Q2 2020 American Axle & Manufacturing Holdings Inc Earnings Call
Hi, I would like to welcome everyone to the American axle and manufacturing second quarter 2020, <unk> earnings Conference call.
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As a reminder, today's call is being recorded I would now like turn the call over to Mr., Jason <unk> Director of Investor Relations. Please go ahead Mr. apartments.
Good morning.
Welcome everyone enjoy yes.
Second quarter earnings call.
[music]. This morning, we released our second quarter of 2020 or anything else.
You can access announcement on the Investor Relations page of our website.
Www Dot dot.
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You can also find supplemental slides for this conference call on Investor page of our website as well.
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We have today to 11 59 PM Eastern time August.
[music], we began I would like to remind everyone that the matters discussed in this call.
Making comments in forward looking statements subject to risks and uncertainties.
People get their quantified.
And which may cause future activities and results of operations to differ materially from those disgusting.
[music] information, we see refer to our filings with the Securities Exchange Commission.
Also during this call may refer to certain non-GAAP financial measures.
Information regarding these non-GAAP measures.
As was a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
Well, let me turn things over to Ams, Chairman and CEO David.
Thank you Jason Good morning, everyone. Joining me on the call today, our Mike Smiley Ams President.
And Chris Smith, Vice President Chief Financial Officer.
To me and my comments today I'll provide some remarks and I am second quarter financial results.
Which were adversely impacted by extending global production shut downs, resulting from the cobot 19 pandemic.
I am sales were 515 million the second quarter of 2020.
Compared to 1.7 billion.
Second quarter of 29 team [noise].
The decrease in our revenues on a year over year basis reflects primarily two factors.
The first relates to the global production shutdowns and reduction in consumer demand due to the coven 19 pandemic. We estimate the that's had an unfavorable impact of approximately 947 million and the second quarter of 2020.
In addition, our second quarter 2019 sales included 171 million.
The chart U.S. iron casting operations. The business was sold in December 2019, and therefore, no longer part of our sales base in 2020.
Adjusted EBITDA for the second quarter 2020 was it was 52.1 million.
That's compared to adjusted EBITDA of 266 million and the second quarter of 2019.
Our second quarter adjusted EBITDA wish all without significantly year over year basis, primarily as a result, the unfavorable impact associated with Cowen 19.
The made it a 299 million.
In addition, our second quarter 2019, adjusted EBITDA included 17 million related to our U.S. iron casting operations.
On the outside we realized the benefits of the cost reduction actions that we initiated a response and much lower expected sales due to the pandemic as well as lower launch costs.
Adjusted loss per share with the second quarter 2020, well the dollar 79 as compared to adjusted earnings per share up 55 cents in the second quarter 2019.
From a capital perspective, adjusted free cash show when they use a 161.8 million.
As expected and I expect the result, given the production shutdowns that occurred first half of 2020.
Well the second quarter financial results reflects some of the most difficult challenges we face today I believe our second quarter performance also highlighted the resiliency of our company the flexibility of our operations and our ability to quickly adjust our cost structure.
Despite all the challenges we faced in the second quarter 2020, we also accomplished several important highlights in the corner.
Mmm was named G.M. supply or the year for the fourth year in a row, a great accomplishment and special recognition from our largest customer.
During the quarter, we also issued new unsecured debt at a favorable interest rate in order to refinance our most significant near term maturity and strengthen our debt maturity profile.
And finally, we lost our first he tried program in China at Oh, So am joint venture supporting the New Bob Johnson E 300, plus program.
Well, that's what I'm personally quarter for the global economy, the industry and a we took that as an opportunity to adjust our operations structurally reduce our costs and strengthen our financial profile.
Most importantly, we are taking the necessary steps and actions to address our global operating procedures to further promote the health and safety of our 25 20000 associates worldwide and the Miss something called 19 pandemic.
With the stabilization of our China operations, and the ramp up of our European and North American operations, we're optimistic about our ability to generate operating profit and positive free cash flow and this new market environment.
Well things are not back to normal our global operating teams have done an outstanding job adjusting and adapting to change while staying focused and disciplined to delivering power principle, the guy they have associates each and everyday.
Okay.
Well, we have seen positive developments recently, there was still a significant amount of uncertainty that exists as it relates to the Golden 19 pandemic and its continued impact I consumer demand like production levels.
That's a result, where refraining from up their previous they withdrawn 2020 financial outlook.
As we continue to ramp up production that just because of the new market demand and the second half of 2020 were focused on the health and safety our associates.
Supporting customer production schedules and watches.
The operational access to generate positive financial performance and investing in our future.
Well, we navigate through the numerous challenges this year as president and we're also focused on position now for a successful future beyond 2020, <unk> reduction of our environment, we expect to be lower and what we have experienced.
Last couple of years.
We're taking action to rightsize realigned this business to be financially successful at a 14 million U.S. our environment.
The benefit of our restructuring actions began to take all we're confident in our earnings power in free cash flow generation potential.
During the present times, you're also dealing with significant disruptive change and I know, we're dedicated did I just getting back to normal but to come out of these challenging times is a stronger leaner company positioned for profitable growth and financial success.
Before I hand, it over to Chris Let me reiterate some key takeaways.
First despite the anticipated severe drop in production by.
Hey, I'm performed well in the first half the year and made the necessary adjustments to the business to reduce cost and conserve cash.
[laughter].
But you don't Tendulkar solid second half the year I spoke to our operating performance to drive profit levels and free cash flow generation.
Sorry aim is restructuring the business to drive our earnings power and free cash flow generation at a 14 million units are level, we're confident in our ability to achieve this.
For our recent financial transactions have provided am with increased financial flexibility.
Lengthening our debt maturity profile, given that even longer financial runway to operate in workplace.
And lastly, despite all the near term challenges, we can tend to be focused on profitably growing our business.
Addresses key trends within the automotive industry, namely electrification.
Hi, My prepared comments for this morning I. Thank everyone for your time attention today and for your continued interest in a now let me turn the call over dressmaker Chris.
Thank you David and good morning, everyone I will cover in the financial details of our second quarter 2020 results with you today.
Well also referred to the earnings slide deck as part of my prepared comments.
Let's go ahead and start when sales.
Sales in the second quarter 2020 were $515 million compared to 1.7 billion in the second quarter 2019.
Slide five shows a walk down a second quarter 2019 sales to second quarter 2020 sales.
First we stepped on our second quarter 2019 sales by $171 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 Colbert 19 related production shutdowns and reductions across the globe in the second quarter of 2020 was $947 million.
These reductions impacted us at nearly every manufacturing facility across our global footprint.
Other five in Mexico was down $40 million year over year.
And we also continue to see the trend lower year over year metal market pass through pricing foreign currency in the second current order of 20 point, resulting in a decrease in sales $31 million.
No we bought the profitability.
Adjusted EBITDA loss of $52 million and the second quarter twenties money. This compares to earnings of 266 nine in the second quarter was 29 team.
I see a year over year walk down of adjusted EBITDA on slide six.
The first step in our even a war so more to sales you back out the second quarter 2019, U.S. casting EBITDA right comparable figure after the sale U.S. castings business.
Yes, I mean, it impacts the scope at 19 related production shutdowns adjusted EBITDA was $299 million, representing a detrimental margin approximately 32%.
As we discussed on our last earnings call, we expect the decremental margins, but each of the common 19 shut down slightly higher in the second quarter in the first quarter. There was a greater impact on a north American operations, especially the full size truck programs we support.
Excluding the impact over 19, we were favorably impacted by volume and mix unfavorably impacted by minus X by $19 million, we experienced $7 million year over year pricing.
We spent $6 million the government 19, inefficiencies startup costs, which represent osbert <unk> additional cleaning and disinfecting and other costs related to operating adjustments. We made response to the common 19 shut down and ramp up.
As David mentioned the team has been very focused on cost reductions.
You can see the impact of these actions any 22 million dollar in year over year savings.
This includes actions such as temporary wage reductions permanent headcount adjustments and reduced discretionary spending.
This puts us in line to meet our 60 million dollar cost reduction saving target, we expect to achieve this year.
And we also saw continued improvement and lower launch costs and performance of about 6 million in the second quarter 2020 compared to 29 team.
All things considered yam team did a good job flexing, our variable cost structure, reducing discretionary spending and running your operations effectively a very uncertain involved production environment.
Let's take a look at S.J. expense.
As you get a including R&D in the second quarter 2020 $73.8 million. This compares to 91.3 million in the second quarter of 2019.
R&D spending through the second corner of 2020 was $32 million compared to $33 million into second quarter 2019.
Suction and that's changed reflects a portion of our cost reduction activities and excluding R&D reflects a reduction of nearly 28%.
Aren't she was essentially flat is we continue to invest in key advanced technology initiatives at our upcoming electrification launches.
Now, let me cover interest and taxes.
Net interest expense in the second quarter of 20 to one he was approximately $52 million as compared to 56 million in the second quarter of 29 team.
Income tax was a benefit a 43.9 million in the second quarter 2020, as compared to expense of 6 million and the second quarter, a 29 team.
During this quarter, we began to realize evaluation allowance against our deferred tax assets related to U.S. interest expense carry forwards as a result, we experienced more tax benefit to the second quarter.
Going forward, we expect our effective income tax rate for book purposes to be closer to 25%.
We do not expect in fact, our projected cash tax payments in the foreseeable future.
Taking all of these sales and cost drivers into account GAAP net loss was 213.2 million or $1.88 cents per share and the second quarter 2020, compared to net income of 52.5 million 45 cents per share in the second quarter 29 team.
Adjusted loss per share $1.79 cents per share the second quarter of 2020 compared to earnings of 55 cents per share well second quarter of 2019.
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 not a proceeds received from the sale property plant equipment.
M. defines adjusted free cash flow to be free cash flow, excluding impact of cash payments for restructuring and acquisition related costs.
Net cash used in operating activities in the second quarter at 2020 $122.5 million.
[noise] capital spending adipose each well, let me equipment was $35 million second quarter twenties. Why this is a year over year reduction nearly 70%.
Cash payments for restructuring and acquisition related costs for the second quarter 2020 were 15.7 million.
Reflecting these activities. He has adjusted free cash flow in the second quarter 2020, when the use of $162 million.
This cash will use reflects the impact of our operations being shut down for the better part of or the.
The net working capital impact for the quarter was relatively neutral as the working capital benefits in the first half of the second order were used during the ramp up of our operations and the back half of the border.
Also like our operating an S unit cost controls, we moved quickly I'm targeted capital spending reductions helped mitigate the impact in the second quarter.
[noise], we also took action and the second quarter to strengthen our financial profile at the beginning of the quarter, we amended our existing credit facility to revise financial maintenance covenants to provide additional flexibility for am as we adjust our business or the estimated impact of carbon 19 on current and future global light vehicle production.
Later in the quarter, we took advantage of favorable market conditions to issue and your unsecured notes and six and seven 8%.
These proceeds to refinance our senior notes due twentytwenty too [noise].
[noise] after payment of the 2022 notes in mid July when you're not in any significant debt maturities until 20 talked before.
We also paid down a portion of the revolver that we do on during the quarter.
Liquidity at the end of June was over $1.6 billion, consisting of available cash borrowing capacity I am all facilities.
When factoring in the payment we made in July to redeem the 2022 notes there would still have nearly 1.3 billion up liquidity at June 30.
[noise], while we're not providing guidance today, we thought it was important to show trends we are seeing.
So my first we included our breakeven scenario from our maintenance, earning call your slide deck and mix.
That scenario based on an assumed reduction of am sales by 25% to 30% is compared to what we expected Oh here at the beginning this year.
In relation to the sales midpoint of our breakeven scenario, we're seeing trends based on third party estimates customer schedule and other inputs.
We see production volumes in North America, or better Europe, very similar China, better in India, Brazil, see well below that estimate.
In addition, we are confident in our ability to deliver all the $60 million cost reduction savings and our previously disclosed capex figure at $250 million for the full year of 2020.
Lastly, we initially estimated approximately $40 million it covered 19 startup and supplier efficiency cost. We're now estimating those expenses in the $30 million to $40 million ranch.
[noise] uncertainty in demand production schedules and the supply chain remain I can impact any of these assumptions and trends.
Despite all the uncertainty that exists we're cautiously optimistic on the second half 2020 based on demand indicators I just covered for the key price support.
We see our customers prioritizing full size truck as you be and crossover vehicle production.
Lumpy our inventory levels continue to suggest pent up demand supports current production levels and we take that as a positive as well.
Ultimately and consumers continue to demand the vehicles I wish we supply keys systems and components and that is again I, perhaps yeah.
And as a management business or today, you're also setting up well for future profitable growth.
Sample, we continue to invest in our important electrification initiatives.
Launched our first try you try program during the quarter.
Investing in the key or is it possible gold for am is our primary.
Right.
Moving towards actually benefiting important even stronger future were excited for the potential of our future earnings capability and free cash flow generation I. Thank you for your time participation on the call today I'm going to turn it back over to Jason. So we can start if you want to.
[laughter].
Thank you question, David yet reserves, sometimes you take question I would ask you. Please limit your questions no more than two [noise].
Hi.
Feel free to perceive any questions you have.
[noise] at this time I would like to remind everyone in order to the question. Please press Star then the number one.
Hi.
Well pause for just a moment to come topic, you any roster.
[noise] [noise] [noise].
[laughter] first question comes from John Murphy of Bank of America. Please go ahead.
Good morning, guys. This is elynx and that's on for John.
Hi.
Good morning on the balance sheet.
$900 million in cash appears pretty sufficient to whether through the current crisis as we think about the back half a year and cash burn reversing as volume comes back and look forward into next year presuming things continue to recover and cash flow throughs can you remind us what you feel comfortable with in terms of a minimum cash level above what.
She would look to direct capital towards Delevering.
Sure. Good morning. This is Chris My first I would remind you that.
Once at the end of June also contains the proceeds from the note issuance that we had in the back half would you on 350 million of that was deployed in July to redeem those notes.
Well, obviously in a breakeven scenario the back half would imply a positive free cash flow generation, we would clear up the remaining items in terms of priority remaining open items in terms of our revolver and then as we have previously communicated obviously funding our organic growth in our R&D initiatives as a top priority for us and.
Reducing and continuing to reduce our gross debt leverage on the company.
Okay. That's helpful on and then a bit more of a longer term strategic question. There's been a lot of height more recently around electrification. So did you really for light and commercial trucks. However, among some of the incumbent automakers. They're also appears to be a strategically to emphasize actually even introduced new.
Oh, I body on frame trucks and their product portfolios do you see any burgeoning opportunity for the industry and for axle from expansion of this high margin segment and any discussion are bidding on future programs that you may be involved.
This is David I was speaking.
First of all electrification is here and tell you gonna grow as it relates to this penetration in the market.
You understand the various segments. She was you were talking specifically to the pickup truck side of things Theres, obviously, a number of new entrants that are coming into that market with their lifestyle leisure type vehicles.
I also expect the Detroit three well do what's required to protect their market share on the truck side of things, whether its IC engine based or electrification base.
As you know where a leading provider of dry by the systems for the IC engine base. We've also been invested heavily in electrification since the 2010 period of time and we've won three contracts now well, which we just launched one in China.
Here recently, and we continue to position ourselves.
To provide product offerings for all the vehicle segments that supports the different regions of the world.
So we are actively working on truck electrification activities.
Nor Cal crossover vehicle electrical electric case activities as well as front wheel drive passenger car.
We've been successful in the market today, we expect more opportunities to present themselves will win our fair share.
At the same time, the Oems are gonna have to make some decisions how much of the work will they do themselves internally.
But at the same time, we feel very comfortable about competing.
Guards to the marketplace and what we need to do to win our fair share the business.
At the same time I still am a strong believer that the IC engine will be around we're continuing to grow our business and the IC engine side.
And I think what does cobot activity, it's got to your force both the Oems as well as the consumers to assess.
The value proposition associated with the different technologies, but I still think you're going to continue to see investments by the Oems.
Especially in the Ace is area the autonomous connected electric and shared it just maybe a little bit delays in some cases by by select Oems and other cases, they're moving forward and protecting their plants. So.
I addressed your question.
Yeah, Yeah, that's very helpful commentary, thanks to the question.
Yes.
Okay.
Question comes from Rod that Wolfe Research. Please go ahead.
Good morning, everyone.
[music].
There's.
A lot of puts and takes as you look out the Q3 Q4 between the strength in trucks that you're seeing and some weakness and some certain passenger cars and crossovers are the Thailand business getting wound down.
Ah, yes, a lot of stuff. There's some insourcing was hoping you might just talk a little bit more about the outlook in specifically how that affects the incremental margins that we'll see which is like a blend of all these things moving around.
Maybe relative to the 32% you saw here in the quarter. The 33%. Your scenario do you think it gets better and then how do we think about the incrementals as business recovers hopefully next year.
Hi, Good morning, Rod. This is Chris you know what I think in terms of thinking about the back half of the or maybe a couple of perspectives first maybe on sales, which would probably time when some of the commentary you made as part of your question and then some thoughts on profitability associated with the movement of some of these pieces.
Certainly from a sales perspective, we think sort of pre Cohen type of activity you did mention the Thailand operations for as did see since the end of second quarter, that's approximately a $20 million per quarter sales headwind. If you will and then the other large pieces were converting to the new general motors that should be full size truck, which.
We disclosed previously near that would be from a from a sales dollar perspective has a different architecture, which impacts us related to the items that we talked about coming into the year [noise].
Well, it's probably your main from a sales perspective in terms of second half versus sort of a normal run rate. How many of my perspective, you know obviously, we would generate additional profitability on a net sales change for the company and you saw our decrementals in the US first quarter sort of in that 28% range you saw the second quarter sort of into 32.
A little bit higher when it impacted us on the GM strike impact in the back half of 29 team, but you know from a planning perspective, we're saying, it's sort of plus or minus just holistically core sales momentum kinda plus or minus right around that 30% now that said, we'll continue our restructuring activities into the back half of the.
Year, where you saw us perform at over 20 million a quarter that 60 million a run rate here in the second quarter I would expect that to continue at that pace into the back half of the year I do expect to have some.
Cost associated with Cowen Nineteena, we talked about that between 30 to 40 million for the full year you saw it impacted 6 million in the second quarter as our operations sort of came online in sort of the back half of that quarter up a little bit maybe better than I. Originally we thought 90 days ago.
Obviously balancing our R&D and asked you net income find them all the cost structure activity. So.
I will provide a little context in color in terms of your question.
Yes, that's very helpful and just secondly looks like you're not really significantly pulling back on R&D, but you are on on yesterday side are there any.
Kind of long term consequences that did you're anticipating from the posture that you're taking just relative to spending.
Rob This is David we do not too long term consequences with some of the restructuring actions that we're taking no. We're fully dedicated and committed to supporting continued growth and the electrification space and investing in that product portfolio. At the same time, you know what our conventional product. So we had a complete portfolio already.
So we feel very good about where we are a were just reprioritize or redirecting and that same time cutting costs, where appropriate but don't think it'll have a lasting effect on us going forward.
Okay Alright. Thank you. Thank you.
Your next question comes from Ryan Brinkman with JP Morgan. Please go ahead.
Great. Thanks for taking my question no. Firstly, just how should we think about decremental margin trending over the remainder of the year relative to I think 27% into accuse should that continue to moderate or just given the outlook for less severe industry production declines and is your restructuring actions are more fully felt or how should we think about that.
Yeah, Ryan it's Chris it's kind of for our core kind of movement of our product you know, we're sort of an a plus or minus right around that 30% range. Obviously, we continue to drive some of our restructuring activity should benefit some of that a little bit as well some offset from some of the call. It costs that we articulated and some of my prepared remarks.
Okay, great. Thanks, Matt I saw that announcement relative to the electronic or electric drive unit for bowel. John are you able to provide an update a with regard to your conversations with Oems around electrification generally I do you think that Corona virus speeds up slows down or has no impact on electrification I think theres some thought that disruption.
And from the virus generally speeds up any previously existing transformational trends such as you know we've seen in retail or other industries, but just curious how you know how you're thinking about balancing that against I don't know with automakers me look to delay launches to try to conserve capital or now lower oil and gas prices et cetera.
Yeah. Ryan This is David I'm Crazy, there's an interest by the consumer to support alternate propulsion systems, mainly electrification, but also hybrids.
As I said before we just want to be agnostic to the market.
Make sure that we have product offerings from an IC engine standpoint, a hybrid standpoint and electrification standpoint.
As it relates to the Oems themselves I think is going to vary by OEM.
So our clearly cutting back on some of their electrification spending while others are maintaining or actually even maybe even putting additional investments into that.
So I think it's going to vary I take a lot of it will be dependent upon us government regulations in each of the various countries or regions that we operate them and also the incentive spending and the infrastructure that gets put in place to supported regardless of what the only I'm just doing on the consumer receptivity to it all we want to do is make sure that we've got product offerings to support.
The market showed a shift ill further are stronger and the Oh electrification space.
Okay. That's helpful. Thank you yeah there.
The next question is from Brian Johnson of Barclays. Please go ahead.
Hi team. This is Jason stool dragged on for Brian.
It really just kind of one question, if we could revisit the downside protection playbook to you you introduced last quarter.
Hi, Andrew aggressive 14 million, sorry, which I know, there's a long way down but it sounds like in North America. OE is also sort of calibrating inventories to at this point I just wanted to try to understand the level of confidence of being able to get the organization you know not only profitable enough you know versus historical metrics at that level, but but also.
So profitable enough even to generate over nothing cash flow generating enough to support the debt load and if you know there would need to be a debt restructuring or recapitalization of sounds sort of 14 million sorry level.
This is David talk speaking, we're highly confident in our ability to restructure our business to 14 million units are level, we won bind to be our friends in the future. So we're taking the necessary actions that we need to in order to realign our business a new market demand we've been very clear in regards to what our downside protect.
From a playbook is and the elements that make that up.
Essentially exercise every one of the elements that we outlined in there in the presentation to you all obviously massive reductions in regards to head count both salaried and hourly. We've also worked in regards to plant loading and plant consolidation where appropriate we'll continue to assess those matters as we see how the market ultimately settles out.
Out across the global volumes of drop from 90 million to approximately 70 million in the U.S. ours drop over 17 million down a little over 12. This year and then you'll get on the second half a year, we expected to be at 14 plus.
That's why we aligned ourselves up at 14, if we need to make further adjustments to our cost structure. Then we'll do that but it's all with the effort of the again focused on generating that profitable growth and supporting that operating and financial performance that will allow us to service the debt going forward.
You all know where we have been a large cash positive free cash flow generator or using that to support our debt reduction and strengthen our overall balance sheet financial performance and I don't see is changing any of that you know going forward clearly the only thing that we've got a watch and monitor is just sales and then making sure.
We can adjust our business accordingly, but I don't see us with any recapitalization at this point in time.
Our plan some Chris unless you have any other comments so Jason as you as you framed that and you heard David's comments, you know aligning a very profitable organization at that level of the SAR plus production level, reducing capex will allow us to generate meaningful cash flow and service our debt as well as all the up needs of the organization.
And then maybe just.
Very helpful color, but is there any sort of minimum EBITDA or free cash flow target debt investors could think about 14 million sorry level.
No I mean, obviously.
Can you to perform at top tier EBITDA margin profile I would expect that to continue at that level for the company and we'll continue to generate meaningful cash flow as a company.
We're not giving any guidance for the balance of this year, but you understand how we performed in the past volumes, there and with our cost structure being adjusted it should.
Set us up to perform very well in the future, yes, and keep in mind, we've articulated in terms of Saar capex initiatives, reducing that 5% or below at these type of levels in the foreseeable future. So that all plays very well to our cash flow profile.
Thank you.
Your next question is from Dan.
Credit Suisse. Please go ahead.
Hi.
Good morning, Thank you for taking my question my.
What does this start by asking on T.N. T. One I know I won't ask to fall in love, we are assuming for the year for the balance here, but could you just give us a sense of what type of contribution margin <unk>, we might expect on a on the GM business given their drilling all out trying to squeeze out every unit they can.
It should we expect similar <unk> contribution margin, what you've done in a high 20 or low 30% range and I guess I'd ask that question. It's specific to for Q1, we're going to see a very large.
On your increasing to one I think it's something like 30% Oh, So just any commentary on the contribution margin there.
And then what you heard me articulate in some of the previous questions you know sort of corporate blend around that 30% on these movements you saw that a little higher, especially if you think back to our jam work stoppage back in the fall last year, where you saw a little bit more overweight or the truck on that standpoint, but that's specific to the truck, but now you're seeing.
And typically we have a little bit higher contribution margin on that profile for a full size truck platforms, but when you look at it and the entire zee.
But the business you have to pointed out with everything in especially in light of these circumstances why you're moving a large population of sales up and down just not the truck.
Okay and in the fourth quarter, when it ER and outside the mountains of production.
I mean that profile it sounds like that's in line, let Craig.
Yes, I mean correct.
Okay.
Second.
Question on on electrification and you know to a you know your or the the news on the value Jean Yves around them and then you've now.
But can you give us a sense of exactly what content you're doing in house on that what you might be outsourcing being it being it motors or power electronics.
And.
Yeah.
What's the broader set of discussions are quoting that you're having with customers and what are they asking of you and it's easy to use it for a full you drive solution for components. Just wondering if a you know how that might be a shifting if at all.
Yeah. This is David though speaking.
Our strategy from electrification standpoint is to address the customer needs that range anywhere from a component state. So think gears and shafts to sub assemblies states that include differentials to gearboxes to full integrated three in one type solutions that involve motors and inverters as well.
From a product portfolio standpoint, as we've identified in the past.
We've got all the all the mechanical side of things as far as the gears the shaft. The differentials the gearbox capability, we have all the controls a software capability, we got the integration capabilities, what we like right now internally with an A.M., but we have partnerships that support us our motors and Inverters and we're not.
Sitting still in those areas, but the same time are leveraging relationships either guided by the OEM for partners for us to work with our partners that we have developed independently on their own.
Continuing to evaluate what else we need to do in those arena at the same time, we have a number of innovation initiatives that we're working on ourselves internally to further promote and optimize the performance of those three in one type solutions at the Oems are looking for.
When it comes to the Oems themselves and the region's I'd say you know the folks in China, you know tend to ask for a more.
Complete solutions from gearboxes to complete solutions, including integration of the vehicle when it comes to the Western Oems They tend to do the integration themselves and that's a variance between the Oems based on some are looking to do the three in one solutions themselves, where others are looking for a complete solution. So we just need to manage it at that.
But we've got a full depth and breadth of capability from a portfolio standpoint from component to sub assembly to final assembly with the engineering aptitude to support the integration and controls a software that is vital to support electrification and then back that up with our operational excellence and performance, we feel we're very well.
Position to capitalize in the marketplace.
Okay. That's really helpful color, if I could just get a follow up on that is that a in terms of be Oh, yes look it sounds like they're looking at a broad set of solutions and it depends on the region in which to customer you're talking to you, but insourcing versus outsourcing is that still no ship. There you'll have some that are looking to do more in how some that are.
Looking to outsource more no broad shift in the amount looking to outsource or the Mt looking to in source.
So we haven't seen a change in their behavior from what we're seeing before so it's good to be a mixed bag in regards to some Oems will outsource and some are contemplating then and have made decisions to insource, but no no no change because it call. It as a result this time.
Okay. Thank you.
Your next question comes from I'm in Pos think of VHS of Morgan Stanley. Please go ahead.
Great. Thank you for taking the question.
Good morning.
Morning, I'm, just trying to think through second quarter.
Obviously production was shut down for several months here, but.
Production started to pick up the Oems that besides trucks, which is beneficial to you just trying to think through what what what's sort of a lift you got in the second quarter and how we should think about that potentially normalizing for the third as they expand their production to the other product set.
Yeah. This is David I'll talk first thing Chris can comment on the other side of things.
As you said.
First of all deal we focus on the health and safety of our associates a as they came back to work or they received our powering up a safety protocols are very well, we haven't had a major disruption any of our facilities. So that's been positive we've been working in close contact with the Oems that regardless of their production schedules and their launches clearly.
They prioritize truck so she leaves and crossovers as their priorities that positions that sits well for us based on how we're positioned on their focus on their profit pools, which will also helped drive our profit pools going forward. We havent. Yeah, you know the balance of the business that being crossover vehicles or commercial vehicle. Yeah. We're just the ill.
Supporting the demand that's out there, which as Chris covered in his earlier comments is lower than where we were operating before we'll see how that recovers, but overall, we feel very good about the customer schedules. We understand there was a pent up demand for our product when you looked at the average age of the vehicle approaching 12 years, it's going to.
Continued emphasized the pent up demand obviously G. M is still looking to rebuild inventory from from the strike that they had earlier and that positions us very well to capitalize and benefit from that all so Chris I don't know if there's anything you want to add to that no at this you're right on in terms of the prioritization of the trucks, we experienced in the second quarter you saw their Memphis.
I think that more mid quarter and trying to bring those on early more than the rest of our product set that start to come on in the back half of June it into July.
Okay and then my other question around Mexico plant opened up or earlier than expected.
Without you were thinking about David what are you seeing out of Mexico with regard to.
Regions are today and the supply chain there.
Yeah, clearly Mexico's running eight to 10 weeks behind the U.S. as it relates to manage the co. Good activity. So we're keeping a watchful eye on that as if the whole industry I'm clearly the the industry's only as strong as the value chain and there's a sizable amount of suppliers that ship product either within Mexico or out of Mexico you go back.
To the U.S.
Yes, right now.
From an overall standpoint, we've got very few supplier issues, we definitely have a couple that we're managing but nothing that we see jeopardizing production, there's clearly a certain regions within Mexico as the presidency on managing that health and safety within that country, which are things that we need to watch as far as the areas that were operate in right now.
We're able to phone function, we're able to operate.
But that could change in a minute depending on if there's a big outbreak yen I'm. So we're preparing and looking at alternative plans. It event that we had to shut some things down but our priority is to make sure that we can protect health and safety of our associates first and protect the schedules and the launches of our customers going forward and do that with the support from our supply base or altered.
That supply busy part so [laughter] great. Appreciate it. Thank you for taking the question.
Yeah.
Your next question comes from James Ticker Ela Keybanc. Please go ahead.
Hey, good morning, guys Werent James.
Can you quantify or or put any parameters on what that change in a GM architecture impact is relative to your original expectations as we think about second half.
Well they converted from a whole beam rear axle on that platform to an independent rear suspension. So you know you do lose tubes sprague's, so on and so forth, but if you think about sort of pre covert our guide stepping into the year. This was sort of the final phase or the GM truck transition, we expected our revenues holistically on that platform.
Do you want platform that is to be down 225 million coming into the year bulk of that related to the CV architecture change sort of running at a full year. So that would sort of articulate kind of on a quarterly basis, what that might impact us.
And you don't see.
They produce so [noise].
Yep.
What was your Thailand business profitable when factoring that 20 million a quarter revenue loss and it was definitely captured in the quarter.
No I mean are piling business is profitable Oh, you mean prior to the shutdown yeah. It was profitable business.
Right, sorry, I'm, just saying as we take out the 20 million a corridor.
I'm just wondering what the yeah, but that so it's probably like Oh, you're thinking about it seem in the corporate average you know it was good but of course and southeast Asia.
Got it okay. As we think about axles liquidity just under 1.7 billion this quarter.
Would you expect to finish the third quarter at a similar level I believe you indicated you expect positive second half free cash flow. So I guess I'm just trying to get a sense for maybe the threeq versus Fourq you cadence on freight.
Yes, Jason for you'll need to take 350 million of our note redemption out of that liquidity number right. So you are killing carrying the proceeds of our June bond issuance in that quarter end number so that comes out in the third quarter is we redeem those notes.
And then the balance of the your liquidity will change based on our free cash flow private profile.
So you do expect that could have free cash.
If we're to breakeven or better yes, it would have correct.
Or negative Augusta, yes.
Thanks, guys.
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Thank you denim in your last question comes from Joe Stack with RBC capital markets.
Thanks, Good morning, everyone.
No.
On the.
David the Badger Onethree hundred I. I think that's probably I know you've been for a while talking about the three Electra program. So I mean since the third.
Maybe you could talk a little bit more what you see in in the pipeline if theres any more programs on on the horizon, but also that Belgians clearly a different vehicle. Then then yeah. You know the vehicles you've been on historically and even different you know for the axle product, where I think the others were sort of a more no SCB type vehicles.
How does the CPV of that have that.
I was on program compared to maybe the other E actual offerings.
Yeah, Yeah, you know Joe this is a a value brand opportunities. So the content per vehicle on this product is much lower than what we like we're doing other driver of our land Rover Eyepiece program as you know on the IP is program, we're well over the 22000 or $2500 range. This is much lower than that think more component.
And gearbox type or related activity. Your so it's going to be at a much lower end of the range that we've given you before.
Okay, and then just otherwise I bought but a very a bit but a very important entry into that market, which has a value driven market and we expected incremental opportunities present themselves as a result with us.
Okay.
Joe This is Mike Joe Joe Real quick you know when when we think about the content per vehicle available in this market segment. This is not a segment that A.M. has historically had much opportunity to plant.
Different you know what will drive passenger car base vehicle. So for US you know, even though the content opportunity is relatively small compared to light trucks and crossover vehicles that type of thanks. This is valuable growth for us because this is kind of questing a portion of the market, where we didn't really play.
Fair enough maybe a second question you know we've seen.
Some of your sort of other acts what competitors make I guess, the best thing I would terminal guess is software related ACO hires to gain more engineering competency for electrification systems and and granted a lot of those have been more I think on the commercial vehicle off highway side, but I was curious if that's something that A.M. has been evaluating whether it's something you need to.
To do or are you comfortable with your organic engineering inorganic engineering spend.
A combination we're very comfortable the engineering resources that we have today.
Especially as we have invested over the last several years on software controls engineers, how much will lend itself and support electrification going forward, we're very comfortable at the partners that we haven't place today, and clearly I've been able to offer the customers value proposition for them to sources business, but our job is to continue to.
Do you know enhance that cost performance well adapting the technology and give in strengthened that value proposition overtime, I think we'd like to control more of that ourselves, but we have no problem youre working in technical partnerships joint ventures, or just and customer supplier relationship as long as we can deliver those value.
Propositions to our customers and right now we've been able to demonstrated that NB successful and not only a winning new business, but launching a new business and as you know where our third a lot for your second electrification program I will be launching next year.
That's very unique high performance passenger car.
It's got multiple variance off of that and then we've got a pipeline of other opportunities that's banned all the different segments that we support in the marketplace today.
Thank you very much yeah. Thank you. Thank you.
Thanks, Joe We think all who don't participate on this call appreciate your interest in a.
We certainly look towards the top me talking with you in future.
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