Q2 2021 American Axle & Manufacturing Holdings Inc Earnings Call
Good morning, everyone. My name is Jamie and I'll be your conference facilitator today.
At this time I would like to welcome everyone to the American axle and manufacturing second quarter 2021 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 a question. During this time simply press the Star T. Then the number 1 on your telephone keypads.
If you would like to withdraw your question you May press star and the number 2.
As a reminder, today's call is being recorded.
At this time I'd like to turn the conference call over to Mr. David Lim head of Investor Relations. Please go ahead Mr. Lynn.
Thank you and good morning, I'd like to welcome everyone, who is joining us on Aam's second quarter earnings call on here.
This morning, we released our second quarter of 2021 earnings announcement.
And ex access this announcement on the Investor Relations page of our website www dot a M dot com and through the PR Newswire services. You can also find supplemental slides for this conference call on the Investor page of our website as well.
A replay of this call you can dial 1877344.70.
752, 9 replay access code 10156, 1999. This replay will be available beginning at 1 P. M. Today through 11, 59 PM Eastern time August 6.
Before we begin I would like to remind everyone that the matters discussed in this call may contain comments and forward looking.
These statements are subject to risks and uncertainties, which cannot be predicted or quantified on which may cause future activities and results of operations to differ materially from those discussed 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.
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, everyone. Thank you for.
Today to discuss Aam's financial results for the second quarter of 2021.
Joining me on the call today are Mike Sumani, Am's, President and Chris May Aam's, Vice President and Chief Financial Officer.
To begin my comments today I'll review the highlights of our second quarter 2021 financial results net.
Next.
I'll touch on some exciting business development news in the quarter, including the announcements with the Chinese EV OEM deal and a recent communication about gm's onshore plant.
And lastly, we will discuss the ongoing and unprecedented challenges within the supply chain and our financial outlook.
After Chris covers the details.
Sales of our financial results. We will then open up the call for any questions that you may have.
AAM delivered strong operating performance in the second quarter of 2021 navigating industry production volatility stemming from the continuity of supply challenges.
Challenges were greater than originally anticipated at the beginning of the quarter, but our.
Excellent job imagine these obstacles, resulting in solid financial results.
AAM sales for the second quarter, 'twenty, 'twenty, 1 or 1.28 billion up.
Approximately 149% compared to $515 million in the second quarter of 2020.
The increase in net revenues on a year over.
Year basis, primarily reflects the recovery from COVID-19 related industry shutdowns that we experienced last year.
North American industry production was up approximately 130% according to third party estimates.
8 truck production was up 150% year over year and volumes of our core platforms increased significant.
<unk> year over year.
Inventory levels on key light truck programs that we support remained well below normal levels consumer demand for light trucks remains robust and our OEM customers are building them as fast as possible.
We believe the demand environment for these products combined with a lack of inventory should.
A link to an extended recovery through 2022, which will certainly benefit a.
<unk> adjusted EBITDA on the second quarter of 2021 was $222.6 million or $17.3 per cent of sales. This compares to a loss of $52.1 million last year.
In addition.
Benefiting from higher production levels, our intense focus on optimizing the business and flexing our cost structure over the past several quarters greatly contributed contributed to our performance in the quarter.
We remain committed to driving efficiency and managing factors underneath our control.
Am's adjusted EBITDA or.
Isn't the best in the second quarter of 2021 was 29 per share compared to a loss of $1.79 in the second quarter of 2020.
And as for cash are very excited about our cash flow generation in the quarter, we generated adjusted free cash flow of over $136 million compared to an outflow of.
Approximately $162 million in the second quarter of 2020.
Our operating performance and commitment to efficient capital spending drove this high level of free cash flow.
Additionally, we prepaid over $140 million of term loans in the second quarter.
And since the fourth quarter of 2020 to the second quarter 2000.
'twenty, 1 we have paid down approximately $360 million of long term debt.
And as we've previously stated we are committed to reducing our debt and strengthen our balance sheet. This year and we're delivering on that goal.
We achieved 2.5 times net leverage ratio in the second quarter.
This management team's for.
Further strengthen aam's balance sheet.
On the business front, we're very excited to announce that we will be supply on electric vehicle components to neo supporting their next generation of E Powertrain program and.
And for those who don't know who Neil Neil it's at a leading Chinese electric vehicle OEM and a pioneer in China's.
Because the vehicle market.
We continue to see good growth opportunities to support electric vehicles will drive units and a wide range of sub assemblies and components.
This applies with both existing and new customers.
Today's announcement, clearly underscores Ams technology, and electric vehicle propulsion and our commitment.
Electrics loans within the space, we're very eager to support this new customer.
Okay.
Electrification dialog with multiple global Oems continues to be very constructive as manufacturers are intensely focused on to support this transformation.
We see plenty of opportunities over the next several years.
<unk> state of the Art technology Engineering compact design and new product offerings are attracting strong global interest.
Our engineering teams are rapidly developing next generation technology, while supporting the launch of multiple new electrification programs globally.
Our technology innovation and focus on customer service.
Our strong value propositions, allowing Oems to compete to win business with both traditional and start and the startup Oems did.
It's our goal to be the supplier of choice when it comes to the electric drive units sub assemblies and components.
Clearly these are very exciting times for AAM.
Having said that we continue to deliver on our theme of securing the future by protecting the core we're very pleased to reiterate that I am would be the sole supplier of front rear pickup axles for the production on that Gms Oshawa facility.
This development demonstrates our high quality products and on time delivery capabilities as well as our strong relationship.
General Motors.
We look forward to supporting GM as they expand their production of this successful full sized trucks to meet consumer demand and rebuild their inventories.
In the quarter, we completed an acquisition with specializes in producing powder metal components and as we mentioned before we will do smart quick.
We are on bolt on acquisitions that will complement our core business drive synergies and provide solid financial returns. This was a compelling high value purchase which should immediately benefit am. That's also part of our long term light weighting component strategy.
Finally, we are recognized as.
Return on Overdrive Award winner in 2020, we're very grateful for this award as it demonstrates our commitment to the continuity of supply while addressing an unfortunate industrial fire last year.
Operational excellence is a core value for a M and will certainly benefit us and provide us the competitive advantage going forward.
Jan before I transition to Chris I want to talk about our current operating environment and our financial guidance.
The stress on the value chain stemming from shortages in semiconductors labor steel shipping containers port delays and rising commodity prices is unprecedented.
Second quarter 2021 was challenged.
London environment with the semiconductor challenges, causing the production volatility that we saw on our schedules.
These headwinds are continuing and schedules will remain volatile we believe the second quarter 2021 still to be the trough on this issue and the semiconductor availability to improve in the second half of the year. However.
We expect supply chain challenges related to this and other constraints to continue into 2022.
For AAM will continue to work diligently with our customers and our extended supply base to protect continuity of supply and support our customers.
Let's discuss our financial guidance although.
Although there is continued operating uncertainty, especially within the availability of semiconductors, we are maintaining our guidance for revenue and raising the low end of our EBITDA range. We are also raising our adjusted free cash flow outlook.
Our guidance is as follows our revenue will be 5.3% to 5.5.
Adjusted EBITDA $875 million to $925 million and adjusted free cash flow of $350 million to $425 million.
Chris will provide more details about our guidance in his prepared remarks.
Aside from the impact of the semiconductor issue and metal margin challenges.
Operationally our business is running very very well, we are focused on managing our costs and expenses, while ensuring operational and capital efficiency to optimize our business and as I've mentioned before these fundamentals should support strong margin opportunities as we returned to normal operating conditions.
And we have to overachieve and priorities and both are equally important.
First we're focused on the here and now that means operational excellence strong cost management and an unwavering commitment to support our customers. We are continuing to demonstrate these qualities qualities and managed factors that we can control.
Joel leading to strong free cash flow generation, and yes, a stronger balance sheet.
Second we're focused on our future we will continue to make investments in R&D to develop the next generation of electrified products and light weighting the light weighting of components to drive profitable future growth.
Our.
Marin teams are developing creative solutions to offer a solid value propositions to our customers. This is demonstrated by high interest in our electric vehicle products.
For us our breadth and depth in drivetrain provides us with a competitive advantage in not only technology development, but also on understanding of the Oems what the Oems want.
Propulsion system.
Clearly these are very exciting times in the future is very bright for a and with that let me turn things over to Chris May Chris.
Thank you David and good morning, everyone I will cover the financial details of our second quarter results with you today I will also refer to the earnings slide deck as part.
<unk> from her comments.
Let's go ahead and begin with sales.
In the second quarter of 2021, AAM sales were $1, 2.8 billion compared to $515 million in the second quarter of 2020.
Slide 7 shows a walk of second quarter 2020 sales second quarter 2021 sales.
First we add back.
My proactive COVID-19 from second quarter of 2020 of approximately $947 million.
We account for the unfavorable impact of the semiconductor shortage, which we estimate to be approximately $162 million in the second quarter of 2021.
Other volume and mix and pricing was negative by $99 million.
The impact that was on FX accounted for an increase in sales of $82 million.
During the last several quarters, we have continued to see an increase in the primary index related inputs to metal based materials that we purchase you may recall, we hedged this risk with their customers by passing through the majority of index related changes.
Metal.
A portion of this column reflects those elevated pass throughs on a year over year comparison.
Now, let's move on to profitability.
Gross profit was $190 million or 14, 8% of sales in the second quarter of 2021 compared to a loss of $99 million in the second quarters on 2020.
Adjusted EBITDA was 200.
$2.6 million in the second quarter of 2021 were 17, 3% of sales. This compares to a loss of $52.1 million in the second quarter of 2020.
You can see a year over year walk down of adjusted EBITDA on slide 8.
We benefited from the contribution margin on the increase in net sales from last year as we.
Continued to experience positive improvements in performance.
As a result of short notice production schedule changes and receipt of long lead inventory items, such as steel our raw whip and finished goods inventories increased in this quarter. This drove a $16 million benefit from inventory absorption timing, we should reverse out in the second half of the year.
And 'twenty 2 as we anticipate reducing inventories during that timeframe.
As we mentioned throughout the quarter, our schedules were more volatile than expected, but we were able to close the latter part of the quarter on a strong note.
Now let me cover SG&A.
SG&A expense, including R&D in the first quarter of 2021 was <unk> 86.
$6 million or 6.7% of sales.
This compares to 14, 3% of sales in the second quarter of 2020 as revenues rapidly declined last year due to COVID-19 related shutdowns.
Aam's R&D spending in the second quarter of 2021 was $30 million compared to $32 million in the second quarter of 2020.
We will continue to focus on controlling our SG&A costs, while at the same time continue to invest in key technologies and innovations with an emphasis on electrification.
This emphasis includes an appropriate level of funding to be successful and meet our objectives. But also includes smartly utilizing current resources from traditional products to support.
New technology development in a cost effective manner.
We do expect R&D to increase in the second half of the year as we are positioning to launch and pursue more electric vehicle business.
We continued to experience significant customer interest in our new products and technology.
Now, let's move on to interest and taxes.
Net interest expense was $47.3 million in the second quarter of 2021 compared to $51.6 million in the second quarter of 2020.
We expect this favorable trend to continue as we benefit from continued debt reduction.
In the second quarter on 'twenty, 1 we recorded income tax expense of $2.4 million compared to a benefit of.
$43.9 million in the second quarter of 2020.
As we continue into 2021, we expect our effective tax rate to be approximately 15% to 20%.
Would expect cash taxes to be in the $30 million to $40 million range.
Taking all these sales and cost drivers into account our GAAP net income was <unk> 16.
$16 million or <unk> 13 per share in the second quarter of 2021 compared to a loss of $213.2 million or a loss of $1.88 per share in the second quarter of 2020.
Adjusted earnings per share, which excludes the impact of items noted in our earnings press release was 29 <unk> per share in the second quarter of 2021 compared to a loss of $1.79.
For the second quarter of 2020.
Let's now move to cash flow and the balance sheet.
Net cash provided by operating activities for the second quarter of 2021 was $167.1 million compared to an outflow of $142.5 million last year.
Capital expenditures net of the proceeds from the sale of property plant and equip.
Per share for the second quarter of 2021 was $41 million.
Cash payments for restructuring and acquisition related activity for the second quarter of 2021 were $16 million.
Net cash inflow related to the recovery from the Malvern fire, we experienced in September of 2020 was $5 million in the quarter.
However.
Equipment, we anticipate the Malvern fire to have a neutral cash impact for the full year as the timing of cash expenditures and cash insurance proceeds a line over time.
In total we would expect $50 to $65 million and restructuring and acquisition costs. In 2021. This is no change from prior guidance.
Reflecting the impact of this activity.
<unk> AAM generated adjusted free cash flow of $136.1 million in the second quarter of 2021.
From a debt leverage perspective, we ended the quarter with net debt of $2.6 billion and LTM adjusted EBITDA of $1 billion.
Calculating a net leverage ratio of 2.5 times at June 30.
This continues the trend of a declining leverage ratio and marks the achievement of a critical goal for 2021 to reduce our leverage by a full turn or more this year.
On Aam's strong free cash flow generation, we prepaid over $140 million on our term loans in the quarter.
Subsequent to the end of the second.
Second quarter, we redeemed an additional $100 million on our 6 and a quarter notes due in 2025.
We continue to expect to strengthen aam's balance sheet by reducing our gross debt and lowering future interest payments.
As of today, we have paid down approximately $350 million on our term loans and notes due 2021 alone.
Before we move on to the Q&A portion of the call. Let me close out my comments with some thoughts on our 2021 financial outlook.
As you can see from our press release and as David mentioned, we have maintained our revenue outlook to 5.3% to $5.5 billion range.
We raised lower end of our adjusted EBITDA range and we incur.
Our outlook for adjusted free cash flow.
Our outlook is based on the latest and best information, we have regarding our customer production schedules, including the reduction in GM truck production, we're experiencing this week.
We continue to assume our customers will prioritize building full size pickup trucks and Suvs going forward.
But then on certain backdrop related.
Semiconductors remains on the ranges we have provided.
The revision to our free cash flow range as a result of focused on efficient capital spending restructuring and cost reduction initiatives year over year margin growth and working capital optimization.
Our strong financial results will be used to reduce debt and support.
Weighted decision development initiatives to solidify our position for future profitable growth.
AAM continues to focus on building long term shareholder value and success.
Focused on our future on electrification, we continue to allocate more engineering and financial resources to technology development to provide compelling high value products to Oems.
Our research and drive our future profitable growth you are now beginning to see tangible results of the new business Award announcements we are making.
We will continue to secure business on our legacy core platforms that will yield strong cash flow as well future.
And let's not forget our passion to run an efficient highly focused organization that centers around performance optimization.
Strong cost structure and delivering a best in class results.
The second quarter of 2021 continues the theme of managing factors under our control in a difficult operating environment.
There are plenty of near term challenges and uncertainties as it relates to the supply chain in the second half of 2021 that stated this management team is experienced and confident.
Navigating these obstacles.
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 David Thank you, Chris and David we have reserved some time to take questions I would ask that you. Please limit your questions to no more than 2.
So at this time, please feel free to proceed with any questions.
You may have.
Ladies and gentlemen at this time, we would like to remind everyone that in order to ask a question. Please press Star then the number 1 on your telephone keypads.
For just a moment to compile the Q&A roster.
And next question today comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, everyone. This is aileen Smith on for John.
My first question is you're on.
To make our customers have clearly been benefiting on the margin side from very favorable price inventory environment.
<unk> been more cooperative with recovery mechanisms for let's call. It the stop and go production environment that you and others have experience with the semiconductor shortage.
Heard from some suppliers that automakers have been receptive to cost recoveries, where those suppliers have had to buy Spotify semiconductors to avoid disruption, but just wondering if that is extended.
On the automakers are also helping all on cost overrun for logistics or manufacturing or other buckets for those suppliers that are just trying to meet their customers with very choppy schedules and releases.
This is David Dauch speaking.
First and foremost we've been able to work with our suppliers and our own.
With respect to with respect.
Protecting.
Semiconductor supply to our business. So theres been no need to have to go to the customer to ask for relief. There. We're protecting is theyre prioritizing and allocating chips. Accordingly, we're adjusting and following their lead with respect to that.
With respect to any premium costs that are being incurred because of some of the supplier.
Expect dealer shortages in the marketplace.
We deal with debt on a case by case basis with each of their respective customers and I don't really want to go any further from a detail standpoint on that but.
The customers had been very understanding of the situation that's out there at the same time.
They were asking for some pain sharing in the process, which we've been supportive.
Yeah.
At the same time, we're all just trying to protect continuity of supply and keep industry rolling.
Okay. That's helpful. And then second I wanted to ask a question around the EBITDA margins, obviously, we've seen a bit of a return to normal but it is still incredibly strong margin performance from some pretty elevated quarters over the past year, but can.
Of bridge, how you land at what I think will probably be at 16 or sub 16 margin in the second half of the year to debt to your full year outlook versus where you stood in the second quarter. We got the volume environment that will probably be sequentially better, but what's offsetting factors are there for that.
These mix or just cost lingering.
Can you open.
Hey, Good morning. This is Chris Mike, Yes, certainly if you think about our second quarter performance. Our first half very similar in terms of strong performance bridging that to the second half on a couple a couple of points I would sort of emphasize with you I would expect some benefit as some of the semiconductor sales return of a obviously second.
Quarter. The trough. So we'll have a benefit there was a benefit of some continued performance.
Setting some of that is a couple of different items on which you see in our year over year EBITDA Walk bridge, where we had some benefit of a build of inventory in the second quarter that will actually bleed out through the back half of this year neutral to the whole year, it's just a timing difference but if.
About how we're advancing also some of our electrification initiatives.
New business opportunities. So we're just going to step up some of our product engineering spend associated with that as you know.
Things, we've been sort of dialogue with you and others over the past 6 months little light weight on the first half of the year, it's going to be a little heavier in the back half of the year in terms of product.
Engineering spend.
Mechanically some of the timing of our price decreases year over year, a little bit more weighted to the second half of the year that will impact us a little bit and as you know metal markets and others continue to rise here throughout this quarter and expected to rise a little bit into the second half of the year Youll have a little bit of impact associated with margin associated.
With that as well.
Those are the primary elements and again, we'll pick up some sales and benefit from performance as well to mitigate some of that.
Great. That's very helpful color on 1 last question on the balance sheet. If I may clearly you continue to make good progress on generating cash and Delevering on can you remind us what your timeframe is to get to.
A sub 2 times net leverage target on it.
That's something that could be theoretically achieved in the next 12 months and then as you get to that target that you've talked about in the past.
The capital allocation framework change in anyway.
Yes in terms of a 2 times leverage target as you know we're obviously, we're 2.5 times here in the second.
Quarter, making meaningful progress already year to date, you've heard us articulate our objective to get to 2 times Nicole there well, we've not made a specific targets that obviously sooner rather than later is our objective.
And then when you get into that level of framework from a leverage perspective that certainly opens to capital allocation playbook, but at that point I think that's when we would.
To further dialogue on that topic.
Okay. Thanks for taking the questions.
Thank you.
Our next question comes from Rod Lache from Wolfe Research. Please go ahead with your question.
Thanks, everybody.
Really nice to see these incrementals.
In the quarter and frankly, a bit surprised just given the short notice production volatility, but I'm just.
Aliens question. It does look like those decrementals on the back half are very high or at least that's what's implied by your guidance and I'm just wondering I understand the timing of <unk>.
Pricing, but I'm wondering if you are are sensing that there is.
Any change in in and production schedules that would also be contributing to that or are you actually gaining or still having a limited confidence in in production in the short run.
Yeah Rod this is David I'll make couple.
The comments I will turn to Chris is.
Obviously, the Oems have been protected are there major core platforms to manage their profit pools.
<unk> benefited greatly as are many other suppliers with respect to that obviously, we took our first downtime. This week with respect to some of the GM full size truck platform at select plants, that's all coming.
Back on line starting next week, so that's positive.
We do still continue to see.
Extended downtime with respect to some of our crossover vehicle business income.
The uncertainty that we're managing in the marketplace.
And we just need on.
Understand that that can be a challenge for the balance of this year on an as I indicated we'll.
Carry into 2022.
We think our major core platforms will be protected going forward, but we also need to be prepared because we didn't expect the gym start to go down this week, but we have to adjust with our customer base and we've done that and we didn't utilize that time efficiently to give our people ablow do maintenance on our facility.
And then just catch up on some service part aftermarket type work. So it actually we turned on negative into a positive but Chris any comments you want to make to rods question. Yes, I mean, just I mean I listed out sort of the key drivers on the previous question, but if you think about for example that inventory absorption and that's a 50 basis point margin impact on us in the second half and it is truly just timing within.
<unk> neutral in total and if you think about the other elements as well a lot of them are timing driven and you see we didnt change for example, the top end of our margin or EBITDA guidance, which would imply a lot of the stuff was previously known to be timed at different points throughout the year.
Mhm.
Okay.
And then just secondly.
A year ago.
It looks like Youre going to get to that 2 turns of net leverage over the next year or so.
It sounds like that should.
Provide you with a lot more flexibility for acquisitions.
Or other things can you just talk a little bit about the opportunities that youre seeing particularly assets that would be complementary.
Lee.
Do you on electrification and also organically if you could just provide any color on on the magnitude of bidding opportunities that you see at this point.
Yeah. So rod this is David I'll start on the latter question first.
About 1 billion and a half for the new and incremental opportunity for our business, which is consistent with how we have been quoted in.
Entering the bigger the biggest difference is the fact that the mix of debt quoting now has shifted dramatically to hybrid and electric vehicles, whereby about 80% of what were quoting today is in that category.
Which is a positive because that's where the industry is pivoting to a ship into and we're seeing any quotation opportunities, especially based.
On the technology days that we've had with our various customers the excitement that we've garnered with the products that our engineers have developed.
Now, it's just a matter of converting some of those are accused of RFID to book business going forward. So we're very excited.
About what that has the whole going forward.
When it comes to the acquisition side as I noted in my prepared remarks, we did a small bolt on acquisition in the core powder metal business again, we want to be smart about debt, we've said that where it's appropriate to consolidate the traditional business.
We can leverage our size on our scale and get synergies and have a financial.
The benefit to the overall business, we're going to act on those types of things, especially as our our capital structure and balance sheet becomes even stronger and we see more opportunities both on the metal forming side of our business as well as other driveline side, but we also want to keep in front of us.
Certain things that we want to do to strengthen our vertical integration capabilities.
<unk> or partnership capabilities with respect to electrification and clearly, we'll keep that as a priority as well when we're looking at acquisitions.
Okay, great. Thank you.
Our next question comes from Ryan Brinkman from Jpmorgan. Please go ahead with your question Hi, Thanks for taking my question I.
Check in with regard to the still relatively new venture with an advanced in China. So a couple of questions around that I mean, firstly I realize Magna also operates its integrated electric drive unit business via a joint venture in their case with LG electronics, Although I think Borgwarner has claimed some benefits to having all capabilities within 1 company. So.
So wanted to get your thoughts on that you know what advantages or disadvantages either approach may have if any and unrelated note with regards to the new neo when I'm curious if you think the venture with an advanced helps with you know go to market strategy, our customer introductions in China, where they're based in if these customer introductions might also confer.
Wanted to benefits on the component or other side for you such as with differentials as well as for complete electric drive units.
So Ryan this is David as it relates to the new business the new businesses sub assembly work that 1 directly from an AAM standpoint, with Neo we did not have or need any involvement from our partner.
And events with respect to that.
Just a button and ability and relationship that we've established with neo as they continue to grow their market share in China, and they have greater demands and needs for their product and the performance of that product.
Really turned to us based on our overall capabilities, especially in the area of MGH.
First 1 day.
So that's been a big positive for us in regards to building that relationship.
On the hand events question in events has certainly been a good partner for us in China, they've helped us introduce us to many startup Oems as well as.
Other Oems within the China market.
H are clearly growing our business in China with <unk> support and leadership in some cases.
So that's been a positive for us we expect further growth opportunities we're jointly developing some next generation products today.
It will only strengthen our capability as far as product offerings to the marketplace, whether it be in China.
Globally around the world and that Relationship's going very positive.
As we've said before when it comes to the market, we don't necessarily have to be completely vertically integrated in order to to win business, we're bringing a value proposition to the table with the partners that we have today and we've been successful.
Festival in winning our fair share of the business clearly as we go forward and we'd like to strengthen our knowledge and capability there, but it doesn't mean that we have to do everything ourselves, but the partnership within events is going very well right now.
Thanks, and then the last question is about how you have been named as the 100% sole supplier of front and rear.
Pickup truck axles for production at Gms, Ottawa, Ontario facility, how should we be thinking about this in the context of your earlier, having gone from I think 100% to more like 65 per cent of the content on GM full size pickups as that program transitioned from the caito ex X to T..1 architecture does this potential.
Please signify any kind of shift in how <unk> thinks about producing these components in house versus outsourced or you know is GM, maybe already at capacity in terms of what driveline components. They can produce out of Arlington and they didn't want to make an additional investment, whereas you already had some excess capacity maybe more nearby and then on this topic as.
G M in sources driveline capabilities for it all to you drive program do you think as they reallocate resources that might in the future.
Reassess you know how much of the non OPM pick up driveline work do they want to do in house, maybe benefiting American axle.
Yeah, let me start with the traditional side of the business.
Before we talk about electrification.
Clearly you have made a decision we understood that decision and we've executed that decision with GM in regards to they decided to take a portion of the light duty pickup truck program only in house into their Grand Rapids facility that business is running and we help them get debt business started.
And they are running that business essentially to the capacity that they have installed. So that's positive for them, obviously impacted us, but we've overcome that and we manage that through our financials over the last several years I'll remind everyone on the on the heavy duty or on the SUV.
Jim did not as source any of that work and we're the supplier of that debt.
That business directly all the incremental capacity programs that Jim has had have all come towards American axle. So that's positive in regards to our relationship the latest being the Oshawa program and we're very grateful for their confidence in us at the same time, we've earned it based on our performance and the value propositions that we brought.
To them for decades, but but even here late lately so.
So our relationship with GM is very very strong.
They need us we need them on the traditional products today at the same time, we've had very good involvement with their senior leadership in regards to our technology on electrification, we recognize and understand what theyre doing on the Altium platform.
For them, both from a battery and from an easy to use standpoint.
That will apply to many segments within their vehicle models, but.
But at the same time.
They've shared with us if theres a good value proposition from the from the supply base and the benefits of general motors than Delta entertain that and we're highly confident in the <unk>.
And so we have some value propositions to offer them in the field on electrification so more to come nothing more to say at this point in time, but we're very confident about where on relationship is with general motors.
Thank you.
Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.
Hey, good morning, Thank you for taking the question.
Where do you play in.
I'm sorry, if I missed this earlier, but in the second quarter, how much did mix play a role on the strong margin and maybe you could just comment on.
What you're expecting for mix into the second half.
Yes.
This is Chris clearly with the semiconductor impact here inside of the second quarter the focus on.
And customers, whether it be still lantus or general motors and others. Their emphasis has been building full size truck applications.
Really the detriment of some of their crossover vehicles. So you do get a small benefit associated with.
Mix in terms of our overall revenue profile.
You would expect that to continue for a little bit here into the third quarter, but as they bring those facilities back online that will sort of obviously I would call it mitigate more towards our previous normal mix through the course of the back half of this year.
Now in the third quarter as you know.
The third.
As you know they've taken some downtime on the full size trucks that we're experiencing this week that we talked about so that that dynamic plays a little bit on inside of the third quarter.
Great and then and then the net premium fleet in the quarter any any color on the magnitude of premium free is a drag.
Yeah, we had we had a little bit I think of it.
And the concept a framework a couple of million dollars worth of premium freight inside of the quarter due to <unk>.
Basically challenges inside of the supply chain to make sure we have adequate supply.
It wasn't material.
Got it thank you.
And then as a follow up you know I think in the past you've talked about this award in Europe.
Europe.
Luxury OEM for E Drive unit I think that program is supposed to launch in the back half of this year.
P 3.
E drive unit sales and.
Maybe you could just give an update on on that on that program.
But on top of that how does that program created an end.
3 point per discussions with that customer whoever that may be on their on their bed program I'm, just trying to get a sense for whether any progress you're getting on advanced hybrid is giving you an entry into.
Higher content discussions on BD.
This is David.
Right.
We are going to be launching a new electrified program on a P..3 application for a luxury European OEM at the end of this year.
At the same time there'll be 7 variance to that program that will launch over a multiple years going forward here clearly anytime you have the opportunity to work that closely with an OEM on advanced new technology Youre going to build.
The strength of the relationship not only strengthen their confidence in us as it relates to our development side, but also our ability to launch successfully that that program. We expect other opportunities present themselves. We're all because of the technologies that were developed and we're also seeing other opportunities that could use that piece free type application.
Actually OEM.
We're working with today is supportive of us.
Sharon that capability with some others that are out there right now so we feel very good about opportunities that are first of all the opportunity that we have with them and at the same time other opportunities that will present themselves with respect to whether it's P 3 or 4 applications in the future.
Clearly we're working.
On a lot of other advanced technologies and electrification space that will demonstrate to the customers and then it's just they've got to determine based on their long range product plans, what their technology needs are.
What would they want to do in house themselves versus what they want to supply base provide all we can do is provide them a competitive offering and solution that offers.
<unk> value proposition that we referred to earlier.
Okay.
And that's P..3 E drive unit, how much does that differ technically from a from a bad E drive unit.
Yeah, I mean, it's just a different architecture completely from a full bev type application.
That's more technical than I really want to get into here, but at the same time. This is a high performance passenger car like I said with with derivatives off of that we're on the other vehicles that we're spending most of our time with P Force type solutions, our full battery electric type vehicles.
Got it thank you.
Our next question comes from Joseph Spak from RBC Capital. Please go ahead with your question.
Thanks. This is garrett on for Joe.
Maybe going back to the margins, but taking a step back I mean, you just put up almost 18% margin in the first half I think even if you normalize for some of the timing differences associated with the.
Inventory and kind of more normalized R&D I think youre still high sixteens right around 17, so I mean, what can we kind of extrapolate about the underlying production or performance of the business in the first half as we think about you know on more normalized operating environment, where hopefully you know schedule volatility comes down to the semi situation improves.
Commodity supply chain and it should improve I realized kind of pricing, maybe normalizes and then mix with maybe a slight headwind, but what is what is kind of the underlying performance in the first half say about you know what what this business can do is as things normalize.
I don't want to oversimplify the answer to this but our underlying business ex.
Ex those items you talked about such as you know semiconductor impact on metals very strong in the first half it's got to be very strong on the second half, it's going to be very strong going forward beyond that.
Okay, and then maybe just switching.
Switching gears to the neo and I mean, I think in the.
Past, she said components C. P. D can kind of be as high as $500, maybe give us some sense of where the neo when wise on that and then of kind of the the easy sourcing activities. You know the 80 per cent of the 1.5 billion that you're quoting I mean, what what percentage of those as you know based on conversations where customers are looking.
Looking for you to supply the full E drive solutions versus just just components.
This is David Dauch speaking as we indicated to the investment community I mean, we're approaching the market for different ways as it relates to our electrification strategy..1 is on the components state So think gears and shafts Tuesday on the southern.
Please state so think differential assemblies and others.
3 years on a gearbox and for us on the fully integrated unit.
We're clearly seeing opportunities in every 1 of those categories right now we're capitalizing on that on the latest 1 being the New award, which is a sub assembly application the.
The pricing is in line with some of the things.
We've got to do in the past.
And we see more opportunities presenting themselves going forward on a fully integrated electric drive units just because our technology has been more demonstrated and more understood and well received by the customer base.
Just because of the content per vehicle is going to swing it disproportionately on that direction.
However, there is plenty of opportunity that presented itself and the other 3 categories I mentioned to you.
Okay. Thank you very much.
Thank you.
And our next question comes from Brian Johnson from Barclays. Please go ahead with your question.
Yes, just have a question around the.
Issue.
Oems, particularly by protecting their full size truck platforms building vehicles that don't have chips and stored on lots are around their factories. You know just as we kind of get out the sharp pencils for this quarter and next quarter do you have any sense of the magnitude of that failed because that may not show up in.
IHS or awards production numbers, because they're not finished trucks, but from your perspective, you would've delivered an axle set to those factories.
Yeah, Brian This is David I don't know a specific number on there's clearly every 1 of the Oems is building full units with chips, they're building or changed.
<unk> duration on some trucks to take out chips.
So they can still sell those directly to the marketplaces with less capability and performance and maybe the fully integrated ones and Theres clearly other vehicles that are being built short of chips right now.
Can't tell you what that exact number is but it has impacted all of the Detroit 3 truck manufacturers.
<unk>.
And clearly they're going to happen as soon as they get the steady supply of chips they'll put those back into the system.
I just don't know what that volume is off the top my head, it's probably better to ask the OEM back question.
Okay and second question just following up on.
On the Neo win congratulations you did.
It can start as a component discussion or did you pitch the drive the E Motors and then drive modules.
With your kind of knowledge of the capabilities and then wound up with a sub component.
But you got to remember they have our existing suppliers today and they've got some issues with some of those existing suppliers as.
It relates to the capability of the other products on the performance, especially in the area of N V. H, we bring a tremendous skill set there.
So first we solve an issue that they have.
Second we obviously identified opportunities that we can quote going forward and third there's extended dialogue is taking place and we're hopeful that there'll be other opportune.
That could even include some of our advanced technology going forward.
Okay. Thank you.
Right.
Our next question comes from Adam Jonas Adam Jonas from Morgan Stanley. Please go ahead with your question.
Hey, everybody.
First a clarification that 80% of the quoting activity.
<unk> that was electrification you mentioned it was hybrids and.
Other forms of electric electrification can you tell us the split of hybrid versus B E. V. For example on the 80 per cent quoting on them. Adam. This is David Dauch, the majority of its electrification.
So I mean, when I say majority almost all so.
Meaning electrification, meaning non.
<unk> like pure Bev.
Correct. Thank you.
And David or team any any comment on.
I know, it's a tricky question because its influx and scale economies are not comparable.
The profit of these wins the margin profile on these wins versus what may be rolling off on.
The day adoption.
Can you provide color on them not expecting us the exact answer but just color on if it's lagging.
Sure.
Protein breakeven at EBITDA, and and any kind of color you can say so we can think of as these programs ramp when we can narrow the gap between presumably.
I would guess margins that just by virtue of the starting point is a bit lower than what you're what's rolling off next.
Yes. This is Chris.
As we think about new business that we source or are sourced with our customers and we price and approach. It right. We maintain a very tight financial discipline margins are 1 element of that return on invested.
Paul is another element of that.
Big picture, our objective is to continue to be a high margin performing suppliers, both in our traditional business and in our future business.
I appreciate it thanks.
Our next question comes from <unk>.
Mccarry from Citi. Please go ahead with your question.
Okay.
Thanks, Good morning, everyone.
Just a quick housekeeping to start if I just look at the DNA and Capex outlook for the year compared to the first topic I think it kind of implies.
Capex up significantly in <unk>, DNA down quite a bit color on on the flows there.
Yes.
Capex is clearly weighted to the back half of the year and in particular more so on the fourth quarter as we are launching some of the programs that we've previously announced and beginning that process as it relates to DNA a little bit wait.
Weighted to the first 3 quarters of the year you may notice, we had some accelerated depreciation associated with 1 of our.
Exited a region in Brazil, so that actually ceases debt acceleration at the end of the third quarter. So thats the dynamic youre seeing from a depreciation standpoint.
Great. That's helpful question, and then just kind of going back to maybe a bigger picture Inc.
Incremental margin question and I know, it's early to talk about 2022, but if we do have a.
<unk> production cadence next year, and then also considering some the investments youre, making on electrification is there any updated thoughts on how broad do you think about a range of incremental margins beyond 2021, just given the choppiness this year.
Yes, if you think about going into next year right Youll pick you in theory.
Conductors.
The euro issue passes Youll pick up volume, which you know our contribution margin is generally very attractive with that as you know some of our customers are adding full sized truck capacity and volume requirements that we just talked about Osceola previously that's obviously very attractive to our overall revenue line into next year.
That's very positive from a revenue perspective on the cost side.
As we've mentioned we will continue to invest in the R&D space. So I would expect that to continue to increase slightly over time as kind of and those are probably our 2 major items thinking about walking into next year, but do you have your normal stuff that we would typically talk about in terms of pricing, partially offset with productivity and a few other items.
Great.
As a quick follow up did you share where R&D is expected to come in this year.
Right now the first half of the year were a little over averaging about $30 million per quarter. We said that would step up on the back half of the year that step up will probably be similar to what we would see into next year.
So typically we've been talking about $35 million to $40 million range, we've been trailing under that roof.
Recently, but we're gonna start to move into that range share over the next 369.12 months.
Perfect. That's all very helpful. Thank you.
And our final question today comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
Yeah, Hi, good morning, everybody good morning, David.
I just wanted to come back to the 80 per cent of quoting activity from electrified solution, which is a very big number and I was comparing that to your I think 15 per cent of the.
3 year backlog, which.
Which is.
E V solution. So would you expect over the next 3 years or more.
Grouping up your back book shift to overwhelmingly electrified solutions I guess, how should we think about it yes.
Yes, Emmanuel this is David the answer to that question is absolutely, yes, I mean, we're seeing less and less traditional opportunities from the Oems right now and more and more of the electrification, which is clearly indicative of what.
Sort of what's your 80% of our quoted opportunities are in that electrification space.
Okay, and then do you have any initial data obviously early days on the electrification effort, but do you have any initial bid on.
Win rates on some of this quoting activity and maybe in comparison with the traditional business.
I, just I'm I'm Jeremy.
You know if you have the unfortunate you in a few years to get to your annual backlog contribution above the $200 million instead of averaging right now and back to higher level.
He used to be a few years back.
Yeah no.
At.
We're clearly comfortable in regards to our ability to win business going forward as you know historically, we've been in that 25% to 30% win rate on our traditional business.
As long as we can continue to support debt and then some we will have plenty of opportunity to offset.
Any business.
That's a trading out of either here, which isn't that $100 million to $200 million range, but trending to the low end of that range right now.
Recognize our backlogs you know 1 of the lower backlogs we've had in some time.
We fully expect it will be growing that backlog in years to come going forward.
And I guess just from them.
Your initial experience on on electric.
You shouldn't win is that <unk>.
On the fact that 30% win rate.
Potentially applicable for those opportunities as well.
But we're winning our fair share of the business and that's all I really wanted to say about that.
Okay. Thank you yeah. Thank you. Thank you.
He came annually we think.
Thank all of you who have participated on this call on and appreciate your interest in AAM, We certainly look forward to talking with you in the future. Thanks.
Ladies and gentlemen, with that we'll conclude today's conference call on presentation. You may now disconnect your lines.