Participants
Craig Barber; Senior Director of IR & Strategic Planning; Dana Incorporated
James K. Kamsickas; Chairman, President & CEO; Dana Incorporated
Timothy R. Kraus; Senior VP & CFO; Dana Incorporated
Colin M. Langan; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Dan Meir Levy; Research Analyst; Barclays Bank PLC, Research Division
Emmanuel Rosner; Director & Research Analyst; Deutsche Bank AG, Research Division
James Albert Picariello; Research Analyst; BNP Paribas Exane, Research Division
Noah Duke Kaye; Executive Director & Senior Analyst; Oppenheimer & Co. Inc., Research Division
Rod Avraham Lache; MD & Senior Analyst; Wolfe Research, LLC
Presentation
Operator
Good morning, and welcome to Dana Incorporated’s Fourth Quarter and Full Year 2022 Financial Webcast and Conference Call. My name is Rob, 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. For those participants who would like to access the call from the webcast, please reference the URL on our website and sign in as guest. (Operator Instructions)
Craig Barber
Thank you, Rob, and good morning to everyone on the call. You will find this morning’s press release and presentation are now posted on our investor website. Today’s call is being recorded, and the supporting materials are the property of Dana Incorporated. They may not be recorded, copied or rebroadcast without our written consent.
James K. Kamsickas
Good morning, and thank you for joining us today. Please turn with me to Page 4, where I will discuss our business highlights for the last year and outlook for 2023. Starting on the left side, Dana achieved record sales of $10.2 billion last year, a $1.2 billion increase over the previous year, driven by often erratic, but solid customer demand, new business backlog in all of our end markets and the successful cost recovery efforts.
Timothy R. Kraus
Thank you, Jim, and good morning. Please turn to Slide 15 for a review of our fourth quarter and full year results for 2022. Beginning with the fourth quarter, sales were $2.6 billion, a $282 million increase over last year, and for full year 2022, sales were a record high $10.2 billion, an increase of $1.2 billion. Higher sales were primarily driven by improved demand in all of our end markets and recovery of commodity and other cost inflation through pricing actions.
Question and Answer Session
Operator
(Operator Instructions)
Noah Duke Kaye
Maybe you can start by helping us understand some of the margin puts and takes for ’23. Maybe quantify what you’re assuming is a tailwind on the commodity front. And then how you think about the incremental headwind from material cost inflation or otherwise?
Timothy R. Kraus
Sure. I can take this one. So on commodities, it will be about an $85 million tailwind on the EBITDA line. And then if you think about inflation, inflation should be about a $50 million net headwind to profitability.
Noah Duke Kaye
Great. And then you called out the net investment spend on EV, right, the $30 million headwind year-over-year, I believe. Can you just refresh for us now relative to the targets you put out at the Capital Markets Day, when you now think the EV business should be breaking even?
Timothy R. Kraus
So when you think about our EV business and where we see it becoming breakeven, it’s certainly within the nearer term. So within the ’23 to ’25 time horizon. A lot of what’s changed is, as we think about where we were a couple of years ago to where we are today, we really did believe that there would be a lot more of the sales growth would be coming from the adoption of current EV programs. So think of direct drive in commercial vehicle.
Noah Duke Kaye
That’s very helpful. If I could just sneak in one more. And this is sort of a housekeeping item. Do you think that the CapEx would sort of stay in this $500 million range through at least next year based off of what you said? Maybe you could expand a bit on the tax rate as well, but what you think about as a normalized tax rate as you move past this year and into ’24?
Timothy R. Kraus
Yes. So I’ll take the tax rate first. I think the tax rate stays significantly elevated over the near to midterm, really based on having the valuation allowance up in the U.S. And then on CapEx. The CapEx we have currently in the plan supports what we have in the forecast for — and in the backlog for EV sales to the extent we were to win significantly additional business that could change over the longer term, but I’m pretty comfortable with the near-term CapEx levels that we’re seeing in ’23.
Operator
Your next question comes from the line of Dan Levy from Barclays.
Dan Meir Levy
Just wanted to follow up on that prior question, and I think you sort of alluded to it already. The $500-plus million of CapEx, that is the highest annual amount you’ve ever done. So — and is all of this just really — it’s near-term and longer-term programs that are requiring this significant step-up? And is there any catch-up in this CapEx? Because I think the key question here is just on the path that free cash income and a lot of that is based on the CapEx.
Timothy R. Kraus
Yes, there’s a very small amount that you think of as catch-up maybe coming out of some of what we’ve seen, but most of it is being spent to support both the growth in the EV business, but also the market share gains that we have in the business overall. So if you just think about it, we — the EV business alone didn’t exist 5 years ago, and now we’re seeing EV spend that is an exceedingly large percentage of our total CapEx spend.
Dan Meir Levy
Okay. Got it. And then my follow-up is on light vehicle, and maybe you can just help us unpack what’s going on there. Obviously, ’22 was quite hard just given all the stop-start and the impact, and that’s why your contribution margin was quite weak. But what is your visibility of these trends reversing?
James K. Kamsickas
Thanks for the question. This is Jim. A couple of things. Let me work maybe from the back forward on that. If you look at the offsets on that, hopefully, it was picked up on, but Colorado Canyon did roll off where we filled that plant with an electric — that I didn’t announce by the way, an electric program going in. So concrete for concrete, it’s net-net.
Dan Meir Levy
I’ll just add a follow-up on that. Are there any other levers that you can pull in light vehicle to help mitigate this? And I don’t know if there’s maybe applying learnings from off-highway where you’ve done pretty well, but anything you can do to help mitigate some of these pressures?
James K. Kamsickas
Yes. The most important thing we can do, and I’m not going to ask you to do it right now, but go back to — when you get a chance, go back to the launch slide and just kind of reinforce the way the light vehicle business works. It’s different than off-highway. It’s different. They’re a little bit different in their own way as they should be. if you go back and you think about our book of business of whatever plus/minus $4 billion in that light vehicle segment, and then you think about the size of Super Duty, which is launching this year, if you think about the Jeep Wrangler and Gladiator that’s launching this year, if you think about the size of the Ranger platform in Argentina, America and South Africa launching this year, I mean it’s kind of a reset.
Operator
Your next question comes from the line of Emmanuel Rosner from Deutsche Bank.
Emmanuel Rosner
My first question is on the 2025 targets, which are extremely helpful. But then trying to put them into context, it still suggests probably on the 9% EBITDA margins or so on these high revenues. And I was just curious if you could just compare and contrast with your historical midterm targets, which was looking for the 12%, that’s sort of like $10 billion revenue range. I guess what has fundamentally gone worse? I understand that there’s choppiness now in volatility, but this is a 2025 target. So I guess, what is different? And what would it take to essentially get you back into these higher margin targets?
Timothy R. Kraus
This is Tim. So I think when you think about the targets that were put out, there was no thought or even consideration for the rapid amount of inflation that has come through and then the sales that have been generated off of those recoveries, which come not only with no margin, but obviously, come with a margin headwind. So I think to get the business back to double-digit margins, all of that — all of those margin headwinds are going to have to be rung out of the business, which is going to take some time as we continue to turn over programs across all of the end markets.
Emmanuel Rosner
Okay. That’s helpful. And then I was hoping you can help us to — give us a little bit more color around the profitability of the — your EV business and more importantly, the trajectory ahead. So it’s helpful to know that you’re still targeting a breakeven within the sort of like the midterm horizon. When I’m sort of like looking at the amount of information that you’re giving us, so I think $700 million in sales in 2023, up about $150 million or so. And then it results in sort of like a negative $30 million swing in EBITDA. Are your EV sales currently at target gross margin, and it’s really just R&D that is essentially putting it into negative territory? And are you able to quantify the EV R&D for us?
Timothy R. Kraus
Yes. So yes, we are — those sales do convert at what we would consider to be good margins. It’s really the investments that we’re making in engineering, but also really building an entire EV business and infrastructure from program management to sales to engineering, right? All of that has to be put in place and that has really ramped much, much more quickly than we had originally anticipated, right?
Emmanuel Rosner
Are you able to quantify for us the EV R&D or engineering either as a percentage of the total or sort of like in dollar terms? And whether is it the right place as a percentage of revenues or if you would expect it to increase more over the next few years?
Timothy R. Kraus
We would expect it to start to moderate. I won’t comment on the total dollar amounts or percentages, but obviously, it’s higher today than we have historically had as a percentage of sales only because we’re spending a lot of upfront dollars on new programs that haven’t started to generate sales.
Operator
Your next question comes from the line of Colin Langan from Wells Fargo.
Colin M. Langan
Just a follow-up on the prior midterm targets versus where you are now. I’m just trying to understand because the target used to be $10 billion in sales, 12% margin, which is like $1.2 billion. And now you’re at 11.5% at the midpoint for ’25 and just over $1 billion. It does seem like something else structurally has gotten worse more than just the inflation diluting the percent margin. Now is there some other headwinds that are kind of baked into the 2025?
Timothy R. Kraus
Well, Colin, I think there’s 2 things. One, I can’t explain enough without going into sort of an immense amount of detail the impactfulness of both inflation and the commodities on margin percentage. And I think the other is that as our EV business continues to grow and while we’ll get to breakeven, that pull ahead of EV investments and the growth in that business and not converting at on a net basis at the same place as the mature ICE business, is both impacting margins.
Colin M. Langan
Okay. Got it. And then on the prior target, it was 5% free cash flow conversion versus now you’re talking about 3%. The difference is CapEx and just the lower margin assumption. Anything else that would be baked in there?
Timothy R. Kraus
Yes, it’s a couple of things. So one is obviously elevated levels of CapEx, but we also would anticipate, with rising interest rates and other costs, that those would also be impactful as well as well as from a tax perspective.
Colin M. Langan
And when I look at light vehicle and commercial vehicles, sequentially, sales were fairly flat, down a bit, but margins were a lot worse. So any color on what’s happened in the quarter sequentially there that made the margins so much worse?
Timothy R. Kraus
I’m sorry, on LV and CV?
Colin M. Langan
Light vehicle and commercial, yes.
Timothy R. Kraus
Yes. So light vehicle, I think on both of those, we were incurring higher-than-anticipated launch costs, right? We’ve got very large launches that we’re preparing for on the light vehicle side this year, right? We’ve got Super Duty and the relaunch of the Wrangler coming in as well as current launches going on around the world for global Ranger.
Colin M. Langan
Got it. And just one last one. When I look at Slide 21, I would have thought that some of your growth would reflect recoveries for some of the net inflationary costs. But if I look at traditional and EV growth, that’s $600 million, and I think your slides before said it was $300 million market, $300 million new business. So where would the benefit of price recoveries for inflationary costs fall in the sales walk?
Timothy R. Kraus
Well, in the sales walk, it would primarily fall on traditional versus EV because a lot of the EV is new business. So those would already be currently priced. I think if you think about the profit conversion, if you just think about the impacts of inflation, right? The $60 million on $450 million converts at, what, 12% to 13%. If you just add the $50 million, which is primarily on the traditional organic side, we’ll be getting a conversion that’s more like 25%.
Colin M. Langan
Got it. Just if I add those 2, so that when you talk earlier in the slides about $300 million of market, that also includes? Is that where the expected recoveries are baked into that $300 million piece of it?
Timothy R. Kraus
It would be.
Operator
Your next question comes from the line of James Picariello from BNP Paribas.
James Albert Picariello
Just a follow-on to that — to the last question, to Colin’s question. Can you confirm what was Dana’s net pricing this past year? And what is embedded from a net pricing perspective in the guidance for this year?
Timothy R. Kraus
Yes. We don’t generally break out pricing. Obviously, it’s a subject that is always a difficult one to have with the customer, and so we don’t generally break out pricing discussions or amounts in the walks.
James Albert Picariello
Okay. And then just for the cadence for the year, I mean it sounds as though it will be back half weighted year from a margin improvement standpoint. Just curious if you could put a final point on how the first quarter is trending, how you’re thinking about maybe the first half versus second half split? Any color there would be helpful.
James K. Kamsickas
I think you got it right. This is Jim. Thanks for the question. Like you said, it’s going to — it’s just because it’s kind of out of our control, just where the volumes are, launch acceleration cadence, all the other things associated with some supply chain stuff going out there, exactly what you just said right there.
Operator
And your final question comes from the line of Rod Lache from Wolfe Research.
Rod Avraham Lache
Was hoping just to get a little bit more color on the bridge to your mid-decade target. You’re talking about $200 million of additional EBITDA from 2023 to 2025 on $1 billion of additional revenue. When I look at the backlog over the next 2 years, it looks like maybe $400 million of that $1 billion growth comes from EV business over those 2 years.
Timothy R. Kraus
Yes, Rod, good question. So yes, I think it’s a combination of a couple of things. So as you mentioned, right, the EV business gets larger and gets to breakeven over that period. So that’s obviously no longer a drag on profit — overall profitability. I think the other is, you’ve got additional roll-on program. So we got a lot of programs that are rolling on this year. They’ll obviously go through launch. We’ve got 120 launches, right?
Rod Avraham Lache
Great. And just secondly, I think you’re pretty clear on what the differences were between the old targets and the new targets. You absorbed about $117 million of inflation last year net of recoveries and the $50 million is expected this year. So that’s crystal clear to me.
James K. Kamsickas
Rod, thanks for the question. This is Jim. It was a right-on-mark question, and the answer is yes. The they’ve been reset, I would call it, for per se current economics. It may not be exactly the same margin benefit we had before, but on total dollars, return on investment and all of the critical characteristics of any program and hurdle rates, that’s how we’ve set up the business. So again, we just can’t speed up the clock. We just have to let them do it, doing it the right way, and at the same time, the same customers are — we’re very thankful that they’re choosing us as their electrification partner moving forward.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.