Q2 2022 American Axle & Manufacturing Holdings Inc Earnings Call
Good morning, everyone. My name is Jamie and I will be your conference facilitator today.
At this time I would like to welcome everyone to the American axle and manufacturing second quarter 2022 earnings Conference call.
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After the Speakers' remarks, there will be a question and answer period.
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As a reminder, today's call is being recorded.
I'd now like to turn the floor 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 earlier. This morning, we released our second quarter of 2022 earnings announcement, you can access this announcement on Investor Relations page of our website www dot dot com and through the PR newswire.
You can also find supplemental slides for this conference call on the Investor page of our website as well.
To listen to a replay of this call you can dial one 870 734 475 to nine replay access code 22115 to three this replay will be available through August 12.
Regarding the Investor Relations calendar, we would like investors to save the date for a technology investor event in the city of lights Las Vegas on January <unk> 2023, a day before CES open.
Additional details will be forthcoming in the coming months with that said 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 to differ.
Materially from those discussed for additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
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.
Now, let me turn things over to Aam's, Chairman and CEO David Dauch.
Thank you David and good morning, everyone. Thank you for joining us today to discuss Aam's financial results for the second quarter of 2022.
Joining me on the call today are Mike Smiley, Aam's, President and Chris May Aam's, Vice President and Chief Financial Officer.
I will review the highlights of our second quarter financial performance.
Next I will touch on some exciting business development news in the quarter, including our recent announcement regarding Mercedes AMG.
Revenue electrification component wins and the completion of our tech for acquisition.
Lastly, I'll discuss our updated 2022 financial outlook 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 all may have.
Let's begin.
Aam's second quarter 2022 financial results were impacted by rising input costs and the continuing global supply chain volatility.
We cannot control the macro environment, but we can manage our business, which includes the continuity of supply to our customers product quality and manufacturing optimization, all while positioning <unk> for sustainable profit and free cash flow generation.
<unk> second quarter sales were 144 billion.
Production shutdowns continue to occur but to a lesser degree compared to last year, but similar to recent quarters and.
In our view OEM Oems will likely continue to prioritize our light truck output, which is good for AAM.
Oems cannot build their large trucks fast enough as inventory levels on key platforms. We support remained low and consumer demand appears to be resilient.
However, we are closely monitoring the macroeconomic background that you are all aware of that.
As for our products, we believe all wheel drive and four wheel drive mix tends to be more resilient compared to other vehicle features especially with full sized trucks.
Aam's adjusted EBITDA in the first quarter of 2022 was $195 million or 13, 6% of sales.
In the quarter. The results were negatively impacted by rising input cost semiconductor availability and other supply chain constraints.
Semiconductor conditions continue to improve but we believe supply chain challenges will persist into 2023 and in certain regions. These headwinds may take longer to resolve.
That said, we remain focused on sales contribution conversion supporting R&D and mitigating inflationary headwinds.
Chris will cover more details with you.
Additionally, we're happy to share that we have made very good progress on commercial inflation recovery discussions with our OEM customers and in line with the expectations that we shared with you last quarter.
Aam's earnings per share in the second quarter of 2022 was <unk> 19.
Am's adjusted EPS was <unk> 22 per share.
Even with these challenges AAM continued to deliver positive adjusted free cash flow generation in the quarter. This is a compelling strengths of our operating model.
Aam's second quarter 2022, adjusted free cash flow was $114 million.
Our capital allocation strategy supported by our free cash flow is very straightforward.
Strengthen our balance sheet.
With our long term goals and electrification and conduct smart high value bolt on M&A, when it makes tactical and strategic sense.
And then the second quarter, we did just that we deploy capital to our high value acquisition and continue to pay down gross debt.
Now, let's talk about some rethinking highlights for the quarter, which you can see on slide four.
Our electrification dialogues with Oems continues to be very constructive the auto manufacturers remain extremely focused with their respective electrification product plans.
It is our goal to be a partner and supplier with our strong leadership in electric drive units.
Im assemblies and components.
Our technical and commercial efforts are experiencing very positive traction and reaction from our customers.
In the quarter, we also announced that AAM has begun to supply electric drive units for Mercedes AMG.
This rear drive unit was recently named a 2022 automotive news pace Award finalist.
We are very pleased to partner with and support Mercedes AMG as we continue to grow this relationship.
This <unk> III drive technology is also garnering interest from other manufacturers.
<unk> was also awarded numerous electric vehicle component contracts in the quarter with multiple global Oems are proven electric gear in component technology will support both front and rear drive units for these Oems respective programs.
In addition, our proven and strong electric technology is driving the possibility of various technical partnerships with factors.
This is an excellent step to further build already solid relationships and support current and future customers and we see this as growing opportunity.
Finally, aam's acquisition of Tech for it became effective on June the <unk>.
As a reminder, the acquisition has strong synergy potential improves our geographic mix and enhances our portfolio and electrification components.
<unk> generated approximately $285 million euro in sales in 2021 am acquired tech for on an enterprise value of approximately 125 million Euro.
This purchase adhere to our strategy of high value quick return bolt on acquisitions, while we just closed on this transaction in June 2022, we believe we are on track to bring meaningful synergies in 2023, as we leverage our strengths capabilities and product portfolio.
We're very excited about <unk> four and we once again welcome the <unk> <unk> to the AAM family.
Now, let's talk about our guidance on slide five we've updated our financial outlook to reflect the best information, we had available and to take into consideration the completion of the <unk> acquisition.
AAM is now targeting sales of $5 75 to $5 95 billion compared to five 6% to $5 8 billion previously.
Adjusted EBITDA of approximately $790 million to $830 million compared to $785 million to $830 million previously.
And adjusted free cash flow of approximately $300 million to $350 million, which is unchanged.
From an end market perspective, our north American production assumption is unchanged at approximately 14, 3% to $14 7 million units as the second half is difficult to predict with a number of macro and supply chain factors. However, we are hoping to see greater volumes in the second half.
During these uncertain times, we're managing variables that are under our control. We believe we are nicely positioned when the production environment improves driven by strong demand and inventory replenishment.
We underscore that the AAM team is confident in successfully navigating these possible future economic challenges with our deep industry experience.
In conclusion, our Amazon in future and we will continue to focus on generating strong free cash flow.
Strengthening our balance sheet secure.
Securing our traditional business, which we've made tremendous progress on advancing our electrification product portfolio and position <unk> for profitable growth, especially in the area of electrification.
Let me now turn the call over to our Vice President and Chief Financial Officer, Chris May Chris.
Thank you David and good morning, everyone I will cover the financial details of our first quarter results with you today I will also refer to the earnings slide deck as part of my prepared comments.
So let's go ahead and begin with sales.
In the second quarter of 2022, AAM sales were 144 billion compared to $1 8 billion in the second quarter of 2021.
Slide seven shows a walk of second quarter 2021 sales to second quarter 2022 sales.
First we account for the lower year over year impact from semiconductors and supply chain challenges.
While we continue to be impacted by this issue, we did experience year over year improvement, which we estimate to be approximately $63 million of sales in the quarter.
Positive volume mix and other was $45 million.
The <unk> acquisition contributed $29 million to sales, which effectively represents activity for the month of June .
Metal market pass throughs, and FX added approximately $27 million.
During the last several quarters, we've continued to see volatility in the primary index related inputs to the metal based materials that we purchase you may recall, we hedged this risk with our customers by passing through the majority of index related changes.
Metal portion of this column reflects these elevated pass throughs on a year over year comparison.
Now, let's move on to profitability.
Gross profit was $173 5 million in the second quarter of 2022 as compared to $190 million in the second quarter of 2021.
Adjusted EBITDA was $195 1 million in the second quarter of 2022 versus $222 6 million last year.
Please refer to our adjusted EBITDA walk on slide eight.
In the quarter improvements in semiconductor availability and the supply chain added $12 million to EBITDA versus the second quarter of 2021.
Volume mix and other added $9 million.
Second quarter material freight and utility inflation net of recoveries negatively impacted EBITDA by $12 million.
This is a sequential improvement versus the first quarter impact of $28 million driven by continued progress of recoveries with customers.
R&D was higher by approximately $5 million driven by launches in electrification development and lastly, our new acquisition <unk> also contributed to the quarter for one month's activity of approximately $2 million.
We continue to experience year over year increases in index related metal costs as I mentioned previously and the retained portion negatively impacted us this quarter was approximately $16 million.
Let me now cover SG&A.
SG&A expense, including R&D in the second quarter of 2022 was $84 8 million or five 9% of sales.
This compares to $86 2 million or six 7% of sales in the second quarter of 2021.
R&D spending in the second quarter of 2022 was $35 2 million compared to $30 million last year.
We continue to control, our SG&A costs, while investing in and increasing our R&D spend to advance our next generation electric drive technology platforms.
On a U S GAAP basis Youll notice, we recorded a gain on bargain purchase of our <unk> acquisition for $11 $6 million. This demonstrates some of the value inside of this transaction.
Let's move on to interest and taxes.
Net interest expense was $39 5 million in the second quarter of 2022 compared to $47 3 million in the second quarter of 2021, we.
We continue to benefit from debt reduction and refinancing actions in the form of lower interest costs.
In the second quarter of 2022, we recorded income tax expense of $600 million 6 million compared to expense of $2 4 million in the second quarter of 2021.
For 2022, we expect our effective tax rate to be approximately 15% to 20%.
We would expect cash taxes to be in the $50 million to $60 million range.
All these sales and cost drivers into account our GAAP net income was $22 $9 million or <unk> 19 per share in the second quarter of 2022 compared to $16 million or <unk> 13 per share in the second quarter of 2021.
Adjusted earnings per share, which excludes the impacts of the items noted in our earnings press release was <unk> 22 per share in the second quarter of 2000 to 2022 compared to <unk> 29 per share for the second quarter of 2021.
Let's now move on to cash flow and the balance sheet.
Net cash provided by operating activities for the second quarter of 2022 was $146 7 million capital expenditures net of proceeds from the sale of property plant and equipment for the second quarter of 2022 were $42 6 million.
Cash payments for restructuring and acquisition related activity for the second quarter of 2022.
Were $8 $1 million cash payments related to the malware fire. We experienced in September of 2020 net of recoveries was $2 1 million in the quarter.
In total, we expect approximately $30 million to $40 million and restructuring and acquisition related costs in 2022.
Now includes the <unk> acquisition activity.
Reflecting the impact of these activities AAM generated adjusted free cash flow of $114 $3 million in the second quarter of 2022.
Aam's strong second quarter cash flow performance provided funding to accomplish multiple capital allocation priorities those being to invest in tech for and continue to pay down additional debt in the quarter.
From a debt leverage perspective, we ended the quarter with net debt of $2 $5 billion and LTM adjusted EBITDA of $739 million calculating a net leverage ratio of three four times at June 30.
We expect to continue to strengthen aam's balance sheet by reducing our gross debt and lowering future interest payments and.
As just mentioned in the quarter, we reduced our outstanding debt by over $30 million.
Before we move on to the Q&A portion of the call. Let me close out my comments with some thoughts on our 2022 financial outlook.
As you can see from our press release, we have updated our outlook to $5 75 to $5 $95 billion of sales and $790 million to $830 million of adjusted EBITDA or adjusted free cash flow target of $300 million to $350 million is unchanged.
The update primarily reflects the completion of the <unk> acquisition, we expect modest EBITDA contribution from <unk> for this year and then increases our cost synergies are on track for our 2023 delivery.
We also contemplated small FX translation and other impacts for the year.
In general the production environment remains volatile and availability of labor is a challenge for the industry.
As customary we evaluated the latest and best information, we have regarding customer production schedules.
And operating environments, including inflation headwinds and projected recoveries and currency.
Our North American production assumption for 2022 is unchanged at $14 3 million to $14 7 million units we.
We expect the cadence of sales and related profitability to align with industry estimates are stronger a stronger second half volume timing versus the first half of the year.
We continue to assume our customers will prioritize building full size pickups and Suvs.
But we foresee continued volatility in most areas of our business due to macro conditions.
That said, we will continue to focus on what we can control so for a midpoint check of the year. Our focus is on driving optimization customer recoveries integrating tech for developing class, leading electrification technology positioning ADM for 2023, and working our capital allocation plan.
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 two so at this time. Please feel free to proceed with any questions you may have.
Ladies and gentlemen at this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
Pause for just a moment to compile the Q&A roster.
Okay.
Okay.
And our first question today comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys I just wanted to add.
Just to ask it.
Our first question on GM trucks.
Obviously inventory is de Minimis.
And.
Even if the market gets a little bit wobbly here, there's still going to be some inventory rebuild so theirs.
Potential for huge cap, you would or maybe even upside if volumes over time.
We go into 2023 for those trucks I'm just curious as you think about the inventory levels and sell through.
It doesn't seem like there's unit risk, but there might be mix risk. So could you just remind us what your content range.
On that on those trucks and then also what kind of impact of 95000 units that have been built but not.
Finalized and delivered to dealers might have on your business or not.
Yes, John This is Chris I'll take that content question, our average full size North America pickup truck or SUV content is approximately 15% to $600.
And that of course would be a blend of front wheel drive and four wheel drive vehicle applications at a blend of light.
Light duty and heavy duty trucks, so to the extent that they're stronger mix. For example on the four wheel drive were in excess of that if it's a little bit lighter two wheel driver a little bit under that way, so hopefully that sort of parameters and dimensions, our content exposure on that vehicle and as for the.
Tori elements for general Motors, but we see strong schedules going forward continued demand for this product, we don't anticipate any disruptions in production schedules.
But we're aware of on a go forward basis in relation to the item you mentioned there.
Got it Okay and then just a second question on the AMG rear drive unit.
Other.
E drive units can you sort of remind us what the content potential is there on those and what sort of the economics are from a margin and return profile or the similar.
The margins and returns due to core beverage.
How should we think about content on those programs.
Yes, I would think from a margin perspective, very similar to corporate average and as you know we don't provide margin specific information on particular platforms.
Corporate average from a broad perspective and from a content perspective very high. This is a very high content vehicle for us you've heard us articulate from our electric drive units. When we're supplying these applications into these vehicles, we can have content per vehicle into $2500 plus range and it falls right inside of our thought process.
There.
Okay. Thanks, nice application parts, a very great application for us.
Seemed like it was a great great win.
Thank you very much guys.
John .
Yeah.
Our next question comes from Ryan Brinkman from Jpmorgan. Please go ahead with your questions.
Great. Thanks for taking my question.
I wanted to ask on the AMG win which means you'll now have content on electrified vehicles ranging from like 30.
<unk> 39 horsepower Biogen E 300 to 843 horsepower AMG GTE right. So does this maybe highlight the comprehensiveness of your electrification capabilities, but what also can you say like Directionally speaking about the.
Relative competition for or content per vehicle or profitability of components or systems for high end versus low end electrified vehicles and you know one of your driveline supplier competitors has stated that they desire to more narrowly target the light vehicle electrification space with only.
High torque applications, so thought to get your thoughts on the relative attractiveness of these different ends at the end.
Market.
Hey, Ryan This is David Dauch here first of all thanks for your question.
We're very excited about the progress that we're making on electrification with the portfolio that were developed in the interest that we're garnering from our customers, but most importantly, the business that we're announcing and launching.
And the Mercedes AMG is just another example of the innovation and the technology that our team as it continues to bring forward.
We launched one of the first electric drive vehicles with the I pace at the same time. This product is probably the most complex product that we've ever made.
It's a hybrid type application that is still involved in engine as well as the electric assist or electric drive and with tremendous horsepower and range capabilities.
We continue to look at the market assess the customer needs which are evolving.
Try to understand where we think that sweet spot of the market as we are developing a portfolio of range of portfolio of products.
It is platform based so we can try to achieve economies of scale.
But also satisfy that market and we're trying to identify a product whereby we can give you a base electric axle. If you want a featured up and include torque Vectoring and other type of performance features in that you can do that if you want a deep content to be more like what we've seen in some of the Chinese applications.
That we can do that as well so right now our strategy is working we are growing in China, we're growing in Europe , and we're also growing in North America with respect to our electrification initiatives on the content per vehicle I think Chris has given you a good indication already with us earlier answer.
We're seeing a number of our programs that are north of that 2000 2500 range. When you factor in the motor inverter and gearbox into the equation and whether it's one or two axles all dependent on the requirements of the vehicle and.
And from a competition standpoint, they've got to decide where they want to compete where we want it and we have to decide where we want to compete.
We're going to concentrate on the light vehicle side. However, parts of the light vehicle side will take us into the lower range of the commercial vehicle side as well, but that will continue to assess that going forward, but we're concentrating our resources on our efforts.
On the light vehicle side of the business, but hopefully that addressed your questions. Okay. Yes. Thank you and then just my follow up here is.
I think you gave some indication that you're seeing increased traction with recovering some of these.
Non commodity supply chain costs et cetera.
The negotiations with the automakers at the same time, what's the latest that's happening with those non commodity supply chain costs could they actually start to come down in the back half even as you get to more of a recovery is like I know that.
It seems like freight and diesel in ocean shipping might be coming down at the same time is electricity and natural gas still going up or labor I'm not sure how are those.
Non material costs do you think going to net out in the back half of the year and then in relation to the recoveries as well.
Yes, Brian This is Chris I'll take that one from a non material type of cost. If you think about some of the items that you listed out there for example, labor costs, obviously theres some pressure from that standpoint, we've talked about that previously and that would be sticky once those start to get elevated.
Those run rates will start to build in over an extended period of time, meaning into future years. So typically doesn't ebb and flow from a utility standpoint, we've started to increase utility costs in a very meaningful way the back half of last year that continues to be very elevated here this year.
In the short term, we certainly don't see that abating very much.
Almost any regions of the world, but in particular as it relates to Europe , and then I will call sort of the metal pass through type of elements that are part of the structural bomb. If you will so those index related those change as you know every 30 days for us. They continue to kind of go up and down some elements are very elevated such as aluminum that continues to remain very early.
<unk>, we've seen scrap sort of trend down a little bit recently, but I wouldn't call one or two months a trend here, we need to see this play out for a period of time. So hopefully that provides a little color to your question.
Yes. Thank you I appreciate it.
Thanks Ryan.
And our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.
Okay.
Hey, Good morning, guys. Good morning, John just Paul just following up on the inflation conversation.
I think in the last quarterly guide.
Inflation all in inflation number was like $60 million 60 million headwind I don't know I don't know if thats.
By number of years, but is that still intact.
Yes, that's correct that's the number we articulated.
Okay and.
R&D spend for the year with my apologies if I missed this.
Is that tracking for the full year in terms of the increase.
Yes. So R&D you may recall, we articulated coming into the year, we expect it to sort of be that.
Sure.
Sort of $35 million to $40 million a quarter range. The first two quarters of this year, we've been right around $35 million range. We will continue to invest in our R&D to support the continued growth of our electrification platforms, which is the primary consumer of that and then launch of course current products and we would expect that $35 million to $40 million range per quarter is still to be intact.
For the balance of the year.
Got it and then also just.
Just trying to double back on your on your material question, we talked 60 million just say all of that $60 million net of recoveries just wanted to make sure. We're clear with that so you could see that trend starting to play through the course of the year, we had $28 million in the first quarter $12 million during the second quarter as we saw some of those recoveries to take traction and I would expect sort of that $10 million to $15 million per quarter over the next couple of quarters to get to that $60 million or so range.
So just just articulating a little bit on the timing for that.
Got it and was there any way to dimension what the.
With the recovery.
It looks like on the top line, what's embedded there.
Yes, we have not provided yeah, we've not provided that information for a variety of reasons, but you know we've been focused on the net impact to the company.
Yes, okay.
Last quick one for me.
In terms of the debt repayment you have targeted.
Magnitude for the full year in terms of your debt reduction.
No we paid another $25 million down on our term loan b in the second quarter similar to the first quarter. We paid some additional form that down I would expect to continue to deploy some of our free cash flow generation through the balance of the end of the year into gross debt reductions as well, we've quantified specifically how much per quarter, but that's.
The ZIP code that you've seen us over the past couple of quarters do we will continue to do that on a go forward basis at least thats, our current thinking as we sit here today.
Got it thank you.
Once again, if you would like to ask a question. Please press star and one on.
Our next question comes from Jason spot from RBC Capital markets. Please go ahead with your question.
Hi, it's Joe.
Hey, good morning, Joe.
One quick housekeeping item.
No you said, how much tech for <unk>.
Contributed in the quarter I didn't hear.
How much.
Are you expecting for the balance of your like how much of that sort of revenue guidance raise I guess it was related to the type of or was that all of it and basically everything else is unchanged yes.
Yes pretty much that's the case show.
A tad bit higher than that we did have a little reduction for some foreign currency translation, but principally think about that is the bulk of tech poor coming out for the balance of the year.
Okay, perfect and then.
Just.
Secondly, going back to the the M. G. One I was wondering if you can just sort of.
Talk a little bit about how that if that sort of opened up sort of other discussions either within mercedes or potentially with other automakers I mean, I know a lot of times, even within the automakers you know they'll they'll try something out on.
On your technology on on sort of higher end vehicles, and then tried to sort of.
Cascade things down and and obviously this is a very high performance.
Product, but theres clearly obligations for for a broader range of products. So.
Is there anything that you could sort of point to that sort of come up in your conversations with Mercedes or other customers to that effect.
Yeah, Joe This is David.
Again like you said I mean, there is a lot of technology, that's garnered from the racing side.
Other technologists garnered from the performance group so the Oems in this case with Mercedes is the AMG group. So we're honored to be a partner with them and to be selected by them to provide this very unique product that we brought forward to them.
Said in my earlier comments is probably the most complex product that we've ever made we.
We did it in partnership and side by side developing it with AMG has clearly gotten their attention as well as people's other people's attention within the Mercedes organization I expect that Youll see other variance that will come off of this using this type of product, but it also will open us to share with them the balance of our portfolio.
And then they've got to make their individual decisions as far as how much they want to do themselves versus.
They may offer to the supply base all we want to do is make sure that we're positioned very favorably.
To capture the new and incremental business should they decided to put it on the outside.
As I also indicated in my comments there are other Oems.
Are interested in this technology now that's in the public marketplace.
So we're hopeful that we can solidify some new business on that as well.
Okay. Thanks very helpful. I appreciate it.
Thank you.
Thanks, Joe.
And ladies and gentlemen at this time in showing no additional questions I'd like to turn the floor back over to David Lim for any closing remarks.
Thank you and we thank all of you who have participated in this call and appreciate your interest in AAM, We certainly look forward to talking with you in the future. Thanks.
And with that we'll conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.
Okay.
Okay.