Jim Kamsickas - President, Chief Executive Officer Jonathan Collins - Executive Vice President, Chief Financial Officer Craig Barber - Director of Investor Relations & Strategic Planning.

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

There will be a question-and-answer period after the speakers’ remarks. We will take questions from the telephone only. [Operator Instructions]. 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..

Thank you, Carman and good morning to everyone on the call. Thank you for joining us today. You will find this morning’s Press Release and Presentation are now posted on our 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. As always, we will end our call with a Q&A session. To allow as many questions as possible, please keep your questions brief. 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 those factors that could affect future results are summarized in our Safe Harbor statement filed in our public filings, including our reports with the SEC.

Presenting this morning are Jim Kamsickas, President and Chief Executive Officer; and Jonathan Collins, Executive Vice President and Chief Financial Officer. Jim, the call is yours. .

Thank you very much Craig. Good morning everyone. Needless to say, on behalf of the entire Dana team, I'm very proud to communicate that 2018 was a record year for sales, profit, and margin.

We grew the business by nearly $1 billion with a very substantial portion of this growth being organic, and the team executed extremely well in this high demand market. We successfully launched new business and brought on our sales backlog to the market, thus driving nearly $800 million in profitable organic growth.

Our profit came in right where we expected at $957 million, and adjusted EBITDA adding $122 million in profit growth over 2017. Strong execution drove a 20 basis point margin improvement as we overcame launch costs inherent in the business at the beginning of the year, and commodity cost inflation in the back half of the year.

And as we committed to, we achieved significant improvement in free cash flow generating 51% higher returns in 2018, which is no small feat when considering that we again grew the business by double digits last year. Translating this success, we also achieved 18% higher EPS for our shareholders.

Generating shareholder value will always remain one of our highest priorities. Perhaps the best part of accomplishing this outstanding year is at the same time we continue to increase customer satisfaction through new products, technology, and overall operational performance.

As you can see on this page, we received over 30 significant Customer and Industry Honors last year. Of course, directly or indirectly, this enables us to communicate that our backlog is $700 million in committed net new business that will layer on over the next three years.

In fact, finally on this page, what may have us most excited is all of the opportunities that we foresee in the future coming off an incredibly successful year of acquiring the industry leading e-Propulsion companies, TM4 and the SME Group.

We have added great people and technology, and this will only exasperate once we complete the acquisition of the Oerlikon Drive Systems business at the end of this month. This acquisition will further balance our end markets and drive future growth and innovation as we evolve into the world of electrification.

Please turn to page five, for a quick snapshot at Dana over the past three years. So I've been at Dana for approximately 3.5 years now, and I've often been asked what's changed over time. We used this slide in our outlook presentation last month as it tells the story very well.

Over the last three years, sales were up 34% in EBITDA at nearly 50%, and free cash flow was up 66% while continuing to grow the business, and that's no easy task. And finally diluted earnings per share are up 71%.

I really do appreciate the outstanding performance of our team, as they have executed our strategy and integrated seven acquisitions, but we still have a lot more to do and we strive towards in the future. Thank you for your time this morning. Jonathan will now walk you through some detail over last year and our outlook for 2019. .

First, organic growth added $797 million in sales as we continue to convert our backlog and demand in our and markets remained strong all year. The organic growth delivered an incremental $139 million of profit for a conversion of 17%.

The full year conversion rate was lower than our typical 20%, the result of the significant premium costing incurred to meet the elevated demand. We’ve taken numerous actions to streamline our cost structure and improve our conversion rates going forward as we expect to be operating at a high demand environment through the remainder of the year.

Second, inorganic growth drove margin expansion of 30 basis points as we recognized a full year of sales for both the Brevini and US-M1 plant acquisitions and achieved significant cost synergies associated with the Brevini transaction. Third, the impact of foreign currency was negligible on a full year basis as the quarterly changes offset.

Finally, the scale of the commodity cost increases were in line with the expectations we presented on the third quarter call. As we’ve said, we recover the majority of commodity inflation from our customers with a typical one to three month lag.

In 2018 raw material prices increased by $110 million over 2017, with increases accelerating in the back half of the year. We recovered $65 million in the form of higher selling prices. The net impact reduced full year profit by $45 million, lowing margins by approximately 70 basis points.

Please turn now to slide 11, for a detailed look at how our profits converted to free cash flow. We generated $243 million of free cash flow in 2018 for a 3% margin compared to $161 million in 2017 for just over a 2% margin. Our profit growth and lower capital spending more than offset higher cash taxes in working capital requirements.

Elevated cash taxes were the result of timing of payments, increased income in tax paying jurisdictions, and an entity restructuring completed earlier last year. Working capital was a significant use of cash last year to support the $800 million of organic sales growth.

Capital expenditures were below the prior year as we had elevated spending in 2017 related to new program launches, namely the Jeep Wrangler. Please turn with me now to slide 12 for a look at our expectations for this year.

We are affirming our offering our full year 2019 financial guidance range as we discussed with you last month and we are showing it to you two ways. The first is the base business as it exists today before we close the Oerlikon Drive Systems acquisition in a couple of weeks.

The second includes the expected impact of 10 months’ worth of activity for that business. For the base business on the left we expect sales to be at about $8.4 billion at the midpoint of our guidance range.

We expect adjusted EBITDA to be over $1 billion at $1.025 billion and that implies a profit margin of approximately 12.2% at the midpoint of our range.

We expect our adjusted free cash flow to expand on the base business by 100 basis points over last year as our adjusted EBITDA continues to grow and as the working capital that we invested in the last couple of years to deliver as higher sales level begins to subside. We also expect to accrete another $0.20 to adjusted EPS ending this year at $3.10.

The guidance with the Oerlikon Drive Systems business adds $750 million of sales, a $100 million of adjusted EBITDA, which includes $10 million of the $40 million of expected cost synergies. We expect most of the balance of the cost synergies will be achieved next year.

Primarily due to the transaction and integration costs we will incur, we expect the acquisition to be a use of $60 million of free cash flow in 2019, lowering our implied adjusted free cash flow margin to about 3% of sales, which is in line with last year. We do expect the acquisition to accrete approximately a dime to EPS this year.

All in, we are expecting to deliver for the third consecutive year double digit sales, profit and free cash flow growth. Please turn with me to slide 13 for further details regarding the 2019 sales and profit growth. The same four factors leading to last year's sales and profit growth are also the primary drivers of our expected growth this year.

First, organic growth remains a major contributor to our performance. While we expect market demand for our products to remain strong and in line with last year, our backlog is expected to generate $350 million in additional sales.

We had over $100 million in non-recurring sales in the first half of last year, as a result of the old and new Jeep Wrangler programs overlapping. However the year-over-year profit impact will be negligible as the loss contribution margin will be more than offset by the non-recurrence of launch costs on the program.

We expect the overall conversion on organic growth to be higher this year as a result of the structural cost actions we took last year, as well as operating improvements we are making that will lower our conversion costs.

Second, inorganic growth from the Oerlikon Drive Systems acquisition will add $750 million in sales and about $100 million in profit. Third, we expect the impact of foreign currency to be a slight headwind, primarily due to the relative value of the euro to the U.S. dollar.

Fourth, we expect commodity inflation to continue this year, albeit with a higher recovery rate of about $90 million and a net profit headwind of about $40 million as commodity costs level out.

This continues to put pressure on our profit margin expansion, but we are beginning to see signs that commodity costs will improve as we move through the year. Please turn with me to slide 14, for more detail on the quarterly phasing of this year’s sales and profits.

The slide is intended to illustrate the progression of sales and profits through the year. Typically our sales and margins peak in the middle of the year and this year will be no exception.

We expect the first quarter to have the lowest sales and profit margin of the year as will only have one month worth of contribution from the Oerlikon Drive Systems business. We anticipate sales and profits improving in the balance of the year as our backlog converts the sales and we recognize the accretion from the acquisition.

Please turn with me to slide 15 for more details on how we expect profit will convert to free cash flow. As is our overall guidance, we are highlighting the drivers of adjusted free cash flow on the base business, as well as providing the discrete impacted of the Oerlikon Drive Systems acquisition.

The base business adjusted free cash flow margin is expected to expand by 100 basis points as our profit grows and the working capital investment we've made in the last few years subsides. The Oerlikon Drive Systems business will be a use of free cash flow of about $60 million for two reasons.

First, we will incur a transaction and integration cost associated with the deal. Second, the capital spending for the business this year is higher than normal due to the launch cycle of certain programs. We expect both of these to moderate significantly next year. You’ll note that we are using a new adjusted free cash flow measures.

This measure merely excludes the discretionary pension contribution that we plan to make later this year to fund and terminate a frozen pension plan. This action supports our objectives to continue to improve the quality of our balance sheet. Slide 16, reinforces some of the highlights Jim mentioned at the start of our call.

Over the past few years we've grown the topline of the business by $2 billion and expect to add another $1 billion of sales this year, putting us on track to deliver a nearly double digit five year CAGR.

We've also expanded our profit margins by 100 basis points in the last few years and are poised to expand them by another 100 basis points by the end of next year. The adjusted EBITDA growth we are delivering is substantial and it's converting to cash.

Just two years ago the business only generated a free cash flow margin of 1% and we are on a trajectory to generate a free cash flow margin of 5% next year, and will be in a position to deploy this cash in a shareholder friendly manner.

Finally our diluted adjusted EPS is expanded by more than $1.20 over the past few years and is poised to continue to grow this year and next. The entire Dana team remains focused on continuing this excellent trajectory of profitable growth in the coming years.

I’m also pleased to announce this morning that we will be hosting an Investor Day at the New York Stock Exchange on Monday, March 11 at 9:00 AM Eastern Time to provide an update on our Enterprise Strategy, more information around our exciting new portfolio of Electrified Products and the future financial implication of both of these.

I’d like to thank all of your for listening in this morning and I'll now turn the call back over the Carman to take your questions. .

Thank you. [Operator Instructions]. Your first question comes from the line of Aileen Smith with Bank of America..

Good morning. Thanks for taking the question. Looking at slide 20 in your appendix around your underlying market assumptions, which generally appear flat to stronger for 2019 [ph], it’s no secret that there's been some questions around the accuracy of certain market and industry forecasts.

So how much conservatism if any do you think you have baked into your financial outlook and these market assumptions, and more broadly what end markets or regional markets into 2019 have you most concerned right now?.

Hey, good morning Aileen. This is Jonathan. Thanks for the question. One of the things we try to be clear about is that we do our best to corroborate what the industry sources are looking at, and we look at a number of different pieces of information.

We do get pretty consistent releases from our customers and most of our end markets a few months out that we look at, and we also look at our customer build patterns, beyond that and their operating plans and generally we are comfortable with the results of the independent research, and we think they are in line with what we see.

So we put those in as a reference, but we do our best to corroborate them and we think they are pretty comparable.

I think with regards to each of those end markets, obviously we look closely at the North American end markets and that market remaining strong on a full frame truck basis continues to be there for us, and we think that it is going to be a good year there.

And then, I think the other one that’s significant this year for us is the class 8 market in North America, and we continue to see strength there through most of this year, but I would say that’s a market that we continue to look at as very critical and important to us. .

Great, that’s very helpful. And obviously, the Wrangler was a huge launch for you guys last year, and you had costs that really hit in the front half as production was ramping up.

As you think about 2019 and even into 2020 and some of the product launches that you still have coming, should we be thinking about significant launch cost headwinds associated with those new programs.

And in terms of timing, have you incurred some of those costs already or should we be assuming that those will hit around the same time as production ramps up?.

So we are continuing to grow, so the $350 million of backlog that we are bringing online this year is principally driven by the new Jeep Truck that's coming on, the Ford Ranger that's coming back to North America.

The Rear Disconnecting System that we've launched with Ford in multiple regions, so we will have some launch costs associated with those, but the magnitude of those compared to the Jeep Wrangler program is just much smaller.

So, we called that out and highlighted that because the Jeep Wrangler was the second largest platform in the company, and these other launches are just smaller. From a seasonality perspective, we do have some launch activity going on now.

We’ll have launch activity through the balance of the year, but the financial impact we expect to be significantly muted just as a result of the scale and size of the programs. .

Great, that's very helpful. Thanks for the questions..

Sure..

And your next question comes from the line of Brian Johnson with Barclays..

Good morning. Just a few questions. You know, first just following up on the comments you are making about Wrangler and their transition to their pickup truck.

In addition around Wrangler, there seems to be high dealer inventories and Mike Manley called out some production downtime to both correct the inventories and get ready for a PHE version of the Wrangler. Is that fully – you know, not clear if that’s factored into consensus IHS forecast. I guess a couple of questions.

Is that – do you think it is in those forecasts, and then kind of when you looked at your LV guide for the year, do you have to kind of factor that in? Is that part of the cadence?.

I’ll take it first. Hey, good morning Brian, this is Jim. Thanks for the question. I'm not exactly sure if it's baked in.

What I can tell you is, kind of Jon was referring to answering a question a little bit earlier, we get pretty good, pretty long runway on our releases – our specific releases that come to our individual plants and so on and so forth, and everything that's in those releases right now we have baked throughout, in our overall plan that we provided to you and in our guidance that we provided you.

.

Yeah, when we look at IHS Brian, we think it's pretty close as well too. It accommodates for a little bit of downtime, and we are comfortable with the number we're putting out based on what we know..

What I will say though since you offered it as a little bit, just to give the collective audience an update. You know, the Gladiator which is the truck being launched, it leads from all indications and I think many of you probably saw it at different shows or whatever, it looks very promising as it relates to consumer pull through and excitement.

So we are pretty excited about that. We are prepping for that right now, and that will start to come through our system into the Q2, and we’ll start coming up the curve on that. .

And just a follow-on question there, any launch cost impact to worry about there or is it because similar I guess drive lines and plants that’s deminimus?.

You are very astute at this. You and I have talked in the past on this one, it -- it’s like Johnson said a minute ago. Last year was unfortunately – it was the double -- the kind of the carryover between JL and JK, and you can't build the church for Easter Sunday, so we had to share capital that made it really difficult this year.

We don’t have that circumstance, so it's more of a typical launch cadence and we baked that in to our guidance. .

Okay, next question. You know you were expecting a 10% margin in CV, came in closer to 9%. Was that really just driven by commodity cost headwinds and if so, you know can you get to that 10% margin in ‘19 or are there other headwinds we should be aware of. .

There are actually a little bit other headwinds. So you touched on one of them for sure, which was commodity costs. Everybody knows where those were at, in the second half of last year. The other one was the demand pull through from our customers, as well as getting incremental out of our market share and being pulled more.

The demand as I’ve said before, the biggest channel that we had wasn’t for our own plants, but it was getting the overall demand synchronized demand around the world was incredible, especially at the end of last year.

So the good news is as we’ve been installing it, not ourselves, but having it through our supply base, deploying a lot more capital and that a lot of that supply bases came online and continues to come online. So we feel good about coming out in Q1 here and throughout the balance of the year.

And as we put into our guide, yes I expect that it will back up into the double digits. We will reach double digits in our CV Group this year. .

Okay, thank you. .

Thank you, Brian..

Thanks Brian..

Your next question comes from a line of Rod Lache with Wolfe Research..

Good morning everybody. I got a couple of questions. First, there’s some debate about how big products like the Gladiator and the Ranger could be in terms of volume.

Obviously it's sounding very promising on both, but can you give us a sense of what your expectations are and what the content per vehicle for Dana would be?.

Yes, so we are supplying the full driveline similar to what we do on the on the Jeep Wrangler program. As Jim mentioned, a lot of common equipment and incomparable design included in those vehicles. From a volume perspective, while we're not giving a number discreetly, we have been conservative on the number that we’ve assumed for this year.

It's a new vehicle, we think it's going to do very well. And if it does as well as some of the other you know external sources that we are looking at we might do even better. But I would say that we've been a bit conservative on the new vehicle.

We are also really excited about the Ranger coming back to North America this year, the Ford product that is launching in a comparable segment. Compact pickups that we think are going to continue to do well, so we're excited about the growth of that product..

So, you know Ford had planned something like 120,000 units originally for things like Ranger and obviously GM's already pushing 180,000 on Colorado Canyon and to call most like 250.

If this thing gets to something like 200,000 units, is that something you could accommodate?.

Yes, we are capacitized in line to support what our customers believe they can build, so we work with the customers on that. But I think you are going down the right path. We collectively looked at the segment and took a perspective on what we think the other segment can do and calibrated our volume expectations based on that. .

Okay, and I also wanted to just ask if you can elaborate on one point you made. Obviously there was some inefficiency premium cost that you incurred in 2018 just given how strong production was. You made a comment suggesting there's some changes that you've made to address that.

Could you just elaborate on what that is and what's the magnitude of the opportunity?.

Yeah thanks Rod, this is Jim. Most significant, I was trying to refer to anyway was really is our Tier 2 and Tier 3, every arguably Tier 4 capacity out there. The demand was just so high, particularly on the commercial vehicle side of the business, the demand was so high and I know you're aware of that, that there just wasn’t enough out there.

But we didn't start the process of bringing it on. You don’t bring on demand for the type of things that we – or supply for the type of things we were looking for and you are going to just start just doing that in November or October. We did it last year fortunately.

That good planning that we put in the early parts of last year, a lot of that supply capacity was coming on board in the last year and most of its up fully now in January and February this year. That’s the most important thing or most significant thing you should take from those comments. .

What does that mean financially, just an elimination of premium frayed or what should we be expecting from that?.

Exactly! That’s probably the most significant, because we had a spectacular year and I'm not overcooking that word when I say it. We had a spectacular year supporting our commercial vehicle customers and they’ve rewarded us for that.

But it cost us quite a bit of money in premium transportation to get parts from around the world to where we needed to make sure that we were predicting their lines and enabled them to be able to keep their assembly lines running. .

And we though for example, it also affects the P&L in areas like labor efficiency. So the amount of premium time, when we have people standing around waiting for parts were not as efficient. So the addresses in the supply chain will help to make us more efficient in other areas as well. .

It sounds like it's a significant number.

Can you just give us a sense of what that means, you know what is the number that you guys incurred that you can address?.

Yeah, the conversion rate difference is reflected on the year-over-year watch schedule. So we converted it just under 20% last year. We expect to convert it about 30% this year. So that conversion difference is largely attributable to those efficiency improvements.

The other thing that we did mention at your conference a month ago is the fact that we did take some structural cost actions last year as well too that will benefit us in the tune of tens of millions of dollars. That is also encompassed there.

So the combination of those two things are what are driving that improvement in the conversion on the organic sales growth. .

Great, thank you. That's very helpful. .

Sure. Thank you, Rod. .

Your next question comes from the line of Emmanuel Rosner with Deutsche Bank..

Good morning, everybody. .

Good morning Emmanuel. .

So just to follow up actually on these commercial vehicle margins and some of the actions you've put in there, so you know it deployed some more capital in the conversion rates will be you know considered really higher this year.

I'm curious about how you'd be thinking about you know once served like the cycle, you know put some pressure on volumes or where would you see the detrimental margins at that point and do you flex down as a result of some of the structural cost reduction or at this point would we be looking at a you know 30% on the way down as well. .

Yeah, I’ll let Jonathan take the detrimental question more specifically, but I will – I do want to reinforce for the audience the key point in our strategy.

We're also not in the business of building church for Easter Sunday and that you know the capacity, largely the capacity that we brought on was in our supply base, so with that Jonathan I’ll let you take the second one..

Sure. So I mean we have been heavily focused on driving our fixed cost down, the actions that we took last year are one of the examples of what we're doing to make sure that we are prepared to manage the detrimentals. The other thing I would highlight is take commercial vehicle for example.

The most significant run off that we've seen in the last couple years of volume is in the class 8 market. We also have a significant presence in medium duty and in the aftermarket and the margins in both of those businesses, you know the medium duty and the aftermarket are more attractive than the heavy vehicle over the road.

So from a detrimental standpoint we're comfortable that you'll see a conversion that's comparable with what we saw on the way up and we think we have an opportunity to do even better. .

Okay, that's very helpful. And then just turning to slide 16, I'm curious if you could give us a little bit more color on how you're thinking about the targets beyond 2019. It looks like a very nice additional set up in margin is what you expected. Obviously you know revenue growth, we’ve got some improvement.

Can you maybe go back over some of the puts and takes as we look and assumptions as we look into beyond 2019 please?.

Number one, profits will continue to grow and that'll flow through the cash flow, but also due to the fact that we think the top line is going to be relatively consistent going into next year, we would not expect to see a meaningful investment in working capital, which we’ve had for the last few years.

So the combination of both of those factors will also help to drive a higher free cash flow. And then I think those are the highlights, and as I mentioned we're going to talk more about that in a few weeks and get a little more color there. .

Yeah, that's very, very helpful.

And then a very quick clarification; you slide on seasonality on page 14, is it essentially just saying, look, this is the timing of the closing of the acquisition and therefore you get a little more contribution post you know March 1 or is there anything else in there for either in the production down time or destocking you know for some of the U.S.

trucks. .

No, the other, it is absolutely trying to make sure that everyone noticed the 10 months, but also just to highlight that typically the first and the fourth quarter for us are lower from a sales perspective and lower from a margin perspective.

So just wanting to make sure that everyone recognizes even without the Oerlikon business, the base business, it usually follows that curve where profit margins and sales peak in the middle of the year in the second and third quarter, largely as a result of the normal production schedule.

It's not intended to intone any significant demand changes in either of those quarters. .

Perfect, thank you. .

Sure..

Your next question comes from a line of Joseph Spak with RBC Capital Markets. .

Good morning everyone. .

Good morning Joe..

So we spent a bunch of time on commercial vehicle, but if I look at off highway, it also looks like margins are maybe a little bit weaker than I thought and certainly versus the past couple of quarters. It looks like the flow through on volume is still strong.

So the issues we talked about in terms of commodities and some of the performances, is that also what sort of drove with that in the off-highway segment. .

No, actually it's a little more of the former Joe. We, our highest recovery ratios in the business are in our have vehicle segments from a commodity perspective.

So even if we recover most, if there is a bit of margin pressure, but I would note that some of the phenomenons that Jim was mentioning that we experience within the commercial vehicle space were also present in off highway.

There continues to be a lot of cost that we do incur to make sure that we're delivering and meeting the customer's needs and delivering on time. So I would say it's a combination of both of those factors and the normal seasonality that you would see from that business in the end of the year.

Those are really the drivers of the performance, not highway. As we look to next year, obviously we said that that market we think is going to continue to remain strong and there's further opportunity for margin expansion, largely coming from the benefit of the Oerlikon acquisition. .

Okay. And Jim and I'm sure I’ll hear more about this at the Analyst Day, but you talked a lot about and made acquisitions to sort of participate in the electrication of some of the heavier machines and off-highway and commercial vehicles.

There's also been a lot of increased industry talk on electrifying pick-ups and I guess just given your business you figured it would be a good time to ask what you sort of see going on, what some of the discussions with the customers are like and how do you see that evolving on the light duty pick-up side. .

Yeah, thank you Joe for the question and thank you for setting up the nail that we will talk about this more you know in the conference coming up. But the punch line to it is there's not one of our segments you know, because you know very, very well. You know we go from the smallest recreational vehicle, up to the largest underground mining.

There is not one of our segments and that would just by our definition could be directionally 12 different segments. There’s not one of our segments that we're not participating in one form or another in electrification. So I kind of keep it on a kind of a broad level, but just suffice to say that you are stalking specifically in the light duty area.

Yes, there are two, there's plenty of activity, let's put it that way. .

And is it – I mean how would you classify those talks as sort of exploratory in terms of what your capabilities are, in terms of what an overall you know program could look like or I mean like just where are we in sort of the normal I guess indicators. .

I would say, I think exploratory is a pretty good question. I'd say it's a little bit beyond that. I mean if you think about some of the companies and you know these companies, like Workhorse for example, you could argue that in that segment.

There's kind of some of those, may be more of the boutique type company they’ve been talking about and doing it for a bit of a time, but there's all of the other OEMs that certainly are going to ensure that they are ready for the future with that as the consumer demand in pull throughs is coming and they will.

So we are ready for it as I often like to say. You know we positioned the company last year to be energy source agnostic. So we're okay if they go with the internal combustion engine, if they go with full electric or they do – you know they go hybrid in between.

But yeah, there’s certainly plenty of activity, but it is like we've always said, it's further out in the cycle. .

Okay, thanks. .

Thank you. .

Your next question comes from a line of Colin Langan with UBS. .

Oh, great, thanks for taking my question. Any color on power technology, I think it was one of the only segments we haven’t talked about it so far. The margins there, I think we’ve been drifting it down.

What is there for the outlook for that inflecting and how should we think about that as we are going forward?.

Sure. Good morning Colin. It was a particularly soft year from a margin perspective in power technologies principally for two reasons. Number one, that is the segment with the lowest recovery ratio on commodities recovering less than half as they are further down the supply chain in a number of those systems.

The second factor relates to the diesel gate phenomenon that we are seeing in Europe.

We are predominately supplying ceiling thermal solutions for gasoline engines and when the diesel gate occurred and demand for diesels went down, we had to take more of our capacity to fill OE orders on a lot of those products and at the sacrifice of the aftermarket.

So sales still remain high, but our product mix deteriorated, because we supplied more on a proportional basis to OE versus the aftermarket.

We took some actions earlier last year to add some capacity into select places and we feel like we're in a better position to fill that demand moving into this year and we think margins will improve as a function of the product mix getting a bit better.

But it was really a mix of the product mix issue, as well as the commodity cost that caused the lower margins there. But we see an opportunity for that business to get better in time and get closer to the margins that we've recognized in the past. .

Got it. On Oerlikon I think you originally guided about $40 million in synergies. I mean are all of those going to be 2020 or some of them baked into you know three quarters of this year. .

Yeah, of the $40 million, $10 million is included in the $100 million number for this year, so that's where we found the road for this year. Obviously we will – as we did with Brevini to get in and identify the cost opportunities as quickly as possible.

Now what we’re calling for right now is just the balance or the majority of that next $30 million will be recognized next year in 2020, and that ends up being a meaningful contributor to the overall margin expansion next year. .

Got it. And just lastly, any color on tax? I think this year looks like it ended at more like a 26% rate. I’m not sure I’m getting that right, and then I think your guidance is $28 and it’s still a fairly high tax rate.

Is there any potential to bring that down a percent?.

Yeah, I think what we saw this year may be a bit more normal moving forward.

It's really a function of jurisdictional mix and where we're recognizing profits, where we're a taxpayer and where the rates are in those regions?.

So 26% would be the normal rate?.

I think moving forward we’ll probably be closer to that and then we’ll probably give some color on that in a few weeks when we talk about the next couple of years. .

Got it. Alright, thank you very much. .

And James, your line is open. .

Oh, good morning guys. So just on Oerlikon going back there, I mean can you discuss their current backlog and maybe just revisit the synergy actions that get you to the $40 million by the end of next year. I mean you clearly had success with the Brevini acquisition raising those targets. You know there are some parallels with Oerlikon.

So just curious what your perspective is there. Thanks. .

Sure. From a cost synergy perspective when we announced the transaction, we mention that we see the opportunities in a few areas. First is within the supply chain. So our purchasing leverage increases significantly when the businesses are combined.

We’re buying many of the same origins and cappings for our machine operations as the Oerlikon business is, so that’s a big piece of the cost opportunity that we see there. The same was true with the Brevini acquisition. The second area is clearly around our manufacturing operations.

This provides us an opportunity to have some of the equipment that is fungible, be more utilized to make us more efficient across these areas and the potential opportunities to utilize our equipment more efficiently.

And then finally obviously there are areas that are duplicative in the business, in the back office that we’ll be able to address to be more efficient as well too. So those are kind of the primary drivers.

You know we have mentioned that this is a very well-run business and we should see the $40 million as being the costs that can only be achieved by putting them together, but we’ll continue to strive for more than that and certainly hope to get as much as we possibly can.

From a backlog perspective, you know as we get into the business and I start to operate it, we will likely look to adjust our backlog to reflect the Oerlikon, but we typically do that on an annual basis.

I will tell you they clearly have been growing the business in the past couple of years and we see that growth continuing as a combination of new programs that they have won and new content that they are delivering in increment of what they have today, so we are excited to have our backlog augmented by what they've accomplished. .

Okay, thanks. And then yeah I imagined you'll address this in full next month, but just on electrification, can you talk about the key programs or prototype applications that you are working on right now. How are things progressing and you know now that you have TM4 completely in house.

How are you leveraging this business, what's the progress there? Yeah. .

Yeah, I mean you know there's a lot to talk about and it's one of the big reasons that we are getting everybody, inviting everyone to join us in a few weeks. But just as a preview, the integration of both, the TM4 business as well as the SME acquisition we completed last month is going very well.

We see excellent opportunities to integrate these electrodynamics components inside of e-Propulsion systems, whether those are drive units, wheel end drive or electric axles for our customers.

In a few weeks we're going to walk through a lot of that opportunity, help the dimension of what we think the growth opportunity is in the coming years and preview some of that technology. So I don't want to get too far out of what we'll have to do in a few weeks here..

Understood, and just a housekeeping question, which of the higher equity income in the quarter, was it just timing involved with your DDAC JV or is there some strength to the point out there?.

Yeah, DDAC was the primary driver, that while the sales in that business remain relatively flat the earnings improved and the cost structure improved, which drove higher earnings out of that joint venture in China. .

Thanks guys. .

And your final question comes from the lien of Rajat Gupta with JP Morgan..

Hey, thanks for taking my question. This is Rajat calling in for Ryan. On your $40 million commodity cost headwind for 2019, what’s the assumption there in terms of you know what you are expecting for repurchase price.

I mean is there – is it assuming current spot prices or is there some there is an expansion expected in the year or it just kind of trying to understand how much conservative is baked in with that?.

Yeah, it’s a combination of both. So we certainly look at where commodities have come so far this year in the first six weeks of the year. But we also look at the forward. I would say that we've indicated if things continue to move in the direction that they have, there could be some opportunity for us on an overall basis.

But we’ll continue to monitor that closely enough at the end of the first quarter and we’ll recalibrate for the balance of the year. We’ll provide an update on how that's progress. .

Just another question of free cash flow margin. You talked about the 5% potential in 2020.

You have higher EBITDA margin expansion and working capital, but could you give us some more color on CapEx as to you know how do you see that trending, going to 2020 and maybe beyond?.

Yeah, we’ve been pretty clear that we expect to operate around 4% CapEx as a percentage of sales on a go forward basis. At that level with all those other things I mentioned, we are able to get to that target.

So you can basically assume that cash from operations would be about 9%, CapEx would be about 4% and that’s how we get to the 5% that we're expecting. .

Got it. One last one from me, on line 20, I think you have APAC production outlook, you know a fairly decent size going into ’19.

Is that something that you are seeing on the ground or because of I think IHS and third parties have a little be more for conservative outlook, just trying to get a sense of your visibility there?.

Yeah, that doesn’t sound right now. I’ll have to go take a look. In general we indicated where we expected APAC to be. So the markets that are more important to us, which are the heavy duty section, we expect that to down next year. So medium and heavy duty trucks we've got it down high single digits.

So the other markets like light vehicle being up as less relevant for us. So I would say where we are really affected we expect to be down next year. .

Thanks a lot. .

No problem..

Okay, with that this is Jim; I’ll just close. Thank you again everybody for taking the time to spend some time with us.

You know from the CEO's chair, I mean you hope that you know and you plan to for sure be in a position at the end of the year to do a recap and you are able to say things such as record sales, record profits, record margins, increased free cash flow while over 50%.

The scoreboard doesn't lie, so I want to thank my entire team, our entire team for everything they've done, as well as our customers. And while I'm on the customer front, you know you think about it for a minute.

We continue to do this with new organic growth and thinking even forward we'll go and it looks like in 2019 it will be the third consecutive years of over or nearly $1 billion of new revenue and while at the same time we completely filled out our electrification E-Propulsion portfolio for high voltage motors, the low voltage motors and all the inverters and everything else associated with being energy source agnostic as I mentioned a little bit earlier.

As running a business, we can all appreciate this, it’s all about do what you say and then go execute on it. We said that we were going to go grow the business a few years ago, we said we were going to fill in the white space a few years ago though acquisition, through bolt-on and appropriate boutique acquisitions. We continue to do that.

We look forward to a really exciting 2019, look forward to seeing each of you hopefully at the investor conference next month and thank you very much for your time today. .

Thank you again for joining today's call. This concludes today's webcast. You may now disconnect..