Q4 2022 American Axle & Manufacturing Holdings Inc Earnings Call
[laughter].
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 fourth quarter 2022 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 you'd like to ask a question. During this time simply press the star key followed by the number one on your keypad, if you'd like to withdraw. Your question you May press the star key and the number two.
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 Jamie and good morning, I'd like to welcome everyone, who is joining us on Aam's fourth quarter earnings call earlier. This morning, we released our fourth quarter of 'twenty. Two earnings announcement, you can access this announcement on the Investor Relations page of our website www Dot M dot com and through the PR Newswire services.
You can also find supplemental slides for this conference call on the Investor page of our website as well.
Well listen to a replay of this call you can dial 1877344 75 to nine replay access code is 510868 for this replay will be available through February 24th.
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 to differ materially from those discussed.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Also during this call we may refer to certain non-GAAP financial measures.
Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
With that let me turn things over to Aam's, Chairman and CEO David out thank.
Thank you David and good morning, everyone. Thank you for joining us today to discuss Aam's financial results for the fourth quarter and full year 2022.
Joining me on the call today are Mike Sumani, Ams, President and Chris May Aam's, Executive Vice President and Chief Financial Officer.
To begin my comments today I'll review, the highlights of our fourth quarter and full year of 2022 financial performance.
Next I'll cover our achievements in 2022 are both electrification and on our legacy business.
After Chris covers the details of our financial results, we'll open up the call for any questions that you all may have.
Let's begin.
Ams fourth quarter operating results how much of the third quarter were negatively impacted by industry macro conditions. However am concluded the year with strong cash flow performance for the fourth quarter and full year of 2022, we continue to stay focused on managing the factors that are under our control.
And fourth quarter of 2022 sales were $1 4 billion and for the full year a M sales were approximately $5 8 billion.
From a profitability profitability perspective, am's adjusted EBITDA in the fourth quarter was 158 million or 11, 3% of sales.
For the full year of Ams, adjusted EBIT was $747 million or 12, 9% of sales.
Definitely a challenging year.
And was negatively impacted by supply chain disruptions, including semi conductor availability, which likely impacted global production by over 4 million units in 2022.
Combined these factors drove significant customer production volatility.
And Additionally, we navigated higher input costs throughout the year, including rising utility labor and material costs.
Relative to the first half of the year. The second half of 2022 was it more difficult operating environment for us that stated even with these challenges we found solutions to mitigate a number of these issues are still advance key long term initiatives on many fronts.
Some of these topics in a few moments.
Adjusted earnings per share in the fourth quarter of 2022 was a loss of <unk> <unk> per share for the full year adjusted EPS was <unk> 60 per share.
<unk> cash flow performance continued shy am's adjusted free cash flow the fourth quarter was $99 million and for the full year Ams adjusted free cash flow was $313 million.
This cash flow was deployed in 2022 to support significant debt reduction our acquisition of tech for and investing in electrification to position us for the future.
Chris will provide additional information regarding the details of our financial results in a few moments.
Let me talk about the business updates and key highlights, which you can see on slides four and slide five.
We're very pleased to announce that I am well supply Jupiter electric mobility with E. B Mab for the companies to two ton battery electric light commercial vehicle.
Jupiter electric mobility as part of India's Jupiter wagons Ltd, which manufactured railcars railcars commercial and heavy vehicles and marine containers. We note that this is our second E beam analysis with our first being Echo motors, the second announcing a test to Ams ability to combine electric drive technology too.
Full beam axle configuration, providing optimal performance for electric commercial vehicle applications.
Also we're very happy to share that animals by track right electric electronic lock in differentials for a new electric SUV program, providing superior traction for multiple applications and enhancing passenger safety.
Turning to see yes, many of you experienced the technology firsthand.
As vehicles are derivative of what is out in the market today and the performance of the SUV version should be equally as impressive Amazon a great position to provide a full portfolio of products from EV components, such as gears and differentials for full electric drive systems.
For the full year of 2022.
Certainly an eventful year with many accomplishments I want to highlight just a few.
After much anticipation when we announced the launch one of the most sophisticated and highly engineered electric drive units and the Mercedes AMG GT 63 performance vehicle.
Those vehicles and engineering Marvel and we are excited to support a globally recognized premium performance brand and Mercedes AMG.
In addition last year, we were awarded multiple contracts with major global Oems for electric electric components and drive units our strategy to support the E propulsion value chain Oems has taken hold and expanding.
As a technology leader with a focus on innovation. We are excited to be recognized with three automotive news pace Awards in 2022 for our current piece real electric drive unit, our collaboration with Mercedes AMG and for our highly integrated three in one drive you that we'll launch in the coming years.
All the while we secured our legacy core business with more than $10 billion of lifetime revenue for next generation full size truck actual program.
From mid decade to beyond the 2030, a calendar year period of time.
And was also recently named the new Ashland supplier for Gm's next generation, Colorado and Canyon programs.
Quest business win for Us, it's a great program for us and it fits nicely with our mission of securing the legacy business as we transition to electric.
We anticipate full production ramp yet this year and the 2020 three unfolds, we'll see the full effect of that.
We also welcome the tech for group to the AAM family their technical expertise and improving friction and surface treatment and extremely pertinent for E propulsion applications as well as expanding customer and geographic diversification.
Furthermore, we received a number of additional recognitions, including being named one of Forbes best large employers not only in 2022, but also already here in 2023. Additionally, Newsweek recognize a as one of America's most responsible companies.
Now, let's now let's talk about our long term strategy.
And as I said before our strategy is very straightforward, we will continue to secure our legacy core business optimize our operations and drive EBITDA and cash flow generation.
As volumes return in this business model is designed to yield handsome conversion.
At the same time, we will continue to invest in electrification and solidify our position as a global leader in E propulsion systems, providing Oems with cost effective high value solutions.
On the electrification front, we recently hosted an investor event and displayed our electric drive systems and components.
Yes, where we demonstrated our industry, leading electric drive technology.
It's great to see many investors experience, our engineering firsthand, while having the opportunity to drive our electrification demonstration vehicles across multiple vehicle segments.
What differentiates a as our platform technology that can accommodate the electric propulsion needs across light vehicle segments, ranging from small cars to light commercial vehicle applications, the flexibility and modularity provides legacy and startup Oems with superior Optionality from components Gearboxes Motors.
Power electronics to full systems and E beam axles.
We hope that we clearly convey that message to U S C. Yes.
Before I turn it over to Chris Let me reiterate our three year new business backlog that we shared during our technology day and discuss when we also discuss our 2023 full year financial outlook that was included in our press release this morning.
And we expect our gross new business backlog covering three year period of 2020 through to 2025 to be approximately $725 million.
We expect the launch cadence of this backlog to be $350 million in 2023 $225 million in 2024 and $150 million in 2025.
Our backlog factors and the impact of updated customer launch timing, our latest customer volume expectations and does not include replacement business, only new and incremental business.
From a launch standpoint, we have 17 major launches here in 2023, when should drive growth over the next several years.
For the backlog breakdown. Please refer to slide six in our presentation package, 40% stems from electrification compared to 35% last year and our approach to electrification is gaining attraction in our book of business.
Currently as we've communicated before or holding approximately $1 $5 billion of new and incremental business with over 75% of the quotes that we're working on coming from electrification programs.
Let's talk about 2023 from an end market perspective, we forecast production at approximately $14 5 million to $15 1 million units for our primary North American market. This represents anywhere between a one to a 6% increase over last year.
Because of the industry's recent production trends stemming from multiple factors, including the supply chain challenges in macro environment I mentioned earlier, we remain cautious about the build environment in 2023 at this time.
As such slide seven illustrates am's 2023 financial outlook a.
AAM is targeting sales of $5 95 to $6 to $5 billion adjusted EBITDA of approximately $725 million to $800 million.
Just your free cash flow of approximately $225 million to $300 million, which assumes capital spending in the range of 3.5% to 4% of sales.
In the near term, we will remain focused on mitigating inflation.
Optimizing our business and addressing cost recoveries.
Furthermore, we will remain aggressive in our plans to position the company for future margin expansion.
This includes our focus on plant capacity and utilization.
Variable and structural cost improvements and further reducing the capital intensity of our business.
These initiatives will have a positive impact on our business over the next several years and as we stated at sea. Yes. Our goal is to continue to be a top tier margin performer and cash flow generator.
And the longer term, we will continue to focus on securing our core business generating strong free cash flow strengthening our balance sheet advancing our electrification portfolio and positioning <unk> for profitable growth, especially in the area of electrification.
I'm very excited about what lies ahead for a and that includes my remarks today I'll turn the call over to our executive Vice President and Chief Financial Officer, Chris Mapes, Chris.
Thank you David and good morning, everyone I will cover the financial details of our fourth quarter and full year 2022 with you today I'll also refer to the earnings slide deck as part of my prepared comments.
So let's go ahead and begin with sales in the fourth quarter of 2020 to Aam's sales were 1.39 billion compared to 1.24 billion in the fourth quarter of 2021.
Slide 10 shows a walk of fourth quarter 2021 sales to fourth quarter 2022 sales.
In the quarter, we experienced a lower negative impact from semiconductor and supply chain challenges, which we estimate at approximately $21 million.
Positive volume mix and other was $128 million.
The <unk> acquisition contributed $84 million of sales.
And lastly, metal market pass throughs, and FX lowered net sales by approximately $68 million with metal and FX both lower.
Although sales were up year over year, we note that supply chain volatility continued sequentially from the third quarter, resulting in frequent changes to schedules.
For the full year of 2020 to Aam's sales were $5 8 billion compared to $5. One 6 billion for the full year of 2021.
The primary drivers of this increase with a tech poor acquisition, which occurred on June 1st and accounted for approximately $200 million in sales and additional volume and mix throughout the year.
Now, let's move on to profitability.
Gross profit was $167 2 million in the fourth quarter of 2022 as compared to $140 million in the fourth quarter of 2021.
Adjusted EBITDA was $157 7 million in the fourth quarter of 2022 versus $164 6 million last year.
You can see the year over year walk down of adjusted EBITDA on slide 11.
In the quarter higher sales due to a lower impact of semiconductor availability and overall volume and mix and other added a net $39 million of adjusted EBITDA versus the prior year.
Fourth quarter material freight and utility inflation net of customer recoveries was an 8 million dollar headwind.
The net headwind for all of 2022 was $60 million and in line with previous estimates.
R&D was higher by approximately $18 million to support product launches and our electrification portfolio.
You may recall last year, we had the benefit of a large customer E. D. N D reimbursement that accounts for most of this year over year difference.
And lastly, <unk> added approximately $5 million and adjusted EBITDA.
For the full year of 2020 to Aam's adjusted EBITDA was $747 3 million and adjusted EBITDA margin was 12, 9% of sales.
Let me now cover SG&A S.
SG&A expense, including R&D in the fourth quarter of 2022 was $88 5 million or six 4% of sales.
This compares to $77 5 million or six 3% of sales in the fourth quarter of 2021.
R&D spending in the fourth quarter of 2022 was approximately $39 million.
As we head into 2023, we will continue to focus on controlling our SG&A costs and investing in our electric drive technology capitalizing on the growing number of electrification opportunities that are before us.
And we expect R&D to increase in 2023 and be closer to the $40 million per quarter on average, although timing can be lumpy.
Good news here is we continue to see multiple new opportunities driving the spend.
Let's move on to interest and taxes.
Net interest expense was $36 9 million in the fourth quarter of 2022 compared to $41.8 million in the fourth quarter of 2021, we continue to benefit from our debt reduction actions.
In the fourth quarter of 2022, we reported interim income tax expense of $4 1 million compared to a benefit of $2 3 million in the fourth quarter of 2020 one.
As we head into 2023, we expect our adjusted effective tax rate to be approximately 20% to 25%.
Taking all these sales and cost drivers into account our GAAP net income was $13 9 million or 11 cents per share in the fourth quarter of 2022 compared to a net loss of $46 3 million or a loss of 41 cents per share in the fourth quarter of 2021.
Adjusted earnings per share, which excludes the impact of items noted in our earnings press release was a loss of seven cents per share in the fourth quarter of 2022 compared to a loss of nine cents per share in the fourth quarter of 2021.
For the full year of 2020 to Aam's adjusted earnings per share was <unk> 60.
Versus 93 cents in 2020 one.
Let's now move on to cash flow and the balance sheet net.
Net cash provided by operating activities for the fourth quarter of 2022 was $148 $5 million.
Capital expenditures net of proceeds from the sale of property plant and equipment for the fourth quarter of 2022 or $53 $1 million.
Cash payments for restructuring and acquisition related activity for the fourth quarter of 2022 or $6 $6 million.
Cash inflow related to the Malvern fire was $3 million in the quarter.
Reflecting the impact of these activities AAM generated adjusted free cash flow of $99 million in the fourth quarter of 2022.
For the full year of 2022, AAM generated adjusted free cash flow of $313 million compared to $423 million in 2021.
As a team we remain focused on free cash flow conversion, including managing capex effectiveness and efficiency and reducing cash restructuring payments.
From a debt leverage perspective, we ended the year with a net debt of $2 4 billion and LTM adjusted EBITDA of $747 3 million calculating a net leverage ratio of three two times at December 31.
This is down from a $3 three times leverage ratio at September 30 of 2022.
In 2022, we lowered our gross debt by over $150 million, including $50 million inside of the fourth quarter.
We will continue to utilize the free cash flow generating power of AAM to strengthen the balance sheet by reducing our debt.
In addition, we refinanced our term loan b in the fourth quarter and now have no significant maturities until 2026.
AAM ended 2022 with total available liquidity of approximately $1 4 billion.
Consisting of available cash and borrowing capacity on Aam's global credit facilities.
So before we move on to the Q&A portion of the call. Let me provide some thoughts on our 'twenty two 'twenty three financial outlook.
And our earnings slide deck. We've included walks from 2022 actual results to our 2023 financial targets and you can find those starting on slide 13.
For sales, we are targeting a range of $5 95 to $6 5 billion for 2023.
This sales target is based upon an north American production of 14, and a half to $15 1 million units and select assumptions for our key programs.
New business backlog launches of approximately $350 million and attrition of approximately $200 million.
There is continued uncertainty in 2023 as David mentioned all of those supply chain issues appear to be stabilizing relative to last year.
Volatility that we experienced in the second half of 2022 looks to continue in the near term 2023.
So we remain cautiously optimistic that the operating environment will improve throughout the year.
From an EBITDA perspective, we are expecting adjusted EBITDA in the range of $725 million to $800 million let.
Let me provide some color on the key elements of our year over year EBITDA walk on page 14.
First.
We expect to convert our recurring year over year product volume and mix increases at approximately 25% variable profit.
Second the incremental portion attributable to the tech for acquisition principally represents five additional months of profit contribution in 2023 versus 2022.
Keep in mind since this is the annualized <unk> of an acquisition. The additional profit contribution has realized a full cost margin profile and not variable profit rates.
Third our R&D spending will increase year over year as we invest in our future and support electrification projects that are in various stages of launch and development.
For <unk>, we anticipate some higher costs related to inflation this year and our goal is to continually to successfully negotiate with our OEM customers prospects.
And lastly in addition, AAM expects to deliver operational productivity to mitigate some of these inflationary costs inefficiency pressures, we are experiencing inside our own operations.
You can see a continued year over year performance on our walk of a net positive $10 million.
On page 15 from an adjusted free cash flow perspective, we are targeting approximately $225 million to $300 million in 2023.
The main factors driving our cash flow changes are as follows we have capital expenditures as we were coming up on some key launches and investments such as automation and electrification book business.
However, our capex to sales ratio is still very low by our historical measures because we are targeting a capex as a percent of sales of approximately 3.5% to 4%.
We also are expecting higher cash interest and taxes and.
And we do see opportunity to improve working capital in particular related to inventory.
And lastly, while not included in our adjusted free cash flow figures, we estimate our restructuring payments primarily or related to the integration of our recent acquisitions to be in the range of $20 million to $30 million for 2023.
This continues a multi year trend for reduction of these types of expenditures.
We expect to use the free cash flow generated in 2023 to continue to reduce debt.
Further solidify our position in electrification and take advantage of select market opportunities to support growth should they arise.
As it relates to cadence for the year, we anticipate the first quarter two experienced the lowest sales per production day, and an overweight timing of price reductions. We also expect to realize a disproportionate impact from cost headwinds similar to what we experienced last year. These costs typically include a timing aspect where recoveries occur in the following.
Of course.
As the year progresses, we forecast these net cost to improve on a quarter over quarter basis and.
In addition, our new business backlog timing increases throughout the year.
Lastly, we would expect a more stable operating environment as the year goes along.
So in conclusion 2022 was a tough year driven by production Choppiness supply chain inconsistency as an input cost challenges all ultimately impacting our cost structure that said and we will continue to focus on what we can control, including driving optimization successfully negotiating customer recoveries integrating the tech.
Our acquisition.
Executing on our capital allocation plan and developing class leading electrification technology.
We are actively positioning a M to be electric propulsion supplier of choice.
And you can see evidence of that from our growing backlog and electrification mix.
So as cost stabilize volumes return and the realization of cost optimization improvements outlined by David earlier, Aam's should generate nice future EBITDA conversion translating to continued robust free cash flow generation.
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 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.
Yeah.
And ladies and gentlemen at this time I would like to remind everyone that in order to ask a question. Please press star and the number one on your telephone keypads, we'll pause for just a moment to compile the Q&A roster.
Our first question today comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys or just.
A first question on the step up in R&D I mean, we saw some of the fruits of that in its early stages in some of the stuff.
Is it products you showed us out E in Vegas packaging around.
Yeah, the the murder in the electric motor were very interesting and fairly unique but I'm. Just curious as you think about this R&D step up how long how much of it is is program based.
For products that are.
You're in the bidding process and you may have won versus you know product development to really go and pitch.
Your EV technology each to the to your consumers I'm just trying to understand it I'm just trying to understand how much of this is a structural going forward or how much is kind of a step up here in the short run as well.
John This is David I would say a lot of our initial spending right now is more on the platform based technology to get our portfolio in a position that we can actively market to our customers clearly there'll be some program based spending as we win new business going forward all but the majority is platform base to put the product line in place.
And once that product lines in place and we'll expect that to scale down, but hopefully some of the program wins will made may require us to just spend some additional electrification.
Engineering resources of R&D, as we book New business.
Okay, and then just just a sort of a housekeeping or two quick housekeeping, Chris the volatility in scheduled and the disruption can you just remind us what that cost you in 2022, what you expect in 2023 and then also when we think about gross versus net on net new business or new business you've seen them.
It gives us a big attrition this year, a $200 million, how should we think about attrition against that gross.
Business bookings overtime.
Yeah, John in terms of your first questions associated with the efficiency impacts if you think about if you look at our.
The walk that we provided throughout the course of the year, we have a call in there called performance in other than for example in the fourth quarter, it's minus $13 million. The vast majority of that would be associated with the impact some of that volatility. So you saw that both in the third quarter, which was a little lighter than that you saw some further answer it in the fourth quarter that we articulated.
The variances that you saw in the first half of 2022 I wouldn't really articulate those more as efficiency related to the volatility because those were carry comparing to periods that were called and almost near Covid shutdown type of activity at the beginning of 'twenty, one but that.
Those variances that you see on our walks in the back half of the year would be.
By and large indicative of.
What we're experiencing through our operations.
The second question on the to answer your question yes.
Yeah. So I mean, so youre talking about something that's in the in the $20 million to $30 million range. If you I mean, if you kind of put that together yes.
Over the back half and that's what we experienced correct. That's reasonable and then and you expect that to continue into 2023 and Eddie any at the scene at the same rate eventually if the world stabilizes that would then go away is that it is that a fair statement yeah. That's a fair statement correct Yep.
Yep.
And I think your second question then was associated with attrition.
You have $200 million of attrition on a year over year sales walk.
That relates to some programs in China and also in North America. We have historically said the impact associated that was between $100 million to $200 million. This year is at the higher end of the range I would think more closer towards the mid point are kind of in the subsequent years.
Okay, great. Thank you very much guys. Thanks, John This is John .
Our next question comes from Dan Levy from Barclays. Please go ahead with your question.
Hi, good morning, and thank you for taking the question I'm wondering if your first.
Yeah. Good morning, I'm wondering if you could just talk a bit to the mixed trends are obviously T. One if you look at the third party schedule. They think that's forecasting them to be down year over year.
Could you just talk about the impact of mix on margins.
Yes, so from a broad perspective is associated with mix you know as it relates to if you think about our.
Two largest programs T. One Rams, obviously, a large program.
Come back to both of those in a minute the rest of production I would expect to continue as volumes come back that to increase on the rest of the business. So that will start to increase its proportional share of mix of our overall business ramp probably very similar year over year. So obviously you can compute how the mix would impact from that on the T. One perspective.
I believe some estimates third party estimates yesterday, we're just updated to be a little bit more elevated I would think about that sort of the lower end of our sales range. You know, we're a little more bullish on that platform our customers a little more bullish on that platform we believe.
So think of our midpoint of the range, maybe about 5% higher than current IH.
IHS estimates and we're probably a little higher than that at the high end of our range, but again, we're a little more bullish on that but you'll see the rest of our book of business continue to grow as part of that mix.
Great. Thank you and then the second question is on your.
Electrification backlog.
So.
You know your your narrative on E. D is that you have a variety of ways to win between subsequently components all three in one system.
Could you maybe breakdown of that 40% of the backlog that is E D.
Is there a rough idea of the mix on sub components.
You know full drive units are some of the key thing you know.
The rough C. P V. That's that's implied there.
Yeah.
This is Chris again.
Think about it.
Slightly more than half is associated on they think of the drive units. The other the remainder then would be on the components side.
And then from a kind of did you I think your second part of your question was content per vehicle, obviously on the drive units as you've heard us maybe articulate.
Our content per vehicles very significant associated with those think of up to $2500 plus and then on the components side, depending on the vehicle depending on the component supply, we can be up to $500 per vehicle.
Okay, great. Thank you.
Yeah.
Our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
Oh, Thank you very much good morning.
Good morning, Matthew.
First question on the four.
For acquisitions it seems based on your 2023 wall.
The margin.
Contribution sort of like the new low double digits based on the guidance can you just remind us if this is okay.
The right margin profile for the business going forward or if there's more incremental opportunity for improvement.
Yeah. So if you think about you know they came on midyear June 1st of 2022, and if you look at the full year performance the tech forehead Forest and contributed in 2022 from an EBIT perspective.
It was just a little bit north of 7% and you may recall going into this transaction, we saw a great opportunity to expand some of our diversification in customers, but also a great synergy opportunity. So.
The Incrementals you see coming online for 2023 are sort of more of a 10 to 12, 5% range. So you're accomplishing a couple a couple of elements that you're bringing on to forecast business for the first five months plus youre starting to see some of those synergies start to kick in in 2023. So that's why I sort of you know $5 billion $5 million to $10 million range of synergy.
He's coming online because you're gonna Youll get a holistic with your margins I would expect synergies to continue to grow after this period as well.
And then and then obviously once we transition past the full year 'twenty three there change in revenues will be on a variable profit basis.
Yeah that makes sense.
Wanted to ask you about a non material cost inflation I think you had previously or did you expect.
Some of this information to be sticking around for the year I don't really see it as a major factor in the walk is it's not a headwind for this year or would you anticipate offsetting these.
These cost increases with productivity.
No. It continues to be a headwind in particular areas such as labor and some other costs that we incur and included in our productivity inflation that other income in that column.
Think about in 2022, our net residual after customer recoveries for the bulk of this type of inflation was about $60 million. We also had some labor inflation on top of that our expectation is that on a net basis is lower than that more than half of that here in 2023 versus 2022 but again customer recoveries and productivity.
Initiatives will help offset a lot of it.
Okay, and then Gerry.
Finally, if I can squeeze one more.
In terms of overall.
Overall message right. So your industry conditions are still fairly choppy and that's sort of like you know continues to put some pressure on margins what sort of what do you need to see to get back towards sort of active passive stable margins or margin expansion. It just is it mostly around the volatility of schedules as it should.
Yeah. It does.
You know our industry volume growth, so I guess, what would be needed for that yeah. This is David I mean, clearly the first thing is we just need stabilization in our business right. We were dealing with so much uncertainty and volatility in our production schedules. So first thing is stabilization.
Oh, the production schedules clearly any growth as the market starts to recover and rebuild some of the inventory I don't think the inventory will ever go back to historical levels, but incremental growth would be positive for us and then we also need to see a stabilization of the workforce from a labor standpoint, and we're not waiting around for that we're making investments in automation.
And other things to take those things into our own control, but the biggest thing would be stabilization across the board.
Yes.
Yeah. This is Chris you know, that's where the labor precisely your question, even more broadly as it relates to margins, obviously volume drives a lot of that stabilizing or reducing even metal market reimbursements, obviously inflation that we just talked about that you were asking about and ultimately you know as David mentioned in some of his prepared remarks that continued to squeeze down to some of our fixed costs and capacity.
Utilization increases will drive margin as well.
Yeah.
Thank you very much.
Our next question comes from James <unk> from BNP Paribas. Please go ahead with your question.
Okay.
Hi, Good morning, guys good morning, James.
Just as a follow on to the last question.
Just taking a step back and looking at by segment.
You're thinking about you know most of nearly all of the R&D investment taking place in the Driveline segment.
You know what is you know.
Really what are the driving forces the challenges in the metal forming segment and it does this fourth quarter represent the bottom right I mean, because we've seen some pretty notable sequential declines from an EBITDA perspective. It does the fourth quarter to mark the bottom for metal forming and if not you know just timeline on that and you know what when does this get better.
When does this get better for that for this segment Yeah. James This is David Yes, we do expect this fourth quarter of this past year to be in the bottom clearly the big issue, where we're battling is labor availability in.
In our metal forming area, we're working hard to stabilize that and and also bring automation.
Automation enter into those factories, but clearly it's a heavy fixed cost business, we need volume running across it we clearly run a lot better when we have the incremental volume going across that at the same time with schedule volatility you can't lay off people. So therefore, there's an incremental cost the same 10, new people that we're bringing in I don't have the that experienced.
We're incurring some incremental overtime in scrap that we historically haven't.
Endured.
But we do think I'm the fourth quarter was the bottom of the metal form performance, we'll start seeing some improvements so that if you're a quarter to quarter going forward.
This is Chris one other point out at you you mentioned that the.
And rightfully so that the R&D is disproportionate on the driveline segment of our business what I would tell you at least from an inflation standpoint perspective utilities costs and metal market impacts are overweight to the metal forming side of the business. So you see some of that other margin pressure and you saw that sort of play out through the course of 2022.
Cost elements, you know move around and you saw inflation from utility in particular in Europe , which is where they have a large concentration of businesses.
Got it understood that's helpful and then just.
One on the interest expense whats driving.
The higher interest expense is it.
It was at the refi that took place in the fourth quarter, just carrying a higher interest rate or should we assume you're carrying you know some some more short term related debt on the balance sheet.
Yeah I would tell you. It's it's it's the composition of three elements first we actually are it's well it's hard to see receiving some benefits from our continued debt pay down.
Two elements driving the net cost would be one when we refinanced our term loan b. The split on that was up 125 basis points versus the term loan B that was originally put back in place in 2017 and.
And secondly, as you know this is a variable rate debt instruments. So it's effectively sulfur plus the spread and so for US now what three or four times, what it was a year ago. So that's really driving a piece of that a good chunk of this we have hedged, but holistically the rates are up on the variable debt instrument.
Understood. Thank you.
And ladies and gentlemen, our final question today will come from Ryan Brinkman from JP Morgan. Please go ahead with your question Hi, Thanks for taking my question I'm wondering.
How should good morning, how should we think about R&D and capex trending as a percentage of sales beyond 2023, and you know as we drill down to the impact on EBITDA.
EBITDA or at CF over a multiyear period do you expect that the earnings and cash flow headwind from higher electrification spending is more about like multi year timing issue given that spending is taking place in advance of product launches and that the contribution margin. When these products do launch will offset the higher costs over time.
Or I guess said differently like while dilutive initially is the pivot toward electrification accretive dilutive or neutral to EBITDA margin and free cash conversion over the medium and long term.
Yeah from a cycle from a cash perspective.
As you pointed out and David mentioned in one of the previous questions. Our R&D spend would be elevated as we're building out our product portfolio that would then decline and then you'd have some potential program specific R&D as you as you step into watches, but we would see some opportunity over an extended period of time as you mentioned in the future. We'd expect this thing to at some point pivot and declined down for.
Our Capex perspective, you know, we're coming off of 2022, which was I think the lowest a percent of sales for capex in our company's history. Our guide here. This year, which continues to have program launches also electrification element of it still quite low by our historical standards of the 3.5% to 4%, but our commentary around this has been to try to maintain our <unk>.
Capex in the near and midterm at less than 5% of sales, we have been very focused on capital efficiency and effectiveness and even as we're pivoting into electrification.
You know continuing to maintain a good healthy control and balance over our Capex spend is a top priority for the company now where where could you see a different solutions is when you win significant amount of new and incremental business inside of the company, where he would have to spend some extra dollars. There we think that would be a great investment to make.
Okay. Thank you very much.
Great. Thank you Ryan and we want to thank all of you who have participated.
On this call and appreciate your interest in a M. We certainly look forward to talking with you in the future.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining you may now disconnect your lines.
Yeah.