Good day and welcome to Dana, Incorporated's Second Quarter 2019 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 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. [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, Dennis, and good morning, everyone, on the phone. Thank you for joining us today for our 2019 second quarter earnings call. You'll find this morning's press release and presentation are now posted on our investor Web site. Today's call is being recorded and supporting materials are the property of Dana, Incorporated.

They may not be recorded, copied, or rebroadcast without our written consent. 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 future results are summarized in our Safe Harbor statement and found 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.

Now it's my pleasure to turn the call over to Jim..

Good morning and thank you for joining us. Pleased to report Dana achieved second quarter sales of $2.3 billion bringing our year-to-date sales to $4.5 billion, a record first half of Dana.

This was also our 11th consecutive quarter of year-over-year sales growth driven by strong and market demand, execution of our backlog and benefits from our recent acquisitions.

Our adjusted EBITDA for the quarter was $286 million, $40 million higher than the second quarter of 2018, resulting in a 12.4% margin, which is a 40 basis point improvement over last year. Our diluted adjusted earnings per share increased 18% over the last year to $0.87 per share. We have several key highlights this quarter.

First, we are affirming our guidance ranges for the year as we expect stable markets offset by currency headwinds which we will discuss in just a moment.

Dana also took action in the quarter to enhance our electrodynamic portfolio by purchasing the remaining equity in the electrodynamic component manufacturer Prestolite E-Propulsion Systems or what we refer to as PEPS.

And that's just one element of our electrification strategy, in a moment; I will share with you an exciting high performance application made possible through the acquisition of the Graziano business acquired from Oerlikon earlier this year. We are already seeing exciting new growth opportunities for Dana.

Lastly, Dana continues to drive customer centricity, in this quarter we have received major industry recognition for our outstanding customer service, world-class quality and highly advanced technology capabilities. I will share more details in just a few minutes.

Now, I would like to turn to Slide 5, to share our perspective on global macro indicators. As you know, a key strength of Dana is our global footprint and broad customer base as well as our "Build where we sell" strategy.

This global manufacturing strategy provides us with the operational scale, regional diversity and some insulation from regional trading disputes. When we look at global macro conditions, we see a general balance in key issues as it relate to Dana.

Beginning in North America, Dana's end markets are benefiting from relatively low inflation continued economic growth and capital investment. This growth translates more like truck purchased construction equipment sold freight miles driven all positives for our business.

However, our top-line is being pressured by currency translation due to the strong United States dollar. Jonathan will discuss this impact in a few minutes. And as you can imagine trade disputes are generally not helpful to our business.

However, within North America, we are encouraged by the proposed United States, Mexico, Canada Free Trade Agreement and the exemption of tariffs on aluminum from Mexico and Canada which were made effective in May. Moving to Europe our primary U.K. operations serve mainly domestic customers.

However, Brexit remains a concern because of its potential effect on growth in Europe where we expect a relatively stable economic conditions for the remainder of the year.

More concerning is the continued weakness of the euro compared with the dollar and the impact it has on our revenue as we translate sales in the local currency back to the United States dollars for reporting purposes. We are expecting further Euro headwinds this year which primarily impacts our highway and power technology segments.

As I previously mentioned, we primarily manufacture in the regions where we sell which helps to limit the impact of potential escalation of trade disputes between the United States and European countries as relates to Section 232 on autos.

Moving to the lower left quadrant in South America, we are expecting stable economic conditions in Brazil with GDP growth of around 1%, but improving to nearly 2% as we look into next year. As with the euro, currency remains our biggest concern in South America, as the Brazilian real has continued to weaken against the dollar over the last quarter.

This primarily impacts our commercial vehicle segment. We continue to monitor inflation in Argentina and work with our customers and suppliers to ensure that our economic recoveries are aligned.

In Asia, it's well understood that China's economy is slowing with GDP growth expected to be about 6.2% this year down from 6.6% last year with the most visible impact being lower demand for passenger cars. With the exception of Power Technologies business overall for Dana exposure to the passenger car market is relatively limited.

China remains an important growth market for Dana especially when it comes to new energy vehicles. In India, we expect economic growth to remain stable this year at about 6.5% and the economy is expected to see further growth next year at a rate of 6.8% to 7%.

Our recent acquisitions have expanded our presence in the country as we see good opportunities for growth especially in commercial vehicles and off highway equipment. Key Asian currencies from India, China and Thailand have been mostly stable this past year and we expect them to remain flat for the remainder of the year.

And finally, we are encouraged that trade discussions with China have reengaged, while current tariffs are not a major disruption for Dana any expansion of Section 301 tariffs that cover broad categories of commodities could lead to greater commodity cost inflation. Please turn with me to Slide 6 for an overview of our business by segment.

As with our global strategy Dana's multi-market approach gives us a unique advantage as we benefit from scale and can leverage our technology and investment across all three mobility markets while not being overexposed to changing market conditions in any one business or end market.

Over the past few years, we have seen growth in all three of our end markets and we expect them to remain stable throughout the remainder of the year.

On the left of the page in the light vehicle segment, we continue to see strong demand for light truck and SUV markets in North America as evidenced by the strong sales for the Ford Super Duty and Ranger and Jeep Wrangler and Gladiator. In addition, the inventory levels for these key vehicles continues to be in line with expectations.

Our light vehicle group achieved good results the second quarter, but as a reminder the second quarter is typically peak time for sales and margin during the year. And finally, we continue to have great success launching new programs. Our team's focus and commitment to operational excellence continues to drive value for our customers.

Moving to the right side of the page, we expect North America Class 8 and medium duty truck production to remain strong through the remainder of the year. We also continue to see improvements in Brazil with truck and bus production up 6% over last year.

As I mentioned in the highlights, we purchased the remaining equity in electrodynamic systems manufacturer PEPS expanding our in-house motor and inverter manufacturing capabilities for all types of vehicles in China.

This demonstrates Dana's commitment to continue investing and growing in the electric mobility sector as well as the world's largest electric mobility market.

Moving down to the lower left part of the page to the off highway business, our integration plan for all accounts drive system business is on target as we are already seeing positive cost synergies in growth in the business. We anticipate stable end market demand in the off highway markets with normal seasonality this year.

We have been having great success in the marketplace and off highway as we have placed a great deal of focus on the organic growth and leveraging our acquisitions to strengthen commercial channels and it's starting to pay off in terms of share gains.

And finally, in the bottom right of our power technology segment margins are at trough levels due to unfavorable sales mix and commodity cost, primarily aluminum that have been and remain elevated and have significantly lowered recovery rates in the segment than in our other segments.

This is a segment where we have the highest percentage of business in the small passenger car market where global demand has trended lower.

As we look to the remainder of the year, we expect commodity costs to moderate and new product launches that are currently driving cost inefficiencies will be at a run rate and will be a driver for profitable growth.

Included in our new product launches are technologically advanced thermal management solutions on the General Motors duramax engine and battery cooling programs with BMW Neo as we continue to see growth in electric vehicle programs.

As I mentioned in the highlights, we have continued to take actions this quarter to further strengthen our capabilities in manufacturing electrodynamic products. Turning to Slide 7, we recently acquired the remaining equity of electrodynamics products manufacturer PEPS from Prestolite. PEPS is the manufacturing arm of our TM4 joint venture.

We had acquired the initial minority stake as part of our 2018 acquisition of TM4 a joint venture between Dana and Hydro-Québec now called Dana TM4. This transaction enables us to control and expand in-house motor and inverter manufacturing capabilities for all types of vehicles.

Additionally, Dana and Hydro-Québec are broadening our partnership on motor and inverter capabilities with Hydro-Québec purchasing 45% of the remaining portion of PEPS as well as 45% of motor and inverter manufacturer SME which Dana acquired in January.

The expanding partnership with Hydro-Québec North America's leading producer of clean energy and experts in energy storage and conversion demonstrates our commitment to continue investing in growing in electric mobility sector across all three of our end markets.

Turning to Slide 8, I'd like to share an example with you where Dana's electrodynamic technology is being utilized in a high performance and demanding application.

When you combine Dana's traditional capabilities with our full suite of advanced electrodynamic e-propulsion technologies, it's easy to see how we are positioned to lead in this important sector.

When we acquired the Graziano business earlier this year, one of the strategic priorities was to significantly strengthen our technology, engineering and software development capabilities for electric and hybrid vehicles across all our end markets.

Dana is very proud to be one of the strategic partners for the brand new SF90 Stradale Ferrari's fastest car ever and their first production plug in hybrid electric vehicle, which includes Dana's front electric drive unit featuring electromagnetic disconnection.

The built from the ground up plug-in hybrid features a traditional rear wheel drive, hybrid configuration powered by a BA turbo engine combined with an electric front drive system that put out a combined 986 horsepower.

This all wheel drive vehicle accelerates from zero to 62 miles per hour in just 2.5 seconds and can operate as a pure electric vehicle thanks to its 7.9 kilowatt per hour lithium battery pack.

Our full suite of traditional advanced electrodynamic e-propulsion technologies can provide our customers customize cutting-edge technology across all our end markets, who demand extreme performance driving innovation as well as those requiring more traditional capabilities.

We are leveraging these innovations and capabilities across all our electrodynamic propulsion technology roadmaps. Slide 9 highlights how Dana's passion for customer centricity is again being recognized. This year alone, Dana has been recognized with more than 25 Industry Awards.

This past quarter, we are honored by two of our most longstanding customers General Motors and Fiat Chrysler. In May, Dana was named the supplier of the year for General Motors for the second year in a row.

Last year, we were recognized for powertrain thermal management products including battery and electronics cooling solutions, and this year we were honored for our class leading driveline technologies which Dana supplies to GM vehicles in North and South America including front and rear Spicer AdvanTEK axles and Spicer propshafts.

Something you may not be aware of is, Dana has been a supplier to General Motors for 113 years. This prestigious award reinforces the importance of maintaining a strong relationship through the consistent delivery of innovation and high-quality technologies that helps to strengthen our partnership that has existed for over a century.

Equally exciting, Dana was named 2019 supplier of the year by FCA, one of only 19 companies honored. We were also a finalist for supplier diversity award recognizing our commitment, diversity and inclusion which is core to our culture.

Dana supplies driveline technologies as well as ceiling and thermal products to FCA vehicles including front and rear Spicer AdvanTEK axles and Spicer propshafts, our team with FCA dates back nearly a century and we are very proud of our longstanding partnership.

This recognition demonstrates the importance of everyone Dana places and continuously finding a better way to deliver value for our customers and ensure their position for long-term success. Thank you for your time this morning. Now, I'd like to turn it over to Jonathan to walk you through the financials..

Thank you, Jim. Slide 11 is an overview of our second quarter financial results compared with the same period last year.

Second quarter sales top $2.3 billion, an increase of over $0.25 billion compared to the same period last year or 12% growth driven by continued strong demand in our light vehicle and commercial vehicle businesses and the accretive acquisition in our off-highway segment.

Adjusted EBITDA for the quarter was $286 million, a $40 million or 16% increase from the prior year for a profit margin of 12.4%, which is a 40 basis point improvement over the second quarter of 2018. Earnings were a net loss of $68 million compared to net income of $124 million in 2018.

The decline of $192 million was driven by $258 million one-time pension settlement charge related to the transfer of net liabilities from the U.S. pension plan to third-party insurers, which was ameliorated by a net tax benefit of $87 million primarily due to structuring actions.

When comparing this year to last on a like-for-like basis, adjusting for these one-time items in each period, net income in the second quarter of 2019 was $103 million compared to $85 million last year for an increase of $18 million or 21% growth.

Diluted adjusted EPS which excludes the impact of non-recurring items was $0.87, $0.13 higher than the second quarter last year or 18% growth. Operating cash flow is $73 million this year included a $62 million discretionary pension contribution related to the pension transfer.

Adjusted free cash flow which excludes the discretionary pension contribution was $43 million, $18 million lower than last year largely due to the one-time cost associated with the acquisitions. Please turn with me now to Slide 12 for a closer look at the sales and profit growth in Q2.

The growth in second quarter sales and adjusted EBITDA compared to last year is ascribed to four key factors. First, organic growth added $95 million in sales from the continued conversion of our backlog as well as increases in end market demand.

This was primarily offset by a $15 million headwind due to the overlap of the Jeep Wrangler programs that did not reoccur this year. The year-over-year impact of the Wrangler overlap ended in April. The net organic growth added $24 million of profit and delivered 65 basis points of profit margin expansion.

Second, in organic growth from the two businesses we acquired from the Oerlikon Group, Graziano and Fairfield contributed $211 million in sales and $24 million in profit for the quarter. Conversion on inorganic growth will steadily improve through the remainder of the year as we continue to prosecute the cost energy plan. Third, the U.S.

dollar strengthened against most foreign currencies during the quarter lowering sales by $56 million and adjusted EBITDA by $7 million. However, the profit margin impact was negligible.

Finally, increases in commodity costs compared to the same period in the prior year lowered margins by approximately 20 basis points in the second quarter, $18 million of gross cost increases were largely offset by $17 million of incremental customer recoveries in the form of higher selling prices resulting in a net impact of $1 million reduction to profit.

Please turn with me now to Slide 13 for a closer look at how the adjusted EBITDA converted to adjusted free cash flow.

Adjusted free cash flow was $43 million in the second quarter; $18 million lower than the same period last year, as the $40 million profit increase was offset by the following; higher one-time cost of $26 million due to transaction costs related to our recent acquisitions, higher interest payments of $7 million to service the new term debt used to fund the acquisitions; increases in cash taxes of $16 million due to restructuring actions and a change in jurisdictional mix driven by our recent acquisitions; and increased capital expenditures of $12 million to support new programs in our legacy and acquired businesses.

As mentioned previously, adjusted free cash flow excludes the $62 million discretionary pension contribution made in Q2. Please turn with me now to Slide 14 for details on the action we executed in the second quarter to further strengthen our balance sheet.

Nearly two years ago, we announced that we plan to terminate certain frozen pension plans here in the U.S. by transferring the associated assets and liabilities to third-party insurance carriers. In the second quarter of this year, we completed this process by contributing $62 million to the plans and eliminating $165 million worth of net liabilities.

The chart on Page 14, illustrates the change in our unfunded pension obligations from the end of last year to the end of the second quarter of this year. The acquisition of the Graziano and Fairfield businesses net of ordinary activities in our existing plans resulted in an increase of $34 million.

The net liability reduction of $165 million related to the pension plan termination is primarily driven by three factors.

First, the plan liabilities were reduced by $25 million as a result of population changes in the impact of voluntary lump sum payments to eligible participants, which were funded from planned assets and required no cash contribution.

Second, the remaining net liabilities were independently valued by third-party insurers resulting in a $78 million reduction. Third, a cash contribution of $62 million was made by Dana. This action was an efficient use of our capital as we were effectively able to eliminate a liability at a significant discount.

Please turn with me now to Slide 15 for a look at our full year guidance. We are affirming our full year financial guidance ranges again this quarter. Our sales range remains unchanged, but we are adjusting our indication to just under $9 billion.

This is slightly below our previous indication due to foreign currency translation resulting from a stronger U.S. dollar and slightly lower commodity recoveries from an improved outlook in commodity costs. Our expectations for both profit and cash flow margins as well as diluted adjusted EPS remain unchanged in spite of the lower sales.

We expect adjusted EBITDA of approximately $1.1 billion for a margin of 12.3% a 50 basis point expansion over the prior year, adjusted free cash flow of approximately 3% and diluted adjusted EPS of $3.20.

With our strong performance in the first half of the year, we remain on track to deliver double-digit sales, profit and free cash flow growth for the third consecutive year. Please turn with me now to Slide 16 for a closer look at the expected sales and profit growth for the full year.

The same four factors driving our quarterly sales and profit growth are also the primary drivers are expected growth for the full year. First, organic growth is a key contributor to our sales growth this year.

Our backlog is expected to generate about $350 million of growth, but we also had about $110 million in non-recurring sales in the first half of this year resulting from the old and new Jeep Wrangler programs overlapping. The profit conversion on the organic growth remains strong and is the primary driver of our margin expansion this year.

Second, inorganic growth from the Graziano and Fairfield businesses will add $750 million in sales and about $100 million in profit contributing approximately 10 basis points of margin expansion. Third for the full year, we now expect the impact of foreign currency to be a headwind of $200 million to sales and $25 million to profit.

However, this is not expected to affect margins. Fourth, while commodity cost will remain higher than last year, they've begun to subside as raw material prices continue to moderate. We reduced the expected gross commodity cost increase from $100 million to $60 million.

We expect to recover about $45 million this year resulting in a net profit headwind of about $15 million down from the $30 million headwind we previously anticipated reducing the profit margin headwind from 50 to 20 basis points.

Please turn with me to Slide 17 for more detail on how we expect the adjusted EBITDA will convert to adjusted free cash flow. Our full year outlook for adjusted free cash flow remains unchanged.

Adjusted EBITDA growth of $140 million will be partially offset by higher one-time cost of $45 million, higher combined interest and taxes of $40 million and the net increase of $25 million between working capital and capital expenditures resulting in $30 million or about 12% growth.

While adjusted free cash flow margins will remain flat this year largely due to the acquisition, the business remains poised for 200 basis points of margin expansion as we move to next year with comparable contributions from higher adjusted EBITDA, lower one-time cost, lower working capital requirements and lower capital expenditures.

Please turn with me now to Page 18 for a review of the drivers of our outlook for the remainder of this year and next. There are a few variables that we will carefully monitor through the remainder of this year that could have an impact on our full year performance. The first is sustained market demand in the North American Class 8 truck market.

Our current outlook projects production volumes tapering in the fourth quarter this year. However, if production volumes remain at current rates through year-end, it would provide upside to our current indication.

The second variable is the potential for weakening in the global off-highway markets as a result of prolonged trade disputes which conversely would provide downside to our current indication. The third variable is the relative strength of the U.S. dollar to foreign currencies.

The dollar has strengthened over the past few months and if this trend continues, it will put further pressure on our top-line.

Despite some unpredictability in the second half of this year, we remain convicted in our ability to profitably grow the business next year and expand our profits and cash flow margins to the targets we laid out earlier this year.

We continue to expect that our backlog will offset market demand headwinds next year and cost synergies and lower commodity costs will increase profits. Jim and I and the rest of the Dana leadership team remain proud of the great work our 36,000 team members around the globe do to take care of our customers and deliver value for our shareholders.

Thanks for listening in this morning and I'm now going to turn the call back over to Dennis, so that we can take your questions..

At this time we would like to begin the Q&A session. [Operator Instructions] And your first question comes from the line of James Picariello with KeyBanc Capital. Please go ahead..

Hey. Good morning guys..

Good morning..

Good morning..

So just starting with light vehicle, obviously, growth and in margins especially came in quite strong. Just wondering what the sustainability and what are your outlook is for profitability into the back half. Are there anything -- any factors there that might not repeat in the back half one think about margins? Thanks..

Sure. So obviously, we were very pleased with the performance in the second quarter as we start to get some of the major program launches under our belt that are delivering a big piece of the backlog we're seeing the efficiency and the operations improve. We do note that that the high 12% range is a peak for light vehicle.

We do think that on a full year basis, we're going to see strong margins out of that business, but certainly we had a great quarter and we continue to look to perform in that area and it's going to be a big piece of what continues to drive our margins forward as we not only grow that business but do so profitably..

Okay, great. And then, just on an off-highway, obviously, some deceleration on the top-line which runs consistent with industry trends at this point. Just wondering what your expectation there is for market demand in the back half? And margins came in quite resilient, sure you had some ODS accretion in there.

So, just your outlook for off-highway, given the deceleration and industry demand? Thanks..

Yes. We certainly see the same things in most of our segments construction, agriculture and in mining. We're carefully monitoring that business as we move forward. I think what we've indicated is, we expected to remain strong if we see a pickup in the deceleration of those markets if volumes start to fall a little bit further.

We indicated there in our closing remarks that we see some potential headwinds in that segment. From a margin perspective that business has performed very well. ODS is at the point where it's still picking up in the synergies and it's really the legacy business that's capitalizing on this high level of volume and doing so in a very efficient manner.

So, encouraged by what we see there and the performance in the second quarter, but we continue to look to the second half to cautiously on the overall market..

Got it. Just one housekeeping one, for the pension contribution, so you'll have an additional outlays in the back half.

We will not get a free cash flow standpoint or no?.

No. We will not. So everything that was happening with the pension termination occurred in the second quarter. The $62 million cash contribution which is included in our free cash flow, but which we exclude from adjusted free cash flow is the final payment to terminate the plan..

Got it. Thanks..

Sure..

Your next question is from the line of Brian Johnson with Barclays..

Yes. Just a question of interest and I'll dive into financials.

So, on the Ferrari module, you highlighted on Page 8, which parts of that module are you actually providing?.

Good morning, Brian. This is Jim. Nice to hear your voice. It's on the front axle..

Okay.

Are you doing the motor or the power electronics or sort of the axle part of that?.

Not the motor in this particular case, just the drive axle portion of it more the mechanical piece tied in, but obviously working very hand in glove with them on the software and controls associated with that..

Okay. Over on the segment performance kind of looking at the appendix slide, just a couple things I want to kind of get a better feel for. So, power technologies, I see the puts and takes there, but I think the broader question is that had been running a year ago as a mid-13s business. Consensus was about there, we were looking for 12%.

I checked in at 10.4%.

It's sort of the second or third quarter in a row I believe where power technologies has not been in that 12%, 13% range or dump in the year-over-year where it was? What is going on there frankly?.

Sure. Brian, there are really three things that are affecting the performance of that business. The first that we mentioned is the peak commodities and aluminum and this is a business that for us has the lowest recovery ratios of all four of our segments. So, it feels the margin impact of the high commodity costs more than any of the others.

So, that's an adverse impact. The second one is really what I would call a geographic mix in that software passcar volumes internationally or outside of the U.S. particularly in Europe and in China, which are good markets for the power tech segment are felt with a pretty significant contribution loss.

So that's putting some pressure on where we're picking up a bit of volume to offset that. It's admittedly at lower margins. So that's another area that's hurting us.

And the third is that business is in a place where it is launching some major programs in the mid-part of this year, which is why you saw even a further dip in the second quarter from what the levels that we saw in the first quarter.

We're adding some content, we have major content on the new GM duramax diesel engine a very large stainless steel cooler big launch for us that's taken up a lot of resource. These are some things that are putting pressure on those margins. We do believe that this business can perform better in the long run.

We see line of sight to dissipation in the aluminum cost over the next few quarters. We see launch success and moving into higher level productions with these new products as being particularly helpful in the second half of this year.

And that combined with some resiliency on demand globally will go a long way towards returning this business closer to the historical margins that we would have expected..

Hey, Brian, if I may add. My job like all of our jobs I guess out there we stress, we have a lot of worry beads, whatever it may be. Our power technologies group is not one of mine. I can tell you that. This is just a kind of a completed bunch of issues perfect storm, call it what you want, commodities, past car sales, China you name it.

But the good news is, is when we collectively set a vision for power technologies group to grow content per vehicle and what Jonathan was just referring to. Just to take for example, a traditional cooler that we would have been the stainless steel cooler, we just launched with the duramax is over 700% more content per vehicle on a sales basis.

So, I mean you can just see the complexity that's exactly what our business has to do, is to create more value, put more technology products. So, we should expect to see better returns in the back half of the year for sure and the team is doing a good job in that regard..

Okay. A similar question, [indiscernible] over on commercial vehicle driveline, I think two questions, one, is it fair to kind of think about the currency there as being mostly Brazil related or are there other currencies we have to pay attention to modeling that.

And then, second, is there anything we can take from the quarter vis-à-vis incrementals and decrementals and especially decremental as Class 8 built next year settle down to wherever they're going to settle..

Sure. Brian you're absolutely right on currency. The vast majority of it is the Brazilian real. As it relates to the margin profile going forward, in the quarter we certainly continued to deliver very well for the customers at incredibly high volume levels. We continue to wrestle through efficiency issues in that business delivering that demand.

We do see the efficiency improving as we move into the next quarter and as we mentioned we're counting on a tapering in the fourth quarter and the decrementals on that are going to be pretty soft because of the premium costs that we would expect to go away.

However, with some of the efficiency improvements, if volumes do hold up in the fourth quarter, we could see some benefit on the top and bottom-line compared to the projection we put out. So, hopefully that gives you a sense of -- some of the dynamics there..

Okay. Thank you..

Sure..

Your next question is from the line of Dan Levy with Credit Suisse..

Hi, good morning guys..

Good morning, Dan..

Good morning and thanks for taking the questions. I wanted to start and I apologize if I missed it earlier. Your guidance post first quarter versus your guidance today, within organic growth you had -- you have the same backlog on the top-line $350 million, but now its converting $80 million on the $350 million versus $105 million previously.

So, I apologize, if I missed it earlier, but what's the delta in that conversion?.

Sure. A couple of factors. I think the two areas that we were just discussing that put a little bit of pressure on margins in the second quarter will flow through to the full year.

So some of the mix issues from a product perspective within power tech, some of the launch challenges that we're experiencing there do put a lower conversion in that segment as well as with commercial vehicle, the conversion on the higher sales at this peak level of demand are going to be a bit softer than we expected.

The other factor is that with the lowering of our sales guidance being primarily attributable or all attributable to FX and lower commodity costs. It's early in the year for us to think that we would do better on the overall margin.

So, we're sticking with the 12.3%, but if we continue to execute well in the second half, we could see some upside there..

Great. And but in terms of the core programs though -- those you're still maintaining profitably....

That's right, Dan. That organic column, just -- we haven't called it out discretely because it's -- it were net flat on markets, but that includes all of our ups and downs and sales that aren't backlog driven. Everything else is included there as well too that just happens to be about a net zero this year, we're calling it flat, but no.

Backlog is coming on strong, the major launches in the new programs are good, volumes are holding up. So, we're seeing good results from the new business coming on..

Great. And then, just wanted to follow up on commercial vehicle and just following up on Brian's question previously. And I know you've talked in the past that one of the things that helps in terms of commercial vehicle is, we're looking at Class 8 being down quite materially next year is that there's some reduction of premium freight.

And then, also, at the other consideration is that really Class 8 OE, is it is a much smaller piece of the business when we think about that relative to aftermarket or Class 5 to 7.

So, where are we in terms of sort of that reduction of premium freight and as we go into 2020, is there any correlation between the Class 8 aftermarket performance versus what we expect on the OE performance for you?.

Sure. So to the first point on the premium freight and the conversion, we have continued to make improvements in the supply chain. And we did see some benefit in the second quarter most certainly a little bit less than what we would have hoped for.

And we have a pretty good line of sight into continued sequential improvement into the third quarter where volumes will remain high. So, we do expect the incrementals on the year-over-year volume increase to improve as we move into the third quarter. So we continue to work on and execute that plan going into the second half of the year.

Relative to the impact next year, we've indicated that at mid-cycle our commercial vehicle business on a global basis is approximately equal parts heavy, medium duty and the aftermarket. We're certainly higher than that right now with North American Class 8 volumes in the low to mid 300, it is probably closer to half of the business.

But, we do note that there's not a lot of margin pressure on us when that business starts to subside moving into next year not just only because of the premium freight, but because we've been clear that the Class 8 or the heavy vehicle business is the least profitable of all three of those in that segment.

Directly to the aftermarket there isn't necessarily a direct correlation between the two. If you go back and look, the aftermarket can continue to perform quite well even in an environment where OE production is lower. So, we're not necessarily counting on a meaningful reduction in the aftermarket component of the business moving into 2020..

Great. Thanks. And just a quick housekeeping on the reduction of the pension liability.

Does that move your EBITDA at all as it relates to pension income or pension expense?.

No. So, the $258 million charge is excluded from our EBITDA. And it's also excluded from our diluted adjusted EPS..

Wouldn't that modify your pension income or your pension expense rather?.

No. No. Yes. It's only the service cost component is included in EBITDA and that will remain unchanged..

Okay, great. Thank you very much..

Yes. No problem..

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

Oh, great. Thanks for taking my question.

This one on Slide 18, it shows you expect lower off-highway production, I mean what is driving that lower outlook? I mean it's the end market products around?.

Yes. So, Colin, what we're trying to do on Slide 18 on the left-hand side is indicate some things that aren't necessarily included in our outlook for the second half of the year that could represent a headwind or a tailwind to the indication we gave.

So for example on the Class 8 side, we're saying, if volumes stay high in the fourth quarter that could give us a little bit of a tailwind.

The headwind we flagged down the over the off-highway production is that, right now it's a bit hard to handicap or estimate what the production levels are going to be or the impact based on the prolonged tariff dispute.

So, for example, as there are tariffs on crops here in the U.S., we see some indications that we could see lower purchases of equipment and it's hard to know how long that's going to stay or what that impact can be.

So, we're just signaling that we could see some softness in agriculture, for an example, and probably less so in construction and mining in the balance of the year..

Okay. And I apologize, if I missed this. I think you mentioned peak light vehicle margin.

What is driving the peak margin and why would it moderate [indiscernible] in the quarter?.

Yes. Some of it is seasonal and some of it is the fact that we really began to fire on all cylinders in the second quarter. So, we'll continue to launch well, we do have some meaningful launches that drive our backlog coming online in the second half of the year as we ramp up on the on the Ford Ranger program.

We continue to ramp up on the Gladiator program. And those are some of the things that we're just cautious about moving into the second half of the year..

And just lastly, some buyers have indicated increased pricing pressure.

I mean have you seen that in any of your business, is there a more aggressive push than normal from your OEM?.

Good question, Colin. This is, I'm dating myself now, I'm plus 30 years in the business. And that by now it ebbs and flows in the stuff.

But at the end of the day, I always like to say, if anything collectively we did in the mobility industry in the crisis, the economic crisis that we learn -- the OEMs learned that you had to have a very stable and secure supply base to be successful. So, we worked through every deal on a case-by-case basis.

I don't find it any more or any less to be honest with you through the ebb and flow on balance. So, that's I guess is a lot of words to say, it's just normal course of action for us right now..

Got it. All right. Thanks for taking my question..

Thanks Colin..

Your next question is from the line of Aileen Smith with Bank of America..

Good morning guys. It's actually John Murphy pinch-hitting for Aileen.

And how are you?.

Good morning, John..

First question, when we look at Page 18 and you talk about the factors for 2019 and 2020 from a sort of a macro and other direction, I'm just curious as you look at this, it is very difficult to predict these things obviously and there is potentially some more risk in Class 8 in the fourth quarter and maybe even next year.

I mean if you look at all of these variables, what is your game plan if things are a bit tougher than you're expecting. Or are there some real levers that you could point to, that you could pull fairly quickly to offset some macro weakness. I'm just curious what kind of game plan you have set there..

Hey, John. This is Jim. Let me kick it off. Maybe Jonathan, you have some color to add as well. I guess I would start at this.

The one that we would see to be and you would as well not to put words in your mouth, but you'd see more cyclical bigger swings would be in the off-highway side of the business and the commercial vehicle side, right? In the light vehicle side was where truck and SUV supplier, most of our programs are just refreshing or going to refresh and we got Bronco coming on and all those things.

So, I'm going to compartmentalize it, I think light vehicles relatively stable because of platforms around for some foreseeable future.

Back to your specific question, I would say commercial vehicle, you know, what enough to say sometimes when we're at these peak volumes like we've been running for about 18 straight months to come more into a sweet spot and that's what we actually put into our long range plan, more the sweet spot of per se and I'm not putting a prediction out there.

I'm just saying let's just say it's mid 200s. I mean, we run a little bit more efficiently, we know how to flex the cost to be able to run it more efficiently. More importantly for us, our supply base can run more efficiently and provide us what we need to be able to accomplish.

So, that we do it all the time through that cyclical curve of CV and what we call CV, commercial vehicle and we'll do that.

And then, the last comment I do and I hope I answer your question, if you look at Dana back in the history of time, what I mean by that is, let's say last five to seven years, even when we've gone through trough or ups and downs in this, we maintained or even improve margin any off-highway because we've gotten very good at flexing our costs in that segment because of the way we set up via our flexible manufacturing in-house or our in-source, outsource model on the supply side.

So, I don't lose a lot of sleep. We know what the playbook is, we go execute the playbook and keep moving..

And maybe just a follow-up, in order to be a skeptic, I mean I understand the -- certainly in the near term that the product launches on the light vehicle side will certainly be helpful and probably offset any kind of pressure we would see in the next 18 months or so.

But I mean if you think about the light vehicle business what kind of flexibility you have in the cost structure to respond what might ultimately be a downturn in the industry?.

No. I mean I don't know -- other than to characterize it by saying this. I mean we have the same play book over there.

I mean at the end of the day, it's still driveline business is no different than our off-highway and commercial vehicle side of the business a lot of our facilities are running at max capacity relative to 6 and 7 days because our customers are running six and seven days and our ability to streamline and tighten that back down into normal work weeks and take out cost.

If you need to make the hard core fixed cost reductions like many OEM and suppliers have had to make recently, we haven't been in that same situation so much because of our growth and we know how to do that. We played that game. So, we'll just do those normal triggers.

I wish I could make it in a more I don't know what the word is for, appealing and the answer but the reality is, we've been doing it this long you just know all the levers, all the cost buckets and you attack and make sure it's linear to the amount of sales that are dropping off..

Okay. And then, just a question on acquisitions, it sounds like they're a little bit on hold as you're sort of digesting integrating ODS.

Yet, when you look at Graziano, which is small acquisition that's seems like it's playing out pretty well and gives you a good tip of the spear and a good story to tell as you're going in RFPs because you're working with Ferrari on their plug-in hybrid.

I'm just curious as you look at the acquisition landscape, are there -- are you really shut off or are you maybe shut off from large acquisitions right now as we're working on ODS and you can make -- maybe somebody more of these smaller tech acquisitions still and use those and integrate them and commercialize them over time.

Just curious on the acquisition front, how aggressive or not aggressive you might be?.

A great question John and thanks for the question. We've tried to be clear from our strategic plan that we put in place at the end of 2016.

We saw it as mission critical to go fill out our portfolio of products for the markets in which we participate largely in SUV trucks and larger of course in commercial vehicles and all of that not just mobility products, but the industrial products and so forth and off-highway. We completely filled out that suite.

So we filled out, if you want to call it from a motors standpoint from the induction motor to the permanent magnet motor and everything in between the inverter range that we need, the controls and software. Mostly speaking we've got that.

As we said before, we may always pick up an asset here a small boutique thing to pull some things together like we announced today relative to PEPS. We do not see a need for any transformation or anything else like that we filled out the complete suite of that over the last couple of years. And so, we're just moving forward.

Never do you ever say never if anybody does I think they get their head in the sand, but our focus is now to integrate these assets and continue to take these products to market like we did with Ferrari..

Great. And then, just lastly, if we look at Page 14 and think about what you do with the pension here. Is there any more opportunity to do more work here, or if you kind of picked off the lower hanging fruit. I know these deals are tough to get done. So, I'm not to call it lower hanging fruit immediate. I'm sure there's a lot of tough work.

But, I mean is there potential to do more here on this liability and work this over time or is this kind of where you think you'll stand and just sort of naturally drift down over time and you'll work it internally..

Yes. It's a bit more of the latter John. This was the largest plan in the U.S. It was the one that was most actionable a number of these that remain would be under some collective bargaining agreements that we'd have to work through, but we'll continue to look at opportunities domestically.

If you look at the international piece now that makes up the vast majority of the remaining over $360 million balance, the largest piece of that is the German plan, which is a pay as you go plan and there's a limited opportunity in that market there.

So, I would say I'd characterize it more of the latter of the two scenarios that this was the most ripe opportunity within this area..

And I apologize, I'm looking at a black and white print out here. So, it's $55 million is domestic. So that's where you have funding requirements 307 is the remainder that's all pay go, right, so you would never really, I mean….

Yes. The vast majority in the 307, you're right..

Yes..

Okay, great. Thank you very much..

Sure..

Your next question is from the line of Rod Lache with the Wolfe Research..

Good morning everybody.

Can you hear me?.

Yes. Good morning..

Yes. Just had a couple of questions. First, following up on Dan's question earlier on the incremental earnings based on the guidance, you have $80 million of EBITDA. $350 million of revenue, that's a 23% conversion. Q1 was 13%, Q2 was 25%, so the back half has to improve to something like 29.

Can you talk a little bit about the variables that you're thinking about that drive that additional improvement, is that simply just launch comparisons, launch close comparisons.

And it sounded like at this point, you don't feel that you need to make any footprint or cost adjustments to reflect an expectation of lower commercial vehicle, off-highway because there's a lot of premium costs.

Is that accurate?.

Yes, you're right on both fronts, Rod. For the first half, the second half organic conversion improvement launches are a meaningful portion of that. The other part that we touched on a bit is just continued efficiency improvements operating at peak demand in the commercial vehicle segment is probably the biggest place I'd point to.

And also a bit in the power tech segment based on what we talked about. So, that's the bigger driver there. Relative to structural actions or restructuring your characterization there is correct. We think most of the work we can do based on what we see is large going to be in the existing ongoing operations as Jim mentioned.

There are inefficiencies in the system because we're operating at such a high level of demand that we think we can continue to make improvements on in the back half of the year..

Okay, great. Thank you. And just lastly on their second quarter call Ford kind of cautioned the street about launch disruptions for them continuing through 2020 and one of the big launches that they had on their slide showing the product pipeline was Super Duty.

Are you seeing anything unusual with respect to the production on launch products that you'd want to flag over the next few quarters with Ford or anyone else?.

No. Good question. Thanks Rod. I would tell you, if anything you should be aware of, or more of a reminder because I know you're aware of this is, we're preparing for the end of the year that we're preparing for the Bronco launch, which is extremely exciting new vehicle. That's really the only thing I can really add.

Things are fine, we don't see anything like -- anything any pullback or anything like that..

Okay. All right. Thank you..

Okay. Thanks Rod..

Your next question is from the line of Joseph Spak with RBC Capital Markets..

Thanks. Good morning..

Good morning, Joe..

Going back to commercial vehicles. This might be a little bit difficult because the composition of revenues is different, but we're sort of going back to those 2014 levels on revenue and the margin is lower.

So, is there any way to sort of dimensionalize it, like how much of that is, just that that sort of mix change versus the inefficiencies on the Class 8s being at such a high level..

Yes.

It'd be tough to give it to you right at my fingertips, but in principle both of those are contributing factors, higher commodity costs are certainly another factor that put pressure on the margin profile of that business while we do a pretty decent job of partnering with customers to get recovery there even at high recovery ratios that put some margin pressure a bit of the product mix that you noted in the change of the comportment in the business.

And then, just some of those inefficiencies operating at such a higher level of demand, those all together put a little bit of pressure on that.

We do believe that this business is capable of double-digit margins and we think we're going to get there in the second half of this year as we continue to make improvements within the supply chain to become more efficient at this high level of demand.

And then, potentially see some relief here on the production schedules towards the end of the year..

Okay. And then, on power technologies, Jim you provided a lot of good color into sort of what's impacting that business in the near-term. And it didn't sound like you were very worried. But does that mean you see an eventual path back to sort of those mid-teen levels. And do you need any footprint actions in that business as you go forward..

Yes. This is the best way I can characterize it. Thanks for the question.

It almost comes down to the cliché or whatever it is that we were probably never as good as when it was once up in the high 15, 16 range, it was like a perfect situation of commodities, volumes out of China, aftermarket volumes out of different parts of the world and that side of the business, you name it, kind of everything went well.

And we're not nearly, I hate the word bad but for lack of a better word, bad is we've been in the first half this year because it's slower, but it's still a fantastic business everybody on this call knows it's a fantastic business.

So, the answer is, is that it's going to be somewhere it's going to return back into the 13% to 15% range and it doesn't take like a giant leap of things to happen. We've got these new content per vehicle programs that are come in that we've never launched anything this complex in a good way and that's going to help.

But then, the other things are starting to come in. I mentioned it in my comments earlier, just with getting the steel and aluminum, but more specifically the aluminum deal passed through in May. So, on and so forth. I mean all that's going to start to show fruit on the back half of this year.

And then, I look forward even better situation in that years beyond that. So, it'll be back in the ranges where I think that business belongs which is 13% to 15%..

Okay. And then just two quick points on the guidance, one, any color on sort of the slightly higher CapEx? And then, on the recovery of commodity costs which I think sort of made you sort of move more towards the lower end of the range.

How does that flow through to 2020 because I think you're still looking for an impact to sales next year, but then like $15 million tailwind to EBITDA.

So, does that impact some of that trajectory for 2020 as well?.

Sure. First on the cash flow point. The change in CapEx is primarily driven by program timing. So, as we get a better look at how the second half is going to lay out, we just see some higher cash disbursements towards the end of the year primarily driven by program timing. To your question on 2020.

We do remain convicted that there is still opportunity for a further step down in commodity cost in 2020 of a comparable level to the change that we showed just a few months ago. So, we really do think that's going to be a big tailwind for us on margins as we move into next year as well. We don't think it's an issue of a pull ahead.

We think there's a sustained opportunity to continue to see relief on commodity costs..

Okay. Thank you very much..

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

Good morning..

Good morning, Emmanuel..

I was hoping just a little bit more color on the right-hand side of Slide 18 and sort of puts and takes as you move into 2020. So I guess first from the top-line basis, I think the -- on your last update you're essentially looking for some backhaul contribution to be maybe offset by market declines primarily on the commercial vehicle.

How should I understand this, I guess the first circle you have in there, was that the flat arrow organic backlog and market? Is it essentially in line with what you said before or are you seeing some fluctuation versus the previous quantified view?.

We most certainly are Emmanuel that first one is intended to indicate that we believe organic growth will be flat next year because as we see the declines in the North American Class 8 market and we see some predicted pullback in the off-highway market that we were expecting even earlier this year as we looked out the next year.

We think both of those are going to be there, but that at this point those headwinds will be at least offset by our backlog.

So, we're comfortable that the business is going to remain relatively flat and that the mix inferred in there which is a decline in Class 8, the lowest profitable segment within our commercial vehicle business that's going to be a more than augmented by the contribution margin of the backlog. So, still feel consistent there in the outlook.

And then, we feel the same way about the other two variables from a cost synergy perspective, we'll get a little bump in having, we'll look on for 12 months versus 10 months this year to the top-line.

But, from a cost perspective very convicted that the $40 million cost energy plan is well within reach and we'll be able to deliver most of that by the end of next year..

Okay. That's helpful.

In terms of magnitude, I assume since you say remain on track, you still comfortable with the 50 basis point of margin expansion at midpoint?.

We are and both of the factors that are going to drive that improvement or the cost synergies I just mentioned, but as well as some continued improvement in commodity costs..

Understood. And I guess just finally on the commercial vehicle margins. I apologize if you mentioned that earlier, but I think in the past, it was sort of like these near-term targets for return to double digits. And I understand there's a lot of moving pieces going on as well as calling the timing of a Class 8 downturn.

But, is that still something that you expect in the near term or that you expect to be able to achieve within your basic scenario for 2020?.

Yes. I think we believe that the double-digit margins are within reach for the second half of this year and something pretty comparable as we move into 2020 because the impact of the lower volumes within the Class 8 market are not going to have meaningful pressure on margin because of all of the premium costs to fill that demand.

So, we do feel like that's the target we're shooting for there which is in reach in the near term..

Great. Thank you very much..

Sure. Thanks..

Today's final question will come from the line of Ryan Brinkman with JPMorgan..

Great. Thanks for squeezing me in. I appreciate that North America Class 8 and medium duty demand is expected to remain strong this year and there's been speculation that it'll slow next year.

I don't expect you'd have a crystal ball with regard to what the economy is going to do in 2020, but is there anything that you can share at this point in terms of what you're seeing with regard to customer order books et cetera that would either confirm that softening or that would perhaps conversely suggest the current level of strength could continue better than expected at least into the first part of 2020..

Yes. We certainly have line of sight into the order book that gives us some sense that there may be a little bit of upside.

But, what I would say is, the best line of sight we have is a couple or a few months out, so we're starting to get a pretty good look at the early part of the fourth quarter which gives us some reason to [indiscernible], we might be a bit better, but we're probably 30 or 60 days away from having a really good line of sight into the end of the year.

So, when we're together next in a few months, we'll clearly have a really good view of where that's going to end up in the balance of the year..

Okay. Thanks. And then, just lastly I think Brazil is shrunken in recent years as a percentage of revenue for suppliers generally, but you were one of the ones there with a relatively more exposure. Previously I think you'd ratcheted the cost down with a lower production, so at some point this could turn into a pretty decent tailwind.

In the slides you're noting that truck and bus production is recovering there, but also the currency is weaker. So, is Brazil with that tailwind for you this year and to the extent that it does continue to normalize further.

How much upside could that provide from current levels?.

Yes. The answer is yes that business has been helpful in expanding or contributing to margin expansion within the commercial vehicle space. So, when at trough in that market, we were proud of the fact that we flexed our cost structure and stated about the breakeven.

And as we move up and we see these mid-single digits moving to high-single digits increases in heavy truck and bus volumes, we see a really nice contribution coming through. And if that market continues to recover, it's just going to increase our confidence in our ability to go ahead and get to that double-digit margin for commercial vehicle.

As it relates to currency, as you'd probably expect, it's not a meaningful impact the margin with the changes in the currency. It's just flows through at top and bottom-line pretty close to the average margin for the space..

I appreciate it. Thanks..

Yes..

Okay. On that front, if I may, I'll just close on behalf of the Dana team here.

Perhaps there's other companies out there that are delivering record sales in the first half of the year, 11 consecutive quarters of year-over-year sales growth, while delivering $40 million of higher EBITDA or 40 basis points of margin improvement, while at the same time taking care of their customer and continuing to grow those relationships and the backlog for that matter.

But, all I can say is, I couldn't be more proud of the Dana team for what we've done not just in the first half of this year, but of course over the last couple of years. Thank you for the little team that's out there listening and thank you to everybody who's called in today. We'll look forward to talking you in the near future..

Ladies and gentlemen, this does include Dana Incorporated Second quarter 2019 financial Webcast and Conference Call. You may now disconnect..