Good morning, and welcome to Dana Incorporated. Second Quarter 2025 Financial Webcast and Conference Call. My name is Regina, 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 Corporate Communications, Craig Barber. Please go ahead, Mr. Barber. Craig Ba

Thank you. Good morning. Welcome to Dana Incorporated's earnings call for the second quarter of 2025. Today's presentation includes forward-looking statements about our expectation for Dana's future performance. Actual results could differ from what we discuss today. For more details about the factors that could affect our future results, please refer to our safe harbor statement found in our public filings and our reports with the SEC. I also encourage you to visit our investor website, where you'll find this morning's press release and presentation. As stated, 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. With me this morning is Bruce McDonald, Dana Chairman and Chief Executive Officer; and Timothy Kraus, Senior Vice President and Chief Financial Officer. I will now turn the call over to Bruce.

Thank you, Craig, and thank you all for joining Craig, Tim and myself for our second quarter earnings call. There is a lot of noise in our numbers as we've got to reclassify Off-Highway as a discontinued operation. And so in our earnings deck and in our comments, we'll sort of talk intermittently between new Dana, i.e. Dana from continuing operations and the full Dana, which obviously is the basis of our previous guidance and things like that. I guess I'd sort of characterize the second quarter as another quarter of the Dana team delivering on our commitments with a solid Q2 beat, double-digit margins and accelerating free cash flow. In terms of some of the highlights here on Slide 4. As everyone knows, we did announce in the quarter our agreement to sell the Off-Highway business to Allison for just over $2.7 billion, with net cash proceeds expected to be about $2.4 billion. That Closing is expected to occur here late in the fourth quarter. I think substantially, all of the regulatory filings have been submitted, and the teams are working hard, both ours and Allison's on affecting a smooth transition of the business over to Allison. In terms of our use of proceeds, we previously announced that we were going to take the proceeds from the sale of the Off-Highway business and return about $1 billion to our shareholders as well as reduce our overall debt by a couple of billion dollars. I'm pleased to announce this morning that as a result of strong free cash flow and our higher guide here for the year. We're raising the amount of capital return to our shareholders to $600 million from what was $550 million previously. As things stand now, we anticipate using all of that to reduce our shares outstanding, and we're forecasting that we'll end the year with a share count of around 110 million, which would be about 25% year-over-year reduction. In the quarter, we did buy back just over 10% of our shares, returning $257 million to our shareholders. And as we look here into the third quarter, we anticipate buying back another 100 million to 150 million shares. In terms of our cost reduction initiatives, this is where we sort of committed to a goal of $300 million run rate by like by 2026. We're upping that to $310 million as a result of some of the projects coming in better than Tim and I had expected. In the quarter, we delivered $60 million of cost -- nearly $60 million of cost reduction and $110 million to date. And so I think we can kind of tie a ribbon around cost reduction. I think we're highly, highly, highly confident in the $300 million. And we don't really have a long way to go to get to that run rate here by the fourth quarter. In terms of tariffs and the tariff landscape, I mean a lot moving around lately here, but I'd say the takeaway on tariffs is we're in great shape in terms of tariff mitigation and tariff recoveries. Right now, we're -- we have some headwind here in the second quarter, about 80 basis points. That's worse than we expect is going to be the impact for the full year because we have some timing-related catch-ups that we didn't get customer agreements in place by the end of the quarter. Overall, we expect over an 80% recovery for the year. More importantly is the work that the teams are doing with our customers to mitigate the impact of the tariffs. This is critical for our industry because we don't want to just pass these costs along -- we need to make them go away so that we don't impact end vehicle demand. In terms of our balance of the year outlook, I think when we were on our call at the end of the first quarter, there was considerable uncertainty around the impact of tariffs in terms of volumes. I guess what we've seen is very strong schedules holding up in the Light Vehicle side of our business, we have seen some softening in North America CV, which has been partially offset by a bit of better volumes coming out of South America and Europe. In terms of our profit guide, and here, I'm referring only to new Dana, we're up in our profit guidance for the year by $35 million. And if you look at the whole company, it's up $15 million because Off-Highway is down $20 million. And on a free cash flow basis, we're up in our target by $50 million to about $275 million at the midpoint of our guidance. So overall, a really strong quarter. I couldn't be more pleased with the results of the team. In terms of what new Dana looks like going forward, I mean, here's kind of an overall snapshot reflecting 2024 numbers. But we'll be much more of a Light Vehicle company to be much more of a North American-centric company. We do have a nice split between commercial and light vehicle, within commercial, we have a very strong aftermarket business. And we don't talk a lot about it, but our thermal and our ceiling side of our business that we integrated into Light Vehicle continues to be a source of profit improvement going forward. In terms of the full year guidance, I just want to spend kind of minute -- a few minutes on this page because this is the first time we're sort of showing our numbers with and without the discontinued operations. So our guidance, and as we've talked at the end of the first quarter, we had indicated our sales were trending towards the higher end of our previous range. So we're seeing right now on an old -- on a total Dana basis, our sales would have been about $9.9 billion. You can see on the discontinued operations side, sales down $125 million. There, we have seen softness in terms of the tariffs, particularly European product that's imported into the United States that's bearing a tariff, we've seen those volumes drop off. However, on the continuing operations side, we see sales being up $250 million. In terms of the guidance for the two parts of the business. If you think about the original guide at $9.75 billion you can kind of see the split, $600 million for continuing operations and $375 million for Off-Highway. Our revised guidance that I touched on my previous slide, up $35 million for new Dana down $20 million. For Off-Highway for a net positive $15 million. And then stranded costs are just a pocket switch between discontinued operations. Those are costs that we currently allocate to Off- Highway that remain with new Dana. Just a point to note that number is higher than the sort of $40 million -- $35 million to $40 million that we've previously guided to. The reason is within that $60 million are variable costs allocated to Off-Highways that will go away upon the sale. Those are $20 million to $25 million, and that's how you get back down to the range that we've talked about before. And then in terms of cash flow, and I've seen a few notes where there's maybe a little bit of confusion about what's the cash flow split between disc ops and continuing ops. Under GAAP, we're required to report total cash flow inclusive of both pieces. And so that's what we're guiding here today. We will see when we publish our Q is cash flow split by operating, investing and earnings split between the two, and that will get us to the year-to-date actuals. With that, Tim, I will now turn it over to you to go through the financials in more detail.

Thanks, Bruce. Let's begin with how we will be presenting our results in the prior periods. With the signing of the agreement to sell our Off-Highway business, that business will now be considered as discontinued operations. We will be reporting continuing operations in our financial statements. Continuing operations contain our Light Vehicle and Commercial Vehicle Systems reporting segments. The majority difference between these new reporting segments in the prior reporting segments is they now incorporate certain retained operations that were not included in the Off-Highway sale as well as stranded corporate costs and prior intercompany sales to Off-Highway that are now treated as third-party sales according to the accounting rules. The net effect of the higher sales and increased stranded cost is to temporarily lower the profit margin of continuing operations until the sale closes and transition service payments began. Third payment party sales agreements and stranded cost reductions that should begin early next year. And finally, cash flow is the one metric that will include Off-Highway as we had previously. Since the sale transaction excludes cash, all cash flow will remain with Dana until closing. For continuing operations, sales were $1.94 billion, $112 million lower than last year, driven by lower end market demand. Adjusted EBITDA was $145 million for a profit margin of 7.5%, 210 basis points higher than last year as the benefits of our cost saving and productivity improvements more than offset the lower sales and impacts from tariffs. Earnings before tax attributable to continuing operations was a loss of $24 million, a $30 million improvement from 2024. Please turn with me now to Slide 9 for the drivers of sales and profit change. In line with the new accounting and reporting method, we've revised our walk presentation to include the impact of discontinued operations for the current and prior periods. The $691 million in sales and $136 million in profit removed from 2024, represents the Off-Highway sales perimeter and accounting treatment for discontinued operations. Moving to the right. For this year's second quarter, the change in discontinued operations lowered sales by $7 million and overall volume and mix lowered sales by $173 million (sic) [ $172 million ] driven by lower demand in both Light Vehicle and Commercial Vehicle end markets. Performance drove sales higher by $29 million due to pricing actions in commercial vehicle and our aftermarket business, while tariff recoveries totaled $26 million for the quarter. Changes in adjusted EBITDA from continuing operations was $6 million for the quarter. The flow-through of sales from volume mix lowered adjusted EBITDA by $52 million. This was a decremental margin of about 30%. But recall that breaking out performance now, which includes efficiency gains in manufacturing separately. Performance increased profit by $30 million due to pricing and efficiency improvements in Commercial and Light Vehicle businesses. Cost savings added $59 million in profit through the various actions we have taken. This brings us to $110 million to date, and we are firmly on track to deliver our target of $225 million in savings for the current year. The tariff impact in the quarter was just $15 million. Since our tariff recovery mechanisms have a lag and the landscape continues to evolve, we expect to see a continuing headwind due to the timing, but we expect to recover the majority of the impacts this year. Next, I will turn to Slide 10 for the details of our second quarter free cash flow. As I discussed on Slide 8, the accounting for cash flow includes both continued and discontinued operations, as shown on Slide 10. Adjusted free cash flow for the second quarter of 2025 was a use of $5 million, which was $109 million lower than the second quarter of last year. Higher adjusted EBITDA in continuing operations was partially offset by lower earnings in the Off-Highway segment and higher onetime costs related to our cost savings and other improvement actions. Taxes were $22 million this year related -- mainly related to joint -- the sale of our joint venture interest as well as jurisdictional mix of income. Working capital was a use of $115 million during the second quarter as requirements normalized after an unusually strong first quarter this year. Finally, capital spending, net of proceeds of sales of fixed assets and contributions from our customers was $70 million, better than last year. Please turn with me now to Slide 11 for a summary of our updated guidance for 2025. As Bruce outlined earlier, our 2025 full year guidance ranges have been updated for the impact of discontinued operations. On Page 11, we are summarizing the continued operations guidance as well as showing an illustrative view of the prior guidance method for comparison. We are expecting sales from continuing operations to be approximately $7.4 billion at the midpoint of the range. This is about $250 million higher than our previous expectation, as you can see in the column on the right. Higher sales are primarily due to expected tariff recoveries as well as tailwinds from currency rates. Adjusted EBITDA from continuing operations is expected to be about $575 million at the midpoint of the range. This is approximately $35 million higher than previously anticipated, driven by cost savings and performance improvements after adjusting for accounting impacts of the discontinued operations. Full year adjusted free cash flow is anticipated at $275 million at the midpoint of the range for the year. This is approximately $50 million higher than previously expected, driven by higher profit and working capital efficiencies. Please turn with me now to Slide 12 for the drivers of sales and profit change for our full year guidance. As with the quarterly walk, we showed earlier, our full year guidance walk adjusts 2024 for discontinued operations and walks forward our guidance for continuing operations. Beginning on the left, discontinued operations reduced 2024 sales by approximately $2.5 billion, so we begin with 2024 at $7.7 billion in sales for continuing operations. Adjusted EBITDA from discontinued operations was $498 million, reducing 2024 adjusted EBITDA to $387 million, resulting in about a 5% margin on sales. Discontinued operations this year is expected to further reduce sales by $10 million -- or excuse me, $100 million due to lower sales between discontinued and continuing operations, but adds approximately $15 million to adjusted EBITDA due to lower unallocated costs. Volume and mix are expected to lower sales by $425 million, driven by lower demand across both Light Vehicle and Commercial Vehicle markets. Adjusted EBITDA from volume mix is expected to be lower by about $90 million, a decremental margin of about 20%. Performance is anticipated to increase sales by approximately $80 million, with $90 million in EBITDA impacts, mostly through pricing and efficiency improvements. Cost savings will add $225 million in profit, as I mentioned earlier. The tariff impact for the full year is expected to add about $150 million to sales and lower profit by about 300 -- excuse me, $35 million. The majority of this profit headwind will be recovered next year. Foreign currency translation is still expected to decrease sales by $45 million, driven by a mix of currencies with no margin impact. Finally, commodity cost recovery should be about $10 million higher in sales and an equal amount headwind to profit. The net result will be about a 280 basis points margin improvement in continuing operations when compared to last year's as performance and cost saving actions overcome the headwinds we are experiencing in the business. Next, I will turn to Slide 13 for the details of free cash flow guidance. We anticipate full year 2025 adjusted free cash flow to now be about $275 million at the midpoint of the guidance range, $50 million higher than our previous guidance. We expect about $105 million of higher free cash flow from increased adjusted EBITDA when compared to 2024. Onetime costs will be about $70 million, $25 million higher than last year as we invest in our cost saving program and other restructuring actions. Working capital will be about $30 million source of cash, about $100 million better than last year as we continue to lower the requirements in the back half of the year for working capital. And capital spending net is expected to be about $325 million this year, which will be $45 million better than last year. And lastly, please turn with me to Slide 14 for a look at our balance sheet and capital allocation priorities. On the left side of the page, you will see that we have ample liquidity of about $1.35 billion at the end of the second quarter. During the second quarter, we returned over $250 million to shareholders through share repurchases in addition to our regular dividend. As we look to the end of the year, we expect to close the Off-Highway sale in the fourth quarter and expect our net debt leverage to be about 0.7x expected EBITDA. We will -- we expect to continue to execute on our $1 billion capital return authorization and repurchased a total of $600 million of our stock this year. which could result in having about 110 million shares outstanding at the end of the year at the current share price. As we look forward, our capital allocation priorities are: first, to drive organic growth as we will continue to be selective with where we spend capital to drive profitable growth within the Light Vehicle and Commercial Vehicle segments. We will aggressively lower debt as we look to achieve our 1x net leverage target over the business cycle. And as we have demonstrated this quarter, we will return cash to shareholders while increasing the overall value of the company. Thank you for listening, and I will now turn the call back over to Bruce for his final comments.

Thank you, Tim. In terms of 2026, again, a fair bit of comments I've seen from the Street, around how do we get to 10% for next year. So I just wanted to sort of focus on the way that we're looking at it. So Start off with our cost reduction savings plan. We expect that to be $310 million run rate for 2026. So that's a good news story for us and gives us a strong tailwind as we start the next fiscal year. Just starting off in terms of walk, if you use Tim's guidance at the midpoint, we're at about 7.8% for new Dana as we're going to report our numbers here in 2025. First item is the annualization of the cost savings. So this just basically is reflecting the fact that in Q1 and Q2 particularly, we weren't tracking to a $310 million annual cost rate savings. That number you can kind of think about is in the bag and just annualizing that would take our 7.8% up to 8.8%. If I just look at the flow-through of our backlog, we expect that to add about 60 basis points in terms of stranded costs, to get to this extra 50 basis points, we have to eliminate the variable costs that go away on day 1, which is a [indiscernible]. And then we're assuming we're going to offset 50% of the strand in cost here. I would tell you that I'd be highly disappointed if that's where we end up, I would expect a combination of TSAs and continued focus on those stranded costs that we should be able to do much better than that. And then lastly, operational performance, we'll factor in 40 basis points to get there. And I guess what I would just point out on that one is that's about half of the operational performance benefit that we've delivered in 2025. So I really don't look at the 2026 target here of 10% to 10.5% as being a stretch. I think this is a commitment, but I have just as much confidence in delivering as I did when we committed to the $300 million cost savings. When you take that margin and apply it to our sales for next year, you factor in lower cash taxes and interest that we've talked about for some time that we will benefit from once the Off-Highway business has gone. We see free cash flow being in 4% of sales range, which if you do the math, is higher than this year. In terms of our share authorization, the capital return of $1 billion. We will continue as cash flow improves as we focus on sale of noncore assets, expanding the timing of that to deliver more quickly to our shareholders in addition to our existing dividend. Then lastly, we probably haven't done ourselves a disservice here in terms of our top line story. I do think Dana has an underappreciated growth story here. We have a solid backlog that we'll be reporting next year, and we continue to be -- have been very productive with the discussion with both our Light Vehicle and Commercial Vehicle customers on gaining share and winning new business. And with that, I'll open it up to Q&A.

[Operator Instructions]. Our first question will come from the line of Joseph Spak with UBS.

This is Rob Saltzman on for Joe today. Just on the 2026 outlook. You mentioned you'd expect 60 basis points of margin from that accretive new business backlog. Can you just provide some color on what's driving that -- those new business wins and kind of where the wins are coming from in core Dana? That's my first question.

Yes. So I mean if you just look at our -- look back, right, we had incremental backlog when we reported in February. So in large part, that's coming in, it's a mix of both on the Commercial Vehicle side as well as on the Light Vehicle side. We have some significant programs. So we have a program with JLR that's launching next year. We've got volume uplift and additional amounts on a number of big Ford programs, including the Super Duty. And then we have a number of smaller programs across a number of customers in -- across the world that will be being updated and driving that backlog with additional content for those vehicles.

And just my last follow-up here. Just maybe on the cost reduction side. So you increased the goal to $310 million, $10 million higher versus prior. But -- and you've kind of continued to increase that target over the course of this year. But how much room would you say you have to run here on finding incremental cost savings to kind of pull out of the business from the current levels?

Yes, I think the big driver -- so most of our cost saving programs here for the $310 million is really above the plan. Most of what we have left is really going to be around operating improvements largely in the plant. Those would naturally flow through what we're calling performance, and we do that today. Look, we'll continue to look at the cost structure as we move into 2026, and I'm sure there'll be some opportunities, especially as we push forward and find ways to increase efficiencies, but in terms of the big driver on cost reductions, I think the largest and the lowest hanging fruit has been done. I think our real focus next year on those types of things will be around taking the stranded costs out. A lot of those are semi-variable or fixed. So that's where we're going to be concentrating. I mean, the accounting has us at $60 million, that's really more like $35 million or $40 million when you adjust for some of the nuances on how we have to account for them with the discontinued ops rules. But we do believe that we can get the -- at least half, if not more than that $40 million out before the end of next year. So we think we're in really good shape to deliver the 10%, 10.5% margins for next year.

Yes. Maybe just to add on a little bit. If you look at the cost reduction where we got the $300 million. And if I think about new Dana, our total costs are in the just under $7 billion. And we -- the $300 million, we went hunting in about $1 billion of that. And if you think about it, was quick wins, things that we could do quickly without significant investment and things like that. I would tell you that in that remaining bucket in terms of what we can do longer term and where we can make some investments, there's still enormous opportunity. I would also tell you on the $6 billion where we didn't go hunting, which is, I would say, the plant cost, again, an enormous opportunity for us. So it's not stuff that we will bang into like a huge number in 2026. But I think over the next 3 to 4 years, it is a significant opportunity for us to expand our margins.

Our next question comes from the line of Tom Narayan with RBC.

Not a lot to nitpick here, as you guys pointed out, but I guess if I had to ask, the Off-Highway guidance, obviously coming down that's on tariffs. But I guess this would be different maybe then, from what Allison would have known. I guess, is there any risk for anything we should know about in terms of how that guidance cut could potentially impact deal closing timing? And then I have a follow-up.

No, it won't impact deal close timing. There's no covenants other than the typical running the business in the ordinary course. The one thing I will say, although the top line guidance is coming down and there's obviously some degradation around the base or the dollar EBITDA number. The Off-Highway team has done what they always do, which is maintaining their or improving their margins the lower top line revenue. So they've done an incredible job of flexing their cost structure to support and maintain their quality of earnings. So that's really the power that's in the business, and it should not or will not have any impact on timing.

Yes. I would just maybe add to that. If you think about where we were at the end of the first quarter prior to signing this deal. We all had some concerns around volumes from tariffs, and we knew we had some issues in front of us, particularly on Off-Highway on a small percentage of their business, which is a product that they manufacture in Europe that they import into the U.S. That's facing a fairly significant price increase and we're going to see in the volume. So nothing that we're seeing in terms of business performance is any different than, I would say, the time we closed.

And then for my follow-up the cost outs, Q2, it looks like it was a $32 million across LV and CV, I think $22 million for LV, $10 million for CV out of the $59 million total. What was the remainder of the cost out? Was that just kind of overhead...

It's in corporate. It would be in corporate yes. I mean it gets reallocated. So -- but yes, I mean, what you're seeing is the cost outs on the corporate side that then get reallocated back into the businesses.

Correct. Okay. And then I had thought that maybe CV would have seen more because of the EV side with the cost outs, I thought...

A lot of that does fit from an engineering side in corporate. So that's probably where we're seeing the disconnect.

Our next question comes from the line of Edison Yu with Deutsche Bank.

This is Winne Dong on for Edison. I was wondering if you can comment a bit on what you're seeing in the end market now for Light Vehicles, especially from some of your top customers? And then also on the Commercial Vehicles? And what kind of maybe marketing conditions are you embedding into the second half?

Sure. I mean from a Light Vehicle, and Bruce mentioned this pretty stable from a from a Light Vehicle perspective. Now for us, you have to look specifically into the light truck market in North America as that's the majority of our -- where our revenues generated and particularly on four large programs. So there's not -- you got to be careful not to read across the entire SAAR for the Light Vehicle business in North America to Dana, just given the concentration we have on a number of large heavy truck programs. On Commercial Vehicle, we are seeing softness in North America, largely around sort of some of the tariff uncertainty. We -- we've seen that impact sales both in the first half of the year, and we expect that to -- that softness to continue into the second. Offsetting that is some moderate strength in South America particularly in Brazil and then in Europe. Those are a bit smaller businesses for us, but certainly, are helpful in terms of mitigating some of the weakness we're seeing or softness we're seeing in North American CV market.

Yes. And I think softness might be too kind of word. I mean if you look at the Class 8 market, we've talked to a few of our customers. I mean, right now, order -- ordering like book-to-bill is dropping fast. Orders are like running half of last year. So it's just not looking good. And that's a combination of, obviously, the impact of tariffs. But more importantly, it's the uncertainty associated with the business climate here and people are just deferring purchases when they can. So we factored in, in terms of our outlook pretty pessimistic view on North America. But it's and we're not -- and sort of our 2026 guidance. We're not factoring in any cyclical upturn in the Commercial Vehicle market in terms of getting to our numbers.

Okay. Great. That's very helpful to know. And then just on the quarter itself, if I just look at the bridge on Slide 9, the decremental is on the volume mix bucket seems to be about 30% or so. In your prepared remarks, you talked about splitting the performance bucket out. But if I just look at the full year bridge, the implied decremental is about 20%. So I'm just curious on the difference here and what you expect for the full year and what's occurred in the second half? And then how do we think about that on a go-forward basis and performance is sort of a strip out bucket?

Yes. No. So we had a fairly unfavorable mix in the in the second quarter, particularly, we lost -- we had some relatively high-margin sales from a CD perspective, especially in the EV side of the business that continues to impact the business, a lot of that around sort of some of the issues in terms of being able to export out of China. So that's impacting the business. So just being able to get magnets and those sorts of things in rare earth materials. So -- and those are higher margin business than the rest. And then even on the Light Vehicle side, we had a pretty strange mix of some of the sales differences that drove a decrement there, that's a lot different than what we would normally see. When you look in the back half of the year, we're seeing a much better or more favorable mix. We're not seeing quite as much of the downturn from a CV perspective in the EV part of the market and then our sales mix around Light Vehicle is more normalized. So it's unfortunately just a mix issue within the quarter for us given just the sales side.

Yes. As we get into Q3 and Q4, the volume mix bar changes color here on us. So we've been fighting year-over-year negative on the volume mix side of things as we get into Q3, Q4, especially as we just focus on new Dana, that turns from a headwind to a tailwind. So again, some of the comments around first half, second half comps, a lot of, I think, is addressed by the fact that we don't have the volume headwinds in the second half of the year that we had in the first half.

Our next question comes from the line of Dan Levy with Barclays.

Wanted to first just unpack the free cash flow. And maybe you could just help us understand, and we look to try to bridge the free cash flow you've provided, which includes Off-Highway this year, which is, call it, 2.8% of sales, and you're saying next year is 4% of sales to RemainCo. Maybe you can just help us understand the rough bridge there. I understand part of it is going to be improved EBITDA. Part of it is going to be lower interest expense. But maybe help us understand what the adjusted number this year would be for just RemainCo as opposed to including Off-Highway and what that bridges to next year? And then maybe some color on sort of what these adjustments are that are cash items, but are being excluded from the adjusted free cash flow for Dana?

Yes. So in terms of being able to give you a '25 pro forma number, it's really tough given that all the debt sits outside of the Off- Highway perimeter and then you have sort of the tax impact. We've called out about $200 million between those two lines as you bridge from this year to next, that's going to come out as a result of the transaction. But like trying to do a complete pro forma, a bit difficult. As you hit it, right, we'll get help from an EBITDA perspective. Also, the onetime cost, right, $70 million in onetime costs should come down significantly, just given that there's a bunch of costs sitting in there related to the restructuring program and the cost out program have this way. The other is we'll continue to see more efficiency coming through working capital. So that should be an additional head -- tailwind, excuse me, for us on getting to the 4% free cash flow.

Okay. And then the second question is on the outlook into next year. And I recognize the end markets are going to move around. But one of the things we've obviously been hearing from the OEMs is with EV and emission standards easing considerably, there's an opportunity for them to have a much richer mix. In fact, Ford was talking about this on their earnings call. Is this the type of thing that is sort of not currently considered in the schedules and the outlook. But once we see the standards easing and mix starts to enrich that, that is something that could help you. There are certain variants of Ford trucks that could be richer mix for you. So just how much mix could get better on easing emission standard, even outside of just less EVs?

Yes. I mean, obviously, I don't want to get ahead of our customers as to what their build mix might be. But certainly, anything from a market perspective, that drives higher heavy truck and pickup purchases is good for Dana. I mean just think about the main programs, right? Super Duty, Ranger, Bronco and Wrangler, right? Those are four obviously, very popular brands of vehicle and if the customer builds more of them that's -- instead of building an EV or a passenger car or a crossover, that's better for Dana, clearly.

As our lower gas prices in those vehicles, right? So Yes. And in our accretive new business line, we do have volume uplift on Super Duty is in there. Ford has announced that they're going to start to manufacture additional volume next year and another plant and that's flowing through in the back half of next year.

Yes. We would consider that to be backlog because that's incremental volume from an added plant. So that would end up in our -- when you think about Bruce's comments about backlog and the incremental contribution margin that comes from it.

Our next question comes from the line of James Picariello with BNP Paribas.

Buybacks will account for the full $600 million in this year's targeted shareholder returns. For the remaining $400 million commitment, should we consider any special dividend? Or has the company fully committed to share repurchases. And just to clarify, does last week's bridge loan just essentially help the company fund buybacks until the Off-Highway proceeds are received.

Yes. So on your second question. Yes, I mean, obviously, we drew down the revolver to make the purchases in the second quarter. We just wanted to put some liquidity back in to bridge us through the cash flow we're going to generate through the end of the year and then the closing of the transaction. So if you look at it, the bridge falls away at the earlier of basically a year or the closing of the transaction. So that's exactly why we put it in, just to make sure that there's sufficient liquidity, and we have the flexibility to go ahead and do what we need to do between now and closing. On your first question. I think, look, it remains to be seen. We will remain flexible in terms of what we do. But at the current level that the stock is trading at, if we don't think that there is a recognition in the market, for the value -- the intrinsic value within the stock then our choice is made easier for us. We're trading sub-16, I do believe that the company is undervalued on an intrinsic basis.

Yes. I'd maybe even say a bit stronger than that. I mean I think that our Board, we continue to believe our shares are extremely undervalued right now. If you -- our confidence level in the margins that we're talking about here for next year is extremely high, higher than, I guess, you could say consensus is. And therefore, if you do the math using our margins for next year, and you look at the share count that we expect to have at the end of the year and the debt level, we see it being significantly undervalued, and we will be looking to as we generate more cash flow, buyback more faster.

Got it. That's helpful. And my follow-up, are the $60 million in stranded costs mainly reflected in the higher corporate expense now. And the $310 million in cost savings through next year include the recovery of stranded costs. Is that correct?

Yes. So correct. We're showing...

Going to the second part.

Yes. So on your first question, we are showing the stranded costs just separated into corporate. We just typically have very -- less than $10 million in corporate costs, you'll see those be significantly higher. That's where those are being sort of parked in terms of the walks when you think through it. In terms of your $310, the $310 million is without the recovery. We assume we'll -- the $40 million would come off of that. But to our point, we believe we'll be able to get at least half, if not more of that $40 million out of the business next year. And then when we go into '27, we'll have largely mitigated the entire the entire stranded cost item. So because our -- the view on stranded cost for us is it's $40 million. The accounting rules have us at $60 million only because -- if a cost that's allocated is not actually going with the business, even if it's going to go away, you can't put it in discontinued ops. It has to go back and be shown in continuing ops. So that's the disconnect in terms of the accounting versus the reality of what it's going to look like when we get to new Dana for 2026.

Yes. we expect to eliminate the stranded costs in their entirety. Are they all going to be out for next year? No, but they will all be out in 2027. Absolute certainty.

Our next question comes from the line of Ryan Brinkman with JPMorgan.

Could you discuss a bit further what is giving rise to the expected improvement in working capital for the full year versus the prior view? I assume this is behind the planned to return $600 million of cash to shareholders before the close as opposed to $550 million. Including sometimes there's an investment needed in working capital to support higher sales, which you are forecasting. I know you generate a lot of your full year cash in the fourth quarter. So is it kind of like timing-related stuff? How you see sales and production kind of trending toward the end of the year? Or just curious what's giving rise to that improvement? And then how should we think about that maybe spilling over into 2026?

Yes. So you have it right. I mean if you look at the CV and from a cash flow perspective, from an Off-Highway perspective, both those businesses have much longer supply line than in the light vehicle business. Both have shown obviously softness through the first half of the year. it takes a little bit of time to start getting that out. That's all going to get worked out as we work -- as we go through the back half of the year. And quite frankly, Bruce and I are really getting the team focused on taking that out. And then if you think about it into next year, yes, that's another part of how we're getting to our 4% free cash flow is additional improvement in working capital efficiency within the business that we're going to retain.

Okay. Great. And then you've helped a lot already on the whole temporary stranded cost part of the guidance on Slide 6. The overhead component, I think that's easy to understand. But I guess I'm just still a little confused on about the variable cost component. I mean, usually when I think of variable cost, it's like associated with production volume, it wouldn't ordinarily sit above the segment to be allocated. Can you maybe just help explain the nature of those costs a little bit further? What gives rise to them and then your confidence that it goes away.

Yes. So like a couple of really easy ones, right? So if you just think about the cost to audit the company, right? So we're auditing a $10 billion business today. Next year, we'll be auditing a business that's $7 billion to $8 billion, right? So our -- while that cost is fixed, right, it doesn't change. It's effectively variable in the sense that it's not going to cost the same to audit the $7.5 billion company as it is to $10 billion. So that will end up -- those costs can come out. Those are the type of costs that I would call variable. Another would be -- we have a global insurance program. So we have insurance related to the entire business that when it shrinks by 1/3, that will go away. Those are fixed costs today. They don't get allocated to discontinued ops. They end up staying in continuing ops because they're allocated and they're not physically going with the business. But they naturally will go away as we shrink the business because we'll just buy less insurance because we'll have less stuff to insure or we'll have a lower audit fee because the company will be smaller and the cost to audit it will be lower. That's the kind of things to think about.

There's a big bucket in there also.

IT, right. Yes, that's the other one. IT is the other one where we've got licenses that we buy globally centrally for, say, Microsoft, right, or other types of IT software that is not technically going with the business. But when we sell it, we'll need less licenses to affect our Microsoft office. So those costs will naturally go away. So that's the easy -- those are the easy ones to think about.

So when we say they're variable, what we mean is upon the sale, they will go away. There's no risk.

Our next question comes from the line of Emmanuel Rosner with Wolfe Research.

Wanted to ask you about the growth trajectory message with a robust 3-year new sales backlog. So first, if you can just help us a little bit with some of the assumption in the accretive new business contribution to margin next year. I think last time you published backlog was probably about $300 million for next year. Is that still ballpark what you're assuming in that margin walk? And then just more generally curious, how much did new business sort of contributed this past year? And what are sort of like the drivers or sources of acceleration over the next few years?

Yes. So I mean, we haven't published updated guidance, but the $300 million that was in our last guide is still reasonable. There's going to be a lot of puts and takes given some of the changes, but that's still a pretty reasonable number to have out there. In terms of our new business growth that's come on, we continue to have a number of different programs, both on the Light Vehicle and on the Commercial Vehicle side coming online. Now some of those are at a bit lower volumes. So some of the actual flow- through a bit lower. But we are continuing to launch programs, both on the ICE and the EV side. A bit of our growth this year was on the EV side. So that's a bit tempered. But again, it is across the board. We've got Light Vehicle programs outside the U.S. that continue to launch that are ICE related as well as new variants within our programs here. We're getting ready to launch in the next version of the Wrangler. So that has added content. So there's a number of different drivers for us from a backlog perspective this year.

And then your broader comments around the 3-year new sales backlog. Is it fair to say that the I mean the previous disclosure is still directionally correct, sort of like on a 3-year basis. So are there any big new pieces of programs that you've won?

Yes. I mean yes, it is. Obviously, there's a piece in there that is Off-Highway that obviously won't be in there, but the backlog for Off- Highway is typically pretty small, just because of the nature of the way the programs work. But yes, directionally, those numbers are still reasonable. I think the mix of that is probably going to change a bit. I think there was 70% or 75% EV. I think that mix change, but that's reflective of what we're seeing from the end markets with our customers.

Okay. One quick clarification on tariffs. So the net headwind at the end of the year, is that a timing and you would recover their the remainder into next year? Or is that a piece that you believe in the end, you'll have to absorb?

No, no, no. We believe there's timing -- I mean, look, we're not going to get 100%. We'd love to say we're going to get 100%. We'll get the majority of that, but there's still additional recovery from the lag that will come in next year.

Our final question will come from the line of Colin Langan with Wells Fargo.

Just wanted to follow up on the implied second half guide, it implies that sales are down about 1%, but you have like $100 million implied second half adjusted EBIT improvement. How should we think about those main buckets because if I look at the year-over- year basis, it looks like you had $100 million of cost saves in the first half. So it looks like I guess on a year-over-year only a little better. Performance is also pretty strong on your side in the first half. I guess, tariffs a little bit of help. But what are the main drivers to get that $100 million on that?

Yes. I mean it's better contribution. Contribution margin on the sales. So we got better mix coming in. We will have accelerating cost savings coming through. So we expect $225 million for the year. I think you said we're $100 million, so we're about $25 million better in the back half of the year. So that which makes sense. We're going to get to the $310 million. And then tariffs should be better in the back half than they are in the first half. And then we continue to see performance in the business driving margin expansion as we come through the end of the year.

Yes. We have a couple of footprinting inefficiencies, I'll say, in the first half of the year, $20 million, $30 million in first half that kind of go away in the second half as the plants normalize here. I mean a lot of that was ramping up like we're kind of at that exit rate at the end of the second quarter. But Q1, and as we've gone into Q2, there's a pretty big headwind that goes away in the back half of the year.

Yes. largely around a couple of plants that we've closed and are in the process of ramping up elsewhere, and those ramp-ups have hindered our ability to deliver what would have been even better performance from the first half of the year.

Got it. And if I look at sales first half to second half, it implies at the midpoint down 1%. if I look at S&P, Europe and North America, which I think is about 75% of your sales, they're down 9%. And commercial truck in North America Class 8, I think it's down over first half to second half. So what is driving that 1%? Is there other -- I guess, there's some recoveries in there, so maybe some FX in there that....

Yes. There's recovery, there's some FX. There's going to be some -- obviously, tariffs add sales. So that's part of it. And then just the mix in terms of what we're supplying and to whom can have a difference between what the general market from, say, S&P is showing and what we think we're going to end up being able to deliver.

Yes, you really got to look at our 4, 5 main programs, Colin as opposed to the S&P number.

Okay. I mean I see Super Duty is up or any other ones that you'd flag as being...

That's a huge percentage of our sales.

Yes. Super Duty, I think we're going to have better comps when you look at Wrangler because if you think about Stellantis with the Wrangler program at the back half, they essentially didn't even -- they barely ran in the back half of the third quarter and into the fourth quarter.

Even this year.

Yes. So if you say we had tough comparables in the first half of the year because they ran really strong in the first half of '24 coming out of the 2023 Q4 strike and then fell off at the end of 2024. Now we've got a much more normalized production pattern from Stellantis on the Wrangler and the comparables for the back half of the year on Wrangler versus last year are going to be very, very favorable to us, even if they don't run like super strong if they just run normalized like they've been running, which, by the way, we really like because it makes us -- makes our operating performance that much better. Those are going to be good comps for us.

We're going to have to close it down Colin. You can follow up with Tim and Craig can give you a bit more comfort there in terms of the sales outlook. But I want to sort of just wrap up here the call. Again, thanks everybody for participating today. I know there's a lot of noise in these numbers. For me, the key takeaway is our -- it's a solid Q2 beat against every number that's out there. We're raising our guidance. New Dana is doing better than overall Dana, as we explained with the tariff-related volume issues in Off-Highway. We're adjusting our free cash flow guidance up and pumping it into a share buyback because we believe we're significantly undervalued. In terms of cost reduction, it's running well. We're up in our target to $310 million. I'm highly confident we're going to get there. In terms of 2026 the 10% to 10.5% is a commitment from the team. I don't think there's any doubt in my mind that we can get there next year using a golf analogy, I view that as being a tap in. Lastly, if you sort of look at where we think our share should be trading and the value that we're creating here, using the double- digit margin next year, 4% free cash flow share count was down 25%, a substantially delevered balance sheet. We think we're well undervalued and the team is committed to generating more cash so that we can buy back shares more quickly. With that, I'll thank everybody and thanks to our employees for delivering a terrific quarter.

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