Q3 2020 American Axle & Manufacturing Holdings Inc Earnings Call
[music].
HM.
And I'll be your constant so is here today.
Tom I would like to welcome everyone to the American manufacturing third quarter 2000, <unk> earnings Conference call.
Like some place.
Any background noise after the speakers remarks.
I had a question and answer period, if you like.
Ask a question during this time.
Archie number one on your telephone keypad if.
If you would like to withdraw your question. Please press star cheap and number two.
As a reminder, today's call is being recorded now let's turn the call over to Mr., Jason Parsons Director of Investor Relations. Please go ahead of most of course.
Good morning.
Talk about the warning by joining us I named third quarter earnings call.
Earlier. This morning, we released our third quarter 2020 earnings announcement.
You can access this announcement on the Investor Relations page of our web site <unk>.
<unk> Dot E. M Dot com.
Sure the PR newswire services.
You can also find supplemental slides for this conference call on the Investor Web page page of our website as well.
So listen to a replay of this call you can dial 187734475 to nine we.
Replay access code 101.
For 715 for this.
This replay will be available beginning at one PM today through 11, 59, P.M. Eastern time November 6th.
Before we begin I would like to remind everyone that the matters discussed in this call may contain comments and forward looking statements are subject to risks and uncertainties, which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.
For additional information, we ask you refer to our filings with the Securities and Exchange Commission.
Also during this call well refer to certain non-GAAP financial measures.
Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
With that let me turn things over to Ams, Chairman and CEO, David though.
Thank you, Jason and good morning, everyone.
Joining me on the call today are makes money EPS, President and Chris May Ams, Vice President and Chief Financial Officer.
To begin my comments today I'll provide some color on A.M. <unk> third quarter results.
And you have a strong third quarter operating and financial results and free cash flow generation reflects the benefits of recovering global production volumes and our cost saving actions.
Hi, I'm sales were 1.41 billion for the third quarter of 2020 compared to 1.68 billion in the third quarter of 2019.
We estimate that sales were negatively impacted by COVID-19 during the third quarter, a 2020 by approximately $87 million.
In addition, our third quarter of 2019 sales included a $155 million related to our U.S. iron Cascade operations.
Business was sold in December of 2019, as there are no longer part of our sales base in 2020.
Adjusted EBITDA for the third quarter, a 2020 was $297.1 million or 21% of sales that's compared to an adjusted EBITDA of 265.8 million or 15.8% of sales <unk> third quarter 2019.
We estimate that adjusted EBITDA was negatively impacted by the lower sales of coal that 19 by approximately $16 million during the third quarter of 2020.
Despite these challenges and benefited from strong sales mix right.
Well, that's a cost reduction actions and the timing of customer reimbursement items to achieve a record quarterly EBITDA margin.
Adjusted earnings per share for the third quarter, a 2020, what's the dollar and 15 cents nearly doubled compared to 58 cents in the third quarter of 2019.
From a cash flow perspective am generated over $217 million of adjusted free cash flow in the third quarter of 2020.
This also represents a quarterly record for any yeah.
Despite the significant challenges we faced this year am is generate over 130 million a positive adjusted free cash flow.
Year to date, we expect to generate additional free cash flow in the fourth quarter of 2020.
As a result of the strong operating performance on free cash flow, we lowered our net debt leverage in the third quarter and we continue to have strong very strong liquidity position or the other.
The $1.5 billion at the end of September.
[noise], our third quarter performance was highlighted by strong operating performance and financial results I'd like to take a minute to give you an update on the unfortunate event that occurred last month.
On September 22nd we experienced significant industrial fire at our Melbourne manufacturing facility in Ohio.
Thankfully all associates were evacuated safely without injury.
[laughter] D.A.M. team has done a phenomenal job working with our customers and our suppliers to manage around the immense challenge and avoid any significant supply disruptions and.
In addition, we have had we had sections of the Melbourne facility back up and running within three days of the incident and utilize the resources and the other.
Other <unk> metal forming facilities to protect continuity of supply.
Well, we still have some work to do I can assure you that we will continue to coordinate with our key stakeholders are doing everything we possibly can to.
To care for our impacted associates and protect our customers production schedules.
Chris will provide a little bit more color behind the financial implications of the fire a little bit later in today's prepared remarks.
There's no doubt the 2020 has been a difficult and challenging year for everyone.
Significant challenges remain to mitigate the global pandemic and repair kind of moves around the world.
In response, AMITS flagstar operations and have adjusted our cost structure.
We have positioned ourselves to be a stronger company has industry volumes recover from the impact of the pandemic.
Well, we still see uncertainty related to COVID-19 today, the automotive industry has been resilient and that's recovered quickly and many of the key regions of the world most.
Most of age has returned to pre kolpin levels.
North America reached a 16 plus million unit SAR in September and Europe is slowly, but steadily improving as well [noise].
Customer production schedules look strong for many of the key platforms, we support and a favorable mix towards light trucks continues to benefit a oh.
Today, we want to provide our revised financial outlook for 2020.
Assuming the industry continues to stabilize and there are no significant production disruptions for the balance of the year.
Our revised full year financial targets for 2020 are as follows.
Sales of approximately $4.6 billion.
Adjusted EBITDA in the range of $665 million to $680 million and adjusted free cash flow in the range of $220 million to $235 million.
Two quarters ago, we were walking you through our breakeven cash flow scenario.
The recovering global economy and automotive industry.
Execution of our downside production playbook in cost reduction strategy.
It is now on track to generate sizable free cash flow to reduce debt and a year full of challenges and disruption.
Ams performance this year demonstrates our ability to adjust our business and deliver solid results in a dynamic market environment.
While much of our attention. This year has been spent on protecting the health and safety of our associates.
Providing our customers with watch important continuity of supply adjusted our business to the new market demand and reducing costs and preserving cash we have not slowed down our efforts to enhance our technology leadership and drive critical initiatives and investment in growth opportunities with a substantial emphasis on electrification.
We continue to support our customers on current programs and now and upcoming launches on our award winning electric drive units. We're also investing significant human and financial capital and the advanced development of our next generation technology.
Achieving industry, leading power density performance and cost competitive and cost competitiveness and the electric drive space that can be scalable to all vehicle segments and regions and meet various customer requirements.
We have weathered the storm and navigated through a difficult environment.
I remain cautiously optimistic about the macro trend space in the industry for the rest of 2020 and heading into 2021.
Taking the necessary steps to achieve operational and financial success and an ever changing marketplace.
You can see the impact our cost savings initiatives have had on our financial performance and we continue to look for ways to adjust our business.
Optimize our capacity and structurally reduce cost.
We have built positive momentum as it relates to our financial performance and we expect to continue to build that as we head into 2021, allowing us to continue to exhibit industry, leading profit margins.
Generates strong free cash flow and compelling free cash flow yield and further strengthen our financial profile.
And with two more electric drive system launches and multiple electric powertrain component launches next year as well as many significant new business opportunities ahead, and Jim is laser focused on paving the path towards profitable growth and then even brighter future for am two important investments in our innovative advanced propulsion solutions.
Stay tuned for more developments and this electrifying area.
Well have more to say about our 2021 expectations. After we close out this year, but excitement is already building as we start to put our plan and targets in place. This concludes my prepared remarks. This morning, I'll turn the call over to Chris May Chris.
Thank you David and good morning, everyone I will cover the financial details of our third quarter of 2020 results with you today.
Also refer to the earnings slide deck is part of my prepared comments.
Let's go ahead and start with sales sales.
Sales in the third quarter of 2020 were 1.41 billion compared to $1.68 billion in the third quarter of 2019.
Slide six shows a walk down a third quarter 2019 sales to the third quarter of 2020 sales.
First we stepped on our third quarter 2019 sales by $155 million reflect the sale of the U.S. casting business unit that was completed in December of 2019.
Yeah.
Next we add back the impact of the GM work stoppage from the third quarter of last year.
When we account for the unfavorable impact of COVID-19 third quarter, 2020 sales, which we estimate to be approximately $87 million.
One note about the estimated COVID-19 impact nearly two thirds of it relates to lower than expected sales in Brazil, and India while.
While these markets are relatively small for any you are still were significantly impacted by the global pandemic during the quarter.
On a year over year basis, we're also impacted by any of her by GM exit of its Thailand operations by approximately $15 million.
And the transition from a rear beam axle to a new lightweight and highly efficient and ER.
Drive axle for jams, new full size as you'd be impacted sales by approximately $55 million.
On the volume and mix was positive by $17 million, mainly driven by strong light truck mix in North America.
Pricing came in at $10 million year over year impact and metal market pass throughs and foreign currency accounted for a decrease in sales of approximately $15 million year over year.
Now, let's move on to profitability.
Gross profit was $249.8 million or 17.7% of sales in the third quarter of 2020 compared to $248.7 million or 14.8% of sales in the third quarter of 2019.
Adjusted EBITDA was 297.1 million in the third quarter of 2020 or 21% of sales. This compares to $265.8 million in the third quarter of 2019 or 15.8% of sales.
This marks the first time in antenna Street to post a 20% plus adjusted EBITDA margin quarter, let's walk through how we got there.
You can see a year over year walk down on an adjusted EBITDA on slide seven similar to sales, we backed out the third quarter 2019 us casting EBITDA to provide a comparable figure after the sale for us casting business unit and added back to third quarter 2019 profit impact the GM work stoppage.
We estimate that lower sales as a result of COVID-19 impacted EBITDA by approximately $16 million in the third quarter of 2020.
Other volume and mix, which also includes the impact of the GM, Thailand to exit and the full size as you transition was approximately $10 million.
There were a few other significant items to call out as it relates to our EBITDA walk.
The first thing to note were customer reimbursement settlement payments were approximately $22 million in the third quarter of 2020. This.
This primarily relates to past engineering and design costs for new product development that were reimbursed from one of our customers in the third quarter as part of our R&D cost sharing arrangements for future program. This.
This resulted in lower net R&D in the quarter and ultimately higher and again these are higher EBITDA I.
Another major factor in our financial performance. This quarter was our cost reduction savings, which were approximately $24 million in the third quarter of 2020 compared to the third quarter of 2019.
Savings came in slightly higher than those realized in the second quarter and aligned with achieving our target of a total of $60 million of cost savings in 2020.
We experienced about $3 million in comment related cost in the quarter.
Back in May we originally expected to incur about $40 million and corporate related costs in 2020, but we have been able to mitigate and avoid many of these potential expenditures. We now expect to spend approximately $15 million in 2020 for corporate related startup inefficiency costs.
We did see a benefit from metal market and foreign currency of approximately $8 million, mainly driven by FX.
And overall our operations teams continued to perform about productivity improvements on top of the significant cost reductions for an additional $1 million.
Even when backing out customer reimbursement and commercial settlement along with a favorable foreign currency that was realized in the quarter. It was an impressive operating and financial performance.
Third quarter.
As it relates to restructuring and acquisition related costs, we incurred $9.7 million of such costs in the quarter.
We also recorded $8.6 million net expenses related to the Melbourne fire that David previously mentioned these.
These charges are primarily related to the write down of property plant and equipment as a result.
Buyer net of estimated insurance proceeds less our flexible deductible.
As the spread was experienced at the end of the quarter. We continue to assess the extent of the damage caused by the fire and related impacts.
These costs have been excluded from adjusted EBITDA and adjusted EPS.
Let's take a look at best DNA expense.
As you may including R&D in the third quarter of 2020 was $66.5 million or 4.7% of sales. This.
This compares to $92.7 million or 5.5% sales for the third quarter of 2019.
R&D spending was approximately $18 million for the third quarter 2020, compared to $37 million in the third quarter of 2019.
Decrease in R&D on a year over year basis, primarily reflects reflects the previously discussed DMD recovery.
Now, let me cover interest and taxes.
Net interest expense in the third quarter of 2020 was 50.5 million as compared to $52.1 million in the third quarter 2019, we continue to experience lower interest expense cost as we paid down our outstanding debt.
Income tax benefit of 22.5 million per quarter, 2020, as compared to $40 million in the third quarter of 2019.
You May remember last quarter, we recorded a valuation allowance of $36 million against our deferred tax assets related to us interest expense carry forwards.
During the quarter the IRS.
The Treasury Department issued final regulations and additional almost regulations that included important changes and clarifications and ultimately resulting in us to release this valuation allowance in the third quarter of 2020.
Our effective income tax rate when adjusting for special items and the valuation allowance reversal was approximately 15% in the third quarter of 2020.
We expect our tax rate in the fourth quarter to be in the 15% to 20% range.
Taking all these sales and cost drivers into account GAAP.
Net income was $117.2 million or 99 cents per share in the third quarter of 2020 compared to a net loss of $124.2 million or $1.10 cents per share in the third quarter of 2019.
Adjusted earnings per share was $1.15 in the third quarter of 2012 compared to 58 cents per share in the third quarter of 2019.
Now, let's move on to cash flow and the balance sheet we.
We define free cash flow net cash provided by operating activities less capital expenditures net of proceeds received from the sales property plant and equipment.
I am defines adjusted free cash flow to be free cash flow, excluding the impact of cash payments for restructuring and acquisition related costs.
Cash generated by operating activities third quarter, 20 point was $249.5 million.
Capital spending net of proceeds from the sales property plant equipment was $40.5 million in third quarter of 2020.
Cash payments for restructuring and acquisition related costs for the third quarter of 2020 or $8.2 million.
Reflecting these activities EPS adjusted free cash flow in the third quarter of 2020 was $217.2 million. This is a quarterly record.
And reflects strong operational profits significantly lower capital spending and implementation of cost and cash savings initiatives.
It also includes an income tax refund, we received approximately $31 million related to utilization of net operating losses under the provisions of the care Jack.
From a debt leverage perspective, we ended the quarter with a net debt to LTM adjusted EBITDA or net leverage ratio at 4.7 times.
This is down from the second quarter of 2020 on the strength of our EBITDA and cash flow generation.
Liquidity at the end of September was approximately $1.5 billion, we have over half a billion dollars in cash and no amounts outstanding on our revolver at September Thirtyth, 2020, and no significant debt maturities until 2024.
David is going through the details of our updated full year financial targets, So I will not repeat them.
I believe our continued performance in 2020, I'd like to EPS ability to adapt and flex our cost structure.
Our cost savings actions have helped drive significant operating profitability and cash flow generation and a turbulent year.
We're busy working to deliver and build upon these cost savings actions and we believe will position us well for a successful 2021 stay.
Stay tuned for more detailed guidance on next year as we turned the calendar.
Meanwhile, we look to close out 2020 on a strong note and continued to make important progress on innovative next generation electrification technology, our opportunity for a long time to come.
Thank you for your time and participation on the call today I'm going to turn the call back over to Jason. So we can start to want to Jason.
Thank you, Chris and David.
We have reserved some time to take questions I would ask that you. Please limit your questions no more than two so.
So at this time, please feel free to proceed with any questions you may have.
At this time I would like to remind everyone in order to ask a question. Please press Star then one and then.
On your telephone keypad, we'll pause murmur MCU and Iraq.
Your first question comes from John Murphy from Bank.
America John Please proceed.
Good morning, guys morning Jets for all that good morning.
Just a first question is look there's obviously a lot of moving parts around Colgate.
And then some of your rationalization activities.
You got MPG back on track here. It seems like just based on what we can see it.
Your point 56 to 67 on EBITDA margin in the fourth quarter.
After what seems to be like 90% plus even adjusted number.
In the in the in the third quarter. So Im just curious David as you think about the EBITDA margin going forward is there any reason that you could maybe get back to that 16% to 17% range you had in 18 and 19 pre the troubled MPG and once we're through the cobot noise.
Yes.
John will first of all good morning.
No I mean listen that obviously this was an unprecedented year for us and we've taken the structural changes that we need to make to our overall cost structure, we have randle reece size the business to a lower market demand, we're letting buying b our friend as volumes continue to pick up globally around the world, We're clearly hopeful to be able to perform.
At that level that you've outlined.
But but.
What we were not given any guidance today, we'll give that in early next year.
Clearly we are comfortable in regards to the changes that we made to our business that will continue to generate industry, leading financial performance yes.
Yes, John This is Chris I would also point you to our first quarter performance here this year, where we posted nearly 16% let's call them starting to settle and you see the cost savings actions, we've taken really in the last three quarters nearly $60 million and you see a favorable truck mix and volume ahead of us. So we think we're lining up really nice we're very focused on.
You know to deliver that 60 million here, yet this year and as you know some of those were temporary in nature, but were looking to convert those to to fit more fixed in nature in terms of cost improvements. So we're excited for next year and we're excited to deliver strong margins.
Okay. That's very helpful. And then just a second question on any update on own backlog.
Adding process, what you've won.
I can give us there.
The only thing we can say now is we've got to vehicle programs in production today. We've got two additional electrification programs that will be launching next year as well as some components support.
For the electrification.
Market baskets about a billion five of new opportunities, which nearly half of that is tied to electrification the bailouts on traditional products.
We're very comfortable with where we are with our technology advancement.
And where our backlog sits at this point in time, I mean, clearly there's a shift from the traditional product to more the electrification product and we're just trying to position ourselves in the marketplace to win our fair share of the business, we clearly need to sort out what portion of the business will the Oems want to do themselves internally versus what will be outsourced and then.
Make sure that we have a value proposition to support that growth.
David It's fair to say mid May and Theres still progress being made on on bidding.
And everything you're going after right. It's not like we're seeing things are stalled and there'll be delays in the backlog build there is there's the activity is still relatively normal on that side is that a fair statement.
Yes, I mean, we're seeing a reduction in some of our traditional or conventional business opportunities as Oems are looking to carry over more product going forward, but we're seeing an uptick in regard to electrification opportunities. So the balance themselves out going forward.
Okay. Thank you very much yes, thank you John.
And our next question comes from Joe Spak of RBC capital. Please proceed.
Thanks, Good morning, everyone.
Sure.
Chris I just want to.
First clarify something R&D through 18 million.
But is that was that did you say that was netted against the $22 million settlement. So it's really more like 40, you could I think you had talked about it being at a higher rate in the back half of this year, yes.
Good.
Yes, the concepts right at 22 million is eating Andy recovery as well as a commercial settlement about two thirds of that is energy related in terms and that would be netted into that so you'd have to gross it up for that so closer to the 35 range 35 and is that the right way.
To think about the quarterly spend on a go forward basis, yes. So in the near term near term. Yes, obviously, we continue to have one deploy resources in converting from traditional product into electrification space, which will be cost neutral, but obviously deploying towards development and design of our next generation product and will probably continue to spend.
Into 2021, probably step it up a little bit in terms of some R&D spend related to electrification and you may recall some of our previous commentary.
For rewind about a year ago quite a range was in that $35 million to $40 million range, we're pushing closer to 40 as we are investing in electrification, but a lot of our cost savings initiatives that we put in place now have allowed us to redeploy existing cost into electrification and we won't have to probably add as much as we previously gone.
Okay.
My second question is and David I realize you view.
No you indicate you sort of see what your customers plan to do.
In house versus externally as you move to electrification.
I am wondering notice on structure, whether you're seeing.
Any.
Changes in development as a sort of how customers are thinking about some of the larger vehicles, where we've seen.
Maybe some of these vehicles have motors closer to the wheel versus.
On like on model, three or I'd, three or even on the IP to do word which has.
Sort of more in the centre vehicle and.
If you think thats right for the larger more capable capable vehicles and if you're investing there and whats your really capability effects that structure.
No Joe the best cost solution from electric drive utilization standpoint is still a center differential with motors and power electronics integrated into them not necessarily out in the wheel lens, we recognize that some Oems are evaluating.
Technology, we ourselves are developing some of that technology as well.
We still feel that the best value proposition is more of a center differential with the integrated motor and power electronics within our inverter.
Okay. Thanks very much.
Great. Thanks.
Our next question comes from.
Rod Lache with Wolfe Research. Please proceed.
Good morning, everybody.
Can you hear me.
Yes.
So I am just trying to.
You think about what what what is the number that we just saw kind of need to so if we ex doubt the reimbursement. Thanks.
In commercial settlement timing, you would've done 275 million of EBITDA.
You'd be annualizing at about 1 billion one on that.
And how should we be thinking about that number is is it.
Realistic that you could be doing a billion or more of EBITDA.
If you if you were able to sustain that.
I guess the annualized run rate of revenue of 5.64 billion.
Yes, Rob this is.
Yes look a couple of other things I would think about it and what you're trying to articulate there. We do have some favorable FX and metals sort of one through the quarter right and you see that spiked out also on our walk I don't know that that's a number you would try to annualize. It happens from time to time, just based on currency. So that's a little bit discrete in.
Inside the quarter I.
I would also tell you our cost reduction actions of $24 million. Our objective was to be on pace for $60 million for the full year.
This year and as we mentioned some of that cost save this is temporary right that will come out a little bit in the fourth quarter. So think of temporary wage reductions such as that.
Probably a little bit lower than that on a quarterly basis. So, yes, very strong third quarter element to that but.
You have a little bit of leveling from that perspective, but.
The rest will then depend on your sales level right, we still see nice strong mix from a truck side.
And we will continue to obviously work on the productivity side, we'll focus on the cost side, a little bit too, maybe R&D spend and things like that that we're talking about on a previous question.
Okay.
But we're talking about that that it's just that 8 million.
Ill, maybe 30 30 million annualized or something there and some portion of that 24 million that you would say is.
It is something that we wouldn't want to run rate is that clear there is nothing I want.
And what you're dead on a quarterly basis right. You would just annualize does Qualcomm you have to look at it over here.
Okay, but you don't I mean, we are not really dramatically lowering the EBITDA here I mean, it looks like you're you're at least $1 billion right at that at that level or are you is there anything else that you'd say look keep this in mind.
There was a benefit here that is not going to be sustained beyond.
Beyond what we're seeing right now yes.
Other markets you pointed out that like you pointed out Brazil's not back rate you pointed out.
A number of other things that are not.
And we were operating with like a 15 million Saar on average for the for the quarter. Yes, you do when you look at the third quarter discreetly right you have to look at the number of production days. You also have to take a look at the fact that our customers ran during what they would typically have a shutdown at the beginning of the quarter, which was even above and beyond normal production days inside the quarter and you'll have season.
Now let me throughout other quarters of the year. So just extrapolating one quarter you have to take that into consideration as well.
Okay.
I know that David.
David you had been talking about.
Savings opportunities, even beyond the 60 million that you'd originally laid out any updated views on that or should we be thinking look.
This point, you really want to crank up the investment in in some new areas like electrification. So we should be thinking that the cost structure. We see today is it something that you would want to maintain.
Yes rod.
Again this is David we've done a tremendous job as an organization to optimize our capacity structurally reduce our costs.
Right size, our business to the new market demand, but the same time as we've said for multiple quarters now we're going to continue to invest and electrification advanced developments.
So the answer is yes, we're going to continue to focus on that and make sure that we can still be an industry leader on the traditional unconventional products and generate those industry, leading margins like we talked about while at the same time position ourselves to win our fair share of electrification as the market starts to transition there. The big question is is.
When.
I still feel I'm still long on the IC engine for a period of time, but I also recognize that electrification is here today and will grow. It's just a matter of how fast is it growing which segments as a CRO and which regions as a grow around the world.
We feel that we've really optimize our cost structure. We will continue to look at other things that we can do to drive capacity utilization.
Obviously with the Atlanta with this Melbourne fire that we experience we've had to shift a lot of product, which has driven up the utilization some of the other facilities, but we've been able to protect our customers that way.
We've tried to turn a negative into a positive that way.
Other than that we see as we said earlier volumes really starting to recover and most of the major regions of the world, which bodes well for us, especially with the way that our products are positioned in the marketplace too.
Great. Thank you yeah. Thanks, Rob.
Your next question comes from John Barclays. Brian. Please proceed.
Let me just get it off.
Hi, good ones.
Two questions one well drilling.
Going after the same issue.
Could you maybe help us with the walk from Threeq to Fourq looks like if you back out the 22 million reimbursement in the FX metals, it's still a 48% decremental.
Margin.
You know is does that imply there are other costs coming back or is just typical seasonality.
Good morning, Brian This is Chris Yes, let me let me give.
Yes, a little bit insight as we think about walking from Q3 into Q4, and my commentary will center basically around call. It the midpoint of our EBITDA guidance for the full year as I think about what that equates to in Q4.
Can you just talk about the onetime item associated with the 22 million, obviously that will come out I guess I would think a very similar to the FX and metal market element associated with that as well which is the.
But the other thing you need to really step into first and foremost is you'll have lower production days, while our sales per day is very similar.
Extrapolate out our full year sales very similar year over year, but you have four to six less production days, so call that nearly $100 million revenue based on our guide drop that at a 30% decremental into the fourth quarter like you see our profits when they go up or down associated with our revenue.
So that is a that is a key piece as well you do have a little bit of that performance leveling I talked about in terms of the 24 million you saw come through in the third quarter, a little bit that will settle down a little bit into the fourth quarter and that we do have a little bit of pricing, that's a little bit tail weighted this year towards the back half in terms of back half from fourth quarter versus the full year. So you had a little bit of a piece.
Associated with that I would say around the horn you got a little bit some of our project expense and launch activities starting to kick back up is all these activities restarting into the balance of next year.
Okay. Secondly, can you give us maybe more of an update on.
Your electrification effort strategic discuss in Twoq, but since then there is none.
Number of announcements certainly number of startup specs with.
Getting into the market GE announcing its LTM skateboard and which as you are painfully aware set your stock down the day, they announced their plans to largely in source. So we.
We know your three platforms that you are pursuing but just as you think about your core largely as to the pickup truck market. How do you see a participating in that on the electrification side and be on the.
The threat to the kind of solid B back sold drive shaft traditional business.
As well as what you've gotten from metal guide should more of that go.
Into the all electric right.
Yes, Brian This is David first of all the GM announced it wasn't a surprise to us.
We have been working very closely with GM ever since our company started back in 1994, we have a close working relationship with them.
I understood. What you were doing from an LTM batteries standpoint, and some of the supporting easy to use and the different product lines that there.
Into support from a vehicle standpoint.
Clearly they've made investments they are they made a strategic decision to in source on that work, we're where Oems are insourcing work, whether it be GM or others. We're still in the game in regards to supplying components and subsystems.
Where Oems will outsource work, we clearly are wanting wanting to go after the full integrated edu units sold.
So we'll continue to focus on that we have those units developed today.
At the same time, we're working on advanced technology.
We think will bring greater power density greater cost competitiveness and greater overall performance and a smaller packaging space. When it's all said and done it's about providing data.
When it's all said done it's about providing the value proposition to our customers.
We're not going to let you know.
We're going to defend our space and make sure we put forward the right value proposition for pickups, Shooties and crossovers, while at the same time developing product that is modular and scalable that allows us to go after the front will drive market that we ask that you really don't support a whole lot today we.
We picked up some business when we picked up MPG in the print will drive passenger car market. So we see growth opportunity. There at the same time, we're positioning ourselves to defend our current business as I stated earlier I am still long on the IC engine for pickups.
I think there will be around for a longer period of time than people think.
Also recognize that theres, new entrants vehicle standpoint that are bringing on electrification.
Yemen forwarding price or FCTA are all going to do what they need to do to protect their truck market and like any good supplier, we're going to offer them value propositions to help.
Projector market share going forward. So we feel very good about our products in the market today that are in production. We feel good about the new products that we will be launching next year and we also feel real good about where we are in regards to our advanced development of our next generation products, which were accelerating the development of those.
It is improving those capabilities out.
Well and we're meeting actively with various customers with respect to that technology.
Okay.
And anything any wins in that sort of a heavier duty light truck marketplace or is anything in the pipeline there.
As I said, we're in discussions with customers right now, but nothing to announce at this time.
I don't know of anything Thats really been sourced.
From the traditional Detroit three other than what Jim has decided to do internally with their announcement.
For two identify that they're going to have the EPS.
Series product that will be electrified as well again, the volumes are lower than compared to the bigger platform that pays all the bills today for their development not only on electrification, but other things that they need to do.
There is activity with as I said, the upstarts are the new entrants.
And we are in a position, where we're supplying componentry and some of those cases.
Okay. Thank you.
Thanks Brent.
Your next question comes.
Same with Kelly.
From Citi. Please proceed.
Great. Thank you good morning, everyone.
Just wanted to just hoping you could maybe talk about as you think about the next let's say two or three years for the company. Your latest thoughts on how we should think about revenue relative to two end markets, So william growth over market and and whatnot.
As well as Chris.
Chris maybe on the de leveraging front, hoping you give us an update on kind of how you see that progressing over the next couple of years and when do you expect to hit some of your viewpoint on leverage targets.
Yes, well obviously.
Obviously, one of the key will kind of work in reverse.
One of the key objectives of the company is to continue to Delever you saw us do it this quarter, while we're still obviously a little bit high from a leverage perspective, but our cash flow generation. Our continued very strong focus on strong cash flow generation with lower Capex strong operating performance and then obviously building EBITDA will allow us to continue to de lever. So.
Path to de lever is still we think very favorable for us and is a top priority for the company.
As we think about our growth markets look I think you see a couple of things going on inside of that over the next couple of years per se.
See I think of our core product for example, you see light truck vehicles, whether they be pickup crossover vehicles continuing to gain share of that market, which obviously is a sweet spot for us, which we continue to supply into and enjoy the benefits of lighting consumer interest in that product.
David articulate a lot of the areas, we have working now and the electrification space where from a component side.
From a full edu side, we continue to invest in and win business and.
That's an area of growth for us all and so on are even more traditional components metal forming powder metals, such as those areas. We continue to see interest growth.
Segment, and then lastly on their Vcs business, which supports the downsize hyper type engines, a lot of opportunity in that space winning business there as well, we see that growth continuing.
That's helpful and then just a second question.
With the Cobot cases, Unfortunately rising last a couple of weeks are you seeing any additional risk in the fourth quarter of our supply chain disruptions and just curious if any of that risk is embedded into your your fourth quarter guidance.
Hey, this is David clearly.
Clearly the risk with our supply base started deal back in January.
We've been able to manage that risk successfully through the first quarter in the third quarter. When we are actively running production obviously, the second quarter when our operations were down mainly here in North American part of Europe.
There was as bigger concern.
But clearly we have to watch that just because of.
Country announcements or government announcements or regional announcements in regards to where our supply base is.
So there are some challenges that are out there with respect to that but at this time, they've all been very manageable, we've had nothing that interrupted our continuity of supply to ourselves ourselves to our customer as a result of the cobot issues right now.
As it relates to your question on our guidance.
Embedded in our guidance a little bit of costs as we talked about $15 million for the full year of which we year to date incurred about 9 million.
No significant impacts beyond that had been included in that associated with going through the balance of this year.
Yes, yes. It does it daily I mean, the biggest thing that we're watching is volumes are picking back up an accelerating going forward.
Watching the financial health of the business.
Hi base right now to make sure that they can finance the stomach the working capital demands that are going to be placed on them.
So we're keeping a watchful eye on the entire supply base.
Right now that's a very manageable list for us at this time.
As far as everyone appreciate all that.
Absolutely I appreciate all that detail that that's very helpful. Thank you.
Our next question comes from Dan Levy of Credit Suisse. Please proceed.
Hi, good morning, Thank you.
First just want to have a follow up on.
On debt pay down and sort of how you view that relative to R&D I mean.
To what extent if you you incremental EBITDA generation next year beyond let's say there is continued cycle recovery what the opportunity is for incremental debt pay down and then how do you view.
De leveraging relative to R&D, obviously deleveraging is a key priority but.
Same time with the waiver TV, probably increased desire on your right to boost R&D to enhance your EDI offering. So tell me if you could just tell us how do you view the two relative to each other is there any incremental benefit to elevating your R&D expense, perhaps missing out on the opportunity to pay down additional debt or.
The very clear priority has to de leverage first and then you can't do you start.
Start there.
Yes. Good morning. This is Chris first I would tell you from ability to pay down debt. Our debt instruments are very flexible we can pay those down we have prepared pre payable debt at any time. So we're in a good position from from that standpoint, but I think the crux of your question is do you reallocate capital from debt pay down to R&D I guess, what I would tell you.
He was embedded in our performance now is a sizable amount of R&D. We believe is the appropriate amount to support the growth that we see in front of us and continue to support the next generation of product, we're getting ready to launch and.
And obviously investment in our future and investment in growth areas such as that are critical to our long term success. We will continue to support those if we need if we felt at a point in time in the future that opportunities continue to expand that present themselves.
We would obviously continue to invest in our R&D space to drive our product set to drive our growth to expand our customer base.
That being said if you look at the amount of free cash flow that we're generating as a company we can clearly.
Support debt pay down and we can clearly support the investment in our budget.
Great.
And then just to clarify on on your initial comment.
You have flexibility in the debt Paydown, what do you do you need to see a sort of certain sustainability of the end markets to go forward on paying down debt or add you achieved.
The t. that upside we should.
Expect you to be pretty pretty quick about taking advantage of paying down that debt yes.
Yeah, when we think about yes from a from a gross pay down obviously, if you pull cash or net debt would come down but from a gross debt pay down certainly time in circumstances are always considered factor when we think about it. If you think about forward trajectory of the business I think about timing and seasonality within the year first.
First quarter is usually an outflow use of cash flow for example for US you want to think about the macro environment, but again, we have four years of no debt maturities being 20, 20% to 2024. So we have a lot of flexibility in how we handle that.
Okay great.
And then.
Second question. Thank you.
Wanted to ask you about your.
How were treating 1.0 content then.
I think we know obviously you know all of your customers are.
You know accelerating on easy development and within that there is significant the allocation of your.
Your own customers resources away from current combustion vehicles.
But obviously at the same time, there's this dynamic that in a while.
It's not that the allocation of resources, we still know what the mix of combustion vehicle days and especially for your core markets North America.
Well, there's still 98% so.
Well thank you.
Boston remains very relevant victory.
Shifting their focus to more.
EDI that you could argue quickly gain more powertrain 1.0 contents that you could gain more I guess outsourcing has automakers haskew.
Rely more heavily on the supply chain as they ship their effort.
Dan This is David.
The answer is yes to that first.
First and foremost as I said earlier, you I'm wrong on the IC engine, especially here in North America.
And we're in a very healthy position in regards to our market share and when you look at the mix of the vehicles today heavily weighted towards trucks I should be using crossovers, which is right in our sweet spot. So were and continue to perform very well not just for a couple of years, but for multiple years going forward here.
At the same time as the capital demands grow and become larger within the Oems, they're going to have to assess how much. They want a stay in the manufacturing business of 1.0 technology versus what they might want about outsourced, they're they're obviously got if they make that decision they're going to look to companies like American axle that ever proven.
Operating capability proven quality performance proven lots of permanent performance improved proving continuity of supply performance to them because they can't afford to have their profit pools interrupted from a.
Financial standpoint so.
We think we're in a very good position right now in regards to where our mature products are on the traditional products up yet.
The engine related products, we're investing heavily in regards to electrification to position ourselves appropriately in the various markets around the world based on what we think the timing and the adoption may be in those respective markets.
And then we're just going to have to clearly monitor and stay close to our customers in regards to decisions that they make with respect to their portfolio and every company, whether you are an OEM or suppliers evaluating our portfolios right now and deciding where we want to make our strategic bets from a financial standpoint, that's not only relevant today because it needs to pay that.
Bills, but also makes us relevant in the future for sustainability going forward.
So, but but again the short answer to your question was just we think there'll be opportunity in the future there.
And are you, having any incremental discussions with customers on that front now or is it still just still too early in the game.
Yes, I am not in a position to comment on that nor should I. If I was in discussions.
But nothing to announce or discuss at this time.
Okay. Thanks.
Your last question comes from Ryan Brinkman JP Morgan Ryan. Please proceed hi, Thanks for taking my question just get another one around the implication for out your margin, although not specific to 21.
From Threeq is big be cognizant of course that you're not going to be guiding until early next year. I think your normalized margin is maybe or hopefully structurally increased here as a result of learning to be leaner post cobot. Firstly, if you could just confirm that that's your view also and then secondly in terms of trying to understand just how much normalized margin might have improved you called up you called out a couple tailed.
Wins, including FX commercial settlement et cetera, even backing out those items, though I think margin would still have been.
Around 13% in Threeq, you how would you rate. The sustainability then of this 24 million in cost reduction actions, what proportion of those savings come back with volume versus being more permanent in nature, and how does that category no different from performance and other thanks.
Yes, Brian This is Chris good morning look in terms of that 24 million you see flowing through the third quarter I would think as you hear commentary. We said we will perform at $60 million for the full year of 2020, which was effectively Q2 Q3 and Q4, so you sort of half the level it out a little bit sort of more in that range.
At the Delta between that I would call core.
Operational performance. So this would be rightsizing your overhead structures. For example, this would be limiting certain overhead spending and that in that area as well manpower wise from a salary perspective work.
Mark I would call traditional productivity traditional performance, where you're increasing throughput on your lines. You are optimizing hours per part produced things of that nature, reducing scrap where that will continue obviously that's been a core of the company will continue into.
The perpetuity quite frankly, but those things to offset things like price downs and inflation and things of that nature. So this this 60 million we talking about delivering here. This year, we expect to be sticky going forward. Some of its temporary we're re populating that as I mentioned with some more structural stuff I will take a quarter to build that back in.
But that would be our thought process going into next year and beyond Okay. Very helpful. And then finally I'd be curious if you have any content on the new home or E or other electrified.
Products at GM that you're permitted to talk about or maybe just more generally if you have been awarded.
What you can talk about in terms of awards for electrified full size pickup trucks that are currently out there in development.
Yes, Ryan this is Dan we're not in a position to answer that question at this point in time so.
Okay. Thank you.
Thank you Ryan we thank all of you participating on the call today I. Appreciate your interest in am we certainly look forward to talking with you in the future.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.