Q2 2023 American Axle & Manufacturing Holdings Inc Earnings Call
Good morning, everyone. My name is Jamie and I will be your conference facilitator today.
At this time I would like to welcome everyone to the American axle and manufacturing second quarter 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 then the number one on your telephone keypad, if you'd like to withdraw. Your question you May press star and two.
As a reminder, today's event is also being recorded.
At this time I'd like to turn the floor over to Mr. David Lin 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 second quarter earnings call earlier. This morning, We released our second quarter of 2023 earnings announcement, you can access this announcement on the Investor Relations page of our website.
The PR Newswire services you can also find supplemental slides for this conference call on the Investor page of our website as well.
A replay of this call you can dial one 870 734 475 to nine replay access code 4907646. This replay will be available through August 11.
Before we begin I'd like to remind everyone that the matters discussed in this call may contain comments and forward looking statements subject subject to risks and uncertainties, which cannot be predicted with quality quantified, 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 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 with that let me turn things over there.
I am chairman and CEO David <unk>.
Thank you David and good morning, everyone. Thanks for joining us today to discuss Aam's financial results for the second quarter of 2023.
With me on the call today is Chris May Am's, Executive Vice President and Chief Financial Officer.
To begin my comments I will review the highlights of our second quarter financial performance.
Next I'll touch on some incremental electrification business development news in the quarter.
Our technology and our approach to the market through our components and our drive units continues to gain global momentum is driving interest across multiple segments and applications.
That's the transition to electrification unfolds and we'll be at the forefront of that change with our cutting edge electric propulsion technology that delivers robust power output superior N V H and compact designs.
After Chris covers the details of our financial results, we'll open up the call to any questions that you may have so let's begin.
And the second quarter of 2023 sales were $1.57 billion and continues to be impacted by intermittent downtime at a number of our customers.
Although it has become more difficult to pinpoint the cause of this downtime. We believe it is a combination of continued supply chain challenges, including the lack of labor availability and active inventory management by our customers.
On a positive note we have seen some improvement sequentially regarding these industry issues, but we continue to we will continue to monitor the overall macro environment and we remain focused on the factors we can control.
From a profitability perspective, aam's adjusted EBITDA in the second quarter was $192 million or 12, 2% of sales the margin performance reflects the impact of production volatility and inflation in.
In addition, we continue to experience elevated launch costs and inefficiencies driven in large part by labor availability.
These costs to improve throughout the second half of the year as we adjust our business appropriately.
Chris will provide more details around our financial performance in a few moments.
Am's adjusted earnings per share in the second quarter of 2023 was 12 cents per share.
AAM generated strong positive cash flow in the quarter.
Am's adjusted free cash flow was very strong and the other $100 million in the second quarter.
Yeah.
Let me talk about some business updates would you can see on slide four of our presentation deck.
Last quarter, we announced a significant E beam axle award was the Atlantis. This quarter were following up with another E beam award was it undisclosed OEM.
The program is for our light duty truck application in China.
Additionally, we are announcing additional wins with our electric components business. These wounds, where multiple global Oems supporting programs, both in North America as well as in Europe .
Today's announcements reinforce am's broad electric vehicle product portfolio, our capabilities, our technology and our approach to the market.
From a recognition standpoint, we're very excited this year. They are also made forbes' America's best employers for diversity and for new graduates.
AAM is focused on fostering a safe inclusive like something work environment.
In addition, one of our goals is to develop the newly hired graduates to become a M future business leaders, who will not only drive future profitable growth by the company, but also have a strong sense for community and social responsibility.
To close out my comments on slide five shows our guidance, which is essentially unchanged AAM is targeting sales in the range of $5 95 to 6.25 billion.
Adjusted EBITDA EBITDA of approximately $725 million to $800 million.
And adjusted free cash flow approximately $225 million to $300 million.
And we're forecasting north American production of approximately $15 5 million units.
However, as you all know our sales performance is more dependent on the production of certain significant platforms with specific customers.
And the continuation of the theme that started up over the past several years the operating environment remains dynamic, but we are hopeful to see additional industry stabilization in the second half of the year and starting to see signs of that as.
As such we believe the industry is positioned for stable and positive trajectory in the coming years.
As we communicated before our focus and aim is on the future and we will continue to drive our efforts towards securing our legacy business generated a strong free cash flow strengthening our balance sheet advancing our electrification portfolio and positioned for profitable growth.
The future is very bright for a underpinned by a war award winning electrification technology.
Now I'll turn the call over charges that give vice President and Chief Financial Officer, Chris Me Chris.
Thank you David and good morning, everyone I will cover the financial details of our second 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 second quarter of 2023, AAM sales were 1.5 dollars 7 million compared to 144 billion in the second quarter of 2022.
Slide seven shows a walk of second quarter 2022 sales the second quarter 2023 sales.
In the quarter pricing was a 4 million dollar impact.
Positive volume mix and other was $106 million and the <unk> acquisition completed at the beginning of June last year contributed $69 million on a year over year basis.
And lastly, metal market pass throughs, and FX lowered net sales by approximately $38 million with metal and FX bulk law.
Overall, while the North American production was up close to 15% year over year, our primary full size truck platforms with GM and still Atlas were up just over 4%.
Now, let's move on to profitability.
Gross profit was $178 million in the second quarter of 2023 as compared to $174 million in the second quarter of 2022.
Adjusted EBITDA was $191 6 million in the second quarter of 2023 versus $195 1 million last year.
You can see the year over year walked out of adjusted EBITDA on slide eight.
In the quarter volume mix and other added $31 million of adjusted EBITDA, reflecting a 29% contribution margin on Aam's higher sales.
R&D increased by approximately $2 million to support product launches and our electrification technology development.
Net inflation was a headwind of approximately $14 million and inflationary cost recovery discussions remain ongoing with our OEM customers and we expect resolution should be achieved in the second half of the year with most of our customers.
The combination of launch cost performance and other impacted EBITDA by approximately $27 million in the quarter.
The drivers behind this bucket, where good overall performance by the Aam's Driveline segment offset by a combination of launch costs as we continued to ramp up significant new programs.
The impacts of production volatility and inefficiencies at certain plants.
Going forward Aam's launch costs should diminish in successive quarters, as we progressed, a while or launch curves.
We would also expect customer production volatility to continue to improve.
For inefficiencies, we are addressing challenges at underpinning, our underperforming locations, which largely stemmed from labor availability.
Which are impacting throughput scrap the need for expedited delivery and some other premium costs.
We expect these matters to be resolved this year.
Let me now cover SG&A.
SG&A expense, including R&D in the second quarter of 2023 was $91 $1 million or five 8% of sales.
This compares to $84 8 million or five 9% of sales in the second quarter of 2022.
R&D spending in the second quarter of 2023 was approximately $37 million.
As we indicated entering into 2023.
R&D will trend in 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 and our watch and to launch new programs.
Let's move on to interest and taxes.
Net interest expense was $44 3 million in the second quarter of 2023 compared to $39 5 million in the second quarter of 2022.
Although our total debt is lower at quarter end on a year over year basis, the rising rate environment is driving the interest expense increase.
In the second quarter of 2023, our income tax expense was $5 3 million as compared to an expense of <unk> 6 million in the second quarter of 2022.
For 2023, we expect our adjusted effective tax rate to be somewhat elevated at approximately 50% for the midpoint of our guidance range.
Due to evaluation allowance as mentioned on our first quarter call. We also expect cash taxes of approximately $65 million this year.
Taking all this into account our GAAP net income was $8 million or seven cents per share in the second quarter of 2023 compared to a net income of $22 9 million or <unk> 19 per share in the second quarter of 2022.
Adjusted earnings per share, which excludes the impact of items noted in our earnings press release was 12 cents per share in the second quarter of 2023 compared to 22 per share for the second quarter of 2022.
Let's now move on to cash flow and the balance sheet net.
Net cash provided by operating activities for the second quarter of 2023 was $132 $8 million.
Capital expenditures net of proceeds from the sale of property plant and equipment for the second quarter of 2023 or $44 1 million.
Cash payments for restructuring and acquisition related activity for the second quarter of 2023 were $7 $1 million.
Reflecting the impact of these activities AAM generated adjusted free cash flow of $95 $8 million in the quarter.
From a debt leverage perspective, we ended the quarter with net debt of $2 4 billion and LTM adjusted EBITDA of $723 million calculating a net leverage ratio of three three times at June 30th.
Driven by Aam's strong cash flow performance in the second quarter, we continued to reduce our outstanding debt by over $25 million. We will 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 five shows our full year guidance.
Our 2023 financial targets are unchanged.
Core sales, we are targeting a range of $5 95 to $6 5 billion for 2023.
The sales target is based upon our production assumptions for our key programs and a north American production of approximately $15 5 million units.
For our guidance range, we continue to anticipate the Jim do you want X X program to be flat to up to approximately 5% to 10% on a year over year basis.
We note that our total sales are more sensitive to production of certain key platforms versus just overall inventory production.
In terms of quarterly cadence considerations, we would expect launch costs to improve in the third quarter and customer inflation recoveries in the back half of the year.
Operational inefficiencies should diminish over the balance of the year, while uncertainty remains we are cautiously optimistic that the industry operating environment will continue to 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.
In conclusion, we continue to make good strides with our electrification business development and technology.
Reduced launch costs progress on efficiency gains will continue and we are optimistic about it how about our commercial recovery discussions with our customers as.
As we head into some interesting times, we are focused on remaining nimble and optimizing our business and looking forward to capturing updrafts and macro conditions as they materialize.
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.
Ladies and gentlemen at this time I would like to remind everyone in order to ask a question you May press star and one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Our first of all our first question today comes from John Murphy from Bank of America. Please go ahead with your question.
Hi, good morning, guys.
Hi, good.
Good morning.
One quick question first one is 29% you'll blow through incremental margin you were talking about on on revenue EBITDA and by mix. You also mentioned something about the performance.
Pressure from the volatility of schedules it within the in the bar of negative $27 million on the EBITDA walk.
I mean are you calling that out in saying that that's not part of the incremental and just how should we be thinking about these incrementals going forward, maybe if you could give us the number on that volatility costs in the quarter.
Sure Yeah, when we talk about our contribution margin as it relates to EBITDA on a volume that is sort of a pure variable profit. So that's one out of 29% you've heard us historically talk about it'll range anywhere from 25% to 35% based on mix. So that is a pure variable profit on those incremental sales or core decremental in this case, they're incremental.
The performance piece that you're talking about is in the $27 million bucket and think about half of that bucket is related to launch activity in the beginning of the quarter, especially in the other half is related to some of these inefficiencies and I would expect that half of that bucket to continue then to diminish over time through the balance of the year from a performance standpoint.
That's the impact from a sequential Q2 Q3 to Q4, that's kind of the bucket, we're talking about from an inefficiency perspective.
Does that normally take more pricing.
Yeah, and your expectation is that close to zero as we exit the year is that a fair statement.
It should be it'll be definitely trending that way yes.
And David just a second question on the E V transition I'm, obviously two of your large customer for two large customers here in North America or maybe three are pushing back your expectations for E V volume ramp I'm. Just curious you know what that means for your business does that mean, you know on the core side youre going to generate more earnings and cash flow that will fund.
The future and that May shift the way you run the business or you may just keep running it and investing heavily in E. N E V side I'm, just curious how you're interpreting this and what it means for your strategy business near term and long term.
Yeah, John I don't think it really changes our strategy that much I mean, obviously, we're going to continue to optimize our core ice business.
And you can get the most value out of that business as you indicated the performance of our current business is really what's helping us fund the future but.
But as Chris just commented we're going to spend approximately 40 million per quarter in regards to R&D cost and most of that is dedicated towards supporting the transition to electrification. So we're going to continue to round out our portfolio continue to grow our backlog of new business the electrification, while optimizing our core business.
Okay, great. Thank you very much guys.
Thanks, Sean.
Our next question comes from Ryan Brinkman from JP Morgan. Please go ahead with your question.
Hi, Thanks for taking my question I heard you say in the prepared remarks that there may have been some adverse customer mix or lower production on a particular customer program wanted to dig into that sort of only reiterated guide. Despite now expecting the $15 5 million North American production versus 14, five to 15 months earlier it sounded like it.
Some of your programs might still be experiencing some unexpected downtime I heard you say that it could be harder to pin down the reason for the downtime versus earlier, when maybe automakers, where more public about it clearly being semiconductor related et cetera. So I don't know, if you're able to say like which program or programs that you supply into that might've track softer and do you think.
Due to the customer taking downtime to adjust to lower demand, which could presumably to continue or do you suspect it relates.
Step two or more like supply side explanation that could resolve.
Yeah. Ryan This is Chris I'll take the first part of your question here I think the crux of your question is.
Our macro view from a production standpoint is $15 5 million units, that's up from our previous view, but yet we didn't raise our sales guidance and what is contributing to that thought process. So what I will tell you is first and foremost if you look at the assumptions for our sales its really the underpinning of our specific platforms and to be Frank our view on our big platforms that draw.
This company has not really changed much over the last call it a quarter or two.
As we mentioned in the prepared remarks, our view on the General Motors full size truck platform continues to remain the same as it was previously from a year over year flat to up 5% to 10%, Brian Bracketing, a range and as well as our other top platforms, what's Atlantis and other ones with general Motors, those continue to remain pretty consistent sort of quarter over quarter.
We do see some ancillary benefit on the elevated production in some of our smaller components. We would supply for example through the metal forming group. So you do get a little bit of lift on that but our main programs, we have not changed our views on.
Okay. Thanks, I just want to check in on that other comment on slide two about you know the guidance being based upon sort of the current business environment versus the earlier business environment or are you seeing the same improvements in business environment that other suppliers are reporting such as <unk>.
Steadier customer production schedules generally are moderating.
Moderating non commodity supply chain costs.
A lot about freight this quarter or just how are you feeling about the overall industry operating backdrop.
Yeah. So I think from a production standpoint, Ryan what I would tell you is our second quarter in terms of downtime duration of downtime.
Notification of downtime still impacted negatively but better than what we saw and experienced in the first quarter of this year that does continue though into the third quarter one of our largest endpoint plants from a light truck perspective is down for example, two thirds of the month of July So that does continue but it is sequentially better than what we.
In the early part of the year from a cost perspective, we've seen some favorability from a macro conditions on things like utilities and freight, but we still face pressures brought about an inflation standpoint on labor as well as from our supply base, who are also experiencing these type of inflationary cost pressures that they're looking to pass up through the chain.
Those contingency.
Helpful. Thank you.
Hmm.
Our next question comes from Dan Levy from Barclays. Please go ahead with your question.
Hi, Thank you for taking the questions.
I think he made the dresses to comment or just launch costs dissipating, but maybe you can give us a little more color.
Chris on the one eight to two H bridge and specifically you had revenue down.
Slightly at the midpoint, but your margin up a point is that that's just purely the launch call.
Dissipating is there anything the optical with that.
Colorado Bad for margins.
Yes, if you think about first half performance first half second half in totality, if you're talking about call. It at the midpoint of our range. The revenues would be about equal, which would imply a sales per day slightly higher because there are lower production days in the second half. Our view is some of our larger platforms are more consistent from an absolute volume perspective.
Plus our backlog is a little bit more weighted to the back half of the year from a revenue perspective.
Absolutely, yes that would also apply an uptick in some level of margin performance and Thats driven by.
Elimination of some of these launch costs as they dissipate and some of our larger programs were launched here in the first half of the year think of for example, the GM midsize truck platform that was launched in the first quarter and early parts of the second quarter as well as gaining on some of those efficiencies related to labor availability that we've been working through.
In a meaningful way here in the second quarter that will continue into the third quarter and that will start to improve itself as we exit the third quarter into the fourth.
That's how I would think about that.
Oh, Okay. Okay. Thank you and then just as a follow up.
John's question earlier.
David just on the issue of E D.
Target is getting pushed out by a light some of the D. Three.
Are you seeing any change in the Oems in terms of their go gets on vertical integration would've thought that maybe.
They won't have enough volume to justify vertical integration efforts for certain components instead it lays in.
Bit more Q.
The outsourcing opportunity, even if the opportunity for you on drive units.
Yeah, and I mean, there's obviously uncertainty as the Oems are still trying to figure out their long range product plans and what type of vertical integration strategy that they wanted to have what's clear to us that theyre going to do part of it.
How much are they going to do Oh, we want to do is make sure that we've got the proper product portfolio in place to be able to satisfy any demand did they go to the outside to support and we're very well positioned for that as we've conveyed to you. All before you know we're approaching the market where we can go at it from a component standpoint.
We can do it from a sub assembly standpoint, we can do it from a gearbox standpoint, and we can do it in a final assembly in that final or somebody can either be an E. Do you like an electric drive unit or a complete E beam Assembly, which is more applicable to you don't pick ups and things like that for low carrying capability. So we're growing in all those segments right now.
At the same time, we're hopeful that we can continue to grow maybe at accelerated rate, but that's going to be dependent on the oem's banking there there vertical integration strategies, but go back to John's earlier comment in regards to these volumes, maybe pushing out a little bit.
I still think I used is gonna be here much longer than maybe others think I've been very vocal and very open about that but at the same time I'm a big believer in electrification technology I, just think it's going to take a little bit longer to be fully adopted because theres a number of issues that gotta get addressed from the infrastructure standpoint, the charging station standpoint, the affordability of materials.
The affordability from a consumer standpoint, you know from a mass market.
And then ultimately the Oems also have done and demonstrated the ability to make money here because that's ultimately what's going to continue to fund it from there.
So organizations going forward. So I think my personal view is I think there'll be a balance what that balance and mix is going to be in the future T. B D. But at the same time, we will be prepared to support whatever that mix is going to be.
Great. Thank you.
Thanks, David.
Our next question comes from games that Gorilla from BNP Paribas. Please go ahead with your question.
Hi, Good morning, everyone Alright, James.
Just on the metals and FX flow through the first half has seen an EBITDA benefit of $23 million and I think your original guidance, which of course, the maintenance pack you baked in a full year headwinds to EBITDA of about $20 million. So what's driving the major delta there and you know how are you thinking about the.
Rest of the year and then just a follow on to that can you can you provide any color on how you're managing to your Mexican peso exposure and the associated.
Impact there too to your to your conversion. Thanks.
Yes, certainly I will take this here James from a metal market perspective, you know we have seen the first half of this year.
A benefit if you will as we have seen some softening in some of those metal indices.
So you're seeing that translate in a positive relationship for us typically when they go down our revenues go down, but we capture a little bit of that 10% to 20% residual to the profit upside the inverse happens of course when they go up we've seen them start to trend up a little bit here in the back half of the second quarter, but not meaningfully how do we think about things unfolding for the balance of the year.
As you know they change every 30 days for US, we just assume sort of runway run rate, where we exited the second quarter from a level of metals indices.
In terms of profitability standpoint, like I mentioned, they have an inverse relationship we saw some increasing metal content at the end of last year aluminum was very strong in elevated we saw some mixed trends on some of the other commodity so that was our guidance going into the year. This is obviously playing out a little bit better for us from a metals perspective, but again.
It changes every 30 days and we're subject to the whims design of our contracts with our customers or our to insulate us and protect us at a macro level for these type of metal changes.
That'll be my first 0.2nd point that you've asked about the peso side, obviously that that currency is a very important currency for us from a cost perspective, we buy over or consumed on an annual basis over 5 billion pesos. So think of a few hundred million dollars worth of pesos. We do have a rolling hedge program Ah in terms.
That where we hedge between zero to three years out and we're in a pretty good spot for that here. This year, we disclose all our hedging relationships of course inside of our queue, but any typical timeframe. We're hedged on a next 12 month rolling basis anywhere between call it 75% to 80%.
Hopefully that frames up our peso exposure, but it is it is strengthening and obviously that would be a little bit of a headwind for us.
As we head more into next year very small amount for the balance of this year.
Understood.
Paul.
And just on the E beam axle award in China would that be through any.
Joint venture relationship for you guys or is that going to be just completely done in region through your consolidated operations just any color there. Thanks.
We're just not able to comment on that at this time based on what the customer has asked us at this point in time, but at the appropriate time, we certainly will do that and let you know that.
Got it thanks.
Yeah.
And.
Ladies and gentlemen, our last question today will come from Tom Narayan from RBC. Please go ahead with your question.
Oh, yeah, thanks for taking the question.
Could you provide maybe some color on specifically what how you guys are improving the labor availability I know you've called that out a couple of quarters now.
Yeah, just what specifically you're doing but it gives you confidence that will improve.
Yeah. This is David Hum first and foremost.
Obviously, you were extending the pool in the area that we're looking to attract talent from.
We're paying referral bonuses were paying retention bonuses, we've increased our wages multiple times.
You know, what we're demonstrating greater flexibility in regards to how we are hiring and the type of positions roles that we have we're also putting inappropriate skill set training and development because it's one thing to have.
Nevada that hire them, but also then retain them. So we can slow down some of the attrition rate that's going on in the marketplace. You know today, but oh everything I just covered with you in a number of other things are definitely starting to pay off and we're starting to address and get the gist.
She has taken care of and we're highly confident that we'll have it resolved here in the second half of the year.
There's some other elements for that time as well as we look at some of the product closer to our facilities you don't looking to optimize some of our open capacity elsewhere that can that has labor availability or I should say doesn't have labor ability issues that we can leverage from that perspective.
As well as you know you've heard US also talk about automation. So that takes time to implement over time. So we're looking for areas to support that as well. So we're really attacking this on all fronts.
Got it thanks, and then my follow up.
On the.
The the D three a.
Volume issue in North America.
You know, where where we're not necessarily seeing that happen as much with maybe European Oems just curious if.
Are you able if you're making these products is it possible to shift your strategy just selling to other Oems or are you kind of just.
No fixed on on on developing E.
E V products for you know your existing OEM kind of customers that you that you have that are maybe more north America or our approach to the market as it is a global approach to the market from an electrification standpoint broken down into the different segments that I outlined earlier.
Clearly we serve is 75% of our business today is here in North America is if you want to work to protect the existing programs that we have while also growing that.
But we also as we've highlighted before one sizable awards in Europe as well as in China. That's all electrification base. So again, what we'll go where the opportunities are at.
At the same time that'd be respective of the Oem's decisions in regards to what they think the launch timing will be for their respective programs.
Alright, great. Thanks.
Thanks.
I believe that was our last question. Thank you Tom and we thank all of you who have participated on this call and appreciate your interest in AAM you certainly look forward to talking with you in the future. Thank you.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.