Q4 2020 American Axle & Manufacturing Holdings Inc Earnings Call
Good morning, My name is Elisa and I will be your conference facilitator today.
At this time I would like to welcome everyone to the American axle and manufacturing fourth quarter 2020 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer period. If you would like to ask the question. During this time simply press the star Keith and the number one on your telephone keypad.
If you would like to withdraw your question. Please press the star Keith and the number two.
As a reminder, today's call is being recorded I would now like to turn the conference over to Mr. Davidson head of Investor Relations. Please go ahead Mr. Lim.
Thank you and good morning, I'd like to welcome everyone, who is joining us on Aam's fourth quarter earnings call earlier. This morning, we released our fourth quarter of 2020 earnings announcement, you can access this announcement on the Investor Relations page of our website Www dot.
Dot com and through the PR Newswire services you can also find supplemental slides for this conference call on the Investor page of our website as well so listen to a replay of this call you can dial one eight and 707 three and four 475 to nine replay access code 101 502.
And eight nine this replay will be available beginning at one PM today through 11 59 P M. Eastern time February 19th.
Before we begin I would like to remind everyone that the matters discussed in this call with me and contain comments and forward looking statements.
Subject to risks and uncertainties, which cannot be predicted or quantified and which may cause future activities and results of operations and differ materially from those disclosed for additional information. We ask that you refer to our filings with the Securities and Exchange Commission also during this call we may 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 Aam's, Chairman and CEO David Dauch.
Thank you David and good morning to everyone. Thank you for joining us today to discuss Aam's financial results for the fourth quarter and full year of 2020.
Joining me on the call today are Mike Sumani, Aam's, President and Chris May and Vice President and Chief Financial Officer.
And we get my comments today I'll review, the highlights of our fourth quarter and full year of 2020 financial performance.
Next I'll cover some highlights from 2020, including some updates on the technology and innovation front.
And lastly, I'll review, our 2021 financial outlook and our.
Three year, new business backlog before turning things over to Chris.
After Chris covers the details of our financial results, we will open up the call for any questions that you may have.
AAM delivered solid operating and financial results and cash flow performance and the fourth quarter and full year of 'twenty and 'twenty as global production continued to recover resulted in strong EBITDA conversion.
Aam's fourth quarter, and 2020 sales were 1.44 billion compared to $143 billion and the fourth quarter of 2019.
Recall last year, we were impacted by the GM work stoppage and we sold our U S casting business.
For the full year of 2020 and sales were $4 7 billion.
During the year, we experienced lower sales coming from a decline and global production due to the COVID-19, and let's say all of our U S casting business.
From a profitability perspective, am's adjusted EBITDA and the fourth quarter of 2020 was $261 5 million or 18, 2% of sales and fourth quarter record for yeah.
And put in a strong second half of 'twenty and 'twenty with a solid fourth quarter and financial performance, which I'm very very pleased about.
For the full year of 2020, Am's adjusted EBITDA was 720 million or 15, 3% of sales.
For the full year, we were impacted by COVID-19 production shutdowns and lower volumes. However, we also have managed through a difficult operating environment delivering strong EBITDA margins and the second half as production rebounded and our cost structure initiatives took hold.
And adjusted earnings per share in the fourth quarter, and 2021 51 per share and for the full year of 2020, and adjusted EPS was <unk> 14 cents per share.
They have continued to deliver strong free cash flow performance in 'twenty, and 'twenty and adjusted free cash flow and the fourth quarter of 2020 was 173 million and for the full year of 'twenty and 'twenty Am's adjusted free cash flow was 311 million fans.
Fantastic result, considering the challenges that we faced during the year.
We also reduced our gross debt by nearly 200 billion in 'twenty and 'twenty paying down approximately 100 million just in the fourth quarter alone from.
And the more we are committed to reducing our debt and strengthen our balance sheet and 2021.
Chris will provide additional information regarding the details of our financial results and just a few minutes.
Let me wrap up 'twenty and 'twenty with a look back and some of the key highlights which you can see highlighted on slide four of our slide deck.
And the industry faced significant challenges and worked through it and the dedication of our associates.
Operationally, we completed 17 program launches and we received 13 customer quality awards and multiple supplier of the year awards from customers, such as general Motors and Honda.
Flex our cost structure and quick response to the pandemic and generated robust EBIT results throughout the year and.
General and significant free cash flow and strengthen our financial profile to gross debt pay downs.
From a technology perspective, we have benefited from a growing and expanding relationship within advanced automotive and lean.
And provider provider of automotive power electronics, and powertrain systems and China.
And the second quarter and 'twenty 'twenty, one and our first E Drive award with them for a new Chinese OEM.
Already this year, we announced three additional OEM programs with and events. Our alliance with them has created significant value for us by enhancing customer relationships within the swiftly and Chinese electrification Mark.
In addition, and even more exciting you recently signed and technology agreement with <unk> to accelerate the development and delivery of scalable next generation three and one integrated electric drive system, which integrates the inverter electric motor and the gearbox.
Leveraging the partners complementary expertise and electric propulsion technology. This collaboration will seek to enhance the power density efficiency and cost effectiveness.
Driveline technology offered and the global electrification market.
Our cooperation with independents, automotive, Aladdin and exciting new offering to Ams fast volume portfolio, a scalable three and one electric drive systems, Inc.
Salary and our ability to bring new cost competitive technologies to the market.
We are excited to joined forces with such a highly accomplished and innovative provider of power electronics technologies and.
Our goal is to be at the forefront of electrification technology.
We're also working together with our automotive and a laser and electric platform technology.
Company's core and our innovation includes integrating and traditional vehicle components into the wheel, allowing for a flat and modular platform.
We have a small financial investment Larry and we look forward to further opportunities to drive value from this partnership utilize our technology leadership and our operational excellence.
And in addition to these exciting partnerships continue to make great progress and innovation and innovative electric driveline solution as.
As we mentioned earlier, we were awarded that only the automotive news pace Award for our electric drive technology and the Jaguar I pace, but also a second award for our outstanding collaboration with jail or.
These awards further validate not only our technology, but also our commitment to our customers.
In addition, we have several important electrification and launches in 2021, including our high performance E Drive unit for a premium European OEM that we can't wait to tell you more about as well as multiple electric powertrains and all these launches, including one for electric pickup trucks and also one for our commercial truck.
We're excited about our prospects and electrification as the industry has begun to pivot and that direction.
A M is ready to support our customers with cutting edge electrification products and we look forward to keeping you up to date with our new developments.
And a separate note and ICU related we're also pleased to share and then we have to secure the next generation Ram heavy duty pickup truck business with Atlanta and to the next decade.
The latches and it's been a great partner day them over the years, and we look forward and extending our mutually beneficial relationship.
This award.
And with the current business that we enjoy today with Atlanta, Inc.
And several billion dollars and sale and is a key foundational program right.
This program along with other customer next generation program Awards will support solid cash flow performance for many years to come.
Yes.
These are all key development as we leverage our strong core business to support our electrification technologies as we work to bring the future faster.
I'm also very proud to share that and was named to Newsweek's list of America's most responsible companies and to the annual force the world's best employers for 'twenty and 'twenty, we look forward to sustaining this positive momentum in 2021 to support our sustainability priority topics and diversity and inclusion initiatives.
Before I turn it over to Chris Let me cover Aam's, three year, and new business backlog and our 2021 full year financial outlook.
That was recently released and our press release.
And I'm expressed our gross new business backlog covering the three year period of 'twenty 'twenty, one through 'twenty and 'twenty three to be approximately $600 million.
We expect to watch kids and head into this backlog to be 200.002 million 21, 150.002 million 22, and $250 million and 2023.
And there's also factors and the impact of <unk>.
And the customer launch timing and the latest customer volume expectations that we received from our customers.
And you can also see the breakdown of our backlog on slide seven.
About 70% of this new business backlog relates to global light trucks, including crossover vehicles, and another 15% relates to hybrid and electric powertrains.
Half of that will be realized outside of North America, continuing our trend of diversifying geographically on an organic basis.
Now, let's turn to Aam's 'twenty 'twenty, one financial outlook, which can be seen on slide eight and is as follows.
And just targeting full year sales between five three and $5 5 billion and 2021.
AAM is targeting adjusted EBITDA of approximately 850 $925 million in 'twenty and 'twenty, one and the AAM is targeting adjusted free cash flow and 2021 of approximately 300 $400 million, which contemplates capital spending of approximately four 5% of sales.
Well and launch activity decreases in 'twenty and 'twenty. One there are still some key new programs will be focused on during the year, including launching a number of our new electrified products that I mentioned to you earlier.
From an end market perspective, we see production at approximately 15, five to 16 million units for our primary and North American market.
As it relates to our specific north American programs, we continue to expect favorable mix weighted towards pickup trucks, Suvs and crossover vehicles like trucks made up 74% of the production and North America, and 2020, and we see no signs of that changing or slowing down in 'twenty and 'twenty one.
Clearly 2020 was an unprecedented year late and with numerous challenges and obstacles.
However, I'm extremely proud of the AAM team and managing through these speed bumps and instituting protocols to keep our associates safe and healthy while effectively supporting our customers throughout the year.
As we turn our focus on 'twenty and 'twenty, one and beyond our core business is solidly intact and well protected from years ago, you don't need and significant free cash flow generation, which will allow us to strengthen our balance sheet and invest and advanced propulsion technologies to drive profitable growth.
Needless to say.
I'm very very excited about the future.
That concludes my prepared remarks, let me now turn the call over to our Vice President and Chief Financial Officer, Chris Me Chris.
Thanks, David and good morning, everyone I will cover the financial details of our fourth quarter and full year 'twenty and 'twenty results with you today I will also refer to the earnings slide deck as part from my prepared comments.
So let's go ahead and get started with sales.
And the fourth quarter of 'twenty and 'twenty AAM sales were 144 billion compared to $1 43 billion and the fourth quarter of 2019.
Slide 11 shows a walk down of fourth quarter 2019 sales to fourth quarter 2020 sales.
First we stepped down our fourth quarter 2019 sales by $119 million to reflect the sale of the U S. Casting business unit that was completed in December of 2019.
Next we add back the impact of the GM work stoppage from the fourth quarter of last year and.
And we account for the unfavorable impact of COVID-19 on our fourth quarter of 'twenty, and 'twenty sales, which we estimate to be approximately $40 million.
At this point, our estimated sales impact from Covid is only for our India, and Brazil locations, which have not recovered to pre COVID-19 levels for us.
On a year over year basis were also impacted by Gm's exit of its Thailand operations by approximately $10 million.
And the transition from a rear beam axle, so a new lightweight and highly efficient and independent rear drive axle for jams, new full size SUV impacted sales by about $35 million and the quarter.
We will have one more quarter of the year over year impact from this transition and the first quarter of 2021.
Other volume and mix was positive by $38 million, mainly driven by strong light truck mix in North America.
Pricing and Humana 19 million, a year over year and back and metal market pass throughs and foreign currency accounted for an increase and sales of about $7 million year over year.
For the full year, 'twenty and 'twenty AAM sales were $4 seven 1 billion as compared to $6 five 3 billion the full year of 2019.
The impact from COVID-19, and the sales and U S. Casting business were the primary drivers of this year over year decrease.
Now I'll move on to profitability.
Gross profit was $236 5 million or 16, 4% of sales and the fourth quarter of 2020 compared to 183 four.
And were 12, 8% of sales fourth quarter of 2019.
Adjusted EBITDA was $261 5 million and the fourth quarter of 2020 or 18, 2% of sales.
This compares to $193 5 million from the fourth quarter of 2019 or $13 five percentage of sales as David mentioned this was Aam's best fourth quarter, adjusted EBITDA margin and our company's history.
You can see a year over year walk down from adjusted EBITDA on Slide 12, we benefited from higher sales and from our strong cost reduction actions, we implemented this year.
For the full year and 2020 Aam's adjusted EBITDA was $720 million and adjusted EBITDA margin was 15, 3% of sales.
Let me now cover SG&A.
SG&A expense, including R&D and the fourth quarter of 2020 was $83 million were five eight percentage of sales.
This compares to $90 million and the fourth quarter of 2019 or six 3% of sales.
Aam's R&D spending and the fourth quarter of 2020 was $31 1 million compared to $39 $8 million and the fourth quarter of 2019.
For the year SG&A expense was down about $50 million due mainly to our cost reduction actions, both temporary and structural.
As we head into 'twenty and 'twenty, one we will continue to focus on controlling our SG&A costs equally important we will further our investment and key technologies and innovations with an emphasis on electrification, including shifting resources from traditional product support to new technology development and a cost effective manner.
Let's move on to interest and taxes net interest expense was $52 $3 million and the fourth quarter of 'twenty and 'twenty.
Compared to $53 4 million from fourth quarter of 2019.
We expect this favorable trend to continue in 'twenty and 'twenty, one as we benefit from continued debt reduction.
And the fourth quarter of 2020, we reported income tax expense of $13 9 million compared to a benefit of $11 $5 million and the fourth quarter of 2019.
As we head into 2021, and we expect our effective tax rate to be approximately 20%.
Taking all these sales and cost drivers into account our GAAP net income was $36 million or <unk> 30 per share and the fourth quarter of 'twenty and 'twenty compared to a loss of $454 4 million or a loss of $4.04 per share and the fourth quarter of 2019.
Adjusted earnings per share excludes the impact of the items noted in our earnings press release.
And EPS for the fourth quarter of 'twenty and 'twenty was 51 cents per share price of 13 cents per share and fourth quarter of 2019.
Let's now move to cash flow and the balance sheet.
Net cash provided by operating activities and the fourth quarter of 2020 was $208 million cash.
Capital expenditures net of proceeds from the sale of property plant and equipment for the fourth quarter was $69 million cash payments for restructuring and acquisition related activity and the fourth quarter of 2020, $33 6 million.
Reflecting the impact and this activity AAM generated adjusted free cash flow of $172 $7 million and the fourth quarter of 2020.
For the full year of 'twenty and 'twenty AAM generated adjusted free cash flow of $311 4 million.
$207 $8 billion.
2019.
And was able to offset the impact of lower EBITDA through lower capital expenditures or tax payments and working capital benefits, including leveraging the <unk> operating system to reduce inventory levels.
From a debt leverage perspective, we ended the year with net debt and $2 9 billion and adjusted EBITDA of $720 million calculating a net leverage ratio of four times at December 31.
And fourth quarter of 'twenty, and 'twenty, we prepaid over $100 million and our term loans.
And we're pleased to utilize the free cash flow generating power of AAM to strengthen the balance sheet by reducing our debt and lowering our future interest payments.
We expect to continue this trend in 2021.
And ended 2020 with total available liquidity of $1 5 billion consisting.
Consisting of available cash and borrowing capacity on hand, and global credit facilities, we continue to maintain a strong liquidity position and debt maturity profile.
Before we move to the Q&A, let me close out my comments with some thoughts on 'twenty and 'twenty one financial outlook.
And our earnings slide deck, we even put and walks from 2020 actual results to our 2021 financial targets you can see those starting on slide 14.
As for sales, we are targeting and the range of five 3% to $5 5 billion for 'twenty and 'twenty one.
The sales target and it's based upon and North American production of 515, five to 16 million units and new business backlog of $200 million and attrition of approximately $100 million.
We have begun to experience some limited downtime and the first quarter due to supply constraints attributable to the semiconductor chip shortage, we've contemplated what we know today and our guidance and our target range allows for some variability.
From an EBITDA perspective, we're expecting adjusted EBITDA and a range of $850 million to $925 million at the midpoint. This performance would represent EBITDA margin over 100 basis points versus last year.
As you can see on the wants and on page 15, we expect volume and mix positively contribute I suppose could you.
And productivity benefits.
As we stated previously some of our 'twenty and 'twenty cost initiatives were temporary in nature, but our focus has been to replace those with more structural savings. We also expect approximately $40 million and pricing and $15 million and higher R&D spending as we continue to invest and electric all true.
From an adjusted free cash flow perspective, we are targeting approximately 300 $400 million and 2021 and the year over year walk is very simple the main factors driving our cash flow change as higher EBITDA and.
And returned to more normalized income tax payments and higher working capital associated with revenue growth.
And while on a dollar basis Capex is slightly higher than 'twenty and 'twenty, we're targeting capex as a percentage of sales of approximately four and 5%.
You can clearly see aam's ability to deliver free cash flow and full display not only in 2020 actual results, but ahead for 'twenty and 'twenty one.
This strong free cash flow number for 2021 is a reflection of the benefits we are realizing from our restructuring and cost reduction actions.
We are experiencing year over year margin growth and continued cost optimization capex as a percentage of sales at the lowest levels and aam's history, and inventory optimization and delivering significant cash flow benefits.
We expect to use this free cash flow as well as our enhanced EBITDA to fund, our R&D and new product expansion and at the same time reduced leverage this year by a full turn or more.
Our resilience and restructuring activities and 2020 is fueling our 'twenty 'twenty one performance and we're very excited to continue to strengthen our financial profile and focus on the growing of the business.
That said, we are well positioned for 'twenty 'twenty, one and beyond we have and will continue to optimize our business to generate meaningful cash flow and invest and our future product development.
This position is driving growth opportunities and electrification and other areas from a business.
And see this in the third year of our backlog and is the strongest it has.
As the strongest heading into the mid decade timeframe we.
We are being awarded next generation of key products that will position our business to drive cash flow from many years to come.
And the near and mid term, we see customers, adding production facilities for price. We support this is allowing us to leverage our light truck franchise to contribute to strong cash flow generation capabilities, and invest and grow our electrification product portfolio.
And lastly, our cost optimization is focused on driving future margin growth opportunities.
So a couple all that with our flexible operations variable cost structure, and ample liquidity and solid debt maturity profile and a good framework for long term success.
As for now we expect 2021 to be about operational excellence margin expansion free cash flow generation and propulsion integration.
And we're looking forward to a great here and thank you for your time and participation on the call today I'm going to stop here and turn the call back over to David So we can start the Q&A.
Thank you, Chris and David we have reserved some time to take questions I would ask that you. Please limit your questions and no more than two so at this time. Please feel free to proceed with any questions you may have Elisa.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, well pause for just a moment to come from.
Q&A roster.
Yes.
Your first question today comes from Rod Lache with Wolfe Research. Please go ahead.
Good morning, everybody.
I was hoping you could maybe just touch on Evs and and backlog, maybe just starting out with.
The background on an event in advance and China.
What is their market position, even prior to the relationship with U R are the four contracts that you referenced in the backlog that you quoted.
And.
And maybe you can if you can talk about net backlog I think that in the past you've provided the gross backlog number and I believe that that's what you've provided here today what is the net number net of attrition.
Yeah Rod this is David and just working backwards on your questions from a net standpoint, we typically.
It will run off about $100 million a year. So you know so you can do the math and crosses from three year period of time with respect to the and advance organization.
Strong and our lithium producer of power Electronics and Motors, Inc.
And the China market are there and number two and the overall market and regards to supply of product and that market strong and technical competency and manufacturing competency very.
Very compatible to our technology.
We're working very hard and develop you, obviously scalable and integrated technology, where we integrate the inverter the motor and the gearbox all into one unit, that's more power dense smaller packaging space greater performance and greater efficiencies and product, while still offering and our customers value propositions.
And that our partnerships already realized success with four program Awards and China. One that we were awarded last year three that we were awarded here in January of this year and we're working on other opportunities in China, while at the same time, you'll work and other opportunities both in Europe as well as in North America as more and more opportunities are starting to present themselves with respect to.
The customer long range product plans and opportunities.
With where those wins and your backlog goes for well, yeah, Yes, I apologize, yes, because they weren't right.
And obviously your increase our volume.
Yes.
Okay, and secondly, obviously performance looked pretty strong Q4 and it looks.
Fine and in 'twenty and 'twenty, one but it's.
It's pretty apparent investors are thinking about the disruption that the industry is facing and I'm sure you spend a lot of time thinking about that too.
Right now the consequences and low valuations for everybody that is and traditional driveline space and I'm wondering if you could maybe talk a little bit about how you're thinking about strategic alternatives and options for for American axle.
And whether you're looking at more acquisitions at this point divestitures and and the conventional driveline business, what what is that sort of the consequence of the of the environment that you're seeing right now.
Yeah, Ryan just in regard and this is David and regards to the strategic side of things. When you look at our portfolio and we've pared down a lot of our portfolio and we don't have a lot of material things to divest or at this time nothing to announce at this time, but you know twice a year, we evaluate our portfolio and make strategic decisions about that.
But again and we don't see anything meaningful that's.
Gonna have a major impact with respect to go to debt pay down and I mean, our debt pay down and is going to really come through the strength of our operations and the performance that we're seeing from a cash flow generation, which is only getting stronger, especially with the restructuring efforts that we put into place and have been able to demonstrate a third quarter fourth quarter and you can see the strength of our guidance.
And Oh, 'twenty and 'twenty, one as well.
Clearly, we made a big move in regards to expanding our relationship with within advanced from a technology standpoint innovation standpoint are heavily focused on electric drive and there were people youll critical that maybe we were falling behind and we werent falling behind and we're already in production on a number of programs, we've not Atlanta and incremental programs and we've shored up where our.
GAAP was we were very open about it and regards to power electronics and motors.
Also working on a number of other next generation technologies for electric drive.
Oh within advance and independent of and events with respect to satisfying the marketplaces and go forward across different vehicle segments and tailored for each of the respective markets that we're at and support.
When it comes to the bigger strategic side of things and the environment. That's out there right now and clearly there's a lot of uncertainty and the marketplace just with Covid alone with labor availability and just the health and safety protocols.
There is uncertainty out there with this whole global semiconductor shortage. The good news for US is our largest customer has said they're going to protect the truck platform and do everything possible to protect the truck platform here.
And here in 2021, and we're seeing that and their schedules and which are very strong throughout the year. So we're excited about that.
And where they are making adjustments and that does have an impact on us they expect to make some of that up and in the second half of the year and that's not just general motors. That's some of the other customers that were impacted by by also here. There are some other constraints and the marketplace from a supplier standpoint sales steel shortages, but we don't have anything that's negatively impacting us because we've secured that going for.
Forward and we're just trying to manage our way through the port delays and the container shortages that are out there to mainly by putting greater inventory buffers and place you'll just to protect our customers and you know that way, but I do think it's going to put a lot of stress on the supply base going forward and the future, especially as volume start to ramp up globally capital working capital demands and.
Testify plus some of the other challenges that we've just talked through with the uncertainty and the marketplace that could.
Proposal and presents some opportunities for us, but again, we'll take everything in balance with what our priority and our priority right. Now is to continue to generate the strong financial performance continued to grow our backlog and new business, which we think we can add to that three year period of time.
While at the same time.
Making sure that we're deleveraging the balance sheet and paying down the debt. So long answer to your question, but hopefully that addressed what you were asking for right. Okay. Great. Thank you. Thanks.
Thanks, Robert Thanks, Brent.
The next question is from John Murphy with Bank of America. Please go ahead.
Good morning, guys.
The follow up on <unk> question on and events.
Curious if and it sounds like its burgeoning and starting out of China, but is it easy going global or you're going to be going global with this partnership and you know as youre going global and and and bidding on business, though.
You yourselves are potentially and this partnership as well are you running into sort of the usual suspects you know and.
Green and torque management, and and sort of your axle business and just trying to really understand if you're if you're running into new players or it's the same folks with new technology, and and really try and understand your right to play and standalone basis, and and with intervention and that and those discussions.
Yeah, John This is David.
Historically, our biggest competitors and the truck side, they've really been Yo and.
Dana you and some of the in house manufacturing operations on.
And the passenger car crossover vehicles side as far as ice related products.
Biggest competitive but that we really saw out there was GKN.
Dana and Magna and somebody others browser as well clearly with the electrification market, there's a whole host of new entrants or new players you've got your traditional driveline guys and they go beyond the ones that I mentioned to you, but you also have the motor and inverter guys that want to spend time in that space as well you've seen some of the partnerships that are.
We informed the recent LG Magna partnership and the Borgwarner and Delphi acquisition.
Ice and Dunzo relationship they came together, but we feel that our partnership with and events will allow us to compete with any of those going forward and we've got the technology and in every day and are working on and other advanced technology as I am sure. They are as well we are a proven supplier and the marketplace and we feel that we can bring a value proposition to our customers.
The biggest thing we need to do is clearly understand their needs and the timing of those needs based on their long range product plans.
And make sure that we're ready and with proven technology and bookshelf technology to support those regardless of the vehicle segment, whether it's you know pickup crossover and passenger car and regardless of the region North America, Europe or Asia.
And we're positioning the organization to support that we've shifted a lot of resources and reallocate our resources internally towards advanced propulsion technology is heavily weighted towards electrification, but we're not forgetting about our core business from protecting that core business by securing next generation replacement program that will support our cash flow.
Generation for years to come.
So that's a very huge positive for us and but we feel very good about the advancement with an advanced we feel very good about our investment and an already and our discussion with Ari and hopefully there'll be some growth and those relationships as we go forward, but as.
As I said and we're very excited about what the future holds our whole position has been to be agnostic to the market, let the market dictate what type of propulsion system. They want between IC engine hybrid or electrification, but we clearly recognize that the market is pivoting towards electrification and we'll make sure that we're properly prepared to win our fair share of the business.
<unk>.
And David maybe just a follow up to that can you remind us your content per vehicle potential when and ice versus E V and maybe trucks and and a car T V platform.
Yes, I mean, you'll pick up truck full sized truck is around $600 of content per vehicle crossover vehicles range between 902 hundred and some of the passenger cars article 500, and below let's say dependent on components or independent systems.
And when you get into the electrification as we've said to you before and what we're doing and the Jaguar I pace is around $2500 of content, but that involves both a front 80, you and are rarely do you.
Clearly as you move.
Across the different product portfolios I mean, there's an opportunity to grow that in regards to some of the pickup applications, but theres also a possibility to reduce debt the size and appropriately for and the individual vehicles I think a big thing that will impact the price, but and a favorable way will.
And we'll be these three and one integrated solutions, which will allow us to offer a lower price.
<unk> per vehicle beget more outperformance to the vehicle, but still command a profit to support the overall business.
Great. Thank you very much.
The next question is from James Pickerel with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Okay, and my apologies if I missed this but the four new programs and China all of those the EV programs are all of those tied to your agreement with it and events.
Our technology agreement and a separate matter and we earn that through our relationship and <unk>.
And events and our performance within events, but but ultimately we're looking to have a stronger and bigger relationship with and advanced going forward and this is just one part of it as far as the source and that we earn from them at the same time, the confidence that they have and us and we have and them in regards to the technology.
And to put a technology agreement together, and we think theres better and brighter things ahead of us with that relationship going forward and out of global basis.
Okay got it and what's the latest timeframe on on your hybrid award.
And with the premium European OEM and that's you know that's been in the backlog.
That program is going to be launching late this year and will roll into the next couple of years and then.
And as multiple variants that it'll be coming off of that so we're very excited about that program and we're very excited about announcing who that customer and that's because we've been talking about it for a period of time.
But the technology, that's going to go into those vehicles would be something that you haven't seen as far as the type of performance vehicles that it'll it'll be supporting.
Got it and then just two quick modeling questions.
$15 million and and increased R&D within the EBITDA walk does that just reflect the the third quarter.
The commercial settlement.
And that benefited the quarter and then for the 205 million interest expense does that account for any day.
Repayment through the year.
So your first question. This is Chris and good morning, Yes. So your first question as it relates to the R&D portion relates to the onetime flipped from the third quarter, where we had that reimbursement and the third quarter of 2020, but also a slight increase in spending our net overall as it relates to R&D right because as we're direct and some of our efforts towards some product expansion from that standpoint.
$205 million of interest test would begin to reflect the debt pay down through the course of the year. Obviously, we would it would be subject to timing of when any debt payment was done.
Yes, it should reflect that as well.
Okay. Thanks.
The next question is from Ryan Brinkman of Jpmorgan. Please go ahead, hi, and thanks for taking my question are you able to quantify any more your investment and re either in terms of a dollar amount or percent ownership stake and I think I heard you say it was a small investment but I'm mindful.
And sometimes with these pre revenue companies and initial small investment can turn into a larger one and then I'd be interested too and you know what drove you to make the initial investment and maybe more broadly my understanding is Reed has assigned one of these so called skateboard type platforms, and and and just curious what you think the implications are to American axle from.
You know skateboard type platforms or the integration of traditional vehicle components into the arch of the wheel.
Yeah, Ryan and good morning. This is Mike commodity speaking I would I would start by saying a couple of things David was clear about the fact that we're looking at multiple different strategies to access the new energy vehicle markets going forward and electrification as you know the.
And number one focus for our company and we are looking at ways to bring our electrification technology to the skateboard technology that you just referred to but we're looking for multiple different ways to bring that technology to market.
We were first introduced to this company a couple of three years ago. We saw the potential that they had we made a relatively small investment. So when we talk about small we're talking about cost basis Ryan.
And we've been.
And contact over over the years looking for ways for us to advance the relationship beyond day.
Passive VC type investment, we saw opportunity and that from the start and we're we're optimistic I mean, nothing has been done quite yet, but we're optimistic that we can advance this relationship assist.
This.
<unk> created a ambitious and.
And and good group of people that are behind this company to realize their longer term vision through our industrialisation experience. So we see some opportunities there and we're going to chase it pretty hard.
Very interesting. Thank you and then just lastly relative to capital allocation and I heard you say that you're highly focused on that deleverage does that mean that you intend to deploy.
The full three months to 400 million of 'twenty, one mcf toward debt pay down or you know with the rising EBITDA, helping also does that maybe leave room for electrification related M&A and wanted to check out and you know what you think the market looks like for electrification related M&A currently I don't know if the valuations are maybe.
Overheated or whatnot, just given the rise and the market and for EV related stocks or if you think there might still be any attractive opportunities out there.
Yeah, right and this is Chris I'll start with your first question as it relates to our free cash flow and a 300 and $400 billion. Obviously, we'll generate that through the course of the year that will also fund a little bit of some restructuring payments because that's a gross number.
Also as.
As you've seen us and the past we've had made small investments into our joint ventures, where we expanded those and China and otherwise I would expect some small capital allocation into that space as well, but then as we mentioned and our primary objective is continuing to reduce our leverage on this company.
Yes, Ryan this is David on the strategic fronts and being clearly the valuations and some of these power electronic companies as far exceeds what we were willing to pay at this point and time and need to pay based on where our balance sheet and so our priority is clearly to service the balance sheet, but we also don't feel like we're being limited in regards to the opportunities to support our customers with.
The partnerships and we have in place and as Mike alluded to you.
Also looking at other creative ways to leverage our technology and core markets as well as new markets.
Okay very helpful. Thank you.
Yes.
Next question is from Dan.
Please go ahead.
Hey, good morning.
Hum.
And just first start on the backlog and I apologize.
And dressed already your backlog was was effectively flat from two.
21, and 22 versus the prior year and you just maybe walk us through the puts and takes on those years and simple simply that incremental business wins are being offset by weaker end markets versus what you assumed last year.
Yeah, I think you had a couple puts and takes if you think about through the course of 2020 right. Some of our customers defer some of that backlog that was in 'twenty into 'twenty, one and moved out you had some attrition kind of recalibrate as well some volume adjustments and the overall market, but our principal programs and a little bit of re timing and some of their program launches and.
You've heard us talk about this and the past and some ways.
And from months to maybe several months through the course of 'twenty, one and 'twenty two based on a lot of activity really COVID-19 related in terms of how they retire some of their programs, but net net.
The key programs that were and our backlog previously continue to be and our backlog for the next two years and they are ready to launch and ready to go. So we're able to maintain a good hold on that and also keep our attrition level at the low end of our previous range is two so from a net backlog will remain pretty strong from that perspective.
Okay.
Great and then and.
And just on the on the backlog as well the E drive piece and it's up slightly.
And you know some could argue that should be be up more or is that simply again, just a function of timing of programs and why it's up 15 million, but not more.
Yes, so I think if some of the announcements that we've had over the past many months and past quarters and from some of the relationships with and I answered and we discussed so they continue to sort of step and volume increases through the course of that three year period. As these vehicles launch right a lot of these E drive units aren't launching for example, this year they continue to step in and 'twenty, one 'twenty, two and even more in 'twenty.
Three.
So that's why we kind of curve up through that period.
That's great. Thank you okay.
Second question is one that's maybe a bit more.
Existential we saw G and obviously your largest customer and.
You know a few weeks ago put I guess more of a line and the sand.
And outlining a target and it would be fully electric by 2035. This is really the first time that they've highlighted this timing for for a full transition and I realize there's a lot that can happen between now and 2035 and I know they used the word aspire and are released binding but I guess my question to you as you think through all the.
Things that you need to do to transition to a full EV world be it on the product side or the manufacturing side.
15 years, a reasonable period of time for you to make that transition.
And this question.
No and Dennis This is David and you know what again.
You're asking me to predict the future a little bit but at the same time, though let me just say this first and foremost I applaud gm's efforts forward and to be carbon neutral by 2040 and eliminate the tail pipe emissions by the 2035 calendar year period of time, that's just good steward and and this in regards to doing what's right for our environment and the.
Other things at the same time, they've got leading edge technology when it comes to electrification and they wanted to capitalize on that and the marketplace.
So we're well aware of their transition and the announcement that there was not a surprise to us. So you know you mentioned as an aspirational goal for them, but at the same time, they wouldnt put it out there if they didn't have a plan in order to deliver on that but ultimately the market will be the boss and determined the acceptance rate of electrification our whole thing as I said earlier would be agnostic to the market.
And whether it's provide IC engines and hybrids like we predominantly joined today or provide a larger number of electric electrified units and the future we're going to be prepared either way.
At the same time, we're going to partner with various Oems, but in this case you bought them G. M. I mean, they're a large our largest customer and a strategic partner of ours. We've got a proven track record with that and we've been supplier of the year that that and the last four years and in a row and.
And so we're going to get on that journey with them.
Support carbon neutral position and also this hold tailpipe emission issue a big issue is to make sure that we develop these three and one integrated solutions with our partner and events and some of the other activities, we're doing ourselves to offer them as well as other customers and value proposition and we're trying to design and develop our products for their scalable and marketable.
And at the same time.
Offers and economies of scale as more volume comes into play in regards to this technology.
But to answer your question I mean, yes.
Period of time, we can convert our operations a lot of the a lot of that and components that we manufacture today are transferable to electrification. There are some things we'd have to do to modify our assembly lines to accommodate this.
Figuration, but we know how to do that and then obviously there is more that we need to learn and on the motor and the inverter side of the business.
We're highly comfortable.
Our product engineering background, and our manufacturing process background and.
With our partnerships that we can accommodate that I mean, the most important thing to me is the fact that our technology is being recognized and awarded and the marketplace. A day, we validated that with multiple customers, especially to European Oems that have proven our capability to be successful and selected that.
We'll work through with GM, and we're working with a number of other customers and regards to demonstrating that technology. So we're excited about what the future has to hold with respect to electrification, but we also recognize that there's a lot of things that have to be put into place before electrification will be fully adopted and what I can say.
And that I talked about the infrastructure and the roads the grid the charging station and talked about further advancements and and battery technology, especially on coal market conditions or areas. And then also just the affordability of the vehicle most people can afford and 80 to 100000 dollar type vehicle, they're going to need to be.
Net 40 to 50 year quite honestly, the 20 to 30 range to really get the volume that needs to be done to drive the economy of scale, but with the advancements and technology that we've seen in the last several years, we're going to continue to see that going forward and I'm highly confident our customer base will find a way to provide a competitive offering for the marketplace for the consumers to buy that's can be there.
Our choice and the consumer as to are they comfortable and an electric and our product or not but IC engines and will still be available.
Great. Thank you.
Thanks, Dan.
The next question comes from Brian Johnson with Barclays. Please go ahead.
I think you're picking myself okay.
So.
It's true.
And on the question.
Prior questioner.
The G M slated at least per board sitting within their 'twenty to have a called electric G. M C and.
Roughly 20 to 23 as well as electric version of the Silverado and Sierra I know you you don't comment on specific programs, but could you maybe think through the content opportunity and a dedicated bed pickup truck.
And what they might be doing the cyber truck the Arabian and so forth versus a conversion or a kind of an E powertrain and version up and existing blackboard.
Yeah and just.
What are they share I'm clear eye and on your question, Brian that you want to try and understand the content per vehicle and some of the impact with respect to content per vehicle based on Gm's doing is that how I understand your margin can answer it specifically for G. M, where would you see the addressable axle content going on it.
It's been a pick up truck versus a pickup truck that's been fitted with electric powertrains.
From a legacy platform like D E F, one and 50 or perhaps let's go on and be Silverado, Yeah, well, you know clearly and Jim has made announcements already that they have they're all seeing and battery portfolio and they also have their altium electric drive unit portfolio.
And it's gonna be supporting the Hummer program and some of these initial pickup truck programs that you mentioned to us.
And obviously those volumes aren't replace and all of the trucks that they're producing today there'll be incremental to the volume so that they're putting out there and.
And they've got a determined the receptivity of the marketplace with respect to those products.
There is content for us, but more on that component and sub assembly state so ill.
Thanks, Les and $250 of content and that area, but if we get into the full integrated D. D. Type systems, then it can be much greater than that and even north of the $600 a content that we provide today. So you know as we've said we've already got some.
And some benchmarks out there in regards to what we're doing with Jaguar and.
I pace, which is more of a two and one <unk>.
Solution today, with a with and added inverter.
And we've got what we're doing for the next European OEM. So we have a pretty good understanding of what the market prices are for these products and clearly the advancements and technology and the ability to develop these three and one integrated scalable solutions are going to dictate what the price point is gonna be and a future for these products and we're highly confident that.
We're gonna be able to compete for that and you know going forward as I mentioned to you our content per vehicle and a full sized truck today for IC and hybrid is about $600 and content and going forward. We think it can be data or maybe even greater and.
As we go forward here, but there's a lot of dialog that needs to take place with the customer base.
Really understand their requirements before we can identify what that true content per vehicle is but we feel very good about what it could mean to us and pickups at the same time, we think that we can also capitalize on that and the other vehicle segments think crossover and passenger cars.
And model and question as you think through the plant footprint and we've got from metal dine.
And the products that you know and that's primarily based on my towards their facilities and the past.
Targeted engine and transmission components and you know certainly those plants I think are well utilized and did a great job kind of cleaning up and.
The operational issues that came a couple of years ago, but and you think very long term is there a way to repurpose that cash.
Capital equipment towards components that go into electric vehicles, whether it's.
Rough cut a rough forming a gearing that you send to the Oems and there might be and sourcing.
Her.
Hum gearing or could you just make body parts and whatnot and I think Mr box cars out there trying to cast a car like you and cast and Matchbox toy and so just maybe some thoughts on that infrastructure and even if it doesn't wind up serving emailed or E drive three and one units directly what the future of that.
And that's kind of hypothetical future.
And Brian you got a lot of questions within the question, but.
Well the answer is yes.
And what I mean by that is that we have positioned ourselves to go to the market from electrification standpoint from a component standpoint, a sub assemblies and still think differentials and also from a gearbox standpoint, and also from a full integrated EDI use standpoint, all of those COVID-19 component plants that are manufacturing product today that our IC engine.
And hybrid and related type things, so think components and gears and shafts and differentials can clearly be converted over to run electric electric type product.
As I mentioned earlier on some of the full integrated driveline solutions. Those plants can also be converted over but theres a little bit more work that will need to be done in regards to and some of the assembly systems. Most of the day the component activities can be converted over I will say that most of the work that we have that's IC engine related and hybrid related.
Today, we think eight nine and 10 speed transmission think downsize engines.
Which leveraged balance chefs and dampener as those products are going to continue for a long period of time, you don't think a decade and.
And as we get on this journey and regards to electrification and so but as soon as the market starts to accept electrification at a greater scale than it is today and clearly we will start converting those facilities over to provide electric product versus IC engine and hybrid, but again, I keep driving and stress and home that we want to be agnostic to the mark.
And we have strong operational excellence capability and technology capability from product engineering and standpoint, and we will make sure that we have products irrelevance.
Further market, we just in the market to tell us when they are ready to adopt.
Okay. Thank you.
Yes.
Okay.
Thank you Dan and then your last question comes from Joseph Spak with RBC. Please go ahead.
Thank you everyone.
Just a point of clarification and Don you mentioned on slide five.
Some of the electric pickup and commercial vehicle.
Loan and business launching is that is that within the scope of the backlog is that is that and you and I guess are you considering that with in that you drive component or E drive business or not because it's sort of more components on electric programs, but not actual.
And you drive business, Yeah that these are not yet electric drive units their components supporting and electric drive unit manufacturing, Yes. Joe. This is Christian this is concluded and our backlog and alright and think about some of the commentary we talked about previously where we're winning component work on commercial vehicles and pickup trucks for E drive units and those type of plaque.
Forms and segments that would fall into those categories.
But just just to be clear like if we were to and I know you're breaking up the backlog and to you know.
E drive and sort of the other traditional segments, but if we were to sort of look at it through a different lines, which is just content on electric vehicles and he would be above that 15% because this business is spread across.
And that 40% and and.
And like truck and SUV and I don't know it would be and the E drive right because he said.
Support and vehicles right diesel support fully electric vehicles. Okay. Okay. Thank you and then just one more.
Maybe one more on the chip shortage because it does seem like.
Some of the automakers.
Or getting a little bit creative maybe and how they'll build vehicles, where they're talking about building.
A good portion of the vehicle, but maybe without some of the components that are constrained on trips. So I'm wondering if you think that.
You know.
Impacts the cadence of your business, because if you're able to sort of.
Still supply like G.
Do you still end up shipping and then they can sort of you know.
Finish the vehicle later, and so you might actually somewhat diverged from what we see in terms of you know finished.
Finished vehicle Assembly and Alex and the first half from here.
Yeah, Joe This is David.
First of all its an unfortunate situation that the industry is faced with in regards to the semiconductor shortage, but the industry has overcome a lot of other challenges and they will overcome this one as well clearly it's going to really impact the market and the first half of the year here, but they hope to have it resolved by the second half of the year.
Obviously, the Oems are trying to protect their large profit pools and regards to their trucks and Suvs that benefits American axle and our continuity of supply there.
We are being impacted by some of the crossover vehicles and passenger car applications and even some truck applications.
But at the same time some of the Oems plan and make up those units and have the ability to make up those units as long as those those products are available and meeting the.
And the chips are available in the future, which they expect to be.
At the same time as you referenced the OEM items are very creative and they'll find a way to build product where they can even if it's short apart for a period of time and then they'll come back once the chips are available and build those sub assemblies and integrate those into the final Assembly and then ultimately ship those vehicles out once they're validated from a from a quality standpoint so.
Overall, I mean, we haven't been disrupted too badly, but yes, we have been impacted was going to be something we're going to have to continue to moderate as part of the uncertainty that we referred to earlier, but right now our schedules look very strong for our most of our products going forward here.
Just to follow up it's more and indirect impact thus far and then a dark like have you had and you trouble getting supply where are you where you need it.
We have a we have a couple of tight spots, but we're working with our customers with respect to that as they're allocating chip production and making decisions on which plans to run and are not run.
But at this time, when and where we're not be indirectly impacted by this more indirect Pat Thank you.
Okay. Thank you Joe and we thank all of you who have participated on this call and appreciate your interest and AAM and we certainly look forward to talking with you and the future.
Thank you.
Yes.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.