Q3 2023 American Axle & Manufacturing Holdings Inc Earnings Call
Yes.
Okay.
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 third quarter 2023 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.
If you would like to ask a question. During this time simply press the Star key and then the number one on your telephone keypads.
If he would like to withdraw your question you May press Star two.
As a reminder, today's conference call is being recorded.
At this time I'd like to turn the floor over to Mr. David Lim head of Investor Relations. Please go ahead Mr. Lynn.
Thank you and good morning from Detroit I'd like to welcome everyone, who is joining us on <unk> third quarter earnings call.
Earlier. This morning, we released our third quarter of 2023 earnings announcement, you can access this announcement on the Investor Relations page of our website Www Dot M Dot com.
Through the PR Newswire services can also find supplemental slides for this conference call on the Investor page of our website as well.
To listen to a replay of this call you can dial 1877344, 70, 529 replay access code five six to nine to $2 seven.
Replay will be available through November 10.
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.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Also during this call we may refer to certain non-GAAP financial measures information regarding these non-GAAP measures as well as the reconciliation of these non-GAAP measures to GAAP financial information is available on our website with that let me turn things over to our chairman and CEO David out.
David and good morning, everyone. Thanks for joining us today to discuss Aam's financial results for the third quarter of 2023.
With me on the call today is Chris May our executive Vice President and Chief Financial Officer.
To begin my comments I will review the highlights of our third quarter financial performance.
Then provide deeper insights into our operating performance issues and what we're doing to bring and back to our traditional standards.
And then next I will touch on significant business development news in the quarter as we continue to make excellent strides and winning both electrification and ice programs.
Our strong product portfolio of both verticals allows us to fully support OEM driveline needs across multiple platforms and technologies.
After Chris covers the details of our financial results, we'll open up the call for any questions that you all may have so let's begin.
Ams third quarter of 2022 sales were $1 55 billion.
<unk> sales were negatively impacted by continued customer production volatility stemming from supply chain challenges, including lack of labor availability and delivery constraints within the supply base for.
Ams perspective perspective customer production volatility in the third quarter was significantly greater versus the second quarter.
This was further exacerbated by the UAW work stoppage that began in the middle of September.
From a profitability perspective, am's adjusted EBITDA in the third quarter was $157 million or 10, 1% of sales. The margin performance reflects the negative impact of customer production volatility, including the UAW work stoppage elevated input costs continued operational challenges that survey.
Implants that are having an outsized influence on profitability and a warranty charge in the quarter associated with the casting component.
Compounded our matters in the third quarter economic recoveries have not been reached vital river that reached final resolution in part because of the distraction of the UAW work stoppage with our top three customers.
But discussions are very active in the fourth quarter.
As a whole this performance is not up to standards and Chris will provide more details about our financial performance in a few moments.
Am's adjusted earnings per share in the third quarter of 2023 was a loss of 11 cents per share.
Yeah.
AAM generated strong positive cash flow in the quarter Ams adjusted free cash flow was very strong at nearly $136 million in the third quarter compared to 46 million last year.
On slide four of our presentation deck, we've outlined headwinds we have faced all year.
A few stem from the current operating environment and others are a M internal.
This is a very disappointing for me and my management team as we pride ourselves on our operational excellence and our performance execution.
As we mentioned earlier this year, we continue to experience operational challenges in several of our plants, especially in the metal forming business unit. We are driving for the resolution of a majority of these issues as we exit 2023 and the remainder shortly thereafter.
The combination of labor availability plant throughput throughput challenges and capacity constraints were major contributors to the cost headwinds this quarter.
Additional resources have certainly been dispatched to address these operational issues.
On a brighter note our team has been doing a marvelous job securing new business with our innovative products and new customers.
So looking at page five of our presentation deck. The E beam momentum continues for our company here at a you may recall in the first quarter, we announced a significant E beam axle award was the Atlantis.
That was followed up in the second quarter with additional award for that.
As Asian Oems for the China market.
Today, we're very happy to announce two additional E beam awards, one from Sky will auto supported electric band program with a two in one E beam axle in China.
This program is slated to watch in 2024.
The other one is with Mahindra in India and will supply E beam axle for Mahindra is two and a half ton light electric trucks scheduled for launch in 2025.
Furthermore, we continue to win programs with our ice business.
Ann will provide pizza use it already Adams.
Multiple J tour, which is a brand of Cherry vehicle programs beginning in 'twenty to 'twenty. Four in addition, AAM will also supply independent front axles for a number of MPW plug in hybrid programs in China beginning in 2025.
Today's announcements reinforce am's broad E V at ice product portfolio, our capabilities, our technology and our approach to the market.
From a recognition standpoint, we're also very excited to share that AAM has been named a 2023 automotive news pace pilot award finalist for our innovative electric B Mab, so with a high speed motor and integrated inverter.
Our technology can be scaled to cover class, one trucks and vans to class six commercial vehicles. Since 2020 am has received five automotive news pace and pays pilot awards, demonstrating the company's innovation leadership and electrification.
To conclude my opening remarks, let's talk about our updated guidance and please refer to slide six of our presentation deck.
A M is now targeting sales of 6 billion to $6 1 billion.
Adjusted EBITDA of approximately $660 million to $685 million.
Adjusted free cash flow of approximately $200 million to $215 million.
And according to S&P 'twenty to 'twenty, three North American production approximates $15 2 million units.
However, as you all know our sales performance is more dependent on production of certain significant platforms with specific customers.
Related to the UAW work stoppage our guidance assumes the resumption of production by the first week of November and then overall work stoppage impact of approximately $70 million to $100 million in sales and $25 million to $40 million and adjusted EBITDA.
Yeah.
I assure you that Ams management team continues to work with a strong resolve to navigate these dynamic and challenging times. In addition, and we will continue to drive our efforts towards securing our legacy business generating strong free cash flow strengthening our balance sheet advancing our electrification portfolio and positioning.
For profitable growth.
Now I'll turn the call over to our executive Vice President and Chief Financial Officer, Chris Right Chris.
Thank you David and good morning, everyone I will cover the financial details of our third 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 third quarter of 2023, AAM sales were $1 55 billion compared to 154 billion in the third quarter of 2022.
Slide eight shows the walk of third quarter 2022 sales to third quarter 2023 sales.
Positive volume mix and other was $55 million driven in large part due to our backlog.
The UAW work stoppage had a $15 million negative impact to sales in the quarter and lastly metal market pass throughs and FX lowered net sales by approximately $19 million with metal lower and FX higher.
Overall, while North American production was up close to 9% year over year in the quarter in total our primary full size truck platforms were down approximately 4%.
And in the third quarter, we experienced extended downtime at some of our customers full size truck plants greater than what we experienced in prior quarters.
Now, let's move on to profitability gross profit was $131 million in the third quarter of 2023 as compared to $177 million in the third quarter of 2022.
Adjusted EBITDA was $156 8 million in the third quarter of 2023 versus $198 4 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 $15 million of adjusted EBITDA, reflecting a 27% contribution margin on Aam's higher sales.
The UAW work stoppage at a 4 million dollar impact of the quarters.
In addition, we experienced a warranty charge of $13 million associated with the casting component from our metal forming business unit.
The combination of net inflation performance launch costs in other impacted EBITDA by approximately $30 million in the quarter.
The primary drivers behind this bucket or operational inefficiencies at certain underperforming plants and net year over year inflation in several of our cost areas.
Collectively these drivers cause excessive labor cost that represented approximately half of this total.
That inflation of about 20% to 30% of this total in excess of scrap and premium freight for most of the remainder.
All of these issues are addressable in the manner in which David mentioned.
You'll also note that metal market and FX was lower year over year metals were favorable and FX was negative principally driven by the strength of the Mexican peso.
Let me now cover SG&A.
SG&A expense, including R&D in the third quarter of 2023 was $81 8 million or five 3% of sales. This compares to $85 7 million or five 6% of sales in the third quarter of 2022.
Aam's R&D spending in the third quarter of 2023 was approximately $35 million.
As we indicated entering into 2023, R&D will trend in the $35 million to $40 million range per quarter. As we continued to invest in our electric drive technology Capeline capitalizing on the growing number of electrification opportunities that are before us and launching new programs.
Let's move on to interest and taxes.
Net interest expense was $43 7 million in the third quarter of 2023 compared to $39 4 million in the third quarter of 2022, although our total debt is lower at quarter end on a year over year basis, the rising rate environment drove the interest expense increase.
In the third quarter of 2023, our income tax was a $2 million benefit as compared to a benefit of $5 7 million in the third quarter of 2022.
For 2023, we expect our adjusted effective tax rate to be elevated at approximately minus 100% at the midpoint of our guidance range. This very unusual looking rate is driven by the recording of a valuation allowance that we have discussed in previous calls.
We also expect cash taxes of approximately $55 million to $60 million this year.
Taking all this into account our GAAP net income was a loss of $17 4 million or <unk> 15 per share in the third quarter of 2023 compared to net income of $26 5 million or 22 cents per share in the third quarter of 2022.
Adjusted earnings per share, which excludes the impact of items noted in our earnings press release was a loss of <unk> 11 per share in the third quarter of 2023 compared to earnings of 27 per share in the third quarter of 2022.
Let's now move to cash flow and the balance sheet net cash provided by operating activities for the third quarter of 2023 was $178 $3 million capital expenditures net of proceeds from the sale of property plant and equipment for the third quarter of 2023 or $47 5 million.
Cash payments for restructuring and acquisition related activity for the third quarter of 2023 or $5 million.
Reflecting the impact of these activities AAM generated adjusted free cash flow of $135 8 million in the quarter. This is one of our top performing cash flow quarters over the last several years.
From a debt leverage perspective, we ended the quarter with net debt of $2 2 billion LTM adjusted EBITDA of 682 million calculating a net leverage ratio of three three times at September 30th.
As for the rest of the year slide six shows our full year guidance, our 2023 financial targets have been updated to reflect our estimate that the UAW work stoppage will have on our operations.
For sales, we are targeting a range of $6 billion to $6 1 billion for 2023.
The sales target is based upon our production assumptions for our key programs and we estimate that general Motors large truck production will be at one three to $1 three 5 million units this year.
Awfully flattish at the midpoint year over year.
Our guidance also assumes that production resumes and begins to ramp up during the first week of November from the UAW work stoppage, we estimate that the impact of the work stoppage will reduce sales by $70 million to $100 million and adjusted EBITDA by $25 million to $40 million.
Our adjusted EBITDA target to $660 million to $685 million and our adjusted free cash flow target is $200 million to $215 million.
This guidance reflects the impacts of the UAW work stoppage, our third quarter performance and warranty charge and tracks with our performance overview on slide four.
Although we are not providing formal 2024 guidance, we'd like to provide a number of initial guideposts or factors to consider on the cost side, we expect our underperforming plants to positively contribute by early next year.
A higher warranty items included in adjusted EBITDA in the third quarter of 2023 should not repeat next year and we will lap. The UAW work stoppage. In addition, less production volatility should convert to better operational efficiencies and reduced premium costs.
The topline the industry continues to be positioned for production growth year over year, the magnitude of which will be better served once the dust finally settles with production restarts post the UAW work stoppage.
As David mentioned, we are focused on operational improvements as these inefficiencies that we're experiencing are very flexible.
Progress with our commercial recovery discussions with our customers and lastly, securing both prospective ice and EV business. Thank.
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.
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. Please press star and one on your telephone keypads.
As for just a moment to compile the Q&A roster.
Our first question today comes from Ryan Brinkman from JP Morgan. Please go ahead with your question.
Great. Thanks for taking my question, which is on the operating.
She sees of course, the UAW work stoppage with outside your ability to control it and so I see as called out separately on slide nine.
It would be a great great to get a sense, though of the $30 million year over year negative.
Block of EBITDA drivers related to net inflation performance launching other also on that slide you know how.
How much of that May relate to these operating inefficiencies you're talking about and then all that amount how much would you say relates to doctors truly outside your control similar to the UAW work stoppage such as you know customer no volatility in customer production such as with the GM full size truck program et cetera versus how much.
Might you.
You know maybe lie more within your organization and so therefore, better with hidden your ability to control and what is your line of sight to mitigating are those factors.
Yeah, Ryan Good morning. This is Chris I'll I'll take the first part of that question and I'll Dimensionalize that 30 million from a dollar perspective, and then I'll turn it over to David I'll give you some commentary related to some other elements of your question. So if you think about the $30 million on a year over year basis about half of that is driven by labor inefficiencies inside out.
I'd say our own operations, mostly on the metal forming business unit side of the house its premium labor cost over time, Oh call. It excessive costs, we had to pay for to bring third party personnel to assist with maintenance and temporary workers as we were working through some of our challenges again all fixable.
About 20% to 30% of this is net inflation. So we may have some wage inflation, we have some inflation from the supply base that of course as you know we're working through with some potential customer recoveries to offset some of that and then the remaining piece is is excess of scrap premium freight associated with some of these inefficiencies that we have and again.
Once we start to temper down some of those inefficiencies these costs as well we will start to dissipate in the near term.
So that's sort of dimensionalize it from a dollar perspective, I'll turn it over to David for some yes. So Ryan Ryan This is David Chris touched on and you touched on you know the the customer production downtime was much higher in the third quarter that was the second quarter, we made a choice to hold onto our people during that period of time similar situation with the UAW work stoppage because of.
The dynamic environment that we're operating in from a labor availability issue, we chose to hold on to our people and did some voluntary layoffs I'm based under their own selection.
That drove some premium costs for is that normally we wouldn't be carry with us as far as Chris indicated. We also had some operational inefficiency and throughput issues at a couple of our metal forming plants, specifically related more towards the powder metal side.
Again, that's largely driven because of labor availability issues.
Once you have a experienced workers that are leaving the business or left the business, you're bringing new or temporary workers and theres a learning curve to go through that drives excess of scrap and it drives our other premium costs in the business, but we've got our hands on it and we're getting things stabilized and as Chris indicated we feel that we'll have most of that cleaned up by the end.
For the year, a little bit in the first quarter of next year, we did in the quarter experienced some unexpected downtime at our three rivers facility and are on the driveline side of our business that issue has been addressed it's resolved it's behind US now so our real focus is on the metal forming side of our business and just.
Moving to fixed and address the issues that are largely within our control. The biggest thing that we don't control in this whole thing it just customer schedules and we experienced a lot of volatility in the third quarter.
Okay, Great. Thanks, and then just lastly for me sort of as a follow up to some of those awards that are shown on slide five and taking into account the pretty plentiful electrification awards, especially on the E beam axle side that you announced in conjunction with wouldn't you in <unk> earnings is there maybe any sort of preview that you might be able to provide.
For when you announced in January you're you've rolled the 2023 through 25 backlog to reflect 2024 through 2026, and how that might track where is on pace to track, including relative to that 40% of backlog that was announced last January that related to electrification products.
<unk>.
Yes, Brian This is Chris you know, we're not providing any update to our backlog information as you know we customarily we'll release that with our first quarter earnings call, but you've seen this through the course of the year continued to win in various electric drive E beam axles, but also on some of our ice business as well.
Yeah. Ryan This is David I would just expect it to be positively received.
Okay. Thank you very much.
Okay.
Our next question comes from John Murphy from Bank of America. Please go ahead with your question.
Yeah.
Good morning, do you consider equal 90 on for John Murphy.
My first question is so do you adopt you strike as it raised the labor costs.
The Williams and especially at Barrington on accident claims.
How does that translate to.
Actual labor costs do you see any spillover effect.
Well I mean, clearly we're not an OEM and we don't pay OEM wages, nor do any of the other tier ones that are out there, but at the same time, we have to be sensitive to the movement. That's taking place in regards to southern component operations within the Oems.
Obviously, we're all in the market and there's a war on talent and we got to be able to not only attract the talent, but retain the talent and obviously that has again put pressure on the whole industry not just American axle or the actual business. So we're constantly reviewing them our.
Our our wage and benefit structure, we're looking at that against the market and the competition to make sure that we can be at or above where the market is to make sure. We have a stable workforce. We do expect that there'll be downward pressure that'll cascade down basis. A result of these OEM negotiations and we'll be prepared to address it appropriately at the <unk>.
Same time, we will look at what other things. We can do you want to automate our factories as much as we possibly can to mitigate some of the labor complement if need be in order to maintain and address our cost structure.
Thank you and then my second question is on electrification. So it's great to hear that you.
You you one more programs in Asia, and I was wondering can.
Can you give us.
They estimate on how those.
Programs that are impacting margins and given that in the last few weeks everybody's talking about the lower demand and E vs. How does that impact your <unk>.
Future programs.
Fixation on electric vehicles.
Yes. This is Chris good morning look from a margin perspective as you know, we don't typically discuss margin by specific programs and platforms, but.
But as we look to source and win business in this space you know we have certain financial hurdles that we are required to maintain and we wanted to keep that discipline and as we go into these negotiations that that is on top of our mind as well so maintaining a good healthy financial profile as part of our quotation process and whether it's electrification or ice probe.
So that's the discipline that we intend to keep.
Thank you very much.
Our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.
Hey, guys.
Sorry, James.
Could you just provide some additional.
Context on what the specific challenges more at the Asheville plant downtime.
September I'm on the driveline side.
Just to just to have some some color or some context there.
I'm sorry, James David are you asking about the three rivers and the downtime we experienced there.
Correct.
Yeah. It was it was a component related matter, both internally as well as externally and just really a throughput issue is really what it came down to also ft Q in and OE related matters are like I said those issues are both resolved as far as the outside supplier as well as our own internal.
<unk>, so we feel comfortable with where we are at this time.
Got it and then just as we think about the production restart process post ratification once we get there.
From your perspective, how well positioned is the supply chain to get volumes.
Back going again.
Maybe remind us what what that timeline look like from ratification to restart your back in 2019.
That'd be helpful. Thanks.
Yeah, I mean, typically workers don't go back into the plants until their agreements or ratified obviously that's different with these negotiations here, where the UAW has allowed the workers working with the Oems to come back and start before the ratification is completed.
Out of Acacia will take several weeks. So by mid November you can expect probably afford to be done and then it'll be staggered based on their resolution of timing between Atlanta and G M as well, but let's just say the balance of November I think a lot of the supply base is supposed to be and encouraged by the Oems try to run as much as we possibly could during that.
Downtime to address you know our service parts aftermarket and production type related things, we filled up a lot of inventory.
Oh, so we should all be in a fairly good shape for now my biggest concern quite honestly is what others did with their labor and tend to attract the labor back and then can they maintain continuity of supply as things get going you'll see a ramp up over the next year or.
Two to four weeks to get these plants back at full rate, but we fully expect the Oems to try to make up as many lost units as possible, which is going to put a lot of stress in a lot of demand on the overall supply chain, which is already fragile to begin with.
Thanks.
Yep.
And our next question comes from Douglas Karson from Bank of America. Please go ahead with your question.
Great guys.
For the update here.
Congrats on some of the EV business, you've won but can you maybe just turning to the balance sheet I know debt reduction has been in sharp focus and you've done well reducing debt over the last few years, if you could just refresh us.
Where your targets lie and how 2024 25 may look.
Net leverage ratio, which I believes at 3.3 right now.
Yes. Good morning, Doug This is Chris Yeah in terms of how we are addressing the balance sheet you know from a capital allocation priority I think we've been pretty consistent over the last several years that our strong free cash flow generation will be primarily used to pay down gross debt. We've continued to do that really over the last couple of years, each and every quarter.
Obviously in the third quarter, we took just a little bit of a foreign debt down held cash coming into a UAW work stoppage situation.
But obviously paying our debt down will continue to be top of our mind.
From a leverage perspective.
Our goal as we've articulated publicly many times, it's been to drive towards that two times net Levered company, that's driven in part by our cash flow generation and continued reduction of debt, but also then to grow our EBITDA sort of from here in these run rates, especially as production starts to creep up into the future. So that those those goals and those objectives and those allocation parties have not.
<unk>.
That's helpful and if I could just circle back to the easy wins.
In the past you've put out a backlog for EV I'm looking at the slide deck I don't I don't see it I know the numbers.
Pretty strong can.
Can you maybe give us an update on what the backlog looks like in an EV.
Yeah, we released that earlier in the year are actually at our CES show in January was about 40% of our backlog, we typically update that once a year I would expect to see something early next year with that.
Okay.
Yes.
Thanks, so much.
Thanks, Doug.
Our next question comes from Tom.
Marion from RBC. Please go ahead with your question.
Hi, guys.
A follow up some follow ups on some of the questions that just got announced.
So in the event, there's just like snap back post UAW production.
Just curious as to your guys is production capacity.
You know, presumably youre, not obviously operating at kind of 100% or whatever but like.
Is it I mean, there's clearly a limitation as far as.
How much can be produced just curious if there's any color on that dynamic like.
Can you.
Or are you at all seeing enough inertia to kind of overproduce, where do weekends or et cetera that you wouldn't ordinarily not too are you seeing this like sharp snapback.
That's the first question.
Well remember that many of us were running heavy prior to the strike taking place as Oems were trying to build some strike bank protection.
So we've got experience of doing that and you know running at higher capacity levels are based out of our installed capacity I expect as I said earlier that you know the customers are going to try to make up lost units because of the work stoppage. Therefore, there'll be pushing the supply base not just a M, but the full supply base to those no maximum capacity levels.
The question is for how long and how sustainable is that because we all need to be able to do maintenance on our equipment and be able to give our people a break up.
But at the same time wherever we can provide our product to support our customers, we're going to do that and so there there will be stress in the system. There is no doubt about it but it's a design stressed by the Oems.
And I think they're going to push the system as hard as they can and they'll find out which suppliers.
Or are capable of keeping up and that'll be the eliminating factor for the industry.
Great next one.
On the backlog you said that you you you gave that at CES and you give one again next year.
And is there any commentary on on that backlog or are you seeing any vulnerability there or can you is it safe to say that that's pretty secure as of now any cancellations any kind of color on on that backlog.
Yeah as it relates to our backlog we disclosed earlier in the year you know no significant cancellations at this point in time.
Okay, great. Thanks, a lot.
Okay.
Our next question comes from Joe Spak from UBS. Please go ahead with your question.
Oh, hi, everyone a couple of questions.
Questions here.
One on on the all the operational challenges you must stay at which time you know there's sort of a chart like circle was helpful.
Like what like what would be you know b factors that would cause either an acceleration or a delay versus that you know getting things back in order by that second quarter 'twenty four time frame because it is it really labor or you know, which is a little bit outside of your control, especially if it's sort of further down.
The supply chain to your suppliers or is it more stuff under under your control that would.
That would cause you to lean one way versus the other.
Yeah. Joe This is David clearly the biggest issue for US is just the labor availability side of things, we had some major shortfalls on labor availability or split it labor scarcity and a couple of our critical metal forming plants.
Now dealt with that the bigger issue that we're dealing with now is we've got the bodies. Some of the bodies don't have the same experience level of our skill set level. Therefore, it takes us a little bit longer than we lose some efficiency or we drive inefficiencies into our operation that also lead to scrap and other premium cost. So now that we have the body that's a matter for us.
To get in the getting them trained and up to our standards, which will then help us alleviate those premium costs that we're incurring right now so.
The biggest issue was just labor availability I think we've addressed that between permanent hires as well as a contract or temporary hires.
But the biggest thing now it's gonna be within our control with respect to getting them up the learning curve and then minimizing the premium costs that we're incurring.
If I could just follow up there and maybe I misunderstood, but I thought you were sort of implying that there's labor challenges I'm, even broader through the supply chain may be to your suppliers is that is that not the case of Mexico. If your suppliers continue to have some issues or challenges could that and turn them into <unk>.
Back to your upstream.
Joe there, they're still labor availability of a scarcity issues in the marketplace across the supply base.
So we all run their risks not just a M. We all run the risk of that I mean, clearly we're working with our various tiers to try to understand where we have risk and mitigate that risk wherever possible over the last couple of years Amazon sourced a lot of work. So we were within our control in many cases, but we do run some risk and we are monitoring several.
Suppliers right now that have labor scarcity issues.
Okay.
And then second question and I think you sort of touched on this a little bit earlier, but maybe to ask it a different way like you mentioned.
You know some of the recoveries were or maybe pushed as you had some customers that were somewhat distracted this quarter, maybe if you could quantify that one that would be helpful. But the two you know.
Obviously your customers are facing them you know increase cost.
Now next year and the year after as well so it seems like you know maybe those negotiations that they are of course get a little bit tougher and I'm. Just wondering if you have any early insight into how you go after what is rightfully yours whether that is.
Lump sum payments or maybe it sort of takes the form of a piece of price adjustments.
Adjustments or maybe even you know securing future business.
Yeah like I said in my remarks.
Many of our negotiations in the third quarter, where we expected to bring resolution got postponed or pushed into the fourth quarter and understandably so because of the focus on the work stoppage.
And the labor negotiations yeah, we've been in earnest discussion with them. We continue as I mentioned here in the fourth corner Theres always dynamic tension that there's there are we've got to find a solution that is mutually beneficial to both of US we can't just absorb all of the economic inflationary issues that are going on you.
You know what I'm talking about there at the same time it could it's gonna be it won't be the same solution I don't think for every customer and we'll do our best to do that but at the same time it could be lump sum could be piece price could be a number of different ways that things can get ultimately resolved ultimately what we need is relief to the inflated a call.
Cost of wearing crane across the board from material to wages or labor.
Two utilities in freight and other things that we've encouraged encountered over the years and we are being respectful of the fact that we are seeing some trends in the right direction from a macro standpoint, where some of these costs are coming down. So we've taken some of those issues off the table, but there's still a large number that needs to be dealt with with these customers.
And any sense of the magnitude of recovery as you were expecting in the quarter that got delayed.
I wouldn't I wouldn't say magnitude of recoveries per se Joe This is Chris.
If you look at our last couple of approaches that we've provided through these earnings calls we talked about.
This quarter, 20% to 30% of that $30 million a performance related to net inflation you saw a number of about 14 million, we disclosed in the second quarter and another similar number back in the first quarter. So that's giving you the magnitude of the inflation headwinds that we're facing that we're obviously in active discussion with.
Okay.
Thank you.
Thanks, Sean.
And ladies and gentlemen, our last question today comes from Dan Levy from Barclays. Please go ahead with your question.
Hi, good morning, Thanks for.
The question.
A couple of questions on.
On the EV side first maybe you could just give us a sense.
The trajectory of your R&D spend.
On either I know you said the backlog right now.
Intact in the program delays, but maybe you could give us a sense of the trajectory and specifically the level of flexibility you have if there are haircuts to emerge on on the volume side, you know what flexibility do you have to defer a piece.
Pieces of that.
From a dollar perspective, Dan this is Chris from a trajectory as you know we've talked about over probably the last I would say four to eight quarters that we would from a spend perspective flip it up to about $35 million to $40 million per quarter, you would see us now sort of performing in that range. That's why while we're building out our <unk>.
Vacation platform, while we have won work and beginning some development work for the programs that we have one.
In the event that something was delayed or deferred or something of that nature. Obviously, we can manage some of those costs accordingly.
Yeah. Jim This is David the only thing I would say is that.
Honestly all the Oems are gonna be reevaluating their electrification strategies in light of some of the softening of the evs as far as inventory levels.
Our growing and just maybe the acceptance by the consumers, maybe a little bit slower than maybe what was anticipated. So as Chris said, we can throttle things with respect to our spending there but at the same time, we want to make sure that we continue to develop the portfolio. So we can be agnostic to the market. So we can supply ice hybrid or EV related products going forward.
So we will spend appropriately.
Forward, but we wanted to make sure we round out our electrification portfolio appropriately.
Okay, and I think in the margin impact.
We think there is a slowdown that emerges within your particular product set but it's offset by ice.
Is it that the margin profile on ice at least from a contribution margin standpoint is superior T. E. V. So it's net positive margin how should we think of the net margin impact in the event than a.
Slower E D volume outlook.
If holistically you know you know our ice business is basically how we performed over the last several years, which can be very compelling from a margin perspective, you know we have high variable profit if its just incremental volume on our ice can be anywhere from 25% to 35%.
Percent, depending on the on the product set.
It's just variable incremental volume at ice you know, that's obviously very positive for us and some of our large electrification wins you know something that we announced earlier are launching latter part of the decade. So that mix, obviously is not upon US right now we'll launch them smaller programs, but they'll come in at more full cost like any new piece of business would come in and forecast.
But the profile as you know we've tried to articulate that we're trying to run in reasonable financial returns for both sides of this business.
But it's very clear the weekend, we've got size and scale on our ice business and we have growing scale and our E V. But you can expect the margins on EV to be at the same level as ice right out of the chute, but but as that scale grows then you could expect margins to improve but clearly as Chris indicated we should benefit.
If there's a slowdown of ice based on.
Slowdown of B V based on ice margins that we're incurring today.
Okay. Thank you and a follow up.
You know I think what we've heard from some of the Oems out there is that in a in.
The weaker volume environment.
It makes them rethink the level of vertical integration that they had planned because maybe it takes them longer to get scale or to get the volume to justify that scale.
Is the tone or tenor of your conversations with Oems to maybe initially were a bit more aggressive on vertical integration shifting a bit that there was perhaps a bit more opportunity for that to be outsourced to you.
Oh, well, we haven't had any discussions to date because the labor negotiations just have wrapped up they've clearly got to assess their long range product planned strategies. The you know what they want to do to your point on vertical integration. They clearly understand our capability. They clearly understand that were available to help them currently.
We have a cost structure that is lower than the OEM cost structure, hopefully we can maintain that as we go forward. So.
So I do expect that there'll be some discussions along those lines in the future.
Yeah.
Great. Thank you.
Thank you Dan and we thank all of you who have participated on this call and appreciate your interest in AAM, We certainly look forward to talking with you in the future.
Thank you.
Ladies and gentlemen that does conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.
Okay.