includes forward-looking statements about our expectations for Dana’s future performance.

Actual results could differ from those suggested by our comments today. Additional information about the factors that could affect our future results are summarized in our Safe Harbor statement. These risk factors are also detailed in our public filings, including our reports with the SEC.

Presenting this morning is Jim Kamsickas, President and Chief Executive Officer, and Jonathan Collins, Executive Vice President and Chief Financial Officer. Now I’ll turn the call over to Jim..

Thank you, Craig. Good morning and thank you for joining us today. Before we begin, I’d like to send our most sincere condolences on behalf of the entire Dana family to Fiat Chrysler and the family of Sergio Marchionne, who passed away earlier this morning. Mr.

Marchionne was an iconic and visionary leader who accomplished amazing things for the mobility industry. He will be truly missed. On that note, I am pleased to report that in the second quarter, Dana again saw double-digit growth with sales of $2.1 billion, a 12% increase over the last year.

This is our sixth consecutive quarter that we’ve achieved double digit year-over-year organic growth. Our adjusted EBITDA for the quarter was $246 million, 13% year-over-year growth resulting in a 12% margin. Net income was $124 million, a 75% increase over the prior year.

Diluted adjusted EPS increased 9% over last year’s second quarter to $0.74 per share. In the quarter, we repurchased 1.1 million shares, returning $25 million to our shareholders in the second quarter. This strong second quarter performance supports our sales and profit outlook for the remainder of the year, which Jonathan will cover in detail.

Finally, we completed the acquisition of TM4, which positions Dana as the only supplier with complete E-axle, electric motor, power inverter, and thermal management capability, allowing us to offer a broad range of hybrid and electric vehicle solutions for our customers across all three of our end markets.

I will provide some detail around the acquisition in a moment, but first allow me to spend a few minutes to provide you some color around key markets and business highlights across our four segments.

Considering our exceptional top line growth and numerous positive activities transpiring across the company, we thought it could be a helpful change-up to provide some business unit-specific midyear detail.

Turning to Slide 5, starting in the light vehicle segment, market outlook remains positive as global demand for key light trucks continues to be strong.

There is also a shifting customer preference for both trucks and SUVs, as evidenced by recent OEM announcements that they will be de-emphasizing production on low profit sedans and increase production of light trucks and SUVs. This is good news for Dana, yet perhaps overlooked by some.

We are also seeing significant growth in the compact truck segment, automatic all-wheel drive disconnecting technology, which is a growth market with higher content per vehicle. We are currently launching our SmartConnect disconnecting all-wheel drive system on a new Ford global program.

With the push for electric vehicles, Dana has near term e-propulsion opportunities in CUV, SUV, and delivery van markets, which are beginning to show demand. Moving to performance, Dana is outgrowing the market 1.5 times, driven by our mix of product and secured new business backlog.

We are poised for significant margin and cash flow expansion as costs associated with major program refreshes are behind us. While the Jeep Wrangler costs were reduced by half in the second quarter, the impact in the second quarter of the year will be negligible.

In light vehicle, we have solid recovery mechanisms in place to address the rising cost of commodities, such as steel.

With our demonstrated ability to grow the business and to do so while increasing margin, we are well positioned for the future and the next chapter of the story, which will include greater free cash flow generation and margins above 12%.

Turning to Slide 6, we continue to realize significant improvements in our commercial vehicle business, including returning to double-digit margins due to improved market conditions, new programs coming on board, conquest business wins, as well as executing on primary business drivers outlined in our enterprise strategy.

The North America heavy truck market remains strong at the same time the medium duty market continues to deliver growth. We are now also seeing improvement in truck demand from Brazil as their recovery continues. Europe commercial vehicle market remains stable.

While not a large market for us currently, it is certainly a growth opportunity in the future. There is significant adoption of e-propulsion in the China bus market, where we now have integrated e-axles in production.

As you may recall, approximately three years ago when I started with Dana, I communicated that we would return our commercial vehicle business back to double digit margins. In this quarter, we achieved that and we expect to be there for the full year as well.

I would like to take a second just to thank and congratulate our team for their tremendous perseverance and determination. The performance in commercial vehicle can be attributed to several key factors, including the acceleration of new business that is being driven by winning new programs and capturing share with several customers.

These wins are driving more end market balance across the heavy duty, medium duty and aftermarket end markets, which now have more balanced sales exposure, thus minimizing our exposure to cyclical volatility. Lastly, our margin gains are driven by significant operational improvements and solid conversion on market growth.

Additionally, we have solid recovery mechanisms in place to mitigate commodity cost increases. With double digit growth expected in the segment this year, we are confident that the performance drivers we have in place will continue a positive performance trajectory in this segment.

Turning now to Slide 7, organic and inorganic growth are driving significant margin expansion in our off-highway business. The market outlook for the segment remains strong as underground mining continues to recover and the demand for construction equipment remains robust.

In addition, e-propulsion for urban construction and mining equipment is providing near term sales growth opportunities, such as new business we announced with Mecalac on an all-electric excavator, and as has been the case for several quarters, the agriculture segment remained soft in a protracted slump.

Our off-highway business continued to execute extremely well through the previous downturn, positioning us to achieve share gains as the market finally recovers.

We are seeing significant profit growth driven by strong conversion and the cost synergies and cross-selling success from our Brevini acquisition, which I will talk about in greater detail in an upcoming slide.

As with other business segments, we have solid recovery mechanisms in place to address rising commodity costs, but the real story in off-highway continues to be our strong margins, greater than 15%, and 20% sales growth, which is five times greater than the current market growth.

As we continue to see these markets recover, we are expecting even greater improvement in both sales and margin growth in the next year. Turning to Slide 8, our power technologies business remains strong with consistent above-market growth and margin expansion.

Global demand for light vehicle engines continues to be robust, and the evolution of engine technology to more efficient designs is significantly increasing sealing and thermal content for both internal combustion engines and hybrid electric vehicles.

Complexity in Chinese engine and transmission technology is also increasing, which is providing growth opportunities, and e-propulsion demand is driving near term battery cooling growth as well.

Internal combustion engines and electric vehicles are presenting significant content per vehicle opportunities as the market shifts from engine oil cooling to battery cooling, and our re-introduction of Dana Victor Reinz brand to the North America aftermarket is also creating near term growth opportunities.

As we shared with you last quarter, we launched a new plant in China to address the fast growing market adoption of hybrid and electric vehicles in that region, and globally we are launching 90 new customer programs for all types of vehicles, a 30% increase over last year.

Consistent with our other businesses, we have solid recovery mechanisms in place to address commodity cost increases within the segment. Power technologies has had consistent above-market growth and our thermal management business is in prime position to capitalize on the shift to new energy vehicles.

As we move to Slide 9, staying with the new energy theme, I’d like to briefly talk about Dana’s recent acquisition of TM4.

As we have highlighted many times, one of our enterprise strategy priorities is to accelerate our electrification capabilities and create a unique to market singular offering of a complete electrified drive system, solutions that our customers are asking for. This is why the acquisition of TM4 is truly a game changer for Dana.

Through its complementary technology portfolio, it positions Dana as the only e-propulsion design, engineering and manufacturing system supplier across all three major mobility markets. This slide highlights just a few of the benefits.

Starting in the upper left-hand corner, this acquisition provides Dana with the capability to produce electrodynamic components, including electric motors and power inverters in-house.

This vertical integration will be a significant competitive advantage in our core markets, allowing for faster development and innovation, allowing for a cost competitive position that adds value to our customers.

Next, it established an e-technology center of excellence in Boucherville, Quebec, where TM4 is based, joining a strong list of Dana technology centers located around the world that are focused on mechatronic engineering.

Moving down a box, it further strengthens Dana’s position in China through TM4’s 50/50 joint venture in [indiscernible] China Prestolite E-Propulsion Systems Limited, or PEPS, we can now offer electrodynamic components through China and the ASEAN region.

Finally, the TM4 addition to the Dana family brings together our leading mechanical power conveyance and thermal management technologies with TM4’s experience in electric motors and inverters to offer a full range of hybrid and electric vehicle solutions for all drive configurations across all three of our end markets.

Slide 10 outlines how Dana and TM4’s combined capabilities will be used to deliver integrated e-propulsion systems with twice the content per vehicle of our existing systems.

Dana has a longstanding history of delivering software-controlled drive train systems under the Spicer brand, as well as thermal management solutions for power electronic components such as batteries, motors and inverters under the Long brand. TM4 brings proven motor and inverter capabilities which can be embedded in Dana’s e-propulsion systems.

Our new line of e-axles and e-drives are called Spicer Electrified Powered with TM4, and they leverage our combined unparalleled capabilities to deliver superior value through optimized efficiency, power density, and packaging. As I mentioned earlier, this acquisition truly sets Dana apart.

As everyone on the call knows, our industry is changing fast with more and more countries embracing cleaner fuel alternatives. OEMs are shifting focus to electric mobility. Our investment in these technologies will position us as a leader and the customers’ choice in mobility segments which we serve.

Turning to Slide 11, I’d like to provide you an update on another key acquisition and talk about the cross-selling success that is materializing now that Brevini has been with us for a year. The integration of Brevini has gone exceptionally well, helping to drive overall margin improvement.

Now we are benefiting more and more from sales synergies from Dana and Brevini customers that we expect will contribute a 10% increase in incremental sales growth.

By leveraging our wide portfolio of technologies, including traditional axles and transmissions from Dana, we can now provide a range of customers with enhanced system offerings, including drive units, winches, hydraulics and electronics, as well as truly integrated electric drive technologies with a single streamlined package.

When you combine our technology capabilities with our strong network of service and assembly centers strategically located around the globe, it is easy to see how we are successfully leveraging relationships with key customers across the off-highway segment. Thank you for your time this morning.

Now I’d like to turn the call over to Jonathan to review the financials..

Thank you, Jim. Slide 13 provides an overview of the second quarter and year-to-date results for 2018. For the second quarter, sales of $2.1 billion were up $214 million compared to the second quarter last year, a growth of 12%.

The strong double digit organic growth resulted from the conversion of our backlog and strong market demand that has continued through the first half of this year.

Adjusted EBITDA was $246 million for the second quarter, a $29 million increase from the prior year resulting in a 12% margin, a 20 basis point improvement over last year’s second quarter and a 40 basis point improvement over the first quarter of this year. Net income this quarter was $124 million, a $53 million year-over-year improvement.

The increased earnings were driven by higher adjusted EBITDA and a few non-recurring items, including $39 million in discrete tax benefits partially offset by a $20 million write-down of intangible assets.

Diluted adjusted EPS, which excludes the impact of non-recurring items, was $0.74 per share in the second quarter, an improvement of $0.06 per share compared with the second quarter last year. Finally, free cash flow was $61 million, $35 million lower than last year as higher working capital requirements offset the benefit of higher adjusted EBITDA.

Please turn with me to Slide 14 for further details regarding the second quarter sales and profit growth. Second quarter sales increased by $214 million compared to last year and adjusted EBITDA was higher by $29 million. The year-over-year double digit sales and profit growth is attributable to three key factors.

First, organic growth added $192 million in sales as we continued to convert our backlog and as demand in all three of our key end markets remained strong. The organic growth delivered an incremental $21 million of profit.

While the base conversion on organic growth remained strong, margin was muted by the last vestiges of the Jeep Wrangler launch costs that, while greatly reduced this quarter, were not completely eliminated as we previously expected. We also experienced a little more than $10 million in higher commodity cost increases net of recoveries.

As we’ve noted in the past, we generally recover the majority of material inflation on about a three-month lag. Second is organic growth.

While the year-over-year sales comparison is not impacted by the acquisitions we made last year in the first quarter, we continue to track the margin improvement from the synergy plan related to our Brevini acquisition, which added another $6 million in profit.

Third, foreign currency was a benefit in the quarter, improving sales by $22 million and adjusted EBITDA by $2 million due to translation of international results at currency rates that strengthened against the U.S. dollar. Please turn with me now to Slide 15 for an overview of the year-to-date sales and profit growth drivers.

First half sales increased by over $650 million compared to the first half of last year, and adjusted EBITDA was higher by $72 million. The year-over-year growth is attributable to the same three key factors.

First, organic growth, which is the largest driver, adding nearly half a billion dollars in sales due to backlog, and end market strength with all business units printing year-over-year improvements. Organic growth delivered an incremental $48 million of profit.

Cost headwinds in the first half were primarily about $20 million in inefficiencies related to the new Jeep Wrangler launch and approximately an equal amount in net commodity cost increases. Both of these headwinds are expected to abate in the second half of this year.

Second, business acquisitions made in 2017, Brevini and USM’s Warren plant, contributed $56 million in sales and $15 million in adjusted EBITDA. Margin has consistently improved as our planned synergies continue to be realized.

Third, foreign currency was a benefit the first half, improving sales by $110 million and adjusted EBITDA by $9 million due to translation of international results at currency rates that strengthened against the U.S. dollar. Please turn to Slide 16 for an overview of how the adjusted EBITDA converted to free cash flow.

Free cash flow was $61 million in the second quarter, $35 million lower than last year as higher earnings were more than offset by higher working capital requirements to deliver the sales growth.

One-time costs were $17 million lower in the second quarter and $33 million lower in the first half of this year compared to the same periods last year, primarily due to lower transaction costs related to our acquisitions in the first quarter of last year.

Interest was $9 million higher in the second quarter than the prior year due to the timing of bond interest payments as a result of our refinancing actions last year. Our normal cadence will be higher outflows for interest payments in the second and fourth quarters going forward.

As with the first quarter of this year, working capital in the second quarter increased over the prior year as a result of significantly higher sales driving higher inventory levels, and year-to-date working capital included higher cash outflows in the first quarter of this year related to last year’s incentive compensation plans.

Capital expenditures were near last year’s levels for the quarter and $24 million lower for the first half as our investment was normalized with the completion of our two largest program refreshes over the past two years. Please turn with me now to Slide 17 for an overview of the sales and profit changes we expect to see in the balance of the year.

Our full-year outlook anticipates a modest reduction in sales and profit in the second half of the year compared to the first half, but a significant margin expansion driven by several key factors. First, organic sales are expected to decline by approximately $300 million, with two-thirds of this change attributable to lower seasonal demand.

This is a normal demand pattern for the markets we serve as there are fewer production days in the back half compared to the first. Additionally, as we discussed last year in the first half, sales benefited from the overlap of the new and old models of the Jeep Wrangler.

This represents about $100 million of episodic sales that will not recur in the balance of the year. While sales were very strong in the first half, our incremental margin suffered from launch costs and the timing of material cost recovery.

As we compare the second half with the first half, we expect to see profit decline by only about $5 million on the lower sales.

The sequential decremental impact is so low because the $45 million reduction in profit due to the lower volume is nearly offset by commodity cost recoveries and the dissipation of the Jeep Wrangler launch costs as volumes steadily increase.

Finally, foreign currency, primarily the euro which was a benefit in the first half when compared to the prior year, will be a headwind to sales of about $50 million and $5 million in profit in the second half as compared to the first. We now expect the euro to be between $1.10 and $1.20 for the full year.

Please turn to Slide 18 for our full year financial guidance. We are affirming the previously provided full year financial guidance ranges. We now expect sales to be at the high end of our range, approaching $8.1 billion, which represents 12% growth over last year.

We expect adjusted EBITDA will remain at the midpoint of our range at $980 million, implying a 12.2% margin. This represents 17% profit growth over last year and 60 basis points of margin expansion. We continue to expect free cash flow to be approximately 3.5% of sales and diluted adjusted EPS to be approximately $2.90 per share.

Please turn with me now to Page 19 for a brief look at the drivers of the expected change in our sales and profit versus last year. There are a few updates to our full year guidance drivers. First, organic growth remains the primary driver of both our sales and profit increases this year.

With continued strong demand, we now expect three quarters of a billion dollars in organic growth over last year, with slightly lower conversion due to the margin headwinds we’ve discussed.

Inorganic growth remains on track to provide a meaningful contribution to our margin expansion as we realize the benefits of the cost synergies associated with the Brevini deal. Finally, we expect foreign currency translation will provide a more modest tailwind to both our top and bottom line as the euro weakens against the dollar.

All of our drivers remain in the green for this year and position us to exceed $8 billion of sales, deliver $980 million of adjusted EBITDA, and expand our margins by 60 basis points. Please turn with me now to Slide 20 to see how we expect our adjusted EBITDA will convert to free cash flow.

Slide 20 is mostly unchanged from what we shared on last quarter’s call, with slightly higher one-time costs being offset by lower net interest and cash tax outflows compared to the previous outlook. We expect to generate $280 million of free cash flow this year as we convert the vast majority of our profit growth into cash.

The adjusted EBITDA growth and reduced capital spending are partially offset by the increased cash taxes and working capital resulting from the double digit sales and profit growth. Please turn to Slide 21 for a look at our trajectory into next year.

As we turn the corner on the first half of 2018 and look forward to the remainder of this year, we’re very pleased with our top line growth rate that is double the global markets we serve.

We continue to exceed the long term sales target that we set out much earlier than originally anticipated; however, this does not mean we’ve reached the end of our growth trend.

We expect to see continued strong market demand in 2019 as well as $300 million of sales backlog coming online that will help us continue our trend of outperforming the market.

Our margin expansion is also continuing its steady 200 basis point improvement towards our 12.8% target next year, even though we’ve already far exceeded our original profit expectations on a dollar basis. The dramatic improvement in our free cash flow seems to be our best kept secret. We’re well on our way to achieving free cash flow at 5% of sales.

This improved cash flow profile is extremely important as it affords us the opportunity to pursue accretive M&A opportunities that improve our competitive position while maintaining a strong balance sheet. I’d like to thank all of you for listening in this morning, and I’ll now turn the call back over to Dennis so we can take your questions..

[Operator instructions] Your first question is from the line of Joe Spak with RBC Capital Markets. Please go ahead..

Thanks. Good morning, everyone. First question, to start out on the LVD segment.

One, some of the remaining costs with the Wrangler, which you said you didn’t expect this quarter that remained in, is there something--could you provide a little more color? Is there something unusual that happened, and do we fully expect that to be gone next quarter?.

Joe, this is Jonathan. I’ll start with the last piece. We do. We expect the costs to largely be gone in the third quarter. From a ramp-up perspective, the program still isn’t at full ramp up where we were expecting the build rate to be.

That caused us to carry some inefficient cost in the second quarter that we weren’t expecting, but the quality of the launch is good, we’re delivering well, but we have good line of sight into the third quarter and have pretty high confidence that those costs will all be gone in the third quarter and the fourth..

Joe, this is Jim. Good morning, thanks for joining the call. I’ll just add to that, as I’m pretty sure you’re aware, it’s a very unique circumstance where you have the prior model and the new model producing at the same time That creates a whole different dynamic operationally.

Our team did a spectacular job getting through that, but it isn’t normal course to have to do that. So to get back to Jonathan’s point, we did a great job transitioning through it. The launch has gone spectacularly well, but it was a unique circumstance for us in Q2..

Staying with LVD, obviously Ford’s talked about some of the impact on the super duty volumes, and I think that probably impacted you a little bit in the quarter.

I believe they’ve mentioned that they don’t think that’s all going to come back this year, so that’s reflected in your updated guidance as well, even though the revenue guidance is taken to the high end?.

Yes, you’re right on that. Our perspective on the build rate for the super duty is that they’ll make up some of the lost volume, probably not all of it, but we think based on line of sight we have, they’ll make up a good piece of it.

The biggest impact for us, we did get caught with a little bit of inefficiency there, but where you really saw it was in our working capital.

We made a conscious choice to continue to produce--you know, that program is running so well, a lot of how we’re meeting demand is on premium time, so we saw an opportunity to build some inventory on more standard time to get out of some of the premium time in the back half of the year.

You probably saw it more in our working capital, the impact of that, than you did in the P&L..

Okay. Last one from me, you even said yourself the hidden secret is the accelerating free cash flow, and I know you put a little bit of that to work with the acquisition, but it seems with the moderating capex, free cash flow could still improve further.

With the stock price where it is, just wanted to know if you had any more updated thoughts on repurchase of shares again..

Yes, we have preserved optionality there, so as you’re well aware, we have an authorization of $200 million. We utilized about $25 million of that in the second quarter and we will continue to look at opportunities.

We clearly have conviction that the stock is trading at a value much lower than what it’s really worth, so we’ll continue to take a look at that as we move through the balance of the year..

Okay, thanks a lot, everyone..

Your next question is from the line of Aileen Smith with Bank of America Merrill Lynch. Please go ahead..

Good morning, guys. Thanks for taking my questions. We have a quite active day of earnings, and some of your light vehicle customers that reported this morning cut their forward outlooks on intensifying headwinds from raw materials and FX, among other factors.

As we look at your reaffirmed 2018 outlook and what was just a 20 basis point hit to your EBITDA margin target, is this more a function of your diversification to other end markets outside of light vehicle or even mix within your light vehicle segment, or is it more a function of cost rationalization and other internal actions that you’re taking at Dana?.

We see it as a combination of both of the first factors you listed. It is where we’re positioned within the light vehicle space.

As you’re well aware, we are on the rear wheel drive, all-wheel drive platform, and as Jim mentioned in his comments, we still continue to see consumer demand trending towards those vehicles, so the fundamental for performance of light trucks and in particular the compact truck segment and the SUVs and some of the platforms that we are on, we still believe that the demand for those is going to remain strong in the balance of the year, in spite of some of the headwinds you mentioned.

I also would indicate that it does have to do with the fact that the light vehicle market only makes up just over half of our business, and the other markets that we participate in - the heavy vehicle businesses, both on highway and commercial vehicle, and the off-highway segments of construction and mining in particular, continue to perform very strong.

As we have line of sight into the demand, we see a great opportunity for us to continue to capitalize on the expenditures that are being made for those types of equipment in the balance of the year..

Great, that’s helpful. Then on the commercial vehicle business, it looks like conversion is improving, and you guys cited getting to a double digit margin, which you had targeted.

Is that more a function of the recovery in Brazil? I mean, the North American Class A market continues to run in excess on a run rate of 300,000 units, which I believe you’ve commented in the past drives less than optimal conversion for you, so is it just Brazil or are there other factors in that, that are helping as well?.

Yes, it’s really a combination. We’ve been pretty clear, once Brazil starts to move off of its bottom, it doesn’t take a more than 300,000 unit market in the U.S. for us to get to double digits. But what we’re seeing this year is really a combination of multiple factors.

First, Brazil is getting some recovery and we’re getting strong conversion on that, based on the consolidation that happened in the market during the downturn, based on the vertical integration play we made with the SIFCO acquisition on forging, so we have really nice conversion margins on the way up.

The second factor is the performance in North America. We are not in the optimal conversion range - you’re right, however we’ve done a great job of managing our supply chain and the team has done a very good job of getting the best conversion that we can get out of those incremental units.

I would also highlight that we just put out a recent announcement - we’ve actually started to recapture some share within that space and winning new business in commercial vehicles, so the combination of all of those is really leading us to a place that we have confidence that this business will be at double digit margins..

A follow-up to your last comment on the CV business and the share gains that you’re making, are those at the expense of other suppliers, or is it at some vertical integration at maybe some of your customers? Can you provide any detail on the technologies that may be driving some of these share gains and new business wins? Is it more traditional drive line technologies or possibly some of your electric drive line products?.

Great question. It seems like every time we answer your questions today, it’s a combination of both, but it is a combination of both in this example as well.

Some of it certainly came from some of our competition, but there also has been a movement within really all of our markets, but in this example commercial vehicle where some of our OE customers have asked us to take on some work that they had done traditionally, so it’s a combination there.

As it relates to the products that they’re on, they are definitely more of the more traditional product, but it goes without saying, because I’ve already put it in m prepared script, we’re working with those customers no different than the other end markets on e-propulsion, etc., but these wins were in the more traditional sense. .

Great, thank you. That’s very helpful. Thanks for taking my questions..

Your next question is from the line of Colin Langan with UBS. Please go ahead..

Great, thanks for taking my questions. I just wanted to follow up on light vehicle. When I look at it quarter over quarter, I know you mentioned--you already talked about Wrangler headwinds actually easing but margins fell quarter over quarter.

What were the other issues that we should be thinking about when we think about that?.

Commodity cost, which was the other thing that we pointed to for all of Dana, obviously light vehicle is our biggest business and they were impacted by those increases.

We’ve tried to be very clear that we do have--we recover the significant majority of our raw material cost increases, but if we’re getting price increases in April, usually we’re not getting those price increases coming through on the top line for a few months after, so that was a factor that put some additional pressure on light vehicle but also our other businesses..

Got it. You also talked about free cash flow, but year-to-date it’s actually negative. Should we think about the second half being very, very strong? Is that just normal seasonality, or--.

Yes, absolutely. It’s a combination of the normal seasonality. Last year was a little bit different because of the market ramp-up that was still occurring in the heavy vehicle markets in the second half of the year.

On a more normalized cadence this year where the markets continued to perform well but we had fewer production days, as we move towards the end of the year, you’ll see the normal working capital balance move in line with what we would expect.

The second factor, Colin, that I mentioned a few questions ago is we made some conscious choices, particularly in light vehicle, to build some inventory during some customer downtime to get out of some of the inefficient costs that we have to incur to meet these very high demands.

There was a conscious choice to drive up our working capital balance in Q2 because we thought the economics were attractive. It also happened in other areas, as you are well aware.

We’ve mentioned before meeting demand for all of our off-highway customers right now is a challenge, so when we see the opportunity to procure inventory even on the raw material side to make sure that we can fill as many orders as possible in the back half of the year, we’re doing that, so again it’s another conscious choice.

But we have a very clear path to drive our working capital levels down to where we would expect them to be to deliver cash flow at the 3.5% of sales..

Got it. Just lastly, any thoughts--there’s obviously a lot of concern in the market about potential auto tariffs.

How would that impact your business and what would you do if the tariffs were put in place?.

Yes, the impact for us on the tariffs that have been put in place right now is less than $10 million, so we have continued to focus on ways to offset that, but that’s contemplated into our plan.

Future tariffs that could happen, the hypotheticals, we continue to look at those on a very specific basis, look at opportunities to change the nature of the supply chain or move things around if at all possible, but that’s very much just a wait and see for us.

We’re actively running scenarios to optimize, but clearly it’s an aspect of global trade that’s out of our control right now that we’re continuing to monitor..

The $10 million, is that China related or steel related, or both?.

Yes..

It’s both - okay. All right, thank you very much..

Your next question comes from the line of Brian Johnson with Barclays. Please go ahead..

Yes, good morning. Just wanted to talk a little bit about the commodity cost recoveries and your optimism for second half recoveries. Can you maybe recap, because I know beginning with [indiscernible] there was a lot of work done on this to get contracts, protecting from steel and other commodity increases.

Just what percent of your business is absolutely--you know, maybe three buckets, what percent of it is absolutely guaranteed, locked in just mechanical, what is there in the contract but frankly you might be worried about the OEMs negotiating hard--another analyst urged GM to push against suppliers--[indiscernible] Fiat Chrysler to push against suppliers on the last call, and I guess thirdly in where you have to kind of sit down and cash in some chips to get the recovery..

Sure. We have typically provided the number that about three-quarters of the commodity cost increases that we see are recoverable.

We’ve not provided the exact amount of that that’ s contractual versus non-contractual, but I’ll tell you the vast majority of that amount is contractual, and we have a few situations where we have to go and negotiate some of those commodities, but it’s a small minority of the total amount we’ve recovered.

In the aggregate, that’s basically what we have.

It’s pretty consistent across our businesses and our end markets - certainly there is some movements on that, and then the other aspect for us is timing, and what we’ve also tried to say is we typically have to provide those commodity cost increases to our suppliers, on average usually about three months before we get the increase from our customer, and those customer increases are not retroactive, so that’s where we get that timing impact where we have in a short period of time a steep increase, we get caught, and then that only gets fully recoverable in the long run if those commodities end up coming back down to those levels..

Okay.

Second question, a bit more strategic, with tucking in some acquisitions to help on the e-drive side, what is the cross-selling you’re seeing between your e-drive opportunities and your battery cooling opportunities, and do you think even if you don’t have the e-drive, there’s still significant opportunity in the battery cooling area?.

Yes, for sure. Great question, Brian. Thank you - this is Jim. At the end of the day, the OEMs are going electrified - we all know that. Batteries are coming.

Pre-TM4, back a month ago or so, we had a strong pipeline of interest among new business awards and interest across all of our end markets in battery cooling, so with or without TM4, that was going to happen.

What this brings for us now--you know, a visual, a picture is worth a thousand words, is having our thermal engineers, who by the way our distributed technology center for that is in Oakville, Ontario, now with our distributed technology and headquarters for TM4 being in Quebec, Canada, right down the road essentially from each other, now they’re working together to go have that systemized approach to go have the best solution in general.

So it’s kind of--what it is, is essentially we already had one swim lane for growth as it related to battery and electronics cooling. Now we have another one because it’s all interconnected with the e-axles. .

Okay.

A final, more strategic question, with all the turmoil around tariffs and trade, is there anything, given you’ve worked with our commerce secretary in the past, that you can see in terms of either, A, light at the end of the tunnel for any of these, or B, I think there’s some sort of Section 301 recovery mechanism if jobs are threatened by the tariffs.

Maybe your thoughts on just the whole NAFTA and new tariff front, and also of course how it might affect Dana..

Well, I appreciate the question, but I will say this - I don’t have any intel, and if I did, I couldn’t relative to Commerce Secretary Ross’ view on things.

I will tell you that as I probably have told you in the past, I learned a tremendous amount with him being one of my mentors as it relates of the art of the deal, and I can kind of understand a little bit of what’s going on and how he and the team may be thinking in Washington, but I really can’t give you any forecasts on how that’s going to work out on either side of the two-sided questions that you asked..

Okay, thank you..

Your next question comes from the line of Emmanuel Rosner with Guggenheim. Please go ahead..

Hi, good morning everybody. I wanted to ask you first a question on the light vehicle drive line margins. I understand the timing factors for this year, so both the launch costs and the commodity costs sort of coming back in the second half.

I’m looking at your 2019 margin indication of 12%-plus in light vehicle drive line, which would obviously be very solid.

What are the drivers there when you start thinking next year? Is it just basically having a full year of what you expect for this year’s second half, or are there any additional improvements next year?.

Yes, it certainly is. The other factor is the conversion of backlog next year at pretty attractive margin profiles, so it’s really the things you mentioned. We certainly have--we’re growing the light vehicle businesses, we will have some launch costs in the balance of this year just like we would next year, but they’re at more ambient levels.

The Wrangler represents the second largest platform in all of Dana, so its launch costs just by order of magnitude are so significant that having all of those gone next year will create a significant margin tailwind for that business. Also the commodities, we expect that those will start to plateau.

The recovery will catch up, so the one-time lag hit that we experienced in the first half of this year, we do not expect to recur next year. Then the third aspect is the backlog, so we’ve been pretty clear about some of the exciting new programs that are coming online with key customers.

We’re really excited about the technology that’s being offered and the margin profile of that business, so once you see those three things happen, we see light vehicle above 12% and it’s pretty clear mathematically we can’t get to our 12.8% target without the light vehicle business performing above 12%, so we have very clear line of sight into the profit conversion on that business going into next year..

Okay, that’s very helpful. Then secondly on the power technologies, it seems like this is probably the third year in a row of essentially flat revenues and flattish margin.

What is preventing growth, or more growth in this business? Fundamentally, to the extent [indiscernible] drive line product, do you still view this as core?.

Yes, relative to the financial profile, one of the really important things to look at, it’s obviously our smallest business just in terms of size, but when we look at the growth trajectory on a constant currency basis and we look at the markets that that business supplies, which is really largely the light vehicle engines is the best proxy to look at for that business, it has outperformed the market over the course of the past four or five years, and we really attribute that to two secular trends that are driving higher CPV, and that is first, as light vehicle engines are becoming smaller and more efficient, there’s increased pressure in the engine for the fluids demanding higher sealing solutions, so we’re seeing our content per vehicle go up, and then the second factor is as they become smaller and more efficient, there’s more heat in the engine so our thermal management and our insulating products that we provide for the engine compartment have grown on a content per vehicle basis.

It’s somewhat--it’s small and often goes unnoticed, but if you adjust on a constant currency basis, given half of that business is done in Europe, we’ve seen a nice, steady increase in the growth rate From a margin perspective, we’ve also been able to increase margins, albeit on an annual basis it’s usually 10 to 20 basis points, but that business has continued to grow from a margin perspective, so it is profitable growth that we’ve seen.

This year, we think margins are probably going to be about flat compared to last year, and Jim noted in his comments we have nearly 100 launches happening right now, and when those all stack up in a same period, we’ve ended up with some inefficiencies.

It’s on a much smaller scale so we haven’t called it out discretely for the overall company, but it has impaired our ability to convert on the incremental sales.

But we see that that’s something that will dissipate moving into next year, and we believe that that’s a business that will continue to deliver solid growth and modest margin expansion on a go forward basis..

That’s great.

Finally, the TM4 deal, can you provide any insight on whether there was some acquired backlog as part of it, and then more longer term, what is sort of the timeline of rolling out that technology into other product lines?.

The way we’re thinking about it, Emmanuel, is we will probably come out later this year with some more specific thoughts on the opportunity that the TM4 acquisition creates.

We’re certainly in the process right now of revising our product road map now that we have this technology and capability in-house, and what we’ll likely do is talk about it in the context of our backlog, how much of our backlog in the future will be made up of electrified programs on a standalone basis, but also leveraging that technology.

So unfortunately a bit of a vague answer for you now, but more to come on that in the second half of this year..

I appreciate it, thanks..

Your next question is from the line of Brian Colley with Stephens. Please go ahead..

Hey, good morning guys. Thanks for taking the question. Just looking at the 2019 targets by segment that you gave, I was wondering if you could just share what you’re assuming in terms of the sales contribution from end market demand there..

Yes, I think at a high level what we’ve indicated is we expect our markets to remain strong next year, and really what’s going to drive the sales growth next year is the incremental backlog that’s coming online.

We’ve provided the distribution of our backlog before by segment and certainly from a dollar perspective, and even on a proportional basis, the light vehicle wins that we’ve talked about - Ranger, Bronco, some of these key programs that are going to be coming on, the disconnecting system that we’re bringing to market in China next year, these are going to be the primary drivers of the growth.

From a contribution margin perspective, we’ve indicated that the light vehicle business is probably near the middle of the pack, maybe in the high teens. We certainly expect off-highway, when they have backlog, it converts higher than that, and you kind of see somewhere in between for the other businesses.

The other thing I’d point to from a margin perspective, if we continue to see the trend, which right now we think will continue in the next year, where Brazil recovers, we get a nice mix impact within the commercial vehicle business even if Class A truck production next year is down a bit.

Given it’s only about a third of our commercial vehicle business, we get into a situation where the commercial vehicle business coming up in Brazil creates a nice mix for us.

I would say those are a couple of things that I would point that help give us confidence, in addition to the items we’ve talked about before, that our margin performance will continue to improve into next year..

Got it. Just thinking about the incremental contribution that you added to your sales--incremental sales you’re expecting this year went from, I think, $200 million to $450 million in terms of end market contribution.

Could you just share which markets are driving that, what are the biggest factors there that led you to increase that outlook?.

Yes, sure. On the light vehicle side, I would say trucks have probably done a little bit better than we had expected, so that’s certainly a piece of it; but the markets that have outperformed compared to where we expect are largely in the off-highway space and in commercial vehicle.

Just give you a couple of examples - construction and mining have continued to do better than we expected. We certainly called for low single digit growth, maybe even mid single digit growth in a couple cases, and that has performed even better in Europe and in Asia, and even to a lesser extent in the U.S.

I would also point to the fact that the commercial vehicle space, we had called the Class A, we were a bit conservative. We were kind of at the lower end of our guidance range, and right now we’re coming out more towards the high end of our guidance range from a Class A perspective.

Medium duty has done a bit better than we expected, and some of the wins that Jim mentioned earlier are coming in the medium duty space, so I would say it’s really in our heavy vehicle drive line businesses, both commercial vehicle and off highway where the markets have done a bit better than expected. .

Got it, that’s helpful.

Just thinking about the EV product road map going forward, I’m just curious, is there any--are there missing pieces to the puzzle where you might look to make another strategic acquisition or partnership, like you’ve done recently?.

We’ve been pretty clear from a competence perspective, now that we have the in-house gear capability, the software and controls, the systems knowledge for drive systems within Dana augmenting the motor and the inverter capabilities really rounds out that competence, so there’s not a missing link left for us to go get. .

Got it. All right, I appreciate the time today..

Your next question is from the line of Brian Sponheimer with Gabelli. Please go ahead..

Hey, good morning everyone. A quick one from me here.

With your ag customers, was there any change in expectation or tone once the soybean tariffs got announced, and just generally speaking body language from customers regarding larger ag?.

Good question, Brian. Good morning, it’s Jim. I think the appropriate word is there was some pause.

I mean, you’ve been covering Dana for many years and that space for many, many years, and the reality is that it’s a lot--you know, customers move a lot quicker based on what they expect is going to happen, based on anything from the weather to other things that can happen.

There’s a little bit of pause there in agriculture, just to see how things wash out, and you used the best example, which was the soybeans..

Okay. On the other side, we have heard from customers on the commercial vehicle side about supply chain inefficiencies, and you talked about some build there.

What’s your sense that really across the board, the CV market has worked itself through some of these supply chain issues?.

It’s a great question. Unfortunately I can’t really speak for the OEMs in terms of how their doing relative this. What I can do, at the risk of taking victory lap, is I can tell you that Dana--you remember the crisis of ’14 and ’15 better than most, right, and I can tell you that we’ve had none of those difficulties whatsoever.

The team has done a spectacular job finding their way through a lot of the constraints that are out there, despite being at record highs for a prolonged period of time, so at least from our point of view, we’re finding a way.

We don’t see any volume getting pulled out, at least in the near term, in any of the releases or schedules coming through, at least from our customer schedules..

All right. Well, best wishes for a great second half..

Your next question is from the line of Ryan Brinkman with JP Morgan. Please go ahead..

Hey, good morning, guys. It’s David Kelly on for Ryan. Two quick ones from me. First, looking at just the off-highway margins here, really strong conversions in this segment.

Can you walk us through maybe the benefits of the higher volumes versus Brevini and also maybe some of your internal initiatives as we think about this pure operational execution in the segment?.

Sure. The best way to quantify the impact of the acquisition is you take a look at the year-over-year bridge that we provide.

The vast majority of the $50 million of sales increase and profit and $30 million of profit increase on a year-over-year basis is related to the Brevini acquisition, a combination of having a full year of sales - that’s the top line piece, and then also the synergies.

We originally said that that business was going to get $30 million of synergies within two years, and a few months ago we communicated that we’ve over-performed to $40 million, so that’s a significant contributor but that’s really getting Brevini to the overall level of the off-highway margins prior to the market recovery.

The second attribute for us is that is a business that, even when the market turned down dramatically, we were able to maintain and slightly improve margins based on a lot of work we did on the cost structure, so we’re probably seeing some of the best incrementals on an organic growth basis out of the off-highway space, in the mining and in the construction parts of the business within off-highway.

That’s the best way I can dimension for you the impact of both of those..

All right, great. Appreciate it, that’s really helpful. Then just a quick follow-up here.

How should we think about tax rate for the balance of the year, given the discrete items in the first half of 2018?.

We continue to expect the cash tax rate to be approximately 25%, so that’s probably the best way to give you a sense of where we think we’ll be. So setting aside the effective rate and some of the one-time items, 25% is what we expect from a cash tax rate..

All right, great. Thank you..

Today’s final question will come from the line of Christopher Van Horn with B. Riley FBR. Please go ahead..

Good morning. Thanks for squeezing me in. Just a couple questions.

First on the aftermarket side, I know it’s probably a small part of the overall story, but just curious how you see that business, the trajectory there, and do you see costs having to go into getting that going? Is there any specific end market that you see a big opportunity in?.

Yes, the aftermarket performance has been really good for us on a proportional basis.

I’d point to one of the biggest opportunities for us is how we engage with our aftermarket partners, so we rolled out last year our new ecommerce platform, Danaaftermarket.com, which is the tool that we use to provide content and visibility to the parts that we have, and there’s a fulfillment improvement that’s been made on the back end of that, so that’s an example of an opportunistic way where we made a choice to make an investment and get us in a position to capitalize.

I would say we see growth opportunities really across all three end markets by having the availability of components, having high quality Dana components available for the market really across the commercial vehicle off-highway, and probably to a little lesser extent the light vehicle space. .

Okay, got it. Jim, we met a couple years ago. You focused a lot on the white space, and I was curious just to get an update on your vision of what you see in terms of what white space is left, how do you feel about the white space you’ve filled, and just kind of the strategy..

Thanks a lot for the question. I hope you would actually continue with that and say that I walked the talk on that, or we walked the talk on that.

For those of you that maybe weren’t around at some of those initial discussions, when we talked about that, we filled the North American aftermarket piece with Magna and we filled the piece with lack of heavy manufacturing or forging in South America, we filled the space with track vehicle technology on the off-highway side of the business, and the list goes on, and obviously TM4, it goes without saying between motors and inverters.

So I think I’d be lying to you if I said that I’m not always keen on incremental opportunities on white space and where they are. My first instinct on that right now is we can always get better, but we believe we’re pretty good at software and controls because we’ve done that for decades as it relates to the transmission business.

I would tell you that we are always looking to get better, and because we have a distributed technology center model around the world, the more software and controls people and experience that you can gain anywhere is always a positive.

So if I were to tip my hat a little bit, you’re always thinking in that regard, but even if we don’t go that way, we can organically grow it. We will organically grow it.

How do you organically grow it? Well, one really good starting point is to have great people like we do at TM4, train the trainers and teach the folks around the world, and we’re already on a fast horse of doing that..

Great. Just one last quick one from me. The Navistar win, and I apologize if you went over this, but the Navistar win yesterday, it sounds like that’s an additional content win for you in terms of line-up of vehicles. It’s an existing customer, obviously, but it sounds like it’s a new business win, and I just want to confirm that..

It is, it is. Not much else to add to that. We appreciate Navistar’s confidence in us. The team has done a spectacular job performing throughout these synchronized volume increases around the world, including here in North America. It was very nice to be rewarded..

Okay, great. Congrats, and thanks for the time..

At this time, there are no further questions. Please continue with any closing remarks..

I will do so, thank you very much. I would just say growth obviously is a fantastic thing.

I’m not sure relative to the companies which you may cover, how many of them are getting on the line with you talking about six consecutive quarter of achieving double digit year-over-year organic growth, but I can tell you that I’m very proud of our team for having accomplished that.

More so, I’m proud of the team for doing it the right way, and by right way, that’s providing our customers exceptional products and services along the way. That’s mission critical, because this is not--the business is certainly not a sprint, it’s a marathon. This should be important.

It’s not just cheap talk, it should be important to the audience because it really underpins my conviction that we’re going to continue into 2019 and beyond.

You have to walk the talk, as I said a few seconds ago, and between the read on the markets that I have and the team has, the communication we have with our customers, and of course with locked down new business roll-on that’s coming, I would not have asked the Dana IR to go put incremental data out there for you to see ’19 if I didn’t think it was value-add for you to understand that I have strong conviction that things will continue to head in the right direction, but it is because we’re taking care of the customer and that folks are committed to doing so.

Thank you very much for attending the call this morning, and I look forward to talking to you all very soon..

Ladies and gentlemen, thank you for joining Dana Incorporated second quarter 2018 financial webcast and conference call. Thank you for your participation. You may now disconnect..