Q3 2019 Earnings Call
Missing data and I'll be your conference facilitator today at this time I would like to welcome everyone to the American axle and manufacturing third quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer a period. If you would like to ask a question.
During this time simply press Sparky then the number one on your telephone keypad, if he would like to withdraw your question. Please press the star Keith and then number two.
As a reminder, today's call is being recorded I would now like to turn the call over to Mr., Jason Parsons Director of Investor Relations. Please go ahead mr.
Yeah.
Thank you and your and good morning, I would like to welcome everyone. It will join us on Am's third quarter 2019 earnings call.
Earlier. This morning, we released our third quarter 2019 earnings announcement.
You can access this announcement on the Investor Relations page of our website Www Dot am dot com.
Through the.
PR Newswire services you can also find supplemental slides for this conference call on the Investor page of our website as well.
To listen to a replay of this call you can dial 1877 [noise].
34475 to nine reservation number 10135 307.
This replay will be available beginning at one PM today through November .
Before we begin I would like to remind everyone that the matters discussed in this call may contain comments in forward looking statements subject to risks and uncertainties, which cannot be predictor, bonafide, and which may cause future activities and results of operations to differ materially from.
Discussed.
For additional information, we ask you refer to our filings with the Securities and Exchange Commission.
Also during this call we will refer to certain non-GAAP financial measures.
Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available.
On the web site.
Over the next few months will participate in the fall in conferences.
The Barclays Global automotive automotive conference on November Twentyth.
The Bank of America Merrill Lynch leveraged Finance conference on December 3rd and the Credit Suisse Industrials Conference on December four.
In addition, we're always happy to host investors at any of our facilities.
Please feel free to contact me to scheduled visits.
With that let me turn things over to Ams, Chairman and Chief Executive Officer, David though.
Thank you, Jason and good morning, everyone. Joining me on the call today, our make some money, our president and Christmas I am a.
Isn't chief Financial Officer.
To begin my comments today I'll provide some color on A.M. third quarter results.
And its financial results in the third quarter 2019 reflect solid operating performance despite lower than expected production volumes, resulting from the gym work stoppage, which began in mid September .
I am sales were one point.
Six 8 billion for the third quarter 2019, compared to 1.82 billion in the third quarter of 2018.
We estimate that sales were negatively impacted by the GM work stoppage during the third quarter 2019 by approximately $57 million.
Adjusted EBITDA for the third quarter 2019 was tour.
65.8 million or 15.8% of sales that's compared to adjusted EBITDA of 275 million or 15.1% of sales and then third quarter 2018.
We estimate that adjusted EBITDA was negatively impacted by the gym work stoppage by approximately $18 million during the third quarter 2019.
Despite this we were able to increase our adjusted EBITDA margin, both sequentially and year over year through improved operating performance and lower project and watch cost.
Adjusted earnings per share for the third quarter 2019 was 58 cents compared to 63 cents in the third quarter 2018.
We estimate that.
Busted GPS was negatively impacted by the gym work stoppage during the third quarter 2019 by approximately 12 cents per share.
From a capital perspective, and generate over $160 million of adjusted free cash flow in the third quarter 2019. This is one of a EMS largest quarterly free cash flow fingers in recent years.
Ams that leverage ratio was 3.25 times at September Thirtyth 2019, our strong free cash flow generation third quarter allowed us to reduce our debt leverage.
Let's now discuss our business unit segment performance. The Driveline business unit recorded sales of 1.15 billion in the third quarter two.
I was 19 compared to 1.23 billion in the third quarter 2018.
Segment adjusted EBITDA for the third quarter, 2019 was 171.6 million compared to 176.9 million.
In 2018.
The dry business should it was significantly impacted by the gym.
Stoppage. However, it benefited from improved operational performance at lower project at launch costs compared to the third quarter 2018 was able to improve EBITDA margin year over year anchor yeah quarter over quarter, despite the unfavorable impact or the GM work stoppage.
The metal forming business unit recorded sales of 476.6 million.
In the third quarter 2019, compared to 509 million in the third quarter 2018.
Segment adjusted EBITDA for the quarter was 80.4 million in 2019 compared to 83.6 million in 2018.
The metal forming business unit was also impacted by the gym work stoppage not only as it relates to.
On this that were sold to our driveline business unit, but also direct ship Mr. G M and tier one tier two tier two tier three relationships that we at what other GM suppliers.
However, we we also experienced higher year over year adjusted EBITDA margins of its business unit through lower launch cost synergy attainment and improved performance.
Amps casting business unit recorded 209 million that sales to the third quarter 2019, compared to 219 million in 2018 segment adjusted EBITDA in the quarter was 13.8 million in 2019 compared to 14.5 million in 2018.
Our casting margins are flat year over year, but down from double digit margins realized.
The first two quarters of 2019, we experienced some lower sales at our commercial and industrial markets were impacted by higher operating costs, including outside prostate expenses related to some new program watch us.
In summary, despite our lower production volumes and challenging circumstances, Ams operations performed well and generate solid profitability.
Realty in the third quarter.
There are also some other developments of interest in the third quarter 2019 at September 18th we announced the sale of our U.S. iron casting operations. The gamut capital management, the sale enables us to streamline our business accelerate our debt reduction initiatives and enhance our margin profile.
It also eliminates fixed costs and improves our resiliency during a potential cyclical downturn.
It's also important to note that we're retaining our El Carmen manufacturing facility in Mexico. This facility will continue to provide significant vertical integration benefits day, while also continuing to serve external customers and Mexico and then other global.
Yes.
We expect this transaction to close by the end of 2019, and we strongly believe that a sale is best for a and best for the U.S., our casting operations and the associates that are associated with it.
In addition, we also achieved some significant accomplishments on the electrification front in the third quarter at all.
Yes, we are awarded our third E Drive unit program, which will be providing front you drive small units for small fully electric passenger car program through our though China joint venture.
This new business award is quite different from our previous award businesses represents our first electrification award in China. As also our first award for our value or.
Yeah that product.
I am also was awarded new business with exciting new customer for differential assemblies on an upcoming electric commercial vehicle.
These new awards further demonstrate our ability to meet customer requirements across the globe with our wide range of scalable electric drive solutions and related components.
[noise].
We're also pleased to announce recently that our electric drive or Driveline technology feature an E. Am's, all will drive front and rear electric drive units on the fully electric Jaguar I pace has been named a 2020 automotive news pace Award finalist the pace award recognizes supplier advancements in automotive technologies and processes that have reached the mark.
Okay.
This recognition further validates am as a technology leader electric propulsion.
As we look to our future business strategy will continue to optimize and invest in our highly engineered product portfolio.
Focus on profitable growth opportunities, including electrification and further strengthened ams value proposition to all of our key stakeholders.
Let me now review, our revised 2019 financial outlook.
Earlier. This morning, we provided an update on our 2019 financial outlook and our third quarter earnings release, our revised full year targets are as follows our sales will be approximately 6.6 billion adjusted EBITDA will be in the range of 959.
975 million and adjusted free cash will be approximately 175 million.
The most significant update from our previously disclosed targets relates to the US estimated impact of the GM work stoppage well, we began to feel the impact of the work stoppage in the third quarter 2019.
Its impact will be exponentially greater in the fourth quarter of 2000.
As 19 that only where we impact for nearly the entire month of October but the breadth of the impact to the work stoppage expanded geographically during the fourth quarter.
We've also reflected the impact of lower than expected metal market customer pastures, and foreign currency translation as part of this update to our full year targets.
Okay.
Sure I turn things over to Chris I'd, like turn or reinforce a few key points.
First we've made great strides in resolving our operational issues and improving our launch performance. We continue to go through some very important launches a steep ramp curves here in the fourth quarter included in a very important transmission differential Assembly program at our Bluffton, Indiana facility.
Realty supporting the Ford F series Super duty trucks.
As our product launch activity normalizes into next year, we expect to benefit from a more stable operating environment lower project expenses and greater productivity realization.
Second as we head into the uncertain macroeconomic and automotive production.
By are met over the next few years, we're already demonstrating our capability to proactively adjust our operations and adapt our business. Accordingly recently, we have consolidated business units shed fixed cost with the sale to us casting operations and a focused on reducing capital expenditures. We will continue to look at additional opportunities within our.
Yes to optimize capacity reduce our fixed costs and improve efficiency across the globe.
And finally, the strong free cash flow generated during the quarter, along with the announced sale of our U.S iron casting business positions us to continue to deliver on our commitment to reduce debt to strengthen our financial profile. This remains a key priority.
Free up.
This concludes my prepared remarks for this morning, I'll now turn the call over to Chris Chris.
Thank you David and good morning, everyone I will cover the financial details of our third quarter of 2019 results with you today I will also refer to the earnings slide deck is part of my prepared comments.
So let's go ahead and start with sales.
Sales in the third quarter of 2019 were 1.68 billion compared to 1.82 billion in the third quarter of 2018.
Slide nine shows a walk down a third quarter 2018 sales to the third quarter 2019 sales.
As David mentioned, we.
Good our sales were negatively impacted by the GM work stoppage by $57 million in the third quarter.
It is important to note while the work stoppage began in September 15th many of General Motors North American facilities located outside the United States continue to operate during the first week or two in.
In addition, we continue to fill supply.
Throughout all of North America for much of the month.
However, as the work stoppage went on we saw significant drop in this activity and additional facilities halted production near the end of the quarter or shortly thereafter.
As a result, the fourth quarter will have a significantly larger impact of lost sales and related profit associated with the work stoppage.
Our new business backlog was a net increase of approximately 95 $95 million, which nearly offset other volume and mix decreases of $118 million due mainly to lower global production volumes across each of our key regions that we have described on previous earnings calls.
And lastly decreases in metal market.
Indices and related customer pass throughs and foreign currency translation have impacted sales for the quarter.
The impact of these items for the quarter was a decrease of $50 million of revenue on a year over year basis, but remember these passthrough elements of our sales are key risk mitigation mechanism for which we have for certain commodity pricing.
Now, let's move on to profitability.
Gross profit was $248.7 million or 14.8% of sales in the third quarter 2019.
Adjusted EBITDA was 265.8 million in the third quarter of 2019 or 15.8% of sales.
This compares to 270.
$5 million in the third quarter of 2018 or 15.1% of sales.
Ams adjusted EBITDA margin in the third quarter 2019 increased both year over year and sequentially.
You can see a year over year walk down of adjusted EBITDA on slide 10.
As mentioned, we estimate estimate the.
Impact due to the GM work stoppage on adjusted EBITDA to be approximately $18 million.
We were also impacted by other volume and mix and normal year over year price styles.
We experienced a slight benefit from lower metal market in the quarter and a small unfavorable impact from material freight and tariffs, although the impact of these items.
Have decreased consistently over the last couple of quarters.
Over the course of 2019 am significantly improved its operational performance and reduced its project and launch costs. You can see this when you compared to third quarter of 2019 to the same period a year ago.
This is a year over year positive in the quarter.
Of about $20 million.
And we did continue to realize the benefit of our integration activities and business unit consolidation, which improved our performance by $12 million into quarter compared to the third quarter of 2018.
As it relates to restructuring and acquisition related costs in the third quarter of 2019.
We incurred $11.7 million of such costs.
Im also recorded an impairment charge in the third quarter of 2019 of $225 million to reduce the carrying value of our us casting operations to fair value in conjunction with our announced sale of these assets.
These costs have been.
Alluded from adjusted EBITDA and adjusted EPS.
Let's take a look at SGN expense.
As DNA, including R&D in the third quarter of 2019 was 92.7 million or 5.5% of sales.
This compares to 96.3 million or 5.3% of sales in the third quarter.
2018.
R&D spending was approximately $37 million for the third quarter of both 2019 and 2018, but up from the $33 million in the second quarter of 2019.
While we saw a sequential increase in R&D spending primarily related to our advanced.
Certification products and strategies, we did defer some additional planned spending into the fourth quarter of 2019 in order to reduce expenditures during the GM work stoppage.
Now, let me cover interest and taxes.
Net interest expense in the third quarter of 2019 was $52.1 million.
Dollars as compared to $54.3 million in the third quarter of 2018.
Reflecting the benefit of gross debt Paydowns, we made in the second quarter.
Income tax was a benefit of $40.4 million in the third quarter of 2019 as compared to expense of 11.5 million in the third quarter of 2018.
Our effective income tax rate when adjusting for special items was approximately 13.4% in the third quarter of 2019, and 14% year to date in 2019.
We continue to track to the low end of our expected adjusted effective tax rate of between 15 and 20% for the full year.
Taking all of these sales and cost drivers into account GAAP net loss was 124.2 million or one dollar and 10 cents per share in the third quarter of 2019 compared to net income of 63.8 million or 55 cents per share in the third quarter of 2018.
Adjusting adjusted earnings per share was 58 cents.
It's in the third quarter of 2019.
Now, let's move on to cash flow and the balance sheet.
We define free cash flow to be net cash provided by operating activities less capital expenditures net of proceeds received from the sale of property plant and equipment.
I am defines adjusted free cash flow to be free cash.
Flow, excluding the impact of cash payments for restructuring and acquisition related costs.
Net cash generated by operating activities in the third quarter of 2000 $19 million to $241.7 million.
Capital spending net proceeds from the sale of property plant and equipment was 97.5 million in third quarter two.
And in 19.
Cash payments for restructuring and acquisition related costs for the third quarter 2019 were $16.3 million.
Reflecting these activities.
As adjusted free cash flow in the third quarter of 2019 was $160.5 million the third quarter was a very strong.
Free cash flow quarter for am.
From a debt leverage perspective, we ended the quarter with a net debt to LTM adjusted EBITDA for net leverage ratio at 3.25 times at the end of the third quarter down from the second quarter of 2019 on the strength of our cash flow generation liquidity at the end of September was over 1.3.
$3 billion.
David has gone through the details of our updated full year financial targets, So I will not repeat them.
Certainly the estimated effect of the GM work stoppage will be far greater in the fourth quarter has it impacted nearly all of October .
Our adjusted EBITDA guidance reflects the impact of our lower sales primarily.
Finally, as a result, the GM work stoppage.
In the fourth quarter. This impact includes loss contribution margin on a broader product set as the work stoppage expanded an estimated inefficiencies to resume production that in some cases have been idled for nearly a month and a half.
This will be reflective and higher decremental margins when determining the.
Back to the work stoppage in the fourth quarter.
But the team also continue to reduce capital spending in 2019 to align with our sales changes to mitigate some of the impact on cash flow due to lower sales.
Lower than expected global production volumes and the impact of work stoppage at our largest customer have made a.
Plunging year from a topline perspective, however, our operations have done a commendable job reacting and adjusting to the challenges that they have faced.
We have focused on controlling what we can control during 2019, we have significantly reduced capital expenditures throughout the course of the year reduced inventory.
<unk> costs deferred expenses and worked closely with customers to meet demand at the appropriate capacity levels.
As a result, we had improved our operational performance reduce project and launch costs and sequentially improved profit margins.
And while we expect the challenging macro landscape heading into next year, we will continue to rely.
On our operational excellence technology leadership, and world clicks quality to assist us in strengthening our financial profile.
Thank you for your time of participation on the call today I'm going to turn the call back over to Jason. So we can start culinary Jason.
Thank you, Chris and David we have reserves from time to take questions our asset.
Please limit your questions to no more than two.
So at this time, please feel free to proceed with any questions you may have.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one thing your telephone keypad.
We'll pause for just a moment to compile the Q and a roster.
The first question today comes from John Murphy with Bank of America. Please go ahead.
Good morning, guys Anja.
Due to a first question you asked me as we will continue.
There's a couple with UK calculate the decremental just given that you have the middle market pass through sort of addition to the or change in the guidance.
Can you kind of roughly looks like at the midpoint around that 30% decremental.
Im just curious if thats about right and that's what you're thinking about here.
She'd like it's very good performance given kind of a shock environment that you're looking at in this in this.
This pull production if there any sort of lessons learned things you get.
Tell us about what you're doing there as we kind of thinking about a potential downturn in next year, two which rig.
Yes, Okay. John this is Chris in relation to the up decremental margin I would say a year over year basis for the third quarter I would think of it more around 32% fourth quarter going to be slightly higher.
35% embedded with give sort of I mentioned on some of my prepared comments, a little bit broader product set but also those inefficiencies to bring production backup online that have been down for an extended period of time.
But as we think about heading down in the past into the future I think this demonstrates our ability to flex.
Next our capacity and our inputs such as manpower other variable cost into our manufacturing process and how we can move those along with the correlating change in sales through this quarter. This process.
Finally, we did have associates on layoff, we also deployed them for bringing forward maintenance and other activities.
But again showing our quick reaction to this activity I think demonstrates what we can do going forward in whatever market. We face. John This is David as you know we've been proactively adjusting our workforce throughout the year here.
Both at the corporate level as well as a plant level that includes some of the business unit consolidation work that we've done we continue.
To assess our capacity utilization at all of our various facilities to make sure. We're driving high capacity utilization, we've made structural changes to our business, including some plant closings. This year, though we'll finish some additional ones before the year is out.
We will continue to evaluate our capacity utilization, especially as we go.
Lord and with a soft seed market are uncertain market and make appropriate adjustments along the way, but thats, what we get paid to do.
At the same time, we've worked on divesting of.
The us casting business that will close here in the fourth quarter and as we've indicated before we'll look at other noncore businesses, but nothing to announce.
At this time.
Okay, and then maybe just a follow up on maybe some of your being much more efficient.
And stripping Capex and you how much of an opportunity.
There or is there.
Jeff that might occur.
In 2020.
So John as you know, we've we've been operate around 7%.
At the same time, we indicated in previous calls that we expect that to trend downwards, especially as our launched load lightens up a little bit and subsides.
So we're clearly on target to meet those commitments from earlier.
Okay, and then just lastly on slide seven you kind of highlighted the electrification awards Im just curious as we think it.
Now the profit return profile those products and those programs I would imagine early days, we might be a bit below corporate average, but how should we think about those.
Products and programs as they mature overtime would they be close due to the record average or or would they remain below.
John This is Chris.
Yes, so as we think about those products, we think it consistent with other products that we bid quote on in wind right over the course of time there. They are required to meet our minimal at least our minimum objectives from a financial hurdle perspective, obviously when you launch of May incur some cost upfront, but no we expect them to be right in line with the rest of our product portfolio from a margin.
Return on invested capital perspective.
Great. Thank you very much guys they shut.
The next question comes from Armintas Sinkewitz with Morgan Stanley . Please go ahead.
Great much appreciated.
When we think about the year forward.
The general Motors strike being.
Onetime impact in.
In nature.
Yes, we can we can devise our own estimates and assumptions for 2020, but.
The base that we start with for 2019 should we think about that as ex general Motors.
In other words any reason why the strike would have lingering impact into 2020.
No. We don't expect any lingering impact into 2020, I mean did a big issue comes down to is.
How many units with GM be able to make up in 19 or 2020.
Ultimately we will see.
Is that in our schedule releases, but we don't expect the impact of the strike to carry into 2020.
Okay, and then how should we be thinking about the potential pricing implications from this if any.
And mindful of the tier two supply chain. If you could talk about that I know there were some some challenges in the.
The early part of the year, but.
How does that how does your tier two supply chain.
Look today and moving forward.
The only real issue that we still have in our supply chain right. Now is the cast in supplier supporting our electric drive program out of Europe , they're keeping up with our production requirements, but.
The desired level that we'd like them to be at and we continue to work with them. That's really the own only known major issue that we're still working our way through.
Okay. Appreciate it. Thank you. Thank you.
The next question comes from Rod Lache with Wolfe Research. Please go ahead.
Good morning, everybody.
Good morning route by route.
No just to follow up on the.
The bridging items that that we're thinking about for next year. It sounds like you're suggesting we could add back the strike at 32 and 35% in Q3, Q4, which should be like 85 million of EBITDA.
And.
I am wondering if you can just comment on some of the other thing you previously said that.
Capex could fall the five or 6%, so maybe 50 or $75 million of additional from that and.
How much of the 50 to 75 million dollar savings that you've been talking about previously.
What would the net number be of that.
Obviously at this point, it's still a little too early to give any 2020 specific guidance, but in terms of maybe just wait to think about some of those puts and takes into 2020 . Obviously the strike in isolation if that revenue materialize as you can see the profit associated with that I think.
Thats relatively straight forward on your commentary on Capex as David mentioned previously, we're we're guiding that down towards the 5% to 6% range, we still see a line of sight for that into the 2020 timeframe. So that'll obviously be very favorable from a cash flow generation perspective.
And the 50 to 75 that you.
For two this is something we talked about back in the August timeframe, consisting of lower project expense lower launch costs.
The final leg of our synergy step up our consolidation savings from the business unit in addition to.
Some of the restructuring and core productivity initiatives that David mentioned also previously a.
Well portion of that does relate to our castings operations, but not the majority just a small sliver of that but these activities that are underway to support that are still on track.
This is that's a gross number though if I remember correctly should we be thinking in the back of our minds about some inflation or higher R&D.
Spending that.
Kind of mitigate some of the benefit of that 50 to 75.
Yes, Thats it is a gross number.
And yes, obviously, we stepped a little bit of our R&D up here the back half of 2019, we will continue that trend into next year as we support some of these new programs that were on and some exciting opportunities, especially in the electrification front.
That we.
To support but other things that we will obviously discuss a little bit more towards the earlier 2020, but you'll have your annual price downs from customers.
Inflationary type items, so that seems to be moderating some in terms of inflation across the board for us but.
We'll give you a much clear perspective that early 2020.
Great. Thank you and just secondly, theres.
Several pass obviously to reducing leverage including just organically.
The cash flow. The you guys are generating but maybe you could just talk about how you're thinking about it at the moment, whether you feel if theres, an urgency to strengthen the balance sheet for cyclicality or too.
Increased flexibility for strategic.
Thanks, what what or what's the current thinking and what are some of the ideas that are are being assessed.
Yes, Rob this is Dave our focus is on the operational performance and driving cash flow performance through the business.
Has been our thinking it continues bureau, thinking and again to service the debt associated with that.
Clearly were taken action with respect to divestitures of noncore businesses starting with the.
Closed aftermarket earlier, and then also the kiosk casting business and that will evaluate other things at this time, but the big focus right now is just driving performance to our business.
There were some other.
Or opportunities that are there, but that's not our priority right now.
Great. Thank you. Thank you.
Next question comes from Emmanuel Rosner Bank. Please go ahead.
Hi, good morning.
Morning.
I wanted ask you a.
A couple of items in the.
And maybe that walk on slide nine and 10.
So first of all the backlog contribution that over attrition was solid in the quarter.
Last quarter, you had actually lowered to your backlog for the year I.
I think by about 100 million sort of and on the gross.
Basis, just curious your lead with saw its on the this year's backlog in units. So we get that basically what's left to be expected in the fourth quarter and to what extent some of this things thats, where sort of like being pushed out a degree of confidence or not to have them materializing in 2020.
Yes, let last quarter Manny.
We did reset our 2019 gross backlog that number that we articulated in the previous quarter is still true here for 2019, I would expect to see the fourth quarter very similar tours, what you see here in the third quarter as backlog step in was somewhat back half weighted versus fast first half weighted throughout the course of 2000.
In 19.
Some of the elements when we did take our backlog down last quarter. Some of it were deferred into next year from a timing perspective, some of whom we viewed as will be gone permanently which is lower volumes.
Those those commentary that we made backed and continued to be true.
Okay.
And then.
The other demo is interested in is the.
The bucket those other volume and mix. So the 180 million dollar negative revenue impact only $10 million on the EBITDA impact can you maybe talk about what's in there in some reflect the drivers of the so.
Really low decremental margin.
Yes.
In terms of that other volume and mix. These from a revenue perspective, if you think of some of the commentary our last call, where we saw some weakness across some of our China platforms that for example would be items running through here tightened platform.
As well as some.
Her programs that we support on a global basis, so very consistent with commentary that we previously said when you look at the year over year adjusted EBITDA walk on the incremental margins you point to 10 million I will tell you need to take the backlog and the other volume and mix and metals together and compare that.
You can see than that sort of brings that decremental in line with sort of sort of.
Normal run rates, it's a small number so you get trapped in the percentage ratio, but it is right in line with what we would expect.
Okay. So that the decrementals on these non non GM volumes that are declining there about in line with the company average.
No no normally we would expect correct, yes, okay.
Thank you very much.
Sure.
Thin next question comes from Brian Johnson with Barclays. Please go ahead.
Yes, a couple of questions.
One around China, and just want to ran from the electrification wins first fees be China can you provide just little more color.
On straightening out some of the issues that play QQ, which werent really noticeable in threeq or fourq or does that mean, they've gotten away or just kind of swamped by.
The other things going on like the GM work stoppage.
No in terms of that we we experienced Brian there.
Were lower.
Humes, we continue to see those lower volumes and that's a part of that other volume and mix.
Element on a year over year basis, but they have somewhat plateaued to the level, where we reset them back a quarter ago.
Okay, because that the decrementals on that other and volume and mix were fairly mild.
Right.
Under 10% is that reflective.
Other puts and takes.
I know you have to take the combination or backlog.
Which was plus 95 and other volume and mix of minus 118 unit those together that will drive your other volume and mix.
Okay and more in line with what we would expect to see for customary margins.
And second now that Youve.
Got three awards that Jaguar, the premium European Pthree hybrid and the new P. For BV do you have any better sense, where you want to play between P for Babs and Pithree hybrid that's number one and then two given the C. you you seem to.
Mandates that are hitting hard and 2021 is there any opportunity for additional business heading that or at least additional awards as those automakers to prepare for the mid 2020.
Hi, This is David before is going to be our main focus although they will do arsone be three applications that were going and we'll be going.
Into production Wes and most of everything that we're working on is targeted towards the mid 2020 time period.
Okay and in terms of P. four wins, what was the feedback on Chinese sale in terms of key.
Key unique selling proposition for a versus I can imagine any number of competitors with before.
Solutions.
Well I mean, they were very pleased with our technology offering.
The the power density of it the compactness out of the packages while at the same time, we met the cost targets that were associated with it from a value oriented standpoint that was a key initiative of ours.
Was do we.
Focused initially on the high performance type products and luxury products.
And now we've also designed a product portfolio thats modular and scalable that allows us to deal with the value oriented brands as well.
Okay. Thank you. Thank you.
Next question comes from James pick a rollout with Keybanc. Please go ahead.
Hey, good morning, guys, Hey, going into just you back to the Decrementals related to the GM sure again, obviously at 35%.
Very.
Successful demonstration in your ability to flex the cost structure I imagined. It was certainly a combination of head count reductions, but also reallocating resources.
Sources can you maybe bucket those too just so we could get a sense sure I mean your take on maybe how quickly you can get that head count back back online once once production revamps. Thanks, well production is re ramping now most of our head count is getting back on line.
We should have all that back on line.
Lined by next week as we follow our customer schedules.
Got it.
And just one more broadly.
When you think about your portfolio the U.S. casting business now out of the mix by the end of this year, which what's your general assessment of your remaining.
So in terms of core versus maybe which identified as noncore.
Thanks.
Well, we've gone from the started the year four business units when it's all sudden done after the sale us casting business, we'll work our way down to two business units. Those two business units are driveline business as well as our metal forming business.
The majority of the product line, we consider to be core.
There are some products that were evaluating at this point in time and at the appropriate time, we'll communicate that in but I would expect it would have.
Not a major impact, but a minimal impact any leverage reduction.
Thanks.
The next question comes from Dan Levi with Credit Suisse. Please go ahead.
Hi, good morning, Thanks for taking the questions.
First just wanted to clarify regarding the the lower capex outlook for the year.
And I apologize, if I Miss up but.
In.
All of that related to GM. It sounds like most of it is timing I mean as or better reuse or in some of your lower capex outlook really just a bit more conservatism again amid a tougher macro environment.
So I would say the combination of things I mean.
Most of the.
Capital that we need to spend to support the launches over the last several years is in place, which is why we had the high capex levels.
Remember we've had about 180 launches over the last three year period of time, So considered an average 60 a year.
Going forward that subsides considerably.
Therefore, our capex should be able to drop with.
That at the same time theres been a very intense focus from myself down through the team.
To look at how we can reuse.
More of our equipment at the same time be sensitive to the changing environment from a macro economic standpoint.
Which got actually the whole capacity utilization comment I mentioned to you earlier.
Got it okay, well I want to ask.
A follow up on that and maybe a bit more long term and this is thinking about in the long term free cash.
The back at your Investor day, a year and a half ago whole, though.
Seems end market wise like ages ago, you talk to potential free cash flow the.
6% to 7% I think in 2020 or beyond.
Yeah, obviously, the light vehicle markets have gotten much worse since then.
It is this a mid this year end market deterioration do you think this free cash flow target is still one day on the table and more specifically.
It is this the target that you have in mind as you're doing your portfolio review and we saw the casting deal is margin accretive.
You know how did your operating in a tougher environment.
Is the one sort of thing that you're pushing for is just greater free cash.
In addition C.
You know in the face of some of this NACHER weakness.
Cash is king for US right now and we need to generate cash from our operations, we need to manage our working capital we need to including the Capex side of things and ultimately we need to cash in order to service the debt.
Our debts in very good situation.
And we don't have any maturities due until 2022 and 2024. So we've got good financial runway, but the number one priority around American axle is driving cash flow performance in the business and this is Chris you know we've been very focused.
And converting that EBITDA, which is obviously driven by some of the factors you mentioned.
Turning to free cash flow, so reducing interest reducing capex moderating tax things are these nature are really top of our mind on that conversion of EBITDA.
Okay, well and as you're looking at I guess potential future portfolio actions is this the the type of sort of key metric.
That you that you have in mind or is it more just focusing on starting with the balance sheet or what's the sort of overarching.
Focus as you're doing potential future portfolio actions.
And the most important thing for us to look at is.
What product lines do we want to begin and we've said all.
All loan that we want to being a highly highly engineered products business.
At the same time, the commodity business of the forging supports a lot of that highly engineered products business, both internally and externally with customers. So it is heavily weighted in regards to the product portfolio.
And then also looking at the resource requirements at.
Supports Jill.
What is core versus non core reallocating resources appropriately obviously with an emphasis on electrification as we go forward and Chris. This is Chris from a financial perspective, obviously focused on the cash flow profile a lot of different financial metrics, but of course return on invested capital in that investment that we make into that portfolio.
And its ultimate returns is a critical objective.
Great. Thank you.
Your next question comes from Ryan Brinkman with JP Morgan. Please go ahead.
Great. Thanks for taking my question.
Can you just share what is embedded within your Fourq you guide about GM ramp back up to full.
Full production, we've heard some other supplier say could take one week another.
They said it could take 10 days, although I think GM indicated in the first few days back to work at least that the ramp was maybe tracking better.
And then there was some discussion on GM call too about.
The potential for adding over time or or.
Our work through the holidays in Fourq you. The message was sort of not a lot of ability to recoup the loss production near term, but there's still going to try.
Any kind of color on what you've assumed along these lines in your Fourq, you guide and whether there could be.
Any potential upside I would be helpful.
This is David I'll speak first I'll turn over to Chris, but Jim is moving.
Favourably in regards to return into their operations the work.
We're following their releases as are the other suppliers to meet that but I expect them to get up to up to two full production very quickly here.
Your comments about being limited this year in regards to being able to make up some of the units I think that's true and we've heard that.
The GM commentary.
Remember, especially as the product lines that were heavily involved with on the trucks to the movies in the crossovers most of those plants for already running.
Six seven days weekend, and hi, overtime, so that leaves little opportunity to try to make up some of those units, but but I'd say, that's really where we're at this.
On time, I do expect that they'll try to make up some of those units in 2020 I just can't tell you would that number would be GM to better provide that Chris right from a financial forecast perspective, that's basically have David just described is what's included in our financial forecast, that's our best estimate appetite.
Okay, great. Thanks, and then there's been a few questions.
All righty on the better than expected Decrementals I'll, just try to approach it from a little bit different of an angle.
The change the full year.
Look looks to assume about 32% decremental, maybe help some by the metal path through I don't know if you could exactly quantify that but still clearly better than the market assumed.
I think.
Oh Gee few years ago remember there were going through some inventory reduction for the copper production by like a quarter you sell through that with the with pretty flying colors and now there too so I just curious.
While you pass those passing we still haven't seen kind of a protracted downturn in in 10 years, maybe you.
Just sort of reflect on the flexibility of your cost structure now relative to in the past and what that flexibility means for decremental margin and in a recession scenario in North America.
Yeah. Ryan. This is this is Chris look great. Great question you saw through this course, obviously when our adjustment our guidance you saw the kind of the mid 30.
Percent on the Decrementals that of course is a short term action, meaning this came on us very quickly and with an end.
You saw our variable cost structure really take hold whether it be our purchase components our inventory management at the same time, we're able to flex our workforce that supports that production.
As we think forward.
In terms of being able to adapt and to react to what those market demands are it's that exact flexibility that you saw us exercise here again on the workforce side.
Also on some other variable inputs into our manufacturing process and of course, if we faced more prolonged.
Type of a downturn scenario, we would attack our semi fixed.
And fixed cost structure is right in line with some of the previous commentary that we had so being nimble being fast on being aggressive pick up. These costs are really critical for us I think you've seen as demonstrate that now a couple of times.
Okay, great. Thanks, and just lastly from me can you remind us from a.
From a high level strategic perspective without naming names businesses.
What are the characteristics that would make a business or product line of yours to ever be considered core versus non core.
Again right. This is David.
We've identified the driveline business is core to us metal forming business is core to us there's various variance within each of those.
Those business units.
At same time, we've identified that we'd like to.
We have greater diversification in our customer base, our product portfolio and our geographic reach so all those are critical to us in regards to our strategy as we go forward.
And then as I mentioned to you we want to concentrate on highly engineered products in.
Our portfolio.
Okay. Appreciate it thanks, congrats on the quarter. Thank you.
The next question comes from Joseph Spak with RBC. Please go ahead.
Hi, Thank you first one is just.
[noise] clarification of the 50 million year.
Over your head win how well we saw the 50 million year over year headwind I guess from metals in the third quarter and there's also a 59 reduction in the guidance from from metals, but how much of that annual reduction was in the third quarter versus the fourth quarter.
About half right, we got out okay typically.
Run rates on metal so yes.
Okay.
All right. So I want to just follow back on for a second for the balance sheet discussion I was hoping earlier so.
You know the.
The greedy transaction.
It was initially announced it seemed like it was pretty neutral net debt to EBITDA.
Based on an LTM basis, but I also don't consider I guess, the 60 to 70 million in cash restructuring, you're you're announcing today. So that obviously takes it up a little bit but again, it's on a on a pro forma LTM basis. So I just curious how your see that impacting.
The mid term.
Ability on your leverage targets, especially since it sounds like you think getting rid of that business is helpful to your free cash flow profile.
Yes, no Joe this is Chris.
In terms of the initial transaction somewhat neutral our leverage ratios the restructuring items, we talked about were contemplated as part of the previous.
But it will be funded with the proceeds of the sale and that's been all included in part of our commentary obviously going forward. This will reduce some of the gross debt on the company, which will reduce interest costs as well. So that's critical and you also commented that the 60 to 70.
Uptick a.
And our keep in mind was previously 50 to 60, so only the delta is associated with this transaction.
Okay.
Okay.
Just finally up back on the electrification award update so.
As soon as identified now now three awards you think your strategy has.
Ben to integrate some other components and I guess, we sort of focus on the motor here.
How is that sort of.
Played out have you you consistently used one sort of supplier for that as had been directed by.
The OE or.
Have you sort of began to identify.
Referred relationships.
No I.
Specifically speaking to the motor side of things, it's really been working with deal we and their preferred relationship with their motor suppliers.
Although that has led to a preferred relationship with us as well as it.
Ladies to us go into market regarding our products were taken a all type.
Phased approach I guess first we're looking at the component side, we're looking at sub assemblies size. We're looking at gearbox side and then we're looking at to fully integrated system and clearly as we indicated to you before we'd like to vertically integrate where we can which.
Means we need to spend more time looking at software controls and power electronics and motors in and we can either do that individually ourselves or we can do that and technical or strategic partnerships with those preferred partners.
Okay. Thank you very much.
Thanks.
Thank you.
Gentlemen, your last question today.
From E Hi, My Dally with Citi. Please go ahead.
Great. Thank you good morning, everyone.
Just off the two first questions on cash flow.
Operating cash flow guidance came down by 150 million sounds like the little bit more than.
The strike impact is there any any working capital there that we should think about this year and how that might affect.
Next year as well so maybe you can update us as well on on the outlook for cash restructuring going into 2020.
Hi, This is Chris the operating cash flow generally aligned with the change in the EBITDA guidance, obviously than it was.
Mitigate some by the Capex guide no significant working capital items.
Just nuances.
About strict sort of happen mid year. So the beginning an end points a year here really don't change a lot from a working capital perspective.
So that that's how I would think about that for 2019 in.
As of the restructuring charges as you know, we $60 million to $70 million of this year a portion does relate to the guessing. So that was talked about previously we would think about next year around half or less than that.
Got it.
And just secondly, maybe for David hoping you could update us on just the overall level of quoting and booking activity.
And then maybe outside the GM situation, just broadly what you're seeing in production schedules as of late both for the direction and volatility within the schedules.
On the quoting activity, we're still quoted in about 1 billion five worth of activity right now.
Before we had about 500 million of that was electrification, that's probably closer to about 300 million right now just because of some of the awards that took place in all or decisions that were made.
So the traditional products makes up the majority or the balance of the quoting activity.
With regards to customer schedules I mean clearly were.
Seeing a softening on a global basis around the world. Although I think it's a line with where we came out of the second quarter and what Weve now experience here through the third quarter.
Our core products the.
Especially the trucks distribution of the crossover vehicles remained fairly strong.
We have seen some softening the crossover vehicle as we indicate to you before.
In China, especially in them, but thats now factored in back to Brian's earlier question. So.
Great. That's all helpful. Thank you okay. Thank you type.
Thank you each time, we think all of you will participate on this call and appreciate your interest in Nam, we certainly look.
And you're talking with you in the future.
Thank you.
This conference has now concluded. Thank you for attending today's presentation you may now discuss.