Q1 2023 American Axle & Manufacturing Holdings Inc Earnings Call
Okay.
Good morning, everyone. My name is Jamie and I'll be your conference facilitator today.
At this time I would like to welcome everyone to the American axle and manufacturing first quarter 2023 earnings conference call.
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After the Speakers' remarks, there will be a question and answer period.
He would like to ask a question. During this time simply press the star key and the number one on your telephone keypads.
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Tom I'd like to turn the floor over to Mr. David Lim head of Investor Relations. Please go ahead Mr. Lim.
Thank you and good morning, I'd like to welcome everyone, who is joining us on Aam's first quarter earnings call earlier. This morning, we released our first quarter of 2023 earnings announcement you can access this announcement on the Investor Relations page of our website www Dot M Dot com and do their PR newswire services you cannot.
Also find supplemental slides for this conference call on the Investor page of our website as well so listen to a replay of this call you can dial 1877344 75 to nine replay access code 8763803. This replay will be available through May 12.
Before we begin I would like to remind everyone that the matters discussed in this call may contain comments and forward looking statements.
Due 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 Dauch.
Thank you David and good morning, everyone. Thanks for joining us today to discuss Aam's financial results for the first quarter of 2023.
Joining me on the call today is Chris May Am's, Executive Vice President and Chief Financial Officer.
To begin my comments I'll review the highlights of our first quarter financial performance.
Next I will touch on some exciting news in the quarter, including significant developments with our electrification business.
The momentum of our technology is clear and is accelerating.
Combination of our technology leadership, including power density mass optimization efficiency and N V. H expertise is driving strong interest in our product portfolio.
After Chris covers the details of our financial results well open up the call to any questions that you all may have.
So let's begin <unk>.
<unk> first quarter 2023 sales were $1.49 billion.
Hey continues to be impacted by downtime at our largest customers and production volatility.
We're closely monitoring the overall macro environment, including a rise in interest rates and consumer sentiment that drives production and demand. We remain focused on factors we can control.
From a profitability perspective am's adjusted EBITDA in the first quarter was $175 million or 11, 7% of sales disruption in the supply chain and changes to production schedules adversely impacted a M in the quarter.
This continues to be exacerbated by a tight labor market.
We anticipate this backdrop to continue throughout 2023, but we remain hopeful that the operating environment should incrementally improve in successive quarters.
We experienced a lot of launch costs in the first quarter as a company is in the launch mode and some of our most significant launches of the year.
We anticipate these costs to stabilize in the following quarters and Chris will provide more details about our EBITDA performance in the quarter.
Am's adjusted earnings per share in the first quarter 2023 was a loss of one one penny.
Amy spirit to cash flow cash outflow in the quarter.
And I am as adjusted free cash flow use.
In the first quarter was $17 million.
Let me talk about some exciting business updates and key highlights, which you can see on slide four of our investment package.
Earlier this year at our technology day, we showed the investment community our strengths and the advantages of our electric propulsion product portfolio.
Today that technology Foundation is continuing to manifest into tangible results.
We're very pleased to announce today almost supplies the lantus with E beam axle for future electric vehicle program.
The program is set to launch in the latter part of this decade, where Linda and any other further details we can share on this significant program, but we are clearly demonstrating our capabilities and value proposition and electric propulsion technology and systems integration to the OEM community.
This is a great example of how a M is leveraging the axle heritage of the company with cutting edge electric propulsion technology leadership out today to drive our future growth.
The past several quarters, we have announced multiple E beam awards with ACA Jupiter announced the Lantus.
And we expect the momentum to continue as we earn significant conversations with a number of other OE Adams.
Remember our E beams and easy to use are designed to support multiple vehicle segments. It architectures.
Additionally, a M made a commitment and investment in the global strategic mobility fund, which is managed by entertain venture capital.
The investment provides a M with access to new start up and fully vetted high tech companies advancing automotive technologies.
From a business recognition standpoint, where it started this year.
I am was once again recognized by General Motors with the Overdrive award for its efforts in sustainability.
This is our third consecutive year of receiving the Overdrive award, which recognizes suppliers for performance in such areas as purchasing.
Manufacturing services customer care after sales and logistics.
And we also made the list of America's Best large employers by Forbes, our fourth time in doing so and Newsweek recognized as one of America's most responsible companies here in 2023.
From an ESG perspective, we're also very pleased to announce that we recently published in April our 2022 sustainability report.
Some of the key highlights of this report include achieving our S. P. D. A T I validation of greenhouse gas emission goals.
And a minus rating on the CDP climate change survey.
Hiring our first executive for diversity equity and inclusion.
Improving our all safety performance metrics.
In establishing our supplier sustainability council, all increasing our spend with diverse suppliers.
Clearly a M is committed to profitably growing our business in a way that is sustainable socially responsible and equitable.
To close out my comments slide six shows our guidance, which is unchanged.
And AAM is targeting sales from $5 95 billion to $6 two 5 billion adjusted.
Adjusted EBITDA of approximately $725 million to $800 million.
Adjusted free cash flow of approximately 225 to 300 million, which assumes that capital spending in the range of 3.5% to 4%. So again unchanged from earlier guidance.
And the continuation of the theme that started in the past several years. The operating environment remains dynamic we are hopeful to see some stabilization in the second half of the year.
It is difficult to predict what a normal return, but until it does we will continue to remain focused on cost control daily performance and execution.
Continuous improvement.
Quality performance and bring into future faster.
But as we've communicated many times before our aim in the future and we will continue to drive our efforts towards securing our primary legacy business.
Generating strong free cash flow.
Strengthening our balance sheet, advancing our electrification portfolio and position a M for future profitable growth.
I'm very excited about what lies ahead for a.
And that concludes my remarks, let me now turn the call over to our executive Vice President and Chief Financial Officer, Chris Me Chris.
Okay. Thank you David and good morning, everyone I will cover the financial details of our first quarter 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 first quarter of 2023, Aam's sales were 1.49 billion compared to 1.44 billion in the first quarter of 2022.
Slide eight shows a walk of first quarter 2022 sales to first quarter 2023 sales.
In the quarter pricing was approximately $5 million impact.
Positive volume mix and other was 10 million and the primary contributor to the year over year sales increase was the tech for acquisition, which contributed $101 million to sales.
And lastly, metal market pass throughs, and FX lowered net sales by approximately $48 million with metal and FX both lower.
During the quarter the key full size truck programs that we support experienced a fair amount of downtime.
Overall, while North American production was up year over year, our primary full size truck platforms related products were generally flat year over year.
Now, let's move on to profitability.
Gross profit was $160 6 million in the first quarter of 2023 as compared to a $186 8 million in the first quarter of 2022.
Adjusted EBITDA was $175 4 million in the first quarter of 2023 versus $196 1 million last year.
You can see the year over year walk down of adjusted EBITDA on slide nine.
In the quarter volume mix and other added $4 million of adjusted EBITDA.
R&D increased by approximately $8 million to support product launches and our electrification technology development.
That's inflation performance and other was a headwind of $27 million for some color on this variance. It is a mix of net inflation for labor and materials inefficiencies doing production volatility and launch costs, we incurred as we were ramping up significant new programs in the quarter.
Going forward, we would expect labor inflation to remain efficiencies to improve its stability and launch costs to continue into the second quarter and reduced thereafter.
Let me now cover SG&A S.
SG&A expense, including R&D in the first quarter of 2023 was $98 3 million or six 6% of sales.
This compares to $86 1 million or 6% of sales in the first quarter of 2022.
Aam's R&D spending in the first quarter of 2023 was approximately $43 million.
As we mentioned before R&D will trend around the $40 million range per quarter as we continued to invest in our electric drive technology capitalizing on the growing number of electrification opportunities that are before us, including the Atlantis announcement today the.
Good news here is we continue to see multiple new electric propulsion opportunities driving this investment.
Let's move on to interest and taxes.
Net interest expense was $44 6 million in the first quarter of 2023 compared to $41 7 million in the first quarter of 2022.
Although our total debt is lower at quarter end on a year over year basis, a rising rate environment is driving the interest rate increase.
In the first quarter of 2023, our income tax expense was de Minimis as compared to an expense of 3 million in the first quarter of 2022.
For 2023, we expect our adjusted effective tax rate to be somewhat elevated in the 40 to 50 per cent range, primarily due to an increase in our current period valuation allowance.
Taking all this into account our GAAP net loss was $5 1 million in the quarter or four cents per share in the first quarter of 2023 compared to a net income of $1 million or one cents per share in the first quarter of 2022.
Adjusted earnings per share, which excludes the impact of items noted in our earnings press release was a loss of one cents per share in the first quarter of 2023 compared to <unk> 19 per share in the first quarter of 2022.
Let's now move to cash flow and the balance sheet net cash provided by operating activities for the first quarter of 2023 was $32 $1 million.
Capital expenditures net of proceeds from the sale of property plant and equipment for the first quarter of 2023 were $46 $2 million.
Cash payments for restructuring and acquisition related activity for the first quarter of 2023 or $4 million. The net cash inflow for insurance proceeds in the operating section of the statement of cash flows related to the mountain rimfire was $7 million in the quarter.
Reflecting the impact of these activities M incurred an adjusted free cash flow and use of $17 1 million in the first quarter of 2023.
We know that historically working capital is often an outflow in the first quarter and we experienced that trend this year.
From a debt leverage perspective.
We ended the quarter with net debt of $2 $4 billion and LTM adjusted EBITDA of $726 6 million calculating a net leverage ratio of three three times at March 31st.
In the first quarter, we continued to reduce our outstanding debt by over $25 million and we intend to continue to utilize the free cash flow generating power of AAM to strengthen the balance sheet by reducing our outstanding debt.
As for the rest of the year slide six shows our full year guidance. Our 2023 financial targets are unchanged from when we initially provided them on February 17th.
Core sales were targeting the range of $5 95 to $6 two 5 billion for 2023.
This sales target is based upon a north American production of 14, five to $15 1 million units and select assumptions for our key programs.
Underpinning our North American production sales ranges, we anticipate the G. M T on X X program on a year over year basis to be flat to up to approximately five or 10%.
In terms of quarterly cadence considerations, we would expect continued launch costs into the second quarter and customer inflation recoveries more weighted in the second half of the year.
While uncertainty remains we are cautiously optimistic that the operating environment will improve throughout the year.
Our adjusted EBITDA target of $725 million to $800 million and our adjusted free cash flow target is $225 million to $300 million.
So big picture this quarter has been a busy quarter with critical launch activity.
Experienced more large truck downtime than expected, it's been impacted by volatility inefficiencies and has had a robust R&D spend.
However, the even bigger picture.
Interest in our new electrification products is growing and our business is transforming with each new award we earn.
So 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.
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 that you may have Jamie.
And 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.
We'll pause just for a moment to compile the roster.
Yeah.
Our first question today comes from John Murphy from Bank of America. Please go ahead with your question.
Oh, good morning, guys I'm just trying to.
I just want to start on on on slide nine.
Nine and I mean, obviously the inflation net performance in other.
Or are there column is he was kind of the big swing factor. So I'm just curious if you could give us a little bit more detail around sort of the exact numbers there on labor and material logistics and launch costs I think we're kind of the big buckets, you talked about you and how we should think about those going forward I think you kind of alluded to getting much better recoveries towards the second.
Half of the year.
Yes, certainly John this is Chris I'll take that question. So yes. If you look on slide nine you can see that bucket of minus 27 million on a year over year basis, I would break that down into the three categories that you referred to our launch costs. As you know this is a big backlog year for us we're launching the Colorado Canyon is one of the larger programs we're launching.
Plus some of the AMG product continues to launch some variance here that that accounts for about 40% to 50% of this so think of this is just getting ready to start up a scrap run off et cetera, as we get up to a volume run rates here for the back half of the year as our backlog from a revenue perspective is weighted more towards outside the first quarter. It comes online through the course of the year. So that's about four.
<unk> to 50% economics here, so think material are afraid a labor et cetera about 30% to 40% of that bucket and then performance would be the rest associated really with a lot of volatility inside the market.
Okay. That's very helpful. And then David as we think about slide four I'm disappointed E beam axle winters is is great news and congratulations on that U S. You see wins like that how much does that sort of open the door to other potential wins at a company likes to Lantus.
Is this sort of a very specific E beam axle application or was this something that could expand beyond what appears to be just this initial win even into a E D use etc.
Well I think the most important thing you know this John is that we have an extensive portfolio of electrification across E beam as well as easy to use and we're very pleased to partner with Atlantis on this electric vehicle program utilizing E beam technology, we do think there's other opportunities not only with still anxious but other customers.
To use similar technology, but also the expanded portfolio that we have on this is a significant win for us at launch at the latter part of the decade. So we're excited about what this program means it also you'll just validates and verifies our electrification capabilities not only just the Atlantis, but.
To the other Oems in regards to the extensive R&D capability that we have paired up with our operational excellence and our quality and and and the heritage of our company. So we're very very excited about this award and glad we could announce it here today and obviously we're limited in regards to some of the details we can share, but a very positive news.
For a.
I'm, sorry, if I can sneak one housekeeping just that 40, 50% tax rate, Chris you alluded to for the year, how much of that is cash and noncash and what what's normal.
Yeah. So I mean that would I mean technically that's all that's our book rate our cash taxes for the year are around 65 million.
Okay, I'm, sorry, what what rate should we think of as normal.
I mean, even from a cash perspective.
No our book and cash back I mean, a book basis going forward I mean it look.
Like outside of twenty-three you don't think of the low 20% range under Carl Okay. Okay. Thank you very much guys I appreciate it thanks, Jeff.
Yes.
Our next question comes from Ryan Brinkman from JP Morgan. Please go ahead with your question great. Thanks for taking my question I thought to ask around that.
E beam axle award with still an test I know the press release refers to your Korean won E drive technology, featuring an integrated motor inverter and gearbox I think that means but just wanted to confirm if you are integrating your components into the complete system, you're providing your own or your JV partner's components, I mean, rather than integrate into components.
Others and if that is the case you know maybe you can speak to how we were able to manage that how were you able to or or even get into the system integration, but how are you able to.
To provide the system or the components at a lower cost or maybe it's a more efficient approach. How you were able to win that award and then do you think you're in a good position to provide these complete integrated systems, where you are providing the components to when it is ito attached to the axle because you understand to be ask all you probably.
Providing the axle et cetera, maybe you are in a better position even to provide integrated systems. When they go to the actual than maybe some other suppliers are when putting it the the the unit somewhere else like attach the engine or transmission, because because you're an axle expert how do you how should we think about that.
There was a lot there Ryan, but I'm going to try to digest it and they respond to that here, but yes. We are doing the you know the full design the integration the testing the validation and the assembly of the entire E beam axle just like we've traditionally done for our ice business in the past.
Yeah, you participated in our AR technology day, and you saw our three in one systems that we shared with you all that Oh, let's see yes.
Yeah, we could clearly leveraging our heritage and our strength like we said, but we're also partnering with and leveraging our supply base for their <unk>.
Ponant in sub systems.
This case, we are using a strategic partner to support us with respect to motors and Inverters.
But at the same time as we've mentioned to you. All we will continue to develop some of our efforts in R&D activity and motors Inverters ourselves when it comes to the software side of things and the integration side, we're doing a lot of work on the software ourselves but.
But at the same time, we need to work with the Oems in regards to their software integration for the entire vehicle. So well will work jointly together in regards to what we need to do the coordinate the software side of things, but yeah. We couldn't be happier to have to offer and also may be able to supply in the future here and integrated system an E beam axle.
First Atlantis and as I said, just in John's earlier comment or question.
This is going to open up a lot of other doors to other Oems as well. So I'm very excited about this opportunity was in Atlanta is the ability to offer integrated E beam systems. In this particular, one but also prepared to supply integrated E D use and E beams in the future with other customers as well.
Okay, great to hear thanks, so much.
Thank you Ofer.
Our next question comes from Dan Levy from Barclays. Please go ahead with your question.
Hi, good morning, Thanks for taking the questions.
I wanted to ask just on the the <unk> bridge and for the guidance for the full year. If you could maybe just talk to a couple of.
Discrete items, a year transactional exposure on the Mexican peso and indeed, we've obviously seen an increase in steel I know you're more exposed to athlete you, but and you know what's implied for a metal market, which I think in the last Oh on the poor Q printing side would be a 15 to 25 million.
EBITDA headwind.
Yeah, Dan This is Chris as it relates to the peso and the metal market.
Just thinking about our perspective guide so as you know the Mexico peso is our largest foreign currency exposure from a cost perspective as you know we have large operations inside of Mexico.
We are subject to some level of volatility associated with the peso, but we do have a significant I would call three year rolling hedge program on the peso. So we are currently benefiting from some of those hedges that were placed last year or two years ago three years ago, and obviously I think for the most part of this year, we will continue to reap some of that benefit we will have some exposure.
Transaction Lee as the peso has strengthened from about 20 to let's call. It 18 to the dollar.
So we'll have a little bit of that but again, our hedges will protect from a lot of a lot of that exposure here this year.
As it relates to metal market, we generally provide through our guidance metal market forward looking sort of at current run rate coming off the quarter. So as you know they declined sort of at the tail end of 2022 declined a little bit inside of the first quarter and have started to clip up at the end of the first quarter has we've seen some clip up in this active.
And cost.
In April and May are early parts of me, but again, we generally do a flat run rate from the end of the quarter and embedded in our guidance, but we are protected as you know we pass out 80% to 90% of the exposure to our customers up and down and it changes every 30 days.
Okay. So just to be clear on the peso in the quarter within the $12 million EBITDA increase on metal market and FX.
Like there was probably very little transactional headwind on the payer that may yes, correct not very much correct.
Okay, great. Thank you and then just continuing the line of questions on on you're still Lantus win I think in the past you disclosed that half of your backlog was driving units versus the other half of the year EV component of your backlog was.
Components or sub assemblies.
I guess I Wonder you know how much does this change the trajectory of what you're playing for us.
You know it does this change the backlog you know with more C. P V more focus on driving.
So in terms of our backlog Dan that the commentary related to our recent three year backlog were released so for 'twenty three 'twenty four 'twenty five this program launches in the latter part of the decade, but it does not change our view on how we are going to market for the products, we supply both from components and driving it but obviously large dry.
Units E beam axle to have a very high content per vehicle, you've heard us articulate it can be as high as $25 plus per vehicle I would put when you have large applications such as this it would be $2500 plus plus plus so this all quarterly weighted towards on a dollar perspective versus a component sale.
But it does not change how we think about the products, we sell into the market and the customers. We continue to work with.
Well Morris, though in terms of.
Does it shift your focus a bit more to some of the larger pieces of content as opposed to the sub assemblies, which are our lower or is it still sort of a balanced approach throughout all he'd be opportunities. So again. This is David let me be very clear, we're going to maintain a balanced approach as we said we're one of very few suppliers that can.
<unk> approached the marketplace different ways here, where we can supply components. So think gears and shafts sub assemblies think differentials, which were already supplying both of those are those segments today to the industry. We're also supplying gearboxes, which is the third item and then the integrated systems, whether they do eat whether they'd be either user.
So we're going to continue to service the market, there's a demand out there in the market for those areas and we will do it in balance.
Great. Thanks, if I could just squeeze one more in if you could maybe just comment on the Capex requirement.
For a program like this are more broadly if you're if you're pursuing a more drive unit.
When.
Yes, certainly Dan this is Chris and we talked a little bit about this at our our technology day earlier in the year in terms of some of our goals from a capital perspective and that was to keep the capital intensity of new wins in the electrification space at a consistency and an intensity level very similar to our traditional product look a big program.
A big Driveline program of course requires capital to launch, but from a goal perspective and to keep the capital intensity very similar to our traditional products.
But you know large programs require capital to invest in as do smallest intensity level is what's key here optimizing the bi also when you get into some of this Ah think of this as a beam axle award that we announced here that obviously leverages the core products. We do today on the traditional side. So we have a great opportunity to leverage existing equipment through this process as well, but again from an.
Intensity perspective, we would expect it to be similar.
Great. Thank you.
Thanks.
Yes.
And our next question comes from Tom Narayan from RBC. Please go ahead with your question.
Hi, Hey, guys. Thanks for taking the question points out along so hey.
Along similar lines of questioning on the on the EBITDA Bridge, the Q1 and bridge and then to the.
The full year. When you guys gave in Q4 mm. So unbilled volume I mean, it it looks as though that the remainder of the year, obviously should see a pretty sizable kind of ramp relative to Q1, I think you guys called that out and then pricing it looks like.
Reverse and I don't know if things maybe have changed since then or but it looks like it was you've called out like a negative 40 million.
EBITDA headwind on price for the full year and then it was only negative five for Q1, just curious if you could talk to those two volume and price if anything's changed since Q4, maybe the dynamics in the remainder of the year for those on EBITDA, yes.
Yes, certainly.
Tom This is Chris from a volume perspective, I think in my prepared comments, we articulated from a range perspective, especially on the full size truck programs that we support how we see the full year playing out.
From a pricing perspective. In addition from a volume our backlog is also it's a big backlog of your for US. It is more weighted from a revenue perspective outside of the first quarter as we're launching some of these programs inside of the first quarter. So that's another key component to think about from a pricing perspective, yes, we did have $40 million in stepping into the year on a year over year bridge.
That is still our expectation and generally we see those sort of come online in the first half of the year not all discrete with inside of the first quarter. So you'll have a little bit of that sort of step in through as the year progresses.
Okay. Thanks, and then my follow up you know Magna. This morning issued a raised their production guidance Global auto production guide its lately, we're starting to see kind of folks getting a little more constructive on on that certainly may be coming from price cutting coming from automakers or abuse on on pricing coming.
Down on a retail perspective for for for the Oems just curious.
How you are viewing auto production just in general do you feel that same kind of view things getting more constructive or is it still you know still challenging and still still kind of clouds that would be at the end of the at the end of the year, our supply chain and all that all those types of issues. Thanks.
Yeah, Yeah, I'll take that this is David dauch.
Well first of all in the first quarter, we clearly were impacted negatively in regards to unexpected downtime from our customers.
Because of the supply chain issues or semiconductor related matters.
So there's still some uncertainty and disruption and volatility in the marketplace, we see that continuing although improving quarter over quarter as we go forward here obviously.
Obviously, the macro environment is challenged still our interest rates are rising so we'll see how that impacts you know consumer sentiment and demand in the future here.
You know the the wage inflation is still sticky we're dealing with that we're also dealing with economic issues that you're all aware of both raw materials and components wise.
Energy is softening a little bit in regards to Europe from the highest that it was that before but it's still above where we typically operate at.
Labor availability continues to be an issue and companies are going to have to run their businesses differently going forward than how we did pre pandemic. That's just a fact of reality.
I think freight issues and the.
The increases have subsided, but still higher than where they were before so things that needed to be dealt with and addressed here, but yeah. We do see the second half of the year getting better we've guided the street at 14, and a half to $15 1 million units here in North America.
We're hopeful that we're at the higher end of that but we're also prepared to operate to the lower end if it if we need to based on you know the marketplace in a customer and demand, but it's you know it's a to wrap it all up I mean, there's still uncertainty and disruption and volatility in the marketplace again, whereas they focus on the things that we can control, but we're hopeful.
The successive quarters are starting to show improvement.
Okay, and if I could just sneak one and it is does your guidance incorporate any impact any potential impacts from E.
E W. A G M.
Absolutely not we all need to be prepared in regards to a potential work stoppage, but we can't build that into our forecasting right. Now if there is an incident or issue that takes place, but obviously the whole marketplace is gonna be impacted will I'll do so accordingly.
Got it thank you.
Right.
And our next question comes from Adam Jonas from Morgan Stanley . Please go ahead with your question.
Hey, guys.
So first just a housekeeping what what percentage or portion of your Capex spend this year and let's say near term is devoted to the EV pure B V Pro.
So just pure bad this year, Adam it's not really it's.
Think of it probably like a third as you're starting to launch. Some of these are components that are near term some of the AMG product, but we're still launching a fair amount of our conventional product, especially this year, that's driving some of our larger backlog, but what about the rough rough estimate at this point.
Yeah, when do we hit like half or when does that flip.
It's going to transition over the next couple of years, because we you know half of our backlog is associated with.
We have rate is associated with E V product on the component side as well as some additional EU wins and then this announcement we had here today is the latter part of the decade. So it's just going to continue to step up yes.
This is David I mean, 40% of our backlog is electrification base today, you know that backlog coverage to the 23 to 25 period of time, what we're quoting on it was about a 1 billion five of doing incremental opportunities at 75% or more electrification base. So to chris's comments, it's going to be the latter part of the decade that where it will start to seeing that but as well.
Grow into it each year as we win new in a new E D business and that backlog grows on the EV space.
Thanks, just a follow up I mean.
Let me at my word this carefully some of your OEM customers.
Set these volume targets you know a.
A year or so ago.
When the outlook for Evs, you know when there was like a year waiting list for Tesla and tests that was the most profitable cargo in the world and you know, there's just a ton of Hyatt frankly.
And I look at those volume targets now they still cleaning too and I'm thinking there's just no way like not even close now that's just my opinion and I think some people on this call may have different opinions, but how do you remain flexible when you're planning for these these radically different type of architectures and products can you tell us what when when it's delivered by people.
They just may not be setting price or cost in the industry and you know that the gap between the checks that their CFO .
Road, and then what can actually get cashed, how do you how do you stay nimble and kind of what's baked into the contracts or just help us out here because I'm thinking there's a reckoning and I think it's going to happen kind of soon guys.
Well, yeah, you'll get out of this this is David first and foremost from a manufacturing standpoint, we're going to try to design our operations to be as flexible as possible and to utilize as much equipment from ice converting over to E V. But as we've talked in the past before there is some dedicated equipment towards the E V related technologies. So we just did.
Be smart.
As to how we invest.
We need to be sensitive to your point in regards to volumes all the volumes right now are forecasts other than you know what some of the EV producers are generating today, especially Tesla. So we've got to be smart about that because theres still a lot of uncertainty in regards to the adoption rates for electrification and.
The other part of that is the way we were balanced in regards to our commercial approach with our customers. Here also we can share and mitigate the risk in and address any concerns that come up on fixed cost absorption issues and things along those lines, but oh, yeah. You raised a very very important point out there's still a lot of issues that are potentially going to impact the penetration of E D.
You know just the grid itself the charging systems to the battery technology, the raw material cost that Ken the Oems make money at this or not but when it's all said and done it's going to come down to consumer affordability.
Right now the average electrification price for a vehicle at $66000, which is beyond where the where the mass market is and that's why we've got to be smart about you know looking at what the adoption rates are going to be an antibody penetration.
That's great I have a good weekend guys. Thanks, yeah. Thanks, Adam appreciate it.
Yeah.
And our next question comes from James <unk> from BNP Paribas. Please go ahead with your question.
Hi, guys.
Just on the the key customer.
Time late in the first quarter.
Clearly it seems as though you guys were able to navigate it pretty well.
And I know you touched on these factors, but what would you attribute to that performance to manage that disruption and then relative to your expectation for the first quarters margins.
Sequentially flat or worse.
Was the biggest you know clearance.
Clears favorable surprise on that.
Yeah.
Yeah in terms of you know the quarter.
And that performance bucket that was asked earlier, you know, 10% to 20% of that I would call year over year bridge is associated with performance impacts from that volatility in terms of dimensionalize some of that inside the quarter and look you know what I'd tell you. It's James is continuing to be nimble with production schedules. It's a challenge you've seen it dragging through some of our performance.
These year over year walk, but trying to be nimble trying to have good communication with customers.
And you know flexing as quick as you can speed matters in this in this game and managing inventories properly as well. So it's it has a lot to handle and obviously its not optimizing our performance. So that's why we see some upside in the future when things stabilize.
Got it and I know you called out some launch costs set.
Set up for the second quarter, just in terms of the margin cadence for the year should we assume.
Betty profitability improvement through the year.
Yes, our guidance would indicate that's correct, but again, we'll have some launch costs here inside of the second quarter and recoveries from customers on some of those discussions you know are a little back weighted towards the second half of the year versus the first half.
Got it.
My last one is just congrats on the on the Atlantis Award.
Well this well this cover the nameplates entire production or or could it be very specific.
I mean, it will cover the nameplate production at the same time, there could be driven this that's going to be dependent upon where the lantus goes well with the product.
Clearly, we'll be able to adapt and adjust to their market needs, but we also have other products our portfolio based on what they may be looking for.
Congrats again, thanks, Okay. Thanks, again have a weekend.
And ladies and gentlemen, with that we'll be concluding today's question and answer session I'd like to turn the floor back over to David Lim for any closing remarks.
Jamie in and we thank all of you got participated on this call and appreciate your interest in E. M. We certainly look forward to talking with you in the future. Thank you have a good weekend.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for joining you may now disconnect your lines.