Q1 2020 Earnings Call
[music], good morning, and him as Chad and I will be.
Later today.
I would like to welcome everyone to the American axle and manufacturing first quarter 2020.
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After the speaker's remarks, there will be a question and answer period.
If you would like to ask your question joining this time simply of course, the starkey than the number one on your telephone keypad.
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Please press Star Kate then the number two.
As a reminder, today's call is being recorded.
I'd now like to turn the conference over to Mr., Jason parcels director of Investor Relations. Please go ahead Sir.
Thank you Chad and good morning.
Welcome everyone to join US names first quarter earnings call.
This morning, we released our first quarter 2020 earnings announcement.
[music] this announcement on the Investor Relations page for web site.
Www Dot E.M. dot com and through the PR Newswire services.
You can also find supplemental slides for this conference call on the Investor page of our website as well.
Turning into a replay of this call you can dial 18773 or 475 to nine.
We play access code 101.
For three one.
This replay will be available beginning at one PM today through 11, 59 PM Eastern time may 15th.
Before we begin I would like to remind everyone that matters discussed in this call.
Second 10 comments and forward looking statements subject to risks and uncertainties, which cannot be predicted her quantified and which may cause future activities and results of operations so different mature fields discussed.
For additional information, we ask you refer to our filings with the Securities and Exchange Commission.
Also during this call we may refer to certain non-GAAP financial measures.
Formation regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information.
Building on our website.
Well, let me turn things over to Ams, Chairman and CEO, David though.
Thank you Jason and good morning, everyone. Thank you for joining US today, just say its financial results for the first quarter 2020.
Joining me on the call today, or Mike Smiley Ams President.
And Chris May able to vice President and Chief Financial Officer.
So they get my comments today I'll review the highlights of our first quarter 2020.
Second we will discuss how cold it 19 global pandemic does impact our operations, how we are adjusting our business.
You also discussed our current cash flow breakeven so they're all for 2020.
Lastly, we will discuss steps, we're taking a structurally you realize our business.
Great profitably and generate significant free cash flow at a reduced level of global light vehicle production.
Previously planned.
After Chris coverage, the details of our financial results and liquidity status.
Well then open up the call for any questions that you mom anyhow.
I am delivered strong operating performance in free cash flow generation. The first quarter 2020, despite the unfavorable impact of Cowen 19, and global light vehicle production.
Hey, I was first quarter 2020 sales were 1.3 or 4 billion compared to 1.72 billion and the first quarter of 29 team.
The decrease decrease in our revenues on a year over year basis reflects primarily two factors.
First the first relates the global production shutdowns and reduction in consumer demand due to covert 19 pennetta endemic.
We estimate that this had an unfavorable impact of approximately a 169 million in the first quarter of 2020.
In addition, our first quarter of 2019 sales included a 182 million or related to our U.S. iron casting operations, which was sold in December 2019, and therefore, no longer part of our sales base starting in 2020.
[noise] aimed adjusted EBIT in the first quarter, 2020 was 213.3 million or 15.9% of sales.
This is compared to 245 million and the first quarter 2019, or 14.3% no sales.
Our first quarter adjusted EBITDA was down year over year because of the yesterday's impact to the production shut down related to cope with 19, a $47 million and the first quarter 2019 included 18 million related to our U.S. and casting business.
[noise] however on the upside improved operating performance lower lot launch costs in the first quarter 2020 helped to partially offset these decreases as was the main driver of significant year over year margin improvement.
Ams adjusted EPS that first quarter, 2021, 20 cents per share compared to 36 cents per share the first quarter of 2019.
I'm estimates that coven 19 impacted earnings per share by approximately 33 cents per share.
Another bright spot during the quarter was our generation our free cash flow.
We generated an adjusted free cash flow the first quarter 2020 over $83 million compared to a use of cash well over $188 million in the first quarter 2019.
Our capital spending in the first quarter 2020, it was over 50 million lower than what we spent a first quarter last year.
We also experienced favorable working capital compared to last year.
Chris will provide additional information regarding the details of our financial results and just a few minutes your.
As part of our call today I'd like to directly a drastic kobin 19 health crisis, how it's impacting they and what we're doing to address the short term impact and the long term applications on our business.
On slide four four of the presentation deck you can see some of the issue is able to global automotive industry have been dealing with I missed the corona virus crisis and actions, we have taken to support our associates, well flexing our cost structure and preserving cash.
And then China in January and February and then in Europe, and North American March.
Rental actions and related production shutdowns has severely impacted operations.
We are currently planning for customer production due to begin to ramp up in north and Europe and North America here in the mid May period of time and continued to increase production slowly throughout the month of Jill.
As we ramped up production in China, and look to restart operations in Europe, and North America, we are laser focused on taking the necessary steps within our facilities safeguard our associates, while supporting our customers planned and staggered restart their production operations.
As far as the actions taken in its taking to mitigate cobot 19, and the impact on our business.
We established a cross functional Coleman 19 task force that reports directly to me and meets daily to track, our global company wide issues and report on developments.
Second we published our own am powering up comprehensive guide on Cobot, 19, workplace safety and facility readiness.
As a benchmark and the guy that we've worked with OEM.
Sure one peers and always up.
No. It's the guidelines that included the center for disease control input as well as the World Health organization and what.
From a cost for a second perspective, we're flux in all of our variable costs, including direct material hourly wages variable overhead and semi variable costs such as utilities.
We also implemented pay reductions across our salaried workforce, starting with our board of directors at 40%.
30% reduction for executive officers and 20% for the rest of our salaried workforce. These reductions will mostly be attack throughout the remainder of 2020, we've analyzed all discretionary spending and corporate overhead costs for opportunities to delay or reduce expected expenditures.
We currently have identified approximately 60 million in salaried and other overhead cost reductions to be achieved and 2020.
[noise], we've reduced our capital spending forecast for the year from 325 million to 250 million based on our current assessment of the market and customer launch schedules.
And lastly, we recently announced that are announcing an amendment to our credit agreement, which provide additional financial flexibility as we adjust our presence for the impact to covert 19, our current and future global light vehicle production.
Now, let's just say there's been a very difficult challenging time for everyone.
Reaction to this crisis has required swift and decisive actions that requires a level of sacrifice from each associate.
We very much appreciate our globally I'm associates, who have demonstrated tremendous teamwork and contributed to our prompt and appropriate response.
[noise] just sell level of uncertainty associated with covert 19, we went through our 2020 financial guidance on March 25.
Clearly the level of uncertainty continues to remain high including cut country and stayed executive orders customer plan restart dates and global and domestic production volumes and ultimately and consumer demand and as a result, we're not issuing revised 2020 financial targets at this time.
However, we are offering a view of our free cash flow breakeven scenario for the year.
We estimate that we can be breakeven from an adjusted free cash flow perspective, and a scenario in which 2024 years deals are 25% to 30% lower that our initial expectations for the year.
This is very consistent with our previous cash breakeven disclosures.
Assuming we are adjusted free cash flow breakeven for 2020, our total liquidity at the ended the year would be well over a billion dollars of target, which meets our targeted liquidity level.
That's the now since factors in the cost and capital spending reductions I mentioned earlier.
Again with a significant uncertainty that exist today, it's difficult to gauge how reasonable this scenario is and how likely it is that we will experience levels above or below this scenario.
But do you believe it represents a solid baseline to use and the flex up and down.
From an a confirmation of previous assertions we have made.
As we looked at a future it's important that we not only plan for the eventual ramp up of the global light vehicle production, but that we look at what the new normal will look like as it relates the new approach to health and safety manufacturing and consumer demand.
We're not only focused on being resilient through the temporary crisis, but how we position our business going forward to be profitable and generates strong cash flow and a lower production environment.
The actions, we are taking aim to restructure our business and maintain our industry, leading profit margins at approximately a 14 million U.S. our level.
We are reassessing their realigning global capacity to support updated light vehicle demand, we are and we are targeting facility and supply base consolidation and capacity optimization.
Analyzing our current overhead costs and identifying opportunities to right size. This cost structure to an adjusted expectation of light vehicle demand and we are actively planning to reduce capital expenditures to 5% of sales or below for the next several years.
And every crisis, there's an opportunity and we are taking this opportunity position our company for future success as we make our way out of this very difficult time.
Before I transitioning Chris I'll, let it just got some positive develops as it relates to our electric drive technology.
First Ams technology was recently recognized with two I'll mention that again to automotive news pace awards, which serves as the industry benchmark for innovation.
And one both the innovation award and the partnership award for front rear Electric drive unit featured on the fully electric Jaguar I pace.
We're honored to not only be recognized brands market, leading technology. The electric tried lines, but also our ability to effectively collaborate with our customer in this case Jaguar land Rover diluent to deliver best in class deal integration software and controls along with superior MB NVH performance.
These towards further validate am his position as a global leader and electric propulsion technology.
We're also happy to announce another new business wins as it relates to our electric driveline technology.
Recently, we were awarded another new electric Driveline program in China, That's one with a brand new customer like our last award. This program will support a value brand front wheel drive battery electric vehicle and the local Chinese market.
This is our second you drive went in China, we are clearly gaining momentum and this growth part of the market.
We see many opportunities to grow our share of the new energy vehicles in China, and believe our technology leadership and growing customer relationships strongly positioned am for future profitable growth.
It's important to note that while we are realigning our business the new market demand and tightly managing our cost structure, we remain steadfast in our plan to invest in our future.
We continue to seek profitable growth through organic new business opportunities. We will continue to support important book business and customer launches and we'll continue to invest in the next generation of electric drive an alternative propulsion solutions.
And with that let me now turn the call over to our Vice President and Chief Financial Officer, Chris May Chris.
Thank you David and good morning, everyone.
I will cover the financial details of our first quarter of 2020 results with you today I.
I will also refer to the earnings slide deck as part of my prepared comments.
So let's go ahead and get started with sales.
And first quarter of Twentytwenty AAM sales were 1.34 billion compared to 1.72 billion and the first quarter of 2019.
Slide seven shows a walk down a first quarter 2019 sales to first quarter 2020 sales.
First we stepped down our first quarter 2019 sales by $182 million to reflect the sale of the U.S. casting business unit that was completed in December of 2019.
We estimate that the impact of the covert 19 related production shutdowns across the globe and the first quarter of 2020 was $169 million, certainly, having an unexpected and significant impact on our quarterly results.
Excluding the impact of Cobot 19, we did see a benefit of other volume and mix of approximately $18 million.
We also continue to see the trend of lower year over year metal market prices and foreign currency and the first quarter 2020.
Resulting in a decrease in sales of $42 million.
Now, let's move on to profitability.
Gross profit was 195.3 million or 14.5% of sales in the first quarter 2020.
This compares to 222.2 million or 12.9% and the first quarter 2019.
Adjusted EBITDA was 213.3 million in the first quarter of 2020 or 15.9% of sales as compared to 245 million in the first quarter of 2019 or 14.3% of sales.
This represents and 160 basis point increase in margin on a year over year basis. Despite the unfavorable covert 19 impact.
This increase in EBITDA margin is mainly driven by improved operating performance productivity and lower launch costs, along the sale of our lower margin us casting business.
You can see a year over year walked out of adjusted EBITDA on slide eight for more details.
Our first step in our EBITDA was similar to sales to back out the first quarter of 2019 casting EBITDA to provide in comparable figure after the sale of our us casting business.
The impact of opened 19 with lower production related to governmental stay at home Warner's and production shutdowns impacted adjusted EBITDA by an estimated $47 million, representing a decremental margin of about 20%.
We did see a benefit from other volume and mix with mix being a positive factor in the first quarter of 2020.
And operating performance lower launch cost and productivity drove a year over year improvement of $21 billion and the first quarter 2020 compared to 29 team.
We spoke at the beginning of the year about these factors being positive catalysts for MGM and 2020, and we certainly saw the benefits in the first quarter before we became significantly impacted by the covert 19 disruption.
And we expect these and other factors to continue to positively contribute once our operations get back and running over the next couple of months.
We also recorded a non cash goodwill accounting impairment charge in the first quarter of 2020 $510 million.
Typically an annual process the production disruption from the covert 19 pandemic im related potential impact it will have a future demand represent an indicator to test our goodwill foreign Paramount.
This result was driven primarily by lower projected global production volumes and changes to market related inputs, such as increased discount rates as compared to our last assessment.
Let me now cover SJ interest and taxes.
At June expense, including R&D and the first quarter 2020 was 90.3 million or 6.7% of sales. This compares to 90.7 million in the first quarter 2019 or 5.3% of sales.
Ams R&D spending in the first quarter 2020 was 36.6 million compared to 34.3 million in the first quarter of 29 team.
We would expect to see SGN decrease and the second quarter compared to the first quarter as wage reductions and other cost savings actions take hold.
Net interest expense was 48.7 million in the first quarter 2020, compared to 52.7 million and the first quarter 2019, reflecting the favorable impact of lower overall year over year debt balances.
And the first quarter of 2020, we recorded a tax expense of 3.3 million.
This includes a $7.5 million benefit related to our ability to carry back losses from prior years under the cares Act. This onetime gain has been excluded from our calculation of adjusted EPS.
We may experience some volatile quarterly tax rates. During 2020, we continue to expect our adjusted effective income tax rate for the full year to be approximately 20% range.
Taking all these sales and cost service into account, Jeff Our GAAP net loss was 501.3 million and first quarter 2020, compared to net income of 41.6 million in the first quarter 2019.
Adjusted EPS for the first quarter of 2020 was 20 cents per share compared to 36 cents per share in the first quarter 2019.
We estimate that the lower production related over 19 unfavorably impacted our adjusted EPS by 33 cents.
Let's now 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 proceeds from the sale of property plant and equipment AMD defines adjusted free cash flow to be free cash flow, excluding impact of cash payments for restructuring and acquisition related costs.
Net cash provided by operating activities for the first quarter of 2020 was $139.4 million.
Capital expenditures that of proceeds from the sale property plant equipment for the first quarter 2020 was 69.2 million.
Cash payments for restructuring and acquisition related activity.
For the first quarter 2020 were 13.1 million.
We expect restructuring and acquisition related payments to be between $55 million to $70 million for the full year 2020.
Our initial estimate the beginning the year due to additional restructuring our actions that we are taking and plan to take responds to the expected impact of the coal 19 pandemic future global light vehicle production and consumer demand.
Reflecting the impact of this activity and generated adjusted free cash flow $83.3 million in the first quarter of 2020.
This is a significant improvement from the first quarter 2019, we saw an adjusted free cash outflow over $188 million, we benefited from cutting capital spending that was nearly cut in half and the first quarter 2020, compared to last year and working capital benefits.
From a debt leverage perspective, we ended the quarter with a net debt to LTM adjusted EBITDA or net leverage ratio of 3.3 times at the end of March. This calculation takes our total debt minus our available cash balances abide by the last 12 months of adjusted EBITDA.
We lowered our net debt levels as a result at the free cash flow, we generated in first quarter the impact of covert 19 on our adjusted EBITDA resulted in a slight increase of this ratio from the end of 2019.
On slide 10, we have our debt maturity schedule in the first quarter, we redeemed $100 million of our 2022 notes. In addition on April 28, we amended our credit agreement to among other things revise our financial maintenance covenants to provide additional financial flexibility as we navigate the uncertainty that exist in our business today.
We do not have any significant debt maturities until October 2022.
We ended at March 31st 2020, $683 million of cash on hand, including $200 million and proceeds we drew down on our revolver.
Since the ended the quarter, we drew an additional $150 million on our revolver to hold this cash on hand.
On slide 11 highlighted a few important notes regarding the second quarter 2020, what we already through one month of the quarter significant uncertainty remains related to the resumption of production the automotive industry in key regions, including the pace and effectiveness of these restarts by our customers and the entire supply chain.
We're currently expecting production to begin to ramp up in Europe, and North America in mid May based approach and continue to increase production throughout two on June.
Given the uncertainty, we're including in our planning that there'll be some startup supplier inefficiency costs as we resumed production. We currently estimate these to be approximately $40 million in 2020.
However, we should more than offset these costs maintenance additional cost reduction actions.
The challenges, we're facing we expect and the second quarter with over $1.2 billion liquidity.
While we're not providing any financial targets for the full year 2020, David provided you with some information on our free cash flow breakeven scenario for the year.
On Slide 12, we have included two walks to show you some puts and takes give us from our initial 2020 financial targets. So the cash flow breakeven scenario David discussed.
The table in the last starts with the midpoint of our initial adjusted EBITDA target 2020, and walk through the midpoint of our adjusted EBITDA, What do we expect based on the assumption that our revenue instyle, 25% to 30% from our initial 2020 assumptions.
Not only for the assumes significant reduction production volumes were target, but also the startup and efficiency expenses and expected cost savings as well.
Diligently working to minimize the startup efficiencies leap to include for planning purposes.
Most importantly, we are very focused on our cost savings initiatives that will benefit in 2020 and beyond.
Our areas of cost saving focus our temporary wage adjustments that began in the second quarter adjusting staffing levels lower run rate of production on top of normal variable cost structure reductions.
Fixed cost reductions in our facilities, including utilities indirect labor and other elements of overhead.
Our cost effective ways to conduct business by leveraging technologies to support back office demand reduced travel so on and so forth.
Beyond the revised adjusted EBITDA amount, we reduced capital spending down to $250 million expected interest payments of 205 million and tax payments of approximately 50 million, which is about 40 billion lower than our initial expectation at the beginning the year.
We expect inventory reductions and other working capital items to be positive $40 million, resulting in an estimated adjusted free cash flow of approximately breakeven.
The walk on the right takes a slightly different approach demonstrates the same conclusion and actions we're taking.
As was from our initial free cash flow target. So the cash breakeven level. This slide shows all the cash preservation Liberals Ams managing to offset the implications of covert 19 and new market demands.
We have talked about our downside protection playbook and the actions we would take in different scenarios based on the breadth and duration of the expected industry downturn. The playbook is now in full effect, we're focused on multi short term and long term implications on light vehicle demand and adjusting our business to be position for financial success lower production volumes.
We are taking decisive actions, while ensuring our ability to support future customer schedules important program launches and future profitable growth.
Before we move onto Q in a let me add with a few summary points as I look at the challenges and opportunities and we'll face in the near term and the longer term.
Hey, Jim has significant liquidity with our cash on hand, and revolver availability to handle the short term production shutdowns cosmic over 19.
Small difficult times.
Benefiting from our experienced management team variable cost structure and established playbook for declines in production.
And we'll work with customers our supply base and other stakeholders to ramp up production in a safe and healthy weight, our associates and we'll continue to support critical customer launches with important capital and R&D investments.
We expect to exit this temporary business disruption as a leaner stronger company by accelerating and upsizing existing restructuring plans have the opportunity to benefits for years to come.
Am is focused on positioning our business to be profitable and generate significant free cash flow and a 14 million unit North American production us our environment. Following the near term Colvin impacts and if that environment changes we will too.
Thanks for your time and participation on the call today Im going to stop here in turn the call back over to Jason. So we can start acuity Jason.
Thank you, Chris and thank you David we ever had some time to take questions I would ask that you. Please limit your questions to no more than two.
So ill turn it over to Chad to proceed with any questions you may have.
Thank you.
This time I would like to remind everyone in order to ask your question. Please press Star then the number one on your telephone keypad.
I was just for a moment to compile that roster.
Okay.
And our first question will come from John Murphy with Bank of America. Please go ahead.
Good morning, guys, great to hear from you Mindjet.
Just a first question around the balance.
Got it.
You got this situation really in headlock to put it globally and that really good Josh here.
In reacting quickly I'm, just curious on the balance sheet.
Any openings are windows.
Opportunistically raise capital at reasonable cost.
Would you consider that or do you think you really just in very good shape hearing and don't need to entertain that kind of idea.
Well John This is Chris good morning, Hope you're well.
At first I would tell you from a liquidity perspective, I think we're in very good shape, but we're constantly looking at our maturity table our continued.
Just to liquidity it if there was an opportunity we'd certainly consider.
Okay.
And then second question on on the on the restart.
There's obviously a lot of focus by the automakers in producing the.
Most profitable highs makes vehicles as they as they restart to really get things going here I'm just curious as as you look it is particularly.
Around GM in North American market. If you can you sort of remind us of sort of range of content per vehicle.
Hi, low maybe you would have on pickups as GBS and crossovers, because I mean is going to be real significant difference and richer mix as we ramp up here. It seems like it's probably going to be an opportunity that might be under appreciated by a lot of folks.
Yes, John this is David.
Yes content per vehicle full size truck your ranges anywhere between $700 on average maybe around $2500 on the crossover vehicle side of things and that 12 $1300 range. So your comments spot on in regards to as the Oems prioritize the full.
Size truck in the crossover vehicles for their own profitability of profitable needs that should also benefit American axle as we go forward and we said we'd been position very favorably in the marketplace.
With those segments those segments have continued to grow over the years, where it was over 70% last year now last month was over 76% or the overall market or the sales are taking place are right in that sweet spot of trucks and Sq. These.
Our number one priority with the restart is really focused on the health and safety of our associates and implemented all the safety and new manufacturing protocols that need to be put into place.
I think we're very well prepared for that at the same time, we published our own powering up guidelines, which clearly articulate and we've communicated that to our workforce with respect to those new safety guidelines. So thats the priority for us, but the same sound like you said, we will benefit.
From the richer mix.
Great. Thank you very much.
Thank you.
Our next question will be from Rod Lache were more research. Please go ahead.
Good morning, everybody.
Thanks for all the additional information this morning.
So so.
Okay.
It looks like you're you're you're thinking EBITDA would be around for 65 on roughly 1 billion five revenue decline in this hypothetical scenarios to 32% decremental.
We just hoping first of all you you could just address if you get some of that back that revenue that you lose would the incremental margins be kind of linear so what you're seeing sell.
In other words, it certainly feels like full size truck comes back faster and stronger than the rest of the market, but we wanted to calibrate and think about.
A a billion one coming back or billion to or whatever would we apply a similar 32% incremental margin to that.
Yes, Rob this is Chris good morning, Yes. The scenario here, we are using the midpoint of our previous sales guidance around 5.9 billion. So it's a little more closer to 1.6 billion in terms of sales decline in this analysis, but generally speaking, yes, you would see this would flex up and down in similar ranges.
Okay great.
Can you just clarify two things one is.
The.
Volume mix and pricing benefit on EBITDA 17 billion.
On an 18 million dollar topline impact it typically you'd see something like that if there was some kind of pricing adjustment with such a high flow through was that the case or is that something else and then lastly.
Obviously, Mexico is still a major concern for.
Many suppliers.
What's the policies there will be.
Your your latest thinking there just given up.
Your your base of operations there.
Yes.
I'll answer the first part of that question as it relates to your other volume mix and pricing it is not related to pricing as you've indicated.
Truly actually a mix element, where we saw some high volumes and some of our higher contribution margin product and we saw some lower volumes declines and some of our lower contribution margin products what happened to work in a favorable way this quarter and with the low sales change it kind of exemplifies element.
Alright, and then Rob Rob This is David good morning, and with respect to Mexico.
Clearly the country order executive order right now runs until the end of May that's probably is still our remaining concern now that Michigan is allowed folks to come back to work starting as early as next week.
Yes, clearly to the Oems the trade associations the supply base is all working with.
The government in Mexico, and we're hopeful that they will alon align with the mid start or the restart here in the mid may appear at the time just to the end of May I was very critical that happens in order to protect.
The value chain on the continuity of supply going forward for the whole industry.
But as they don't get Scott.
That is the working assumption then that you believe that that is.
That's something that it is likely to happen.
Where is it still uncertain.
It's still uncertain, but we're very hopeful.
Great. Okay. Thank you.
The next question will come from Ryan Brinkman with JP Morgan. Please go ahead.
Hi, Thanks for taking my question, Firstly, just relative to the outlook for liquidity of over 1.2 billion on June 30 versus 1.46 on March 31 can we assume that total change in liquidity of less than 260 million is tantamount to be expected free cash flow during the quarter or there other items and financing cash flows or otherwise the impact.
Could it be et cetera that don't allow us to make that assumption and are you able to sort of maybe bucket out that less than 260 million changing cash our liquidity by.
Maybe working capital versus Capex impact et cetera.
Brian This is Chris good morning, Yes, thats predominantly interchange cash through the course of the second quarter, we would expect a significant decline and operational cash with our reduced sales.
We had a very small working capital benefited tail into Q1 your free cash flow positive in Q1, we would have been free cash flow positive in Q1, even pre covered.
You'll have a gain in working capital the beginning part of the second quarter and then you'll start to consume working capital at the back end of the second quarter in the early part of third quarter.
As operations come back up but there is no other matters on both of your main to inputs into that movement of liquidity.
Okay. Thanks, maybe could you speak to how you contained the decremental margin as well as you did one Q and then as we think about Decrementals, how can we think about them tracking like as the year progressive.
What quarter do you expect to get the 60 million.
Additional run rate savings implemented is it fair to say that Twoq decrementals will be harsha. This year, given just to add the largest a degree of year over year decline in production maybe won't have.
Quite helpful 60 million run rate in there any guidance you can give us in terms of how the Decrementals My truck.
Yes first part of your question relates to the 28% Decrementals, we experienced here on our Coleman impact in Q1, which was really in the back half. So that was actually a abroad and since the entire company in North America in Europe, and Asia was kind of back online, but in the quarter, but that was more of a broad based company average you saw but at the same time as our facility shut.
Now to in some cases near zero production, we are able to eliminate some semi fixed some fixed costs associated that at the tail end, which allowed us to kind of minimise, a little bit of that I would expect similar or a little bit higher in terms of impact in the second quarter.
In terms of because of the dynamic and change of last year to this year in the size and magnitude today.
Okay, and finally, just a housekeeping item what is the cash cost of the 60 million restructuring savings or just said differently like what kind of non adjusted free cash flow could we expect in a breakeven adjusted FCS scenario this year, given any restructuring or other backed out item.
Yes, we have restructuring items here. This year 55 to 70 billion and the piece associated with that 60, you think of it kind of inline with the delta to where we previously work.
At the beginning there we were on that 35 to 40 range.
Okay. Thanks, a lot.
Yeah.
The next question will come from Dan, leaving with Credit Suisse. Please go ahead.
Hi.
Good morning, Thank you.
Wanted to just start with hi, thanks.
The Capex reduction that 75 million dollar capex reduction how much of that in your own.
Discretionary action in trying to cut capex versus simply a function of launch is getting delayed and how should we view the lower capex as sustainable beyond this year.
Yeah. This is David though.
The the efforts to reduce the capex were largely driven by am's internal initiatives, but obviously, we timed some of our spending based on some of the retiming of our customer programs and the launch of that were associated with regarding to the second part of your question regards to Capex of again, we've been targeting all along.
The 5% or less we're very confident that we can hold those numbers for several years going forward.
Okay, great. Thanks, and then.
My second question. Your primary exposure is north American truck and recognize that.
Your diversifying your exposure, but we are in an environment.
Cheaper gas in softened.
Fuel fuel efficiency regulation. So this arguably provides some ability to take your foot off the pedal on spend on.
Thanks, how are you looking at at the Techxtend here what are the near term benefit than does the disruption make you more structurally slowdown tech spend given.
Your quote exposures are still north American truck.
No no obviously, you first and foremost we're going to protect the core business and continued to invest in our core business. We've been steadfast with respect to that at the same time as part of our quite we haven't as part of our cost reduction activity, we have not touched all of our R&D spending and commitments to electrification.
No near term benefits on that.
That's fully intact.
We've just realigned our product engineering, and how we want to spend the money without jeopardizing, what we're doing for advanced an alternative proposals and technology and we are taking cost savings actions outside of that as well in our engineering spend.
Great. Okay. Thank you very much.
Thanks, Alex.
Next question will come from tight Kelly with Citi. Please go ahead.
Great. Thank you good morning.
Just had a just a couple of follow ups first I just want make sure I'm clear on the working capital Christian just with.
The analysis, you've laid out would we expect.
Directionally second half the year working capital to then be.
Source of cash.
Yes.
Got it.
Through the back half of the year in particular in fourth quarter, where we typically have a working capital benefit I would still expect that to happen, you'll see us benefited sort of very tail on first quarter first half of the second quarter, and then flip to a use the back half of the second quarter early part of third quarter net revert back.
Just the nature of the downtime of the sales got it that's very clear and maybe for David a second question just how we should think about.
On the Capex cuts, including beyond 2020, how how you're pursuing new business and any changes there in terms of what the company is looking to pursue as well just the overall kind of quoting environment through this crisis.
Thats looking.
Hi, I mean, clearly with the global volumes changing the regional volumes changing theres going to be excess capacity in some of our facilities and we're working very hard to consolidate those facilities to drive greater utilization at the same time that will free up capacity to go after new business. So we're not changing any of the the organic opportunities that are in our.
Market basket at this time, if anything we think we can capitalize on that as we go forward and that other case with just a senior management, making decisions.
Turning to sales a little bit delighted the current environment that we're in.
We feel as I mentioned earlier very confident we can continue to execute the plan that we have.
At the reduced capex spending levels that we've identified.
Great. Thanks very helpful. Thank you.
Our next question will come from Brian Johnson with Barclays. Please go ahead.
Yes, I just want to.
Get a sense from kind of Mike and.
You know you've been through this before in a way to guide.
Remember those days and im going to take is a given that it three rivers and so while you know how to manage through it but.
What are you seeing b to B the acquired metal.
Plants. So thank you got the because.
You're closer to frontline and.
How have those been how you're looking at those it's been great start are there opportunities could you maybe elaborate on some opportunities to consolidate back like just broadly in general we feel more comfortable with your ability to reramp legacy axle and we've seen some issues with the acquired MPG properties are black.
For years.
Yes, Brian good morning.
Yeah, I think you make a good point, we do have our team assembled almost entirely not exactly entirely but mostly from the last time around and we're flex and the same muscles that we flex before in terms of the cost structure adjustments and and really the quick adjustment to this this type of environment.
We are hoping wouldn't have to do that but quite frankly here we are again.
Relative to the MPG facilities look I mean, we've all of these facilities now for a period of time as far as we're concerned we don't we don't really see any difference between.
These operations and others. The one to one area that is different Brian is the side. Some of these operations and so as David just mentioned in.
Looking at our capacity footprint and looking for ways to not just reduce capex been improve efficiency in our operations.
Get a better fixed cost utilization, we are consolidating some of these operations and we're finding opportunities.
To consolidate into slightly larger not not the same sizes through roberson guanajuatito.
But larger operations that can be more efficient and make us more cost competitive.
We're seeing that show up in our quoting activities and a favorable light we don't have to increase our capex to you know to add incremental business in.
That components such as balance shafts. For example, this is an area for us to capitalize on so I.
I hear yet in terms of some of the launch challenges that we had a year or two years ago.
Our point of view is we've got very close control over how these operations are going to restart in very close control in fact.
David Me, Chris and the all senior management team into the details of how we're going to restructure every one of these operations.
And just as a follow up can you remind us what the acquisition brought in terms of the European footprint, how that sparing.
The shutdown over there gradual restart.
Yes, the European footprint brought it sort of two core businesses, one was a European forging footprint.
The former Xcel business, which is now operated by us in Germany, and the Czech Republic that business, while their sales are down reflecting the OEM marketplace that that businesses.
Being restructured and improved very nicely.
By our team and that business is still running in some areas and we'll be ready to fire up here very soon.
The other bid a business that we had in Europe was in our what we what we originally called our powertrain business. That's now part of our Driveline business and this is the vibration control systems business. This is the business that is.
For two small engine.
Smaller engines and of course balance in those engines. So how do you think think hybrid engines and small displacement engines. So theres still fair amount of growth potential in this business.
We operate that business across four facilities and that business is one that we are looking for some consolidation.
Okay. Thank you very helpful, Mike and I hate to be back here with you again, but I remember last time.
Yes, well, we were not pleased where we would be rather to manage a lot of growth, but we know how to manage this side of it too and quite frankly, we do what how we feel about this right now as we do a really great job managing the cost structure through this situation, we're going to be set up for really competitive positioning coming out of this.
And you can you can count on some very attractive incremental margins when we get our sales back.
Thanks.
Thanks question comes from James Gorilla with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
It really appreciate the breakeven free cash flow analysis.
On the implied decrementals that at 30% in a down revenue scenario.
The question is into down revenue Cerro beyond the 25, 30% Ranger using.
How would the decremental performance change if at all.
Good axle theoretically find additional cost savings at that point sustain a similar level of conversion. So any color there would be helpful. And then just on the 250 million in Capex within that scenario does that establish the minimum level you'd be willing to go down to go down through the for this year. Thanks.
First James combined this is Chris as it relates to the contribution margin Decrementals you would obviously as it decline you would experience a similar rate, but if you think about our playbook. If we thought that duration would be extended I suspected levels as you start to drop further than this you would probably take that view, we won't begin to do some holistic.
Structure it restructuring of some of our capacity, where you would then be able to call back some of that margin loss, but if you look at the playbook on that next slide you'll see exactly how we stepped down in some of the actions we've taken today, especially from a footprint standpoint, and some additional fixed cost elements.
Yes.
In respect to your question on the Capex to 50 as a minimum level that we're going to work to at this time.
But we'll obviously, we'll enjoy it will adjust but the market as need be but we think does the appropriate level to be operating with with an understanding that we got booked programs and committed programs that we need to watch and we'll launch and support our customers.
Got it yeah that makes a lot a sense and then just on the latest de drug reward in China. You can you just provide an update on maybe what your your best assessment is a of the timing for the three programs that that have yet to that have yet so.
Launch I believe the P to program in Europe had a mid or hasn't mid 2021 start.
That first China Award, possibly later this year any any change in and the timing.
First China Award is still on time.
The European is moved out slightly into the 2021 calendar year period of time, but again staggered because of the various variance that go on that program.
But but overall things are relatively in line.
Got it thanks.
Thanks.
The next question comes from Joseph Spak with RBC capital markets. Please go ahead.
Thanks, Good morning, everyone Orange I wanted to.
I wanted to quickly go back to.
So yeah is it really just a quarter Joe. So we you know tried to articulate through that through our liquidity at the end of the core I remember that it does say greater than 1.2 billion, but yeah. We you know will consume cache because of our lower able to operations and you're going to also then consume some working capital as well.
<unk>, you'll get a benefit the fun part there'll be ultimately timed in with how the customer started up in the back half year than where you're working capital move between second third quarter.
Right and then just you know I think slide 13 is really really interesting. So it was for the the the play book.
And I like the way you sort of put this you know between the the sales decline range and the duration range and it seems like right now we're in the you know steeper part of the sales decline, but maybe the duration is is is shorter but you know the mid term duration. I think is still unclear I think is sort of we talked to us from your customers and I'm sure you do as well so how do you.
You go about thinking about executing this sort of play book to look at your you that you laid out here and has this experience sort of cause you to rethink whether maybe you should be more aggressive with some of the the the actions you can take in a more dire scenario <unk>, even if it's just prevent preventatively.
Yeah. So this is David we are going to be very aggressive and are being very aggressive with respect to implement our downsides protection play book. So you can expect to all four bucks and sped around here, we're going to be very focused on it and there'll be activity. In every one of those areas as I mentioned earlier, we're relying in their restructure in our business from a 60.
In a half million new is are you ever North America to a 14 minute U.S.R., which is the second half run rate of this year.
Knowing that this year the full full bizarre won't be around 12 million.
Okay. Thank you very much.
<unk>.
Thank you gentlemen, your last question comes from Armintas sick of Vegas, with Morgan Stanley Dean whose go ahead.
[noise] make good morning, Thank you for taking the question.
You you mentioned positive free cash flow in the first quarter, even pre coal bed can you talk about the the drivers about positive free cash flow you know usually first quarters of seasonally soft quarter. You have you know catch outflows, what what was the difference here that working capital or something else.
Yeah. It's different you know last couple of years, it's been seasonally <unk> a couple of years prior to that were actually positive free cash flow are meant to look we had strong or yeah. I mean, you're working capital and then ebbs and flows a little bit different quarter. So, but it was favorable horse here in the queue one focus on inventory and then <unk>.
And then [noise] the they're trying to eat drive a word you're you know impressive, particularly given you know does the environment.
You know do what are you seeing at it kind of operationally and from a conversation standpoint, <unk> is that starting to pick up or you know people still in China trying to manage you know getting their operations up and running.
No. This is David Armintas, what we're seeing in China, <unk>, obviously ramping up and you get in very close to <unk> production levels month of April is actually a a growth month for them first time and a couple of years I I think you're going to continue see improvements within China going forward here, so they're pretty well.
Almost caught up to where they were pretty coven.
Right, but are you think you know conversations around do business starting to pick up now as well.
As far as new business Ward opportunities <unk>, Yeah, correct. So you had the the one award is that you know sign up more things to come in the near term or is it more about one up here no I think they'll be more opportunities, especially as the government continues to to press and push a new energy vehicles, there and they've also put the incentives back in for another couple of yours.
Now so that's all you gotta stimulating more demand for new energy vehicles, and I think there'll be a additional sourcing opportunities that we'll get our fair share of.
Okay, great. Thank you present questions.
Thank you.
Thank you I meant just when we think all of you who participated on this call. Appreciate your interest in A.M., we certainly on the <unk> talking with you in a future.
[noise] [noise]. The conference has now concluded. Thank you pretending to his presentation you may not just kidding.
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