Q3 2021 American Axle & Manufacturing Holdings Inc Earnings Call
Good morning, everyone. My name is Jamie and I will be your conference facilitator today.
Tom I would like to welcome everyone to the American axle and manufacturing third 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'd like to ask a question. During this time simply press the star key and the number one on your telephone keypad.
If you would like to withdraw your questions. Please press the Starkey and then the number two.
As a reminder, today's conference call is being recorded and I would now like to turn the conference call over to Mr. David Lim 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 third quarter earnings call earlier. This morning, we released our third quarter of 2021 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 870 734 475 to nine replay access code 101595 in Q1. This replay will be available beginning at one PM today through 11 59 P. M. Eastern time November 12th.
Before we begin I would like to remind everyone that the matters discussed in this call may 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 are 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-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 <unk>.
David.
Thank you David and good morning, everyone. Thank you for joining us today to discuss Aam's financial results for the third quarter of 2021.
Joining me on the call today are Mike <unk>, President and Chris May Aam's, Vice President and Chief Financial Officer.
To begin my comments today I'll review the highlights of our third quarter 2021 results.
I will then touch on some exciting business development news, including electrification analysis with re and our largest customer general motors.
And lastly, we will discuss the ongoing supply chain challenges and our financial outlook.
After Chris covers the details of our financial results. We will then open up the call up for any questions that you may have so let's begin.
AAM delivered solid operating performance in the third quarter of 2021, despite unprecedented supply chain challenges that impacted industry production in the third quarter.
Well, we reported second quarter earnings our expectation was that the worst of the shortage was behind us that turned out not to be the case production volatility stemming from the semiconductor chip shortage took another leg down which eventually force Oh, yeah. The idled production at many facilities, including their full size truck.
Plants that we're largely protected previously.
However, the AAM team did a great job in managing these obstacles and factors under our control, resulting in solid financial performance.
AAM sales for the third quarter of 2021 were $1 to 1 billion down approximately 14% compared to $1 1 billion in the third quarter of 2020.
The decrease in our revenues on a year over year basis, primarily reflects the impact of the semiconductor supply chain disruptions of nearly $245 million.
North American industry production was down approximately 25%. According to third party estimates light truck production was down 20% year over year and volumes on our core platforms decreased significantly from a year ago.
The industry is at a point, where a lack of inventory has begun to impact retail sales data supply on key products that we support or at or below 30 days with certain platforms in single digits and large suvs closer to 20 days.
Once the supply chain issues are resolved, which will take some time, we foresee an extended recovery to meet customer demand and replenish dealer inventories.
Amazon is a great position to benefit from the strong demand in light trucks, especially in pickups, and Suvs and the replenishment of crossover vehicles.
Am's adjusted EBITDA in the third quarter of 2021 was $183 million or 15, 1% of sales. This compares to $297 million last year.
Excluding the impact of metal markets and currency, our EBITDA margins would have approximated 19%. This is a testament to our optimization efforts and our strong cost control you'll need a strong EBITDA conversion.
Aam's adjusted EPS in the third quarter 2021 was <unk> 15 per share compared to $1 15 in the third quarter of 2020.
As for cash flow, we continue to generate positive free cash flow in the third quarter Aam's adjusted free cash flow was approximately $69 million.
Earlier this year, we announced the development agreement with re we.
We are pleased to share that we have secured an initial platform business award with our partner and I am classes Flavory with high performance Electric drive units for its highly modular and disrupt a re corner technology.
Enabled full flat E V chassis for multiple applications.
This is a great electrification opportunity for a and as validation of our innovative industry, leading advanced electric drive technology and we're excited to build upon this win with read going forward.
Or is it other interested parties may have an opportunity to see our will and drive units and other EU portfolio on display at trade shows beginning in January of 2022.
In addition, <unk> announced today that we will be supplying track rate differentials for the new GMC Hummer EV. These differentials sub assemblies, Jimmy power generated by the electric drive motor to the left and right wheels. This enhances the experience for drivers looking for exceptional performance.
Performance, both on and off road, we are very happy to support GM on this great product and we look forward. Despite a GM for their future electric driveline needs.
Our strategy and approach to the market continues to take hold our opportunity to see succeed and pole electric drive units sub assemblies and components are well displayed with these two announcements.
As we all know well that's vacation is coming fast and is a great growth opportunity for a yeah. We have a strong product portfolio and easy to use an E beam axles gearboxes subassemblies and components as such our technology is garnering interest around the globe from new and established Oems from small cars to light commercial.
Locals, we're in numerous discussions with manufacturers and our business prospects look very positive.
Because of our deep driveline experience, we believe we haven't hedged among the competition, especially when it comes to the systems integration and that'd be H.
Before I transition to Chris I want to talk about the industry supply chain challenges and our financial guidance.
What the industry has and continues to experience is unprecedented lack of semiconductor availability continues to drive high production volatility with very minimal warning.
Additionally, rising commodity cost labor shortages logistical challenges and port delays continued to stress the value chain.
We're hoping to see semiconductor stabilization over the next successive quarters, but its difficult to ascertain when the industry will return to normal as global demand for chips remained strong and new capacity will take time to come on line.
We expect this issue will continue well into 2022 and possibly into 2023.
That said our priority is to execute our game plan, which means to produce high quality products deliver on time and be cost efficient to support our customers and protect the continuity of supply regardless of the operating conditions and we're doing just that one.
What are the managements top priority is to diligently optimize the cost structure and improve the officials efficiency and we are doing that.
Now, let's discuss our financial guidance.
Operating uncertainty continues in the fourth quarter, and especially with the availability of semiconductors and riding rising commodity prices and as such we have updated our guidance.
For the full year, we now target revenue in the range of 5.15 to $5 to $5 billion.
Adjusted EBITDA in the range of $830 million to $850 million and adjusted free cash flow of approximately $400 million.
Chris will provide more details about our guidance in his prepared remarks.
In conclusion, we had a good and solid operating quarter. We did what we do best that is we delivered operational excellence. The team delivered positive adjusted earnings and adjusted free cash flow under a very difficult operating environment.
We are confident that our strong operating fundamentals should support solid financial performance, especially as volumes recover over time.
In the meantime, we continue to secure our core truck SUV and crossover business and generate strong cash flow to fund our electrification future.
In addition, we will continue to invest in advancing our electrification platform technology and our overall easy portfolio to serve multiple vehicle segments. Our goal is to be the electrification supplier of choice for the broader OEM community and we are making significant strides to bring our vision to reality clearly the futures.
Very bright for a yeah Chris.
Thank you David and good morning, everyone I will cover the financial details of our third quarter results with you today I will also refer to our earnings slide deck as part of my prepared comments.
So let's go ahead and begin with sales.
Third quarter of 2021, Aam's sales were $1 2 billion compared to $1 4 billion in the third quarter of 2020.
Slide seven shows a walk of our third quarter 2020 sales to third quarter 2021 sales.
First we add back the impact of COVID-19 from the third quarter of 2020 of approximately $87 million.
Then we account for the unfavorable impact of the semiconductor shortage, which we estimate to be approximately $245 million in the third quarter of 2021.
During the quarter, we experienced this unfavorable impact on most of our product lines as our global customers took downtime of engine and transmission transmission plants passenger car and crossover vehicle plants and full size truck plants at multiple points during the quarter.
Metal markets and FX accounted for an increase in sales of $86 million.
During the past 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 hedge this risk with our customers by passing through the majority, but not all of these index related changes.
The metal portion of this column reflects these elevated pass throughs on a year over year basis.
For the first three quarters of 2021 metal markets and foreign currency had increased our revenues by approximately $212 million and we expect this to be well over $300 million for the full year.
Now, let's move on to profitability.
Gross profit was $165 6 million or 13, 7% of sales in the third quarter of 2021 compared to $249 8 million in the third quarter of 2020.
Adjusted EBITDA was $183 2 million in the third quarter of 2021 or 15, 1% of sales. This compares to $297 1 million in the third quarter of 2020.
You can see a year over year walk down of adjusted EBITDA on slide eight.
The return of Cobot volumes added approximately $16 million was more than offset by the negative impact from the production volatility stemming from the semiconductor disruptions in the amount of $83 million.
Last year, we also have $22 million benefit from an E. D M D recovery and a customer settlement that did not recur in 2021.
But even through all these disruptions in the quarter and you have still delivered $17 million of net performance.
As I just mentioned dinner sales highlights we are facing significant year over year increases in commodity metal markets. The retained portion impacting this quarter plus foreign currency was $31 million.
You can see on our EBIT walk the dynamic this has on our margin calculations. If you exclude the impact of this pass through dynamic our margins would have been significantly higher as noted on our work.
Let me now cover SG&A.
SG&A expense, including R&D in the third quarter of 2021 was $90 5 million or seven 5% of sales. This compares to four 7% of sales in the third quarter of 2020.
Aam's R&D spending in the third quarter of 2021 was $34 7 million compared to $18 million in the third quarter of 2020.
Recall, we received significant engineering and development recovery last year of approximately $15 million.
The third quarter of 2021, and Curtis sequential quarterly increase in R&D in line with our expectations.
We will continue to focus on controlling our SG&A costs, while at the same time investing in technologies and innovations to achieve our pivot to electrification.
We do expect R&D spend to increase in the coming quarters as we launch new programs and continue to pursue meaningful opportunities in the electric vehicle business as we experienced significant customer interest in our new products and technology.
Now, let's move on to interest and taxes.
Net interest expense was $47 million in the third quarter of 2021.
<unk> to $55 million in the third quarter of 2020.
We expect this favorable trend to continue as we benefit from continued debt reductions.
In the third quarter, we redeemed $100 million of our six and a quarter notes due 2025 and refinanced the remaining 600 million dollar balance.
In the third quarter of 2021, we recorded an income tax benefit of $13 $6 million compared to a benefit of $22 5 million in the third quarter of 2020.
As we near the end of 2021, we expect our effective tax rate to be approximately 10% to 15%.
We would also expect our cash taxes to be in the $25 million to $30 million range.
Taking all these sales and cost drivers into account our GAAP net loss was $2 4 million or two cents per share in the third quarter of 2021 compared to an income of $117 2 million or <unk> 99 per share in the third quarter of 2020.
Adjusted earnings per share, which excludes the impacts of items noted in our earnings press release was <unk> 15 per share in the third quarter of 2021 compared to $1 15 per share in the third quarter of 2020.
Let's now move on to cash flow and the balance sheet.
Net cash provided by operating activities for the third quarter of 2021 was $89 8 million compared to $249 5 million last year.
Capital expenditures net of proceeds from the property sale of property plant and equipment for the third quarter of 2021 was $33 2 million.
Cash payments for restructuring and acquisition related activity for the third quarter of 2021 were $9 million.
The net cash outflow related to the recovery from the Malvern fire. We experienced in September of 2020 was $3 5 million in the quarter How's.
However, we anticipate the Melbourne fired at a neutral cash impact for the full year as timing of cash expenditures and cash insurance proceeds align overtime.
In total we would expect 55% to $65 million in cash payments for restructuring and acquisition costs in 2021.
Reflecting this time, reflecting the impact of this activity AAM generated adjusted free cash flow of $69 1 million in the third quarter of 2021.
From a debt leverage perspective, we ended the quarter with net debt of $2 6 billion and LTM adjusted EBITDA of $930 2 million.
Escalating a net leverage ratio of two eight times at September 30.
We are focused on improving the balance sheet and delivering on our goal to improve our leverage this year, we have made meaningful progress on reducing our gross debt outstanding and reducing our leverage ratio by more than a full turn is at the end of the third quarter.
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, we have revised our outlook to $5, one five to $5 to $5 billion of sales, which includes approximately $300 million of metal market pass throughs and foreign currency.
We expect adjusted EBITDA to be in the range of $830 million to $850 million.
Just as a reminder, investors need to consider the impact of the metal market pass throughs as it relates to our margin calculations when comparing period to period.
In periods in environment, such as this is meaningful.
We expect to generate approximately $400 million of adjusted free cash flow in 2021, or nearly 50% adjusted free cash flow to adjusted EBITDA conversion.
We expect our capital expenditures at less than 4% of sales as our capital reuse and optimization efforts continue to deliver results.
Our updated outlook is based on the latest and best information, we have regarding customer production schedules. We continue to assume our customers will prioritize building full size pickup trucks and Suvs through the end of the year with minimal disruptions.
However, the operating environment remains choppy with multiple factors posing a risk to the supply chain.
As volumes begin to normalize we should be in a great position to leverage that environment to generate profits and cash flow.
This in turn will be used to support our highly advanced research and development initiatives and electrification and solidly position us for future profitable growth aligned with our capital allocation priorities.
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 to no more than two so at this time. Please feel free to proceed with any questions you may have.
And ladies and gentlemen, once again, if you would like to ask a question. Please press star and then one on your Touchtone phones. If you are using a speaker phone. We do ask that you. Please pick up the handset before pressing the keys.
To withdraw your questions you May press star two.
Once again that is star and then one to join the question queue.
Our first question today comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys good.
Morning, John.
I guess, a first simple question, yeah, we look at fourth quarter.
<unk> sales were up a little bit from the third quarter, but EBITDA is down a little bit.
I'm just curious.
You know if you can explain that into you know do.
Do you think we are kind of scraping along the bottom here.
And it is probably not going to get much worst for you, but the timing of it getting much better is still kind of TBD and probably sort of mid next year.
Yeah, John I'll go ahead and comment on the margin piece is it kind of sequentially goes from Q3 to Q4 as it relates to our sales. So a couple of things to keep in mind as we transition from the third to the fourth quarter sort of embedded in a little bit of our commentary as it relates to our metal market pass throughs I would expect we would expect an uptick in those pass throughs in the fourth quarter.
So you're starting to see a little bit continued lift on our revenues associated with that pass through.
No impacts on our margins, but also elevates our sales sort of on a cost basis also things that we talked about we would see inside of the fourth quarter you have normal sequential lower production days, the seasonality associated with the fourth quarter, usually impacts our profitability and margins from that perspective, nothing unusual there.
But we're also in the process now of launching a couple of key programs that's to support General Motors facility Oshawa as they bring that online as well as some key electrification program. So we'll have inside of that quarter. Some discrete project expense associated with that and then lastly, you may recall from the second quarter, we built a benefit with our inventory build through the <unk>.
I would call.
Impact associated with the delays in production some of that benefit will unwind in the back half of the year, we see that happening in more inside of the fourth quarter than the third quarter and probably a little bit of that will carry into 2022 as we unwind those inventories those are kind of the main points associated with that.
And as it relates to your comments in terms of maybe bouncing around the bottom.
Turn back to David's comments he mentioned in his prepared remarks, hopefully this is the trough with some improvement from here, but obviously that uncertainty remains in front of us.
John This is this is Dave let me just add to what Chris said, there are clear that we thought the trough would be a second quarter.
Here to the third quarter, largely because of the outbreak of Covid in South East Asia, specifically, Malaysia area.
Obviously that impacted not only the normal crossover and passenger car, but spilled into pickups, and Suvs as well, which was unfortunate and impacted our sales.
We do see the semiconductor issue starting to stabilize and as I said, it'll get better each quarter going forward, but it's not going away anytime soon until incremental capacity comes online what we're not going to see go away anytime soon is the impact of COVID-19 still.
The issues associated with labor availability and then these raw material price increases in metal market, we don't see going away anytime soon either.
So we've got wage inflation issues out there a raw material economic issues that are out there.
Overall labor availability challenges that are going to continue in the industry.
And extended period of time, Okay, and then just a second question around mix I mean, obviously, you're a beneficiary with GM trucks in.
Trucks at <unk> in general, but given those inventories are still incredibly tight it doesn't seem like that mix will unwind on you next year and probably will take some time before even turns negative sometime in 2023, how do you think about that.
And how do you think about the addition of Ashworth coming on next year presuming chips come back right because you can't produce Jack's direct enough chips, but that I mean, what it would mean for you next year and ultimately when there was a catch up in in production and inventory.
Is that something that's going to be like a plus 20%, 30% on an annual basis. I mean, how do you think about where that can go and how that might be even governed by capacity constraints second half 'twenty two we're probably more into 2023.
Yes, So let me start and then Chris if you want to add you can but you know clearly the Oems they are protecting their profit pools, and we get even better from that as well based on the mix that you're talking about there.
Again, you know their vehicle content mix doesn't necessarily equate to our vehicle content mix because our products are very similar that go in each of the different.
Yeah, because that they are producing there.
So I don't we don't see a big change there, but we do see volumes still being strong, especially as we're starting to see the semiconductor issues starting to stabilize our customers are bringing back 70 plants, especially this week and we're seeing a lot of assembly plants youll come back up and running with respect to the GMO issue with them coming on board.
Next next year, obviously, that's a big benefit for for American axle is we're going to be the exclusive supplier into that facility from the different product mix that they have there and we will benefit greatly from that.
<unk> protecting that that plant just a protected the other truck plants to the best of their ability, but obviously with the semi conductor issue.
But they should be able to do that that will bode well for not only them, but also us.
Moving forward here in addition to other customers again, they're protecting their truck and SUV mixes as well and we're seeing those benefits that'd be afforded the lantus. So yeah. So we see a pent up demand. That's there we see obviously historical low inventory levels that are out there. We think it will take a minimum of 24.
<unk> to replenish that.
New chain and therefore, we should we see some bright days ahead of us as it relates to our ability to generate cash pay down debt and fund our electrification growth in the future.
Great. Thank you very much.
Thanks, John.
Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.
Hi, good morning, and thank you for taking the question.
Yes.
Wanted to just start by looking at the third quarter.
If I just focus on the.
The volume piece alone in Europe.
And your EBITDA walk in sales that way.
27% decremental margin, that's pretty good I mean, we're seeing much higher numbers out of a lot of others.
So just wondering just given the start stop nature.
Production why you've been able to contain this team of 27% decremental margin as it is or the benefit of mix are you continuing to build inventory and that's helping to sort of smooth this out a little bit. So just a little color on the decremental in the third quarter.
Yes, Dan this is Chris certainly understand that perspective.
Look as we think about the volatility associated with production, we rely very heavily on our core operating system and our ability to kind of navigate the ups and downs of the production cycles. There are times, where we tried to lean into benefiting by building inventory for consistency.
But the other side of that equation is we also benefit by rapid quick responses to changes in production to mitigate the impact it would have on our contribution margins. So I think the team has done a great job here in the third quarter. As you know we had somebody in a bit of inventory in the second quarter. We spent don't get probably a little bit here in the third quarter, but nowhere near what we saw in the second quarter, but.
But it's quick quick reaction times, its mitigation of those premium costs associated with that and a good purchasing department coordinating with our supply base to minimize any disruptions there.
That's how I would describe it.
And how you were thinking about the incremental margin just on the volume piece alone as volumes get better Theres No reason to expect it wouldnt be in a call. It 25, the typical 25% plus range that.
They're too soon.
In terms of as it relates specifically to volume at 25% to 30% is that typical range. We would experience if it's overweighted towards some of our highest higher profitable full size truck applications, absolutely, that's a little bit higher than that from both an incremental or decremental.
That would be outside of the fact that we do look forward to expanding some of our investments in R&D and then the other factors associated with that but just from a pure change in volume Yeah. That's typically what we would expect.
Great. Thank you.
My second question, an interesting update there on the EV front.
The differentials for Hunter.
Maybe you could just give us a sense first of all what the.
Types of content per vehicle that you had and then.
Are you going to be engaging more broadly on the entire altium platform with T. M. Can you just give a sense of how this could lead to additional contact point with T. M E.
Yeah, Dan This is David.
Clearly gms kind of define their strategy first in regards to what they may make themselves with their all to him.
<unk> strategy versus where they need their supplier partners no different than what they do on ice business today.
Clearly, we're playing a role with general motors today on the ice business and we're going to play a role with general Motors on electrification business going forward. The Hummer is one of the first programs that we're announcing but we expect to grow that opportunity with them over the next several years as they rollout their electrification strategy and we further demonstrated our.
Advanced our innovative technology.
We think we have some industry leading technology, we've received very favorable feedback from general motors and other customers regarding that technology. It's just we just seem to determine what each of the Oems what I knew you know in your case, specifically the G. M. You asked the question, but we're highly confident that we'll be able to grow our business and partake in some of the healthier strategy.
Going forward.
We're an industry leader when it comes to be Nashville, today, as well as supply and easy to use and don't forget as I mentioned in my earlier comments, we were one of the only companies that can supply.
<unk> sub assemblies, gearboxes, and full <unk> and electric beam axle. So we feel very good about our chances to grow in the electrification space.
Great. Thank you very helpful. I appreciate it.
Thanks, Dan.
Our next question comes from Joseph Spak from RBC. Please go ahead with your question.
Thanks, Good morning, everyone. Good.
Morning, Joe.
So you know I I guess I'm just curious because you guys are in a pretty good.
And to help out here.
Like versus IHS basically had you know the the.
The.
Full size trucks for GM down about 15% year over year. It sounds like you're saying you didn't build more you don't think he built more inventory.
You know this quarter that had more of that happened in the second quarter. So is that is that sort of what you shipped to that program and then you think the unwind happens more you know in the fourth quarter and into <unk> and into 'twenty two I just I just Wanna.
Like you now have a finer point on some of your comments there.
Yes, Joe I wouldn't think about it in the context of just for example, GM full size truck this would be inventory inside of our walls that we would build whether it be with for finished goods that we've either built ahead of schedules or tried to level build as schedules moving around on us so you've to benefit from that on a capture of your absorption of overhead and labor costs into that.
So the thought process be as that inventory sort of crescendo it up in the second and third quarter.
A little bit more in the second quarter versus the FERC, we will begin to one that inventory down in the fourth quarter or into a little bit into the early part of next year as well and as that happens again. This is our internal inventories that benefit will unwind itself. It's neutral it's a zero sum game across the board as your inventories move up and down but it doesn't exactly correlate.
Two how you would think about from a general motors full size truck application it could be across all our product lines.
Okay. So that so that's that's the absorption better from your inventory, but do you have any guidance in terms of.
Like how much of a benefit there may have been from vehicles, where you ship product that might not have been fully.
Completed and then and then wholesale.
Yes, I think that would be difficult for us to ascertain how our customers are positioning those vehicles that their assembly plants.
Okay.
And then just as.
As we think about.
<unk> 22, and you know.
I appreciate your comments earlier about flex time, and flexing down so be.
It doesn't seem.
Like your sort of view.
View on incremental margins as we sort of.
Think about 'twenty two are all that changed it just isn't going to you know that.
The factors the other factors that will sort of dictate the margin profile just be I guess one the.
Stability of the schedules here I'm thinking you know go up go down into what what happens with them with raw materials.
Yes, I think Theres a couple of things to think about obviously, we're not providing any 'twenty two guidance, it's still very volatile at this point, but.
The volatility of production schedules and that cadence and the contribution margin associated with that obviously.
You need to take into consideration when do you expect to continue to increase R&D and not associated per se with production, but if youre thinking about movement from year to year and look at the end of the day as you hear from every other supplier right. We're continuing to face rising material labor and transportation costs, and we gotta look to mitigate that and navigate those challenges.
Between here and next year. So I mean, we do face that on the good side, we expect good control of a lot of our input costs at our factory meeting our conversion costs, our productivity programs, our restructuring programs that we've implemented over the last year or so or mitigating some of those and optimizing our controllable elements of that but those other pieces are very real that we're work.
Through.
Maybe just a quick follow up so a center.
It sounded like Youre running R&D right now.
35, $40 million is that is that the right base to.
The annualized and that is that the right base for 'twenty, two or is there even further investment that needs to happen.
Yes, I would say over the past several quarters, we've been running more between 30% to 35 I would expect it to transition more towards 35 to 40.
Over the course of the next yes, I was talking about the border testing on the back half implied I think sorry I think.
Okay. Yeah. This quarter, Joe was 35, and I would expect that to step up from there between the 35 to 40 guidance.
Okay. Thank you very much.
And ladies and gentlemen, our final question today comes from Brian Johnson from Barclays. Please go ahead with your question.
Yeah, just a quick housekeeping question and more strategic language.
Can continue in a few weeks at our conference.
The housekeeping one is.
We used to pay a lot of attention to scrap and that kind of I think for you or Michael might've been a profit center at some point is there anything beats a b. The scrap you generated in the high spot prices for steel that you ought to be that that's kind of visible in the financials or is it not really meaningful anymore.
When we when we do sell our scrap and obviously as scrap markets increase we do get a slight benefit from that but it's not significant to our financial statements.
Okay.
Second is if you kind of think about that position in evs, particularly where we could take you I think one thing I'm struck by is.
A lot of the mechanical engineering over the years you know that.
And your torque transfer products your drug trade product or their suspension products.
You know I think what re demonstrate because a lot of that can be handled by software for.
For example to adjust suspension systems have dropped her experience with it. So I guess two things you know where are you internally on that software development and can re really kind of gives you a bigger place at the table when an OEM sort of get seasonal light like somebody startups habits.
I I should really be thinking about using software to.
Do a lot of the things they used to do mechanically I know that's kind of a broad strategic question, but just wanted to tee it up yes.
Yes, so Brian this is David clearly, there's a strong demand out there for software engineers and controls engineers as the market and the industry is pivoting to electrification no different than inside of our company as well and we are I mean, we already had a decent base. Our good days were adding every day to our software and controls.
Engineering capability.
Because the demand is just going to be.
Very large as we go forward, especially as the industry pivot to electrification over time.
So we're already offering and adding those services.
Through our partnership with <unk> at the same time, we've taken our innovative and advanced technology with our electric drive unit and integrated into their platform designed that gives them the efficiency and the volume metrics that they're looking forward and meaning you can put more people in the different vehicles.
And support their re technology or the re corner technology. So we're very excited about their technology married up with our technology and leveraging both of our software controls capabilities, but we continue to look at how we can just add organically or look strategically as to what we can do to strengthen our software and controls.
Capability, just because we see the greater demand in the future.
Okay, great. Thanks, a lot and look forward to chatting in a few weeks it sounds great. Brian. Thank you. Thank you Brian and we thank all of you who have participated on this call and appreciate your interest in AAM. We certainly look forward to talking with you in the future. Thank you.
Ladies and gentlemen, with that we'll conclude today's question and answer session as well as today's conference call. We do thank you for participating you may now disconnect your lines.