Q3 2022 American Axle & Manufacturing Holdings Inc Earnings Call
Good morning, and welcome to the American axle and manufacturing third quarter 2022 earnings conference.
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I would now like to turn the conference over to David Lim head of Investor Relations. Please go ahead.
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 2022 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 something.
No 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 870 734 470 529 replay access code is 52525 86. This replay will be available through November 11th.
Regarding the Investor Relations calendar, we would like investors to Mark your calendars for our technology event and right and drive in Las Vegas on January four 2023.
With that said I'd 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 discussions 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 the reconciliation of these non-GAAP measures to GAAP financial information is available on our website now let me turn things over to a 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 third quarter of 2022.
Joining me on the call today are Mike as money Ams, President and Chris May Vice President and Chief Financial Officer.
I'd like to begin today's call by addressing the media activity from yesterday regarding a yeah.
We put out a press release earlier this morning addressing it.
One is our long standing policy not to publicly comment on market rumors and media speculation we feel it is important to state that we are not engaged in any discussions to sell the company and then we are not otherwise for sale.
In the ordinary course of our business and execute our strategic plan, we continuously monitor market conditions and industry developments and we regularly consider strategic opportunities.
The best interests of the company and its shareholders.
Finally, we do not intend to make any further comments or respond to any inquiries regarding these matters on this call.
That said the agenda for todays call is as follows I'll.
Review the highlights of our third quarter financial performance next I will touch on some exciting business development news inside of the quarter regarding the wins with electrification and significant wins with our traditional business.
Lastly, I'll discuss our updated 2022 financial outlook before turning things over to Chris.
Chris covers the details of the financial results, we will open up the call for any questions that you all may have.
So let's begin.
Overall, Ams third quarter 2022 financial results were impacted by higher than expected production volatility and year over year inflation.
Third quarter sales were $1 $5 billion.
As we exited the second quarter, we anticipate a relatively more stable operating environment in the second half of this year.
However, a number of our customers continue to adjust production volumes throughout the entire quarter, mainly driven by continuous semiconductor supply chain challenges and labor availability issues.
We experienced just across multiple vehicle segments in particular full size trucks that we support most of this volatility was experience with short lead time notification.
In addition, we are closely monitoring the macroeconomic backdrop underpinned by the rising rate environment and the inflationary pressures.
That said, even though we have short term volatility we believe large truck demand remains resilient overtime as many individuals and businesses rely upon them for work and personal preference.
In addition, all wheel drive and four by four mixed and tend to be more inelastic compared to other vehicle teachers, especially with a full size truck segment.
<unk> adjusted EBITDA in the third quarter, 2022 was 198 million or 12, 9% of sales.
In the quarter, there were several puts and takes including volume and mix and Chris will cover the specifics with you shortly but we remain focused on factors, we can control, including sales contribution conversion in Boston and R&D initiatives and mitigating inflationary headwinds.
Furthermore, we continue to make progress our OEM commercial recovery discussions we're on track with what we had told you previously.
Let me underscore supply chain challenges, including semiconductors, and labor shortages are very much with us in our view, we believe normalization may not occur until well into 2023 and possibly beyond.
Ams or any per share in the third quarter of 2022 was 22 cents per share Am's adjusted EPS was <unk> 27 cents per share.
AAM continued to deliver positive adjusted free cash flow generation in the quarter, a hallmark of our operating model.
<unk> third quarter 2022, adjusted free cash flow was $46 million.
We have a very straightforward capital allocation strategy supported by our free cash flow generation and that's clearly just strengthened the balance sheet invest in electrification technology and conduct smart high value bolt on M&A when it makes sense such as we recently did with our tech for acquisition.
In the third quarter, we reduced our long term debt by an additional $50 million.
Now, let's talk about some recent and very exciting key highlights, which you can see on slides four and six of our investment package.
Let's start with the electrification, our technical and commercial efforts in electrification continued to experience very positive traction.
Have any of the solid technology base and growing product portfolio are opening up multiple dialogues with OEM customers.
The auto manufacturers are extremely focused on the future of mobility and they need partners with a proven track record in technology and operational excellence.
That's the goal of this leadership team to be a key OEM partner and electric electric facing electrification propulsion from components to full systems.
As such we're very happy to announce our first E beam axle ward with E mobility for it's two and a half ton light commercial vehicle.
As a leader in commercial vehicles in India manufacturing, a complete range of V D's.
Fuel cell you need an alternative fuel vehicles with a focus on low total cost of ownership.
In addition, we were awarded contracts to supply gears for Volvo cars next generation electric drive units, but it was a premier global brand known for its focus on safety.
Well, if he could Volvo cars, you're hearing us talk about new customers markets and geography, that's aligned with our vision of our electrification growth and emphasis on our ability to grow and electric drive units and components.
And as a testament to our engineering and innovation and was awarded not two but three pace awards. This year, we received a pace award for our P. Three electric drive on the Mercedes AMG G. T 63 S. C performance vehicle a pace innovation partnership award for our high level of collaboration with Mercedes.
AMG and it pays pilot Innovation award.
For our highly integrated three and one wheel that an electric drive, which incorporates and integrates a motor or gear boxes that murder and drove compx compact power dense form function.
This technology is applicable on multiple vehicle segments from compact cars, the whole E beam axle applications, our light commercial vehicles and is scheduled to launch with a customer in 2024.
These three pace awards add to the two pace awards at a M received in 2020 for advanced Electric drive unit and OEM collaboration.
The span of approximately two years, we have been recognized with five pace awards related to our electrification technology.
In addition to the Great news electrification, we continue to win significant new business on our conventional programs and was selected as the new actual supplier for the GM, Colorado, and Colorado and Canyon vehicles, beginning in model year 2023. These are very exciting and vehicles and we're proud to partner with GM on this important vehicle.
Segment.
Our wins are not limited to North America.
Barry Automotive Chery automobile company limited as a selected a M to supply power transfer units and rear drive modules first new SUV program. Although we were limited on the details of what we can share. This new SUV is fantastic and is well positioned to add upon cherries success and expand our customer and revenue base and a very important market.
Now, let's talk about our guidance on slide seven.
We have updated our financial outlook to reflect the best information, we have available and to take into consideration the current operating environment.
AAM is now targeting sales of $5 75 to $5 85 billion compared to what we had earlier communicated at $5 75 to $5 95 billion.
Adjusted EBITDA of approximately 745 to 765 million compared to 790 to 830 million previously.
And adjusted free cash flow of approximately $300 million compared to 300 to 350 million previously.
From an end market perspective in addition to normal production seasonality fewer production days in the fourth quarter versus third quarter, we expect our fourth quarter operating environment to be very similar to that that we experienced here in the third quarter, including the continuation of higher than previously anticipated volatility in truck production.
Already here in the fourth quarter. We have received numerous schedule adjustments is customers have reduced shifts lowered overtime and outright canceled production relative to prior plants.
That stated during these turbulent times aim is very focused on the core operational values that differentiate us from the other suppliers through the cycle, we will adhere to smart cost control and look to improve efficiency, we will maintain the high quality of our products.
Steve on time delivery and support the continuity of supply to our customers at the same time, we'll continue to invest in electrification and new mobility.
Although no two cycles are like we underscore that the a M team has deep industry experience and is comping in successfully navigating the near term environment.
In conclusion, our aim is on the future and we will continue to focus on generating strong free cash flow strengthening our balance sheet, securing our traditional and next generation business advancing our electrification product portfolio and position <unk> for profitable growth, especially in the area of electrification.
While building shareholder value.
I'll turn the call over to our Vice President Chief Financial Officer, Chris Me Chris.
Thank you David and good morning, everyone I will cover the financial details of our third quarter results. Today I will also refer to the earnings slide deck as part of my prepared comments so.
So let's go ahead and begin with sales in the third quarter of 2020 to Aam's sales were 1.54 billion compared to $1 to $1 billion in the third quarter of 2021.
Slide nine shows a walk of third quarter 2021 sale third quarter 2022 sales.
First we account for the change in the year over year impact from semiconductors and supply chain challenges, while we continued to be significantly impacted by this issue. We did experience a year over year lower negative impact, which we estimate added approximately $136 million of sales in the quarter.
Positive volume mix and other was $113 million.
And the tech for acquisition contributed $92 million to sales.
And lastly, metal market pass throughs, and FX lowered net sales by approximately $10 million with metal and FX lower inside of that net number.
Now, let's move on to profitability.
Gross profit was $177 4 million in the third quarter of 2022 as compared to $165 6 million in the third quarter of 2021.
Adjusted EBITDA was $198 4 million in the third quarter of 2022 versus $183 2 million last year.
Please refer to our adjusted EBITDA walk on slide 10 in.
In the quarter the year over year change in semiconductor availability and volume mix and other added $43 million and $13 million respectively to adjusted EBITDA.
Third quarter material freight and utility inflation net of customer recoveries negatively impacted EBITDA by $12 million. This pacing is consistent with our full year estimate and continuous progress of recoveries with customers.
R&D was slightly higher by approximately $1 million and continues to run in the range of $35 million to $40 million per quarter.
With a full quarter of tech for in our third quarter 2022 results. The acquisition contributed approximately $9 million of EBITDA.
In the quarter.
During the latter part of the quarter, we experienced a significant drop in key metal market indexes that are an important component of our products.
In particular scrap steel indexes as we've described previously as rates change there was a valuation and cost timing for customers suppliers and internal inventory to run at new levels.
That is what's happening here and understanding this detailed point is important.
As a result of this rapid index drop of nearly 39% from July one to September 30th we.
Just the opposite effect on our inventory valuations and cost of goods sold versus what we realized in the second quarter of 2021 when rates rapidly increased you.
You may recall that we shared with you at that time, there was a $16 million positive benefit inside the second quarter of 2021 for this dynamic.
Conversely, as prices rapidly declined in the quarter, we effectively expensed inventory that was purchased at a higher level through our P&L.
Well I mean I'll cover SG&A S.
SG&A expense, including R&D in the third quarter of 2022 was $85 7 million or five 6% of sales. This compares to $90 5 million or seven 5% of sales in the third quarter of 2021.
This is a 190 basis point improvement.
Aam's R&D spending in the third quarter of 2022 was $35 4 million compared to $34 7 million last year.
We continue to control our SG&A costs, while efficiently investing in R&D to advance our next generation of electric drive platforms.
Let's move on to interest and taxes net interest expense was $39 4 million in the third quarter of 2022 compared to $47 million in the third quarter of 2021 weeks.
We continue to benefit from debt reduction and previous refinancing actions in the form of lower interest costs.
In the third quarter of 2022, we recorded an income tax benefit of $5 $7 million compared to a benefit of $13 6 million in the third quarter of 2021.
The benefit in the quarter was the result of a mix of earnings and valuation allowances on a jurisdictional basis.
For the balance of the year, we expect our effective adjusted tax rate to be approximately 10% to 15% and we would expect cash taxes to be in the range of $40 million to $45 million.
Taking all these sales and cost drivers into account our GAAP net income was $26 5 million or 22 cents per share in the third quarter of 2022 compared to a net loss of $2 4 million or two cents per share in the third quarter of 2021.
Adjusted earnings per share, which excludes the impacts of items noted in our earnings press release. It was 27 per share in the third quarter of 2022 compared to <unk> 15 per share in the third quarter of 2021.
Let's now move on to cash flow and the balance sheet that.
Net cash provided by operating activities for the third quarter of 2022 was $85 $2 million.
Capital expenditures net of proceeds from the sale of property plant and equipment for the third quarter of 2020 to $46 $6 million.
Cash payments for restructuring and acquisition related activity for the third quarter of 2022 or $4 $7 million in cash payments related to the Malvern fire. We experienced in September of 2020 net of recoveries was $2 $5 million in the quarter. In total we continue to expect approximately $30 million to $40 million and restructuring and acquisition related costs.
In 2022.
Reflecting the impact of these activities have.
Generated adjusted free cash flow of $45 8 million in the third quarter of 2022.
From a debt leverage perspective, we ended the quarter with a net debt of $2 5 billion and LTM adjusted EBITDA of $754 2 million calculating a net leverage ratio of three three times at September 30th.
This is down from a leverage ratio of three four times at June 30th.
In addition, as David mentioned earlier completed an additional $50 million down on our term loan b inside of the quarter.
We expect to continue to strengthen aam's balance sheet by reducing our gross debt and lowering future interest payments year to date, we've reduced our total debt by approximately $100 million.
Before we move on to Q&A, Let me close out my comments with some perspectives on our 2022 financial outlook.
You can see from our press release, we've updated our outlook to $5 75 to $5 $8 billion of sales $745 million to $765 million of adjusted EBITDA and adjusted free cash flow target of approximately $300 million.
We reduced our top line sales by $100 million and at the midpoint $50 million. The sales decline is driven by greater production volatility versus our prior forecast primarily in key light truck platforms. We support by way of figures. Our current forecast estimate is approximately 50 to 100000 full sized truck units lower than the <unk>.
Second half of 2022 versus our previous guidance.
Sales per production day basis, we would expect the fourth quarter to be very similar or slightly lower to that of what we experienced in the third quarter.
As for the new adjusted EBITDA targets, the midpoint change can be summarized as follows.
While its contribution margin of approximately $30 million on lower net sales, which reflects the weighting impact of a high concentration mix of lower full sized trucks.
The impact of metal costs and related Q3 inventory absorption impact of $20 million and a net amount of inefficiencies of $5 million to $10 million due to this volatility.
What is really important to know here once production is more stable and predictable. These issues will most likely not be with US. In addition, with lower metal market pricing on select commodities. Once we pass through this like period. This should be very good for AAM.
Lastly, our cash flow conversion remained strong as evidenced by our guidance and continues to be a priority for the company.
So in conclusion, we will continue to focus on what we can control, including driving optimization successfully negotiating customer recoveries integrating the tech for acquisition.
<unk> class, leading electrification technology and positioning ADM for 'twenty, 'twenty, three and executing on 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.
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.
Thank you we will now begin our question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question please.
At this time, we will pause momentarily to assemble our own.
Yeah.
And the first question will be from Ryan Brinkman from J P. Morgan. Please go ahead.
Hey, great. Thanks for taking my question could you maybe give an update on the pace and progress of negotiations with customers to recover premium non commodity costs I think maybe you'd already been a little less impacted by.
By higher commodity costs, because you'd had an above average level of pass through arrangements are in your country, but nobody had.
Anything in there with regards to that the non commodity cost you see pricing still negative I don't know what do you think the outlook is for that going forward and we would just love to get your take on I know you have less exposure to Ford, but I guess, they handed out $1 billion in the quarter, which allowed you know some other companies to beach.
It may be the automakers that you're in discussions with you'll have more exposure to a it might be a little bit taken a different cadence of reimbursement or something just how should we think about this issue.
Brian This is David I'll make some initial comments stuff Chris wants to chime in he can but as we've said and I said in my prepared remarks, you know, we we continue to make meaningful progress with all of our customers on a global basis with respect to some of the commercial and economic recoveries.
We clearly have some more work to do I'm just.
Just based on the continued level of increases that keep coming into our company I would characterize the discussions as being very fair and balanced.
With our customers some better than others, but at the same time overall I think you know balancing and we definitely are on track with what we said we would do in this area.
You're a big challenge that we're still facing his organization as an industry is especially on the energy of the utility issues, especially in the European market and that's a big issue that we're gonna have to continue to address as we go forward here, but overall I would characterize them as being fair and balanced discussions meaningful progress made but more work to do.
Yeah. Ryan This is Chris I would offer a couple of other data points are aligning with your question I know you made some reference to some activity here inside of the third quarter I would refer you back to some of our previous commentary on this where you know in the first quarter of this year, we were almost $30 million off from an inflation standpoint on that topic and you noticed we close that gap.
Pretty meaningfully inside of the second quarter with a lot of our customers almost cut that exposure in half and we would now running at that kind of a much lower rate due to those negotiations in the first half of the year and then secondarily. You also commented on the pricing element inside of our walks. This is our annual year over year long term negotiated pricing arrangements with our.
Customers, we stepped into this year, we told you would be around $40 million. This is just consistent with that that's that's outside the scope of the economic recoveries that you're referring to.
Okay, great. Thanks, and could you just maybe comment on that last question a bit more on the.
Chevrolet, Colorado GMC Canyon, when it's an important one I think it's a conquest you know a lot of what's been going on at acts over the last number of years has had to do in part with your relationship with with G. You know there are decision to in source a portion of their full size truck platform and then later with their their strategy around old T M dry.
So you're you're still winning business there what does this say about the relationship with them and you know how it could potentially evolve over time.
So Ryan this is David Yeah, we have a very strong relationship with general Motors, we value the relationship that we have with them. We've had a strategic partnership for well over 25, plus years, where their largest driveline supplier, we're honored to be able to pick up this Colorado Canyon business with conquests. It does from our largest competitor in this space.
Yes, it's an important vehicles segment that continues to do very well in the marketplace.
So we're excited to launch it next year, which is great.
At the same time, you know we've been GM supplier of the year six years in a row I'm. So they look to us.
With solid operating experience and performance and technology leadership and outstanding quality much like many of the other Oems do we.
We expect a long term a positive relationship with general motors going forward, including activity on electrification and that's about all I can really say at this point in time, but we're highly confident in our technology, we feel very good about our relationship with general Motors and we'll continue to look to maintain the strength of that relationship as we go forward.
Great. Thank you. Thanks.
Thanks, Brian .
The next question is from John Murphy from Bank of America. Please go ahead.
Hi, Good morning, guys I just wanted to follow up on the on the outlook here I mean, you know a number of times you alluded in the call that the fourth quarter would be similar to the third quarter and then you gave us some puts and takes right I appreciate that but I mean, if you think about the your key product volumes in the fourth quarter versus the third quarter.
Are you, saying theyre going to be relatively similar and then Chris you said there was you know there was some no negatives on the on the contribution margin side or the or the EBITDA side of 3 million of contribution margin 20 million on on metals, and then five to 10 on volatility that would kind of indicate.
All else equal that you were looking for sort of $60 million lower on on EBITDA versus I think the third quarter and the third the fourth quarter implied EBITDA is $1 55 to 175. So I mean, you know that would take us down to the 140 ish range and you're applying 155 to 175. So there must be some some good guys that are cut.
In there so really just kind of if you could help us walk or kind of explain what youre thinking about the sequential third quarter and fourth quarter on the top line and then on the honest EBITDA line as well.
Yes, certainly John what I, let me just sort of recalibrate when I articulated the guidance walk up of the volume and mix the inventory and a little bit of inefficiency that was for the full year that was not just the fourth quarter. So I was articulating be elements that were going on inside of our third quarter and fourth quarter combined walking to our previous guidance to our current guidance from a full year.
<unk> is not just the fourth quarter, so that would be sort of 0.1.
But as you think about going from Q3 into Q4, a commentary on a production day basis. So think about the fourth quarter has three or four less production days in the third quarter. We would expect our revenues on a production base day basis or our volumes to be similar to the third quarter, but holistically collectively for the quarter would be less because of less production.
Days, if that makes sense yeah. So.
So as we walk from Q3 to Q4, I mean, the elements, obviously would be lower volume in Mexico, just holistically with the ore production days that I just articulated with you we should see some benefit with with the absence of the inventory absorption issue kind of somewhat behind us will experience, probably a little bit more of that if metal continues to come down inside of the fourth quarter, and then that will be behind us.
You did take those two elements and then you've got some puts and takes around the horn on a variety of other elements that are pretty close to getting you walk into our mid point of that range.
Okay. That's helpful. And then just to follow up on the 50 to 100000 trucks that you think are going to be out of the schedule in the fall.
In the in the fourth quarter, they could have been in the schedule because of supply chain disruptions do you think that will be made up quickly as we get into early 2023 or is this the kind of thing where these get put on the side, where you know that those production run just gets put often determinants <unk>. Yeah. So I would tell you on the 50 to 100000 truck reference that he may and again that was.
For the entire back half of the year second half on year versus our previous thought 90 days ago, we experienced some of that decline in the third quarter and we're obviously projecting a little bit of that decline versus our previous estimate inside of the fourth quarter.
As David mentioned on his prepared remarks, right. We continue to see expectation of demand for both full sized vehicles and how their production schedules cadence into next year I think it's a little too early to call, but we're still holistically bullish on those platforms.
Multiple customers as we think of 2023 and beyond but you understand that is pure supply chain disruption. It has nothing to do with inventory building in the channel with the dealers dealers were in transit is purely supply chain issues right. John This is David Joe. This is David I mean, the three big things impacted all of us in the industry right now clearly semiconductors, but this.
Powertrain issues themselves and become a much greater issue and those supply chain challenges are really driven because of labor shortages or labor availability issues that are out there Oh I do expect you know theres still a pent up demand for these products that are out there I do think the Oems will continue to balance the desired inventory levels that they want to put in place in order to.
To benefit from the transaction pricing that they have and in lower incentives, but at the same time, they've got to replenish the shortage in inventory that's out there and that's why I think there's pent up demand will continue with just with the big issue really just comes down to is getting stability back in the supply chain. So that they can consistently run their facilities on our <unk>.
<unk> basis versus the volatility that we're experiencing in Europe no immediate notice on shut downs, yeah, which creates a lot of problems for the supply base a M included so.
Very helpful. Thank you guys.
Yeah.
The next question is from Rod Liz Shea with Wolfe Research. Please go ahead.
Good morning, everybody.
David I'm not asking you to comment on GKN, specifically, you already told us that you won't but.
But I I just wanted to get your thoughts on how you're thinking about the market strategically.
Do you think that broader consolidation it's worth exploring.
It happens over time cause the last time.
Combination of Driveline suppliers was proposed the synergies were pretty big So I just wanted to get a high level. Just how do you. How are you thinking about the market and how things kind of play out in the space.
Yeah, Ryan as I've said before and as you and I have talked I mean, I still believe that there will be consolidation that will take place in the auto space. Both from an OEM standpoint, you're already starting to see that or select partnerships that are coming together because everyone can afford to do things on their own and tried to manage current ice business as well as the transition to electrification of mobility.
I think you'll see further consolidation within the supply base as we've said all along we want to be a consolidator.
Time, we're going to manage our priorities based on a capital allocation standpoint, and our focus right now is supporting our organic growth and strengthen our balance sheet at the same time when you know you've seen us take.
The strategic actions from an inorganic standpoint, but within our capital structure with the recent things that we've done with it.
Tech for acquisition and some previous things before but again I do think there'll be consolidation in the space I think it's gonna be healthy for the industry. When its all of a sudden done but that's about all I can really say or comment at this point in time.
Okay, I appreciate that and I wanted to ask.
Just to clarify that.
I'm seeing in in Q4 year over year revenue growth from one point to last year to $1 4 billion. This year and it looks like kind of similar maybe just a tad lower revenue in the fourth quarter versus the third quarter, but you also had that $20 million inventory charge.
In the third quarter. So just if I'm just curious about what what what am I missing that drives the sequential decline in EBITDA.
The sequential decline are you referring to Q4 it was either I look to Q4 of last year to this year. I mean, you you have higher revenue, but similar EBITDA and then.
And sequentially it looks like similar revenue, but lower EBITDA, so either way it would just be helpful to get a little bit of a.
A little bit of a bridge from you.
Sure well, if you think let's start with the sequential Q3 to Q4, you know at the midpoint. Our revenues are implied to be down from the third quarter, Yeah, a little over.
Over $100 million, though so it's sizable from a volume and mix perspective. So that's that is the key negative driver inside of the sequential walk between Q3 and Q4, you do get a benefit of the reversal of that inventory absorption benefit in net everything else Theres, a small puts and takes around the horn that sort of watch it right into the midpoint of our guidance.
Well, if you think about Q4 of last year into Q4 of this year you know very similar as you mentioned volume and mix is up but don't forget this year. We do have those net inflationary factors that we've talked about we've been running in that $10 million to $15 million a quarter now since the second quarter of this year FX and metal are still while cleaning down is up from last year and you may recall.
In the fourth quarter of last year, our R&D expense was very well, we had a favorable benefit of some customer reimbursements for that that we're not expecting to occur here in the fourth quarter of this year and then we got some a little bit of favorable productivity that'll drive it up a little bit from there on a year over year basis, that's how I would think about last fourth quarter, that's fourth quarter.
Hey.
Thank you, yes, thanks, Rob.
The next question is from James Pickerill loan from BNP Paribas. Please go ahead.
Hey, good morning, guys.
Can you just confirm so where do you see the full year commodities impact now with the additional $20 million you said it.
And the Guy.
Commodity impact yeah. So we we have experienced through the first you know we do disclose this as a standalone item inside of our your year over your watch from a F combined FX and combined.
It was our metals in terms of both productivity. So sales impact was 56 million profit was down $26 million.
So that was excluding the 20 million dollar inventory item, so that inventory item would be on top of that and then right now some battle indexes are starting to trend down into the fourth quarter like I mentioned scrap steel, but some of them have not like aluminum continued to sort of.
Hang around sort of a consistent level over the past couple of months magnesium is also in a very similar spot those are key inputs for us. So we've not disclosed a specific amount for the fourth quarter, but that's where we've been trending they've been trending down a little bit holistically for us.
Okay understood and then just on the inventory absorption timing of this $20 million just want to make sure I fully understand it so regardless of commodity pricing for next year. The impact this impact will get unwound.
'twenty three or will it still be dependent on certain market dynamics.
It's effectively unwound itself. So now once we step into a lower run rate with metal will start to realize the benefit of the lower metal costs running through our P&L, you'll probably have another quarter here, meaning the fourth quarter as they stepped down even further but this should be a good thing for a M going forward.
Assuming that it'll stay at these levels as you know they change every 30 days and they can move quick in either direction like we experienced in the third quarter.
Right, Yeah, or every two hours right.
Yes, I just thought just on the tech for acquisition that nine the 9 million no positive contribution.
Is that trending ahead of expectations. So it just seems like a pretty decent contribution right from the start here regarding that that acreage. So that's effectively a 10% EBITDA margin on the tech for a business that was sort of the you know when we acquired them on June one that was pretty close to our expectation in terms of the near term we thought it would.
B, you know high single digits, and we're pretty much on track for that or synergy potential and expectations would be for that to step up as we mentioned into more into 2023.
But it's what we all want them pretty much in line with what we thought.
You know more obviously, our average, but we expect it to get up a this is a meaningful deal from a synergy perspective for us.
Right.
Thank you.
Yep.
Again, if you have a question. Please press Star then one.
The next question is from Joe Spak from RBC capital markets. Please go ahead.
Good morning, everyone. Thanks Boingo.
I think E. Christina you may I'm sort of just answered this but I just just to be clear on the on the inventory adjustment.
He's I is there still an impact in the fourth quarter or and then going forward from there you should start to benefit if prices stay stay lower or is that really still done for now I guess on a year over year basis.
So this dynamic happens, it's really an inventory valuation perspective from an accounting.
How the months through our P&L. So if it drops again dramatically, which as you know is good for US you will continue to expense out higher priced inventory sort of think of it in a period, where your your revenue reimbursement from your customers lower it'll pass within a quarter and then it's good when you're into the lower middle market run rates from there.
The extent they drop even further in the fourth quarter, maybe you have a little bit of an impact to that but you again, you'll start to benefit from the lower metal costs Holistically.
Okay. So so so you're I guess the view is that that impact in the third quarter.
Mostly sort of gets you to a current sort of you know spot pricing levels for the metals.
It's it's it's pretty close that was driven by predominantly.
Steel, which was a rapid decline and you saw this as I mentioned in my prepared remarks that we actually had the opposite phenomenon happen in the second quarter of 'twenty, one which was a very positive benefit for us. So I think of it as just sort of unwound itself over the course of the last you know.
12 plus months.
If metals have come back down.
And then David I know I know it was just.
Ron mentioned I sort of heard your comments on on deals and you know I know you don't like to comment on speculation.
I guess.
Again stepping aside from any specific deal. This isn't the first time, we've seen your company in speculative news about a transaction. So I was wondering and and you know this is a magazine in the past has also expressed some frustration valuation. So maybe you could just add a little bit.
In terms of board and management psyche, when you sort of see the the market reaction to to these news and how how you think about that going forward.
Well, obviously the news articles are a distraction to the management team and our business with respect to you know what came out and what we have to do to go forward and put out a public statement with respect to the company is not for sale hasn't been for sale. So it's disappointing that we have to do that in an and redirect our management time.
But at the same time, we want to be very clear to the investment community and our stakeholders that we are not for sale. Yeah. We have a job to do we have a business to run part of our business is not only tend to grow organically, but to look at what can we do to grow inorganically and we're going to continue to assess the market and look at what we can do to stretch.
And our company as far as our balance sheet show growth in the marketplace at the same time continuing to deliver the profitable results that we do as a company. So you know what we'll continue to look at the market conditions and the opportunities that present themselves. That's just doing a good job from a management and leadership standpoint with the proper support from governance.
But at the same time I all I can do is just be clear again that we're not for sale okay.
Okay. Thank you very much.
Thanks, Joe.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to David Lim for any concluding remarks. Thank you Chad and we thank all of you that participated on this call and appreciate your interest in AAM, We certainly look forward to talking with you in the future. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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