Dana Inc (DAN) 2018 Q1 法說會逐字稿

Good morning, and welcome to Dana Incorporated First Quarter 2018 Financial Webcast and Conference Call. My name is Tanya, 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. (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, Tanya, and thanks to everyone on the call for joining us today for Dana's First Quarter 2018 Earnings Call. Copies of this morning's press release and the presentation have been posted on Dana's investor website. Today's call is being recorded, and the supporting materials are the property of Dana Incorporated. They may not be recorded, copied or rebroadcast without our written consent. (Operator Instructions)

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. These risk factors are also detailed 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 I'd like to turn the call over to Jim.

Good morning, and thank you for joining us for Dana's 2018 First Quarter Earnings Call. In the first quarter, Dana's top line growth was one of the highest in well over a decade, with sales of $2.1 billion, a 26% increase over last year, of which 17% is organic growth. This is our fifth consecutive quarter that we've achieved double-digit year-over-year organic growth.

When you think about that growth, I would ask you to not only reflect on where we have been but also to think about where Dana is headed. A few highlights include: in light vehicle, Dana is one of the largest truck and SUV driveline suppliers, which benefits us tremendously because of the strong demand in truck and SUV sectors as we are largely not exposed to the passenger car markets.

In commercial vehicle market, volume projections, including Brazil, look strong for the foreseeable future. And as you will hear in a moment, we continue to organically grow our business.

In our off-highway business, while many of our markets have recovered from a sustained downturn, there is remaining upside from a volume perspective. Here, too, we continue to grow our business organically, especially as it relates to cross-selling opportunities that were created through the Brevini acquisition.

Lastly, in Power Technologies, we will continue to grow with the secular hybrid and electrification trends. Why? Because many extremely high-tolerance battery, electronics and motor cooling products require both sealing and thermal products and process technology, a significant differentiator and value creator for Dana.

Our adjusted EBITDA came in at $248 million, 21% year-over-year growth. Net income was $108 million, a 44% increase. Diluted adjusted EPS increased 19% or $0.12 over last year's first quarter to $0.75 per share. This strong first quarter performance supports our outlook for the remainder of the year.

As you recall, earlier this quarter, we raised full year 2018 financial targets from our prior guidance, including an additional $300 million in top line growth, $45 million of adjusted EBITDA for an additional 10 basis points of margin. And as you've heard me say many times, the key to our success is our laser focus on our customers. And this is measured in our sales growth and the recognition we receive from our customers. This past quarter was no exception.

Please turn your attention to Slide 5. Our enterprise strategy is core to everything that we do. The second gear, customer centricity, illustrates our commitment to partnering with our customers to create value, develop and strengthen relationships, provide cutting-edge innovation and execute on our commitments.

Dana has received 10 customer awards over the past few months. These awards serve as tangible proof points that our customers acknowledge and appreciate our relentless passion to provide exceptional customer satisfaction.

Over the past few months, Dana was recognized by General Motors as a 2017 Supplier of the Year for its cooling technologies. Dana received the award during the General Motors 26th annual Supplier of the Year ceremony where the automaker honored its best global suppliers for going above and beyond requirements to deliver the most innovative and highest-quality technologies to GM vehicles.

Dana's Commercial Vehicle team also received Supplier Excellence Diamond Award for suppliers that meet GM's challenging performance expectations. The Dana off-highway team recently received the 2017 China Supplier Quality Award during the John Deere Supplier Conference. This is the fifth award Dana's off-highway has received from John Deere since 2011.

Remaining in China, Dana received the Supplier Quality Excellence Award during the 2018 LiuGong supplier conference. The award was given in recognition of our excellent quality performance in 2017.

In addition, Dana Power Technologies team in Germany was named the partner-level supplier by AGCO, the highest relationship level a supplier can attain.

Toyota honored Dana recently with 2 awards, the Supplier Award (sic - Superior Award) for achievement in Value Analysis and Best Localization and Value Analysis from Toyota South Africa. We announced earlier this month that Dana was recognized with the Diamond Award from Spartan Motors for our staunch commitment to quality, on-time delivery, total cost control and excellent customer support.

I feel strongly that our focus on customer -- on the customer continues to be instrumental in our success and is further proof that we are doing the right things.

Please turn to Slide 6 for a highlight of one of our success stories. As you recall, Dana has been the driveline supplier to the Jeep on the iconic Wrangler vehicle for over 75 years. The vehicle is renowned for its utility and go-anywhere durability. Having accumulated deep engineering and manufacturing knowledge on the highest-performing Wrangler drivelines over the past three quarters of a century, we are extremely proud to have recently launched the new Wrangler or as often referred to by the off-road enthusiasts as the JL.

With the successful launch of the extremely complex and advanced new Dana driveline, I thought it may be interesting for you to see what the vehicle can do. These are actual pictures of Wranglers climbing rocks on a severe road course in Moab, Utah at the recent Easter Jeep Safari event. Can you imagine the power, torque and durability that comes with the Dana AdvanTEK 44 and 60 axles?

And of course, at Dana, we do not rest on our laurels. New this year for the high-performance market is the all-new Dana Ultimate 80 axles for the courageous rock and obstacle climbers. Bottom line, as the saying goes, a picture is worth a thousand words. These new products are a fantastic representation of how our outstanding customer supplier partnerships, combined with decades of experienced engineering talent, can perform the extraordinary.

The joint engineering communities brought the product to life. 12 individual Dana manufacturing facilities did a fantastic job launching the JL products. And FCA is delighted -- is delighting its customers with a tremendous new vehicle.

Please turn to Slide 7 for an update on some of the key fundamentals driving our business. As we look forward this year, there are 3 key fundamentals driving our success. First is the strength of our end markets. We continue to see strong demand in our core light-truck programs, and we expect it to continue this year.

Our off-highway and commercial vehicle end markets also remain very strong and were key drivers of our raised full year guide this year. This includes increasing production in Brazil, where we are expecting volume improvement in the mid-teens, still a ways to go before the market is fully recovered but it is certainly improving.

The second fundamental is our growth across all of our end markets. As we announced last month, we signed an agreement to supply front and rear axles for the next generation of iconic Jaguar Land Rover luxury vehicles. The estimated value for these programs total more than GBP 300 million. These new contracts with Jaguar Land Rover are a testament to Dana's commitment to engineering and our ability to meet the demands of the market.

Last week at INTERMAT in Paris, France, a premier construction industry trade show, we announced that Dana will supply Spicer front and rear axles in a gearbox for an award-winning Mecalac e12, the world's first compact wheel excavator that runs exclusively on electricity. It meets the 3 major fundamentals for the urban building sites of today and tomorrow: range, performance and compactness.

Dana was also recently selected as the driveline supplier for the all-new medium-duty Chevrolet Silverado chassis cab trucks, which -- with production beginning later this year.

Something you may not know is Dana has supplied driveline technologies to General Motors and its predecessors for more than 113 years, starting with universal joints and shafts for the Oldsmobile and Buick vehicles in 1905.

We were also recently chosen to be the exclusive driveline supplier for the highly anticipated Hino Class 7 and 8 commercial vehicles. Hino will be in production of the trucks in early 2019 at its facility in Mineral Wells, West Virginia.

The President and CEO of Hino Trucks North America was recently quoted as saying, "Working with Dana to bring the XL series to life for our customers was an important alliance. Dana's products are renowned for their impeccable design, consistency and effectiveness for customers. Those traits are consistent with our goals and made them an ideal fit." To hear that feedback from such a respected customer is exactly why we come to work each day.

And finally, I would like to share our go-forward priorities. As I mentioned, market demand for our products remains strong. We're managing the simultaneous increase in demand in virtually all of our end markets. Through our global integrated supply chain, management, engineering and manufacturing teams, we're able to leverage our key assets and processes around the world as we scale to meet demand and to do so profitably. We will continue to maintain our focus on operational excellence.

When you think about it, as I mentioned earlier, the company has grown the top line 26% in Q1 2017 versus Q1 2018, while at the same time, through our quality, delivery and cost performance, we continue to exceed our customer expectations. That is not easy to do, but our operating team has done it.

On a go-forward basis, our extremely talented manufacturing teams will continue to eliminate waste which inherently coincides with the major influx of new business or higher volumes.

No discussion would be complete without mentioning commodity cost. As we all know, there is an upward price pressure on steel and aluminum. And while we may see a short lag in recovery, we continue to have success in offsetting these increases through contractual means and cost-savings activities.

Finally, we've had tremendous success integrating all 4 of the companies that we've acquired over the past couple of years. Most recently, the integration of Brevini asset has gone exceptionally well as we've increased annual run rate operational synergies by over 30%, which has helped us drive our overall margin improvement. Now we are also benefiting more and more from sales synergies with Dana and Brevini customers.

Now I turn the presentation over to Jonathan for a review of the financials.

Thank you, Jim. Slide 9 is an overview of the first quarter financial results for 2018. Our first quarter results were firmly in line with our revised full year guidance we shared with you at our investor forum in March.

For the quarter, sales of over $2.1 billion were up $437 million versus the first quarter last year, representing growth of 26%, driven once again by strong double-digit organic growth from the conversion of our backlog, along with higher end market demand as well as tailwinds from currency and acquisitions.

Adjusted EBITDA was $248 million for the first quarter, a $43 million increase from the prior year or 11.6% of sales below last year's first quarter margin due to expected higher launch costs.

Net income this quarter was $108 million, a $33 million year-over-year improvement. The increased earnings were driven by higher adjusted EBITDA, partially offset with increased depreciation expense.

Diluted adjusted EPS, which excludes the impact of nonrecurring items, was $0.75 per share in the first quarter, an improvement of $0.12 per share compared with the first quarter last year, primarily reflecting the higher earnings.

Finally, free cash flow was a use of $93 million, $8 million higher than 2017 as working capital requirements offset the benefit of higher adjusted EBITDA and lower capital spending.

Please turn with me to Slide 10 for further details regarding the first quarter sales and profit growth. First quarter sales increased by $437 million compared to the same period last year, and adjusted EBITDA was higher by $43 million. The year-over-year growth is attributable to 3 key factors.

First, organic growth added $293 million in sales as we continued to bring our backlog to market, and demand in all 3 of our key end markets remained strong. The organic growth delivered an incremental $27 million of profit. The conversion on organic growth was muted by launch costs principally related to the new Jeep Wrangler, which were comparable to the amount incurred in the prior quarter and are expected to be negligible in the second quarter as we reach our full production run rate.

Second, business acquisitions made in 2017, Brevini and USM, contributed $56 million in sales and $9 million in adjusted EBITDA. Margin was significantly improved as our synergy plan continued to be realized.

Third, foreign currency was a benefit in the quarter, improving sales by $88 million and adjusted EBITDA by $7 million due to the translation of international results at currency rates that strengthened against the U.S. dollar.

Please turn to Slide 11 for an overview of how the adjusted EBITDA converted to free cash flow. As is typical for our business, free cash flow was a use in the first quarter and was in line with the first quarter of last year. Higher earnings, combined with lower onetime cost, net interest and capital spending, were more than offset by higher working capital requirements to deliver the sales growth.

Onetime costs were $16 million lower than prior year primarily due to lower transaction costs related to our acquisitions in the first quarter of last year, Brevini and USM. It's worth noting, cash outflows related to the GKN transaction were only a few million dollars, and the balance of the outflows that occurred this month were more than offset by the receipt of the break fee.

Interest was $16 million lower than prior year due to the timing of noninterest payments as a result of our refinancing actions last year.

Working capital increased significantly over the prior year as a result of the significant increases in sales, driving higher receivables and inventory levels, net of increased payables, as well as higher cash outflows related to last year's incentive compensation plans, which are typically paid in March.

Capital expenditures were $31 million lower this quarter as our investment has normalized with the completion of our major program refreshes. And capital expenditures were approximately 3% of sales, which is slightly lower than our expected go-forward run rate of about 4%.

Please turn with me now to Slide 12 for our financial outlook for the full year. Today, we are reaffirming the 2018 financial guidance that we raised last month. We expect sales to be approximately $7.9 billion, which represents double-digit growth over last year. We expect adjusted EBITDA to grow by $145 million to reach $980 million and a 12.4% margin, delivering 17% year-over-year growth, which translates to 80 basis points of margin expansion.

With lower capital expending requirements this year, we expect free cash flow to improve by about 130 basis points from about 2.2% of sales last year to 3.5% this year. And we expect our diluted adjusted EPS to reach $2.90 per share.

Please turn with me now to Page 13 for a closer look at the drivers of the expected change in our sales and profit versus last year. Slide 13 remains unchanged from what we shared with you last month when we raised our guidance. Organic growth remains the primary driver of both our sales and profit growth projections for this year.

Despite the lower conversion in the first quarter, principally due to anticipated launch cost, we remain confident that we will convert this sales growth to profit at approximately 20%. Inorganic growth is expected to provide a meaningful contribution to our margin expansion as we realize the benefit of the cost synergies associated with the Brevini transaction throughout the remainder of the year.

Finally, we expect that foreign currency translation will provide a tailwind to both our top and bottom lines, largely attributed to the strengthening of the euro against the U.S. dollar.

Those 3 drivers are expected to lead the $7.9 billion of sales and $980 million of adjusted EBITDA for a margin of 12.4%.

Please turn with me to Slide 14 to see how we expect the profit will convert to free cash flow. Slide 14 is also unchanged from what we shared in March. We expect free cash flow in 2018 to increase by approximately $115 million compared to 2017, which is about a 130 basis point improvement when expressed as a percentage of sales. We will benefit from a $145 million increase in adjusted EBITDA and lower onetime cost as our acquisition integration plan is completed.

Cash taxes will be higher in 2018 by approximately $60 million, in part to a timing of tax payments on an entity restructuring outside of the U.S. This restructuring, while generating a onetime tax outflow of about $20 million, will allow for a more efficient structure going forward.

We expect working capital to be a higher use in 2018 to support our sales growth as well as settling incentive compensation payments earned last year.

And finally, capital spending will be subsiding from last year's peak levels as we have completed a large percentage of our investment to support our new business backlog.

These elements combined will allow us to efficiently convert the majority of our profit growth into free cash flow.

Slide 15 provides an overview of the 4 key determinants of our performance. First, as Jim mentioned in his remarks, we are seeing positive demand trends in all 3 of the major mobility markets we supply. We believe global light- and medium-duty truck volumes will remain strong, heavy truck volumes in North America will continue to be robust, and the truck market in Brazil is rebounding. The key off-highway segments we supply, construction and mining, will continue to drive growth.

Second, we expect foreign currencies will drive higher sales for us as we regain some of the ground we lost in the last few years.

Third, we remain very confident in our $300 million of new business backlog coming online this year and the additional $300 million next year. This secured net new and incremental business, net of any losses, totals $800 million over the next 3 years.

Finally, we expect to offset the majority of commodity headwinds by a combination of contractual, operational and commercial means. We have a great track record of managing our input cost and navigating complex supply chains.

We're off to a great start this year and are on track to meet our expectations for the remainder of the year. Our guidance for this year far exceeds the long-term financial targets we originally attributed to our enterprise strategy, a year earlier than expected.

I'd like to thank all of you for listening in this morning, and I'll now turn the call back over to Tanya so that we can take your questions.

(Operator Instructions) Your first question is from Joseph Spak with RBC Capital.

The first question I had was just maybe you could talk a little bit about some of the challenges, it looks like, in sort of Commercial Vehicle with the incremental margins. Were there some higher costs that sort of comeback -- that came back that weighed? Or why wasn't sort of the conversion on the higher sales maybe as strong as otherwise would have occurred?

Sure. This is Jonathan. In CV, a couple things to note. First, we did have -- as we continue to adjust to this higher production level, particularly in North America, we do have some inefficiencies that we are working our way through.

We are confident we've prioritized making sure that we meet deliveries on time with high quality. But we do have confidence that, through some initiatives that we've been working on, that that's going to improve in the balance of the year. So lower conversion costs in the balance of the year will drive a better conversion in CV.

It is also worth noting that Brazil is starting to come back, and we are encouraged by what we're seeing there. Brazil was profitable in the first quarter for us this year. We are very encouraged by that, and we look forward to it becoming cash flow positive within the next few quarters. So those are a couple of the highlights on the CV business.

Great. And then just on light vehicle, I think I heard you say the launch costs in the quarter were similar to the fourth quarter where I think you said I think last quarter, it was about $15 million, which, if true, I mean, the sort of the underlying conversion is sort of mid-teens. So is that the right rate to think about for that segment going forward now that the launch costs will subside?

We've indicated that we think light vehicle will convert in the higher teens. We still believe that to be true throughout the balance of the year. The launch costs associated with the new Wrangler were the primary driver in the first quarter.

There were a couple of other items. Steel jumped very significantly in the latter part of the quarter. We did get caught with just a little bit of a lag issue, which we will recover on the balance of the year. That certainly affected light vehicle. And there were some other inefficiencies, not necessarily related to the new Wrangler but in the overlap of the old Wrangler and the new Wrangler were running at a very high run rate in Q1.

So there's some inefficiencies there that we believe we'll improve upon in the balance of the year. So really, the confluence of those 3 factors are what got us to the conversion in Q1, but we think we'll be high teens in that business going forward.

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

Start -- I want to start with a more strategic question then I have a couple of housekeepings. After -- since you're not going to be, at least near term, tying up with GKN, can you remind us of where you are in your electrification path and what your plans are now independently to go after that marketplace?

Sure. Thanks for the question -- or questions, I guess, that are coming. The -- first and foremost, as it relates to the GKN situation, I think everybody's aware of this, but that was the definition of opportunistic, wasn't really even on the radar.

If the team -- the Dana team wasn't as capable and talented as they were, they wouldn't -- we wouldn't have been able to react as fast as we did once we learned of the profit warnings over in the U.K., et cetera, et cetera. So that really was the purpose of that fit.

Our strategy really just stays back to where it was in the first place. There is essentially no situation where we're in right now -- because we're largely truck and SUV, and it's further out in the cycle -- that we're not in the position already to be able to answer RFQs, RFIs, so on and so forth, with our organic play.

As most people on this call realize, we've been very strong in electrified products in the off-highway region and segment for over a decade. Those skill sets have been transformed over into light vehicle, commercial vehicle. Our products are getting developed. We're launching the bus axles in China right now. And you heard about the Mecalac product a little bit earlier today.

So we're just going to continue to do what we're doing. I mean, the customers -- you saw the numbers, 17% growth organic this quarter alone. We're just going to continue to have the products ready as the RFQs come through the system, and we believe we're going to get our fair share.

Okay. Second question. As you look at the segments, it seems like very strong growth, which you talked about, a bunch of them, except for Power Tech, was the one, at least vis-à-vis our model, wasn't significantly ahead. Could you give us a sense of kind of how that's going to look through the year? Is there some cadence there? Are there launches coming up in terms of how the backlog is going to flow through?

Brian, this is Jonathan. Yes, just a couple of comments on Power Tech. If you look at that business over the last 5 to 6 years on a currency-adjusted basis, it has outperformed the light-vehicle engine market by about a factor of 1.5x. So we are really encouraged by the growth that we've seen in that business on the top line.

And again, the reminder is, as the internal combustion engine becomes more efficient, there's greater heat, greater pressure within the engine that are managed by our sealing and thermal solutions, and there's opportunity for content increases, which we've absolutely seen there.

Also, during that same period, you'll note that that business has improved its margins by about 20 basis points per annum on average. We continue to see that as an opportunity for this business, and we think that we'll have attractive margin growth there as well, too.

In the first quarter, we were comping against a very difficult really strong first quarter of last year. We had a few small items that went our way, few small items that didn't go our way first quarter this year. That's what's driving the unfavorable conversion within that business. But on balance, we continue to think that the business will perform well, and we'll beat the market on the top line and expand margins.

Okay. And final housekeeping question. The launch costs for the JL obviously ramp down as it ramps up, but you had a volume impact from the runout of the JK. So how does that play out through the remaining quarters?

Yes. That's the primary reason that you can't annualize Q1 sales and get to our full year guide. So we had about $100 million of sales associated with the old Wrangler in the first quarter. We built some in April, but for the most part, we're done with that program in the second quarter.

So that's about $100 million of a $2.1 billion of sales that we had in Q1 that you won't see through the balance of the year. Adjusted for that, you're pretty much in line with our guidance range for the full year.

Your next question comes from Emmanuel Rosner with Guggenheim.

So I realize GKN was sort of opportunistic, but at the same time, I think I guess Dana was prepared to spend a decent amount of money as well, obviously, issue shares for it. So I guess looking ahead, what is your appetite for other acquisitions? And maybe even nearer term, could you use some of that cash you were going to use for the acquisition and allocate it towards faster or more aggressive buybacks?

So I'll take the first part of it. I'll let Jonathan take the second part. The one thing I hope you and the entire group would take away from the whole GKN situation is that never once -- consistent at least since I've been here -- never once did we come across just having any deal fever. We were very clear that we were not willing to overpay. We were not willing to lever up our balance sheet.

So we made a run at the asset. It didn't work out. Ultimately, the GKN shareholders, it wasn't -- didn't pick us. They decided they wanted to sell the entire company. It's just what it is.

My point in bringing all that back up again is we don't have these like incredibly tight goalposts as to what an asset could be as we went the inorganic approach to it. We're -- but what we do have tight goalposts on is how we would go about it and stay within our very strict guidelines as it relates to that.

So we keep our eyes open in that regard, but we are very much in a position of strength that we do not -- we're not in a deep need of having to have an inorganic play. Again, being in the transmission business, which I know you're aware of, Emmanuel, but maybe other people aren't, with that has brought tremendous amount of software and controls management capabilities, which have tied into many of the electrified products we've already developed and continue to develop. As it relates to the share buyback, Jonathan, I'll let you take the wheel.

Sure. It's been a couple of years, Emmanuel, since we've really bought back stock. We did announce earlier this year that we had an authorization this year and next to buy back $100 million. We did also announce that we doubled the size of that program about 1.5 months ago. And we intend to be active here in the second quarter given where our stock price is trading compared to where it has been. In our conviction of value, we do intend to reenter under that authorization.

Relative to the size and scale of what you indicated on GKN, that's not our intention to make that any meaningfully larger. From a buyback perspective, we do think it is really important for us to maintain a strong balance sheet, and we see a really good opportunity this year and next to further strengthen the quality of our balance sheet and our credit profile.

That's very good color. And then I guess the follow-up is on your expected organic growth for the year. So as part of your improved guidance, you brought that up to $500 million, $200 million of which are sort of market conditions. It seems like the -- in the first quarter, you had some very, very strong market growth. Can you give an update on, I guess, where you were tracking through Q1 on this $500 million and, in particular, in terms of the $200 million from market contribution?

Sure. On a year-over-year basis, most of the market growth that we expect to see came in the first quarter, just given where production levels were last year compared to the prior year. We had very strong demand in the balance of the year. And then we also had that anomaly that I mentioned as well where we have the -- both programs of the Wrangler running at that time period.

So we do expect to see modest growth in our end markets in the second through fourth quarter, but a large piece of it did come in Q1, and that unique onetime benefit was a contributor.

It's also worth noting that of the $300 million of backlog, we did see the expected amount or a meaningful amount of that come online in Q1. We expect that to be a significant driver on a year-over-year basis in the balance of the year largely as the new Wrangler gets up to its production levels and is able to deliver the incremental content that we expect to see on that platform.

Your next question comes from Colin Langan with UBS.

Just a follow-up on the last question. I mean, so what is the assumption for Commercial Vehicle growth for the rest of the year at this point? Since you said most of the market was already in Q1, is it flat for the rest of the year?

Yes. We are expecting, from a North America perspective, that Commercial Vehicle will be up slightly. But particularly in the second half of the year, we were already producing at the run rates that we were producing in the first quarter. So you see a little bit of bump in the second quarter, but we largely expect to be in line by the time you come into the second half of next year for Commercial Vehicle for North America.

We are expecting growth in the large truck and bus market in Brazil in the balance of the year. So we do expect that to be a contributor to growth as we move through the remainder of 2018.

And on the off-highway side, are you expecting that also to more level out or...

Yes. Well, we are expecting that construction and mining will remain strong, with some level of growth probably a little more conservative on the ag market, which has held reasonably well. But we do expect to see a little bit of a lift in the balance of the year in the off-highway markets, but they have been coming back pretty strong for over a year now.

And you highlighted steel was a little bit of an issue in Q1. Can you just remind us of your hedging policy? I mean, any size of the actual headwind? And do you think you'll wash all of that out by the end of the year with your pass-through agreements?

We do. Our commercial agreements will take care of most of it. But as I mentioned, we have other supply arrangements that we work to offset them with as well as operational strategies to be able to address that. But it was mostly an impact in the quarter just because the prices started going up late in the quarter and the recoveries lagged that. So on a full year basis, we do not expect commodities to be a meaningful impact to profit. But within the quarter, we did see a bit of an impact.

And on the tax rate, I know, when you started at the Detroit Auto Show, you indicated that it'd be a help of about, I think, $0.10 for the year. But the guidance right now is, I think, based on a 30% adjusted tax rate. Why is the rate so high with the U.S. tax reform? And should that -- we think of that going down over time?

Yes. The bigger issue in the effective tax rate is jurisdictional mix. It's an issue of where we are earning our profits and the rate at which they are taxed. So you're seeing our profit projections include profitability at a higher rate in higher tax jurisdictions. From a longer-term perspective, we would expect, as the U.S. continues to become more profitable, that that would help the overall effective rate. So yes to both accounts.

So it should come down over time from here again?

Yes. We would expect a modest improvement over time.

Your next question comes from Justin Long with Stephens.

So to start, I was wondering if you could talk about the cross-selling opportunities you've seen, particularly related to Brevini. You've mentioned that a couple of times. Any way to help us understand how much of a tailwind that's been and how you're thinking about that cross-selling opportunity going forward?

Thanks for the question. This is Jim. I will make this commitment to you: we will provide you some of that information down the road relative to the specific numericals on that. I'm not really prepared to give that to you now. So I'd rather not do a -- just put a flyer out there for you.

What I will give you a visual for is where the cross-selling opportunities are coming from, so you can kind of dimension it before I get you some of that down the line. But if you think about, for example, area work platforms -- an area work platform, you see it at Home Depot or Lowe's or something like that.

Those can often have a full axle across, which would be something that we would have supplied historically. Now there -- now you also can get those in more of a planetary, which is the motor-on-wheel technology. With the Brevini acquisition, we have that capability for motor on wheels, so we're seeing that.

And then the cross-selling opportunity is where Brevini had many, I would call it, more boutique, small customers, albeit important customers around the world, as well as a very strong distribution network of multi -- what we call supply -- service and assembly centers spread out across the world. Those are -- those smaller folks are now pulling through Dana for more of our products.

Vice versa is where we did not have the product lineup in Dana because, again, as you know, we were not in track vehicles and planetary, so on and so forth. We're able to pull those through in with the Brevini acquisition it comes with. And many people may not be aware of this because we don't spend a lot of time on it.

But with it comes -- with it hydraulics, and there's a strong demand for hydraulics out there. There's quite a bit of a shortage of that type of capacity in market around the world as well as electronics, a smaller piece of the overall package but unbeknownst to many because we don't want to oversell something that we shouldn't oversell, but it comes with that.

So we're getting a lot of opportunities associated with former Dana customers in the electronics, which could be, for example, joystick controls, sensing controls and a bunch of other things that relates to tipping functions on off-highway type of equipment. So hopefully, that helps frame up the answer to the question, with the commitment to give you some numbers down the road.

That does, and we'll look for the quantification later. I think second question I had was on Brazil. So I was wondering if you could talk about the EBITDA contribution you're assuming from Brazil within the 2018 guidance and how that compares to what you are expected heading into this year. And longer term, what do you see as the potential EBITDA opportunity in Brazil as that geography continues to recover?

Sure. So we are absolutely encouraged by the increased demand that we've been seeing over the course of the past few quarters. And certainly, returning to profitability in the first quarter in Brazil was very encouraging to us.

We have indicated we've not given the dollar amount of the profit nor the specific contribution margin. But we have indicated through a series of actions there that we expect our incremental margins in Brazil to be considerably higher than some of the other aspects of the business, and that's principally due to a couple of factors.

First, we made the SIFCO acquisition in Brazil as a vertical integration play largely on the forging side. That will create higher incrementals on a go-forward basis.

Second, we worked very hard on the fixed cost structure during the downturn to make sure that we were reducing fixed costs and becoming as efficient as we could to make sure that we can capitalize on the upswing while securing enough capacity to meet demand, which we did. We're encouraged about that.

And then the third factor is, it was a little bit difficult to see during the downturn because the numbers are so small, but the competitive landscape became much more beneficial for us during the downturn. We had a number of competitors that ceased to exist during the downturn, which helped us to win some business and have a better competitive position within the local markets.

So we're encouraged by all 3 of those factors. And we do expect that Brazil will be the difference maker in moving our Commercial Vehicle business from a single-digit EBITDA margin to a double-digit EBITDA margin business. So we have said, with Brazil returning to a more reasonable historical level of demand for heavy truck and bus, the Commercial Vehicle business will be a better than 12 -- or a 10% business or double digit on a go-forward basis.

Your next question comes from Brian Sponheimer with Gabelli.

So within the commercial business, you've had some market share gains over time absent the one customer issue a couple of years ago. Can you just give us some ideas as to market dynamics in North America as we've seen fleet trucking companies come back a little bit more maybe than the owner operators and how you go to market there?

Yes. First, thank you for the question, Brian -- or questions, Brian. Appreciate it. So first, I think I better touch on a reference point, and I hope I don't do too much of this.

But I really have to give a shout out to our Commercial Vehicle team and supporting functions, purchasing and other, because we haven't seen -- the CV market that is, we haven't seen this type of demand consistently in a very, very long time. And in 2014, as you know, we were on the struggle bus getting through that stressor.

We have not any of that issue in terms of supply whatsoever across all of the geographies around the world because the team is really operating at a very, very high level.

To your specific question in terms of customer approach and how to continue to gain new business wins and more -- or more revenue for that matter, it's really a combination of both. We are -- our team is just doing a tremendous job providing our OEM customers with new products and, frankly, services and so on and so forth, that they're having more interest in it.

We've announced a few awards that we've got there. But at the same time, we have to help them with the fleets. And I think any of our OE customers would tell you Dana has done a tremendous job making sure that the fleets know the new product offering that we're providing, how we can help them win in the market and making sure more than anything in this market that we're going to be able to satisfy demand.

So hopefully, that answers your question, but it is a -- it is definitely a different Commercial Vehicle than it was 3 or 4 years ago, and our customers are repeatedly displaying that through the new business awards and other.

All right. And then separately, can -- you talked about the enterprise strategy and the ability to cross-sell. Last week, Ford gave some plans as to how to electrify a lot of their powertrain.

And given how important they are to you, how do you take the Light Vehicle Driveline opportunities that you have and, say, bring along some battery cooling opportunity as a package to let's say a Ford that is looking to add to its electrified capabilities on the SUV and truck platforms?

Great question. A lot of things -- in anybody's business, your business, our business, whatever, everything starts at the relationship level. And fortunately for us, the Power Technologies group is in really 2 main category -- product categories with -- across our OEMs, that being thermal and that being sealing.

And it's really looking for solutions for battery cooling, electronics cooling, so on and so forth. We have those relationships. So we're being pulled under the tent per se with most every one of our major customers out there. And they're asking us what the solutions of the future are.

I may have -- you may recall from the conference back in January where we'd shown some different concepts and products relative to that -- relative to battery cooling, electronics cooling, even enclosures for full batteries that is seeming to be getting a lot of traction behind that.

So it starts at the relationship level. And so when we're in there -- and then what's actually interesting now is because you -- with electric -- let's call it e-axle, so on and so forth, you still have to cool those type of things as well.

And there's -- now there's a much tighter -- in my view anyway, there's a much tighter bridge between the groups not in -- not only within the OEMs but within Dana as well. So we're giving them more of a comprehensive solution for cooling across those electrified vehicles.

Your last question comes from Ryan Brinkman with JPMorgan.

I understand you're raising your full year guidance today despite the incremental headwind from commodities. Could you help to quantify that at all and also just remind us of what your primary commodity exposures are, the degree to which you're indexed with customers relative to spot prices for those commodities?

And then with some of the suppliers, the other suppliers we cover, we've heard this earnings season and last that there tends to be maybe some less price protection, for example, in the aftermarket or with domestic Chinese automakers on average. As you look across your operations globally, are there any geographic areas, business lines or customers with which you might be less indexed that perhaps we should be mindful of?

Sure. So just from a commodity perspective, steel, for example, is the largest impact for us, various types. There was a sharp rise in the -- towards the end of the first quarter. We have indicated before publicly that the majority of our commodity exposures are covered commercially, and the majority of the part that we cover commercially is contractual. There's a piece that's negotiated.

So we continue to partner with our customers for opportunities to reduce the cost of the systems that we provide. But from a commodity exposure perspective, it is not typically something that you hear us talk about from a sales or from a profit perspective because it is largely covered.

The only reason we raised it in the first quarter is because of the steep rise that we saw right at the end of the quarter, which causes a short period of time where there's a lag impact for us between when our customer POs are changed and when the suppliers end up getting higher costs or prices.

Okay. With that, this is Jim. I just wanted to close. Thank you again for joining the call today and allowing us to have the privilege of your time to take you through the Q1 highlights.

I would only close with, obviously, this is a fantastic quarter for us -- top line at 26%, 17% of which is organic. That's a -- those are outstanding numbers. But also, like I said upfront, do not underestimate more of where the go forward is.

Our customers are particularly excited about partnering with us. We talked about new growth and new business with JLR. We talked about it with Mecalac. We talked about it with numerous off-highway customers, numerous Commercial Vehicle customers.

Obviously, we only update the backlog once a year, and that's what we have to do again this year to stay on cadence. But we are taking care of the customers, and we're going to manage the growth profitably and effectively like we have. So thank you very much for your time.

This concludes our conference. You may now disconnect.