Q3 2024 American Axle & Manufacturing Holdings Inc Earnings Call
Betsy: Good morning. My name is Betsy and I will be your conference facilitator today.
Betsy: At this time, I would like to welcome everyone to the American Axle in Manufacturing third quarter 2024 earnings conference call.
Betsy: All lines have been placed on mute to prevent any background noise.
Betsy: After the speaker's remarks, there will be a question and answer period.
Betsy: If you would like to ask a question during this time, simply press the star key, then the number 1 on your telephone keypad.
Betsy: If you would like to withdraw your question, please press the star key, then the number 2.
As a reminder, today's call is being recorded.
Speaker Change: I would now like to turn the call over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.
Speaker Change: Now, to listen to a replay of this call, you can dial 1-877-344-7529, replay access code 1531572. The replay will be available through November 15th.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: With that, let me turn things over to AEM's Chairman and CEO, David Dauch. Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AEM's financial results for the third quarter of 2024.
David Dauch: Joining me on the call today is Chris May, AIM's Executive Vice President and Chief Financial Officer.
David Dauch: To begin my comments, I'll review the highlights of our third quarter financial performance.
Next, I'll touch on some business development news.
David Dauch: and commentary about the industry. After Chris covers the details of our financial results, we will open up the call to any questions that you all may have.
So let's begin with our financial highlights.
AIM's third quarter of 2024 sales were $1.5 billion.
David Dauch: Adjusted earnings per share was $0.20 per share. Adjusted EBITDA in the third quarter was $174 million, or 11.6% of sales. And adjusted free cash flow was $75 million.
David Dauch: AM delivered year-over-year financial performance driven by productivity and operating efficiencies resulting in margin expansion despite lower sales versus last year.
David Dauch: Let me provide you with some high-level perspective on what unfolded in the quarter.
David Dauch: Overall, North American volumes for the industry were down approximately 5% from last year and 9% sequentially.
David Dauch: In addition, two of our largest programs are in the different stages of launch, which we continue to support. This was partially offset by year-over-year volume growth in the GM T1xx platform.
David Dauch: Operationally, we were making positive strides and this can be seen in our EBITDA results. The AM team remains highly focused on driving efficiency, cost, and utilization. Simply, we're managing factors that are under our control and look forward to further positive performance.
David Dauch: Now let's talk about some business updates which you can see on slide 4 of our presentation deck.
David Dauch: We are very pleased to announce that AM was awarded Business to Supply an electric beam axle to a Chinese OEM.
David Dauch: Furthermore, AM will support a well-known premium luxury performance European OEM with electric vehicle components.
David Dauch: These two wins are examples of our capabilities in the EV market. We can provide dynamic component and subsystems to full turnkey E-drives and E-beam systems.
Let's talk about our legacy business.
David Dauch: In our view, combustion engines will be around for a long time, and as you know, this is good for AM.
David Dauch: In sum, AM's comprehensive product portfolio well positions the company to support OEM's various propulsion needs.
David Dauch: We anticipate this deal will close in the fourth quarter of this year. This is a highly favorable transaction for AM, and this sale allows us to strengthen our focus on light vehicle, ICE, hybrids, and full electric passenger car, pickup truck and SUV, and van applications on a global basis.
Now let's talk about the industry.
David Dauch: AM's view is that ICE, hybrid, and EV powertrains will coexist for a very long time, particularly in the U.S. market.
David Dauch: We have seen others adjust electric vehicle take rates down over the past year or so, which is reaffirming our view. What will drive electric vehicle adoption will be factors such as affordability, range, charging availability, and electrical infrastructure.
David Dauch: In the near term, it appears to us the OEMs are still evaluating their future product planning strategies.
David Dauch: This includes balancing investment spend, capacity, program profitability, and consumer preferences.
David Dauch: This is clearly impacting electrification programs and we are starting to see a renewed interest in ICE and hybrid platforms, including program extensions.
David Dauch: As for our own investments, we will invest as needed to maintain our product and technology leadership across multiple propulsion systems.
Ames, very focused on profitable growth and achieving adequate returns.
On to our financial guidance.
David Dauch: With three quarters completed, we are adjusting our full year sales, EBITDA, and adjusted pre-cash flow ranges as follows.
AIM is now targeting sales of $6.1 to $6.15 billion.
David Dauch: adjusted EBITDA of approximately 715 to 745 million and adjusted free cash flow of approximately 200 to 220 million.
David Dauch: The tightening reflects our latest assumption of North American industry production and volume output of certain platforms, including those that are in launch.
David Dauch: In addition, we continue to monitor overall industry inventories, which have been rising.
David Dauch: We are also monitoring transaction prices, incentive spending, and overall interest rates.
David Dauch: Dauch, David Lim, Christopher May, David Lim, Christopher May, David Lim, Christopher May,
David Dauch: To conclude my remarks, and as I have communicated previously, our aim is on the future, and we will continue to drive our efforts towards securing our primary legacy business, which is substantially complete.
David Dauch: Generating strong free cash flow, which we continue to deliver. Strengthening our balance sheet, we've been disciplined about paying down debt. Advancing our electrification portfolio, we've demonstrated incremental wins in that space. And positioning AM for continued profitable growth.
Speaker Change: Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Chris May, for the financial details. Chris?
Chris May: Thank you, David, and good morning to everyone. I will cover the financial details of our third quarter 2024 results with you today. And I will also refer to our earnings slide deck as part of my prepared comments. So let's go ahead and begin with sales.
Chris May: In the third quarter of 2024, AM sales were $1.5 billion compared to $1.55 billion in the third quarter of 2023.
Chris May: Slide 7 shows a walk between 3rd quarter 2023 sales to 3rd quarter 2024 sales.
Chris May: Lower volume mix and other was $23 million driven primarily by lower customer production volumes on certain vehicle programs that we support.
Chris May: Metal market pass-throughs and FX decreased sales by approximately $19 million and both were lower year-over-year in the quarter.
Now, let's move on to profitability.
Chris May: Gross profit was $171.3 million in the third quarter of 2024 as compared to $130.6 million in the third quarter of 2023.
Chris May: Adjusted EBITDA was $174.4 million in the third quarter of 2024 versus $156.8 million in the third quarter of last year.
Chris May: You can see the year-over-year walk-down of Adjusted EBITDA on slide 8.
Chris May: In the quarter, lower volume mix and other reduced our adjusted EBITDA by approximately $9,000,000 versus the prior year.
Chris May: R&D spend was higher year-over-year based on program requirements and timing. However, sequentially it was lowered by $4 million as we looked to optimize our R&D expense.
Chris May: driven by a combination of operational improvements, cost controls, and elimination of a warranty charge in the prior year. All of these activities ultimately resulted in a stronger year-over-year margin performance on lower sales.
Chris May: The increase was primarily due to higher R&D and other costs.
Chris May: AAM's R&D spending in the third quarter of 2024 was approximately $40.1 million.
Chris May: We will continue to support the needs of our business with the appropriate R&D spending levels. That said, we anticipate R&D expense should moderate in the coming years as we adjust our spending in this area to mirror current industry powertrain trends.
Chris May: Let's move on to interest and taxes. Net interest expense was $38.1 million in the third quarter of 2024 compared to $43.7 million in the third quarter of 2023 due in part to lower debt balances.
Chris May: In addition, we paid down approximately $50 million of principal on our 2026 senior notes in the third quarter, which we announced previously, and will continue to opportunistically pay down our debt.
Chris May: In the third quarter of 2024, we recorded an income tax benefit of $12.1 million compared to $2 million in the third quarter of 2023.
Chris May: For the full year, we now expect our adjusted effective tax rate to be approximately 25 to 30 percent.
Chris May: This reduction in overall rate versus previous estimates is primarily due to the favorable tax benefit incurred in the third quarter.
Chris May: We also expect cash taxes of approximately $50 to $55 million this year.
Chris May: Taking all these sales and cost drivers into account, our gap net income was $10 million or $0.08 per share in the third quarter of 2024, compared to a net loss of $17.4 million or a loss of $0.15 per share in the third quarter of 2023.
Chris May: Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was $0.20 per share in the third quarter of 2024 compared to an adjusted loss of $0.11 per share for the third quarter of 2023.
Let's now move to cash flow and the balance sheet.
Chris May: Net cash provided by operating activities for the third quarter of 2024 was $143.6 million.
Chris May: Capital expenditures net of proceeds from the sale of property, plant, and equipment for the third quarter of 2024 were $72.9 million.
Chris May: Cash payments for restructuring and acquisition-related activity for the third quarter of 2024 were $3.9 million.
Chris May: Reflecting the impact of these activities, AEM's adjusted free cash flow was $75 million in the third quarter of 2024.
Chris May: From a debt leverage perspective, we ended the quarter with net debt of $2.1 billion and LTM adjusted EBITDA of $758 million, calculating a net leverage ratio of 2.8 times at September 30th.
Chris May: Our focus is to continue to strengthen the balance sheet by reducing debt.
Chris May: AAM ended the quarter with total available liquidity of approximately $1.5 billion consisting of available cash and borrowing capacity on AAM's global credit facilities.
Chris May: The sales price is $65 million and is expected to close before the end of the year pending regulatory approval.
Chris May: This operation generated approximately $156 million in sales in the last 12 months as of June 30th and approximately $10 million in adjusted EBITDA for the same period.
Speaker Change: Upon closing, this transaction will be both margin and leverage favorable to AAM. So as David said, this is a good deal for us.
Speaker Change: As for the full year outlook on slide 5, we are adjusting our revenue, adjusted EBITDA, and adjusted free cash flow outlooks.
Speaker Change: As you all know, our sales targets are based upon current customer production, production of certain key platforms, launch schedules, and the macro business environment.
Speaker Change: From an EBITDA perspective, we tightened our full-year range to $715 to $745 million, previously $705 to $755 million.
Speaker Change: Our adjusted free cash flow target is $200 million to $220 million, and we anticipate capex to be approximately the same as stated before at 4% of sales.
Speaker Change: Let me provide you with some additional color on our guidance.
Speaker Change: According to third party estimates, the GM T1-XX platform is forecasted at approximately 1.4 million units for the full year, which continues to represent the midpoint of our guidance range.
Speaker Change: Our implied quarterly cadence of sales and profitability also reflects the timing of the launches of two of our top programs.
Speaker Change: Some early fourth quarter customer downtime related to supply chain disruptions due to the impact of hurricanes and overall volume seasonality.
Speaker Change: Putting all this together, AM delivered year-over-year performance for the third quarter while effectively managing critical launches.
Speaker Change: On a year-to-date perspective, we continue to deliver year-over-year margin improvement, we have reduced our outstanding debt by nearly $100 million, and continue to win new business.
John Murphy, Joseph Spak, Adam Jonas, David Dauch
Speaker Change: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up.
Speaker Change: We'll pause for just a moment to compile the Q&A roster.
Thank you. Bye-bye.
Speaker Change: The first question today comes from Ryan Brinkman with J.P. Morgan. Please go ahead.
Speaker Change: Hi, thanks for taking my questions. Maybe starting with the comment on slide 5, I see that your your outlook is predicated upon North America light vehicle production of 15.5 million, so seemingly in keeping with S&P Global Mobility's outlook for 15.48. Just wanted to check if you think there might be some downside risk to that, given that some other suppliers, Lear in particular, you know, assumed below S&P production levels in 4Q, primarily in Europe, but also in North America. I know you're less exposed to Europe.
Speaker Change: Some caution around some of the Stellantis programs, I think, where you might have some exposure. What's the latest that you're seeing in terms of, you know, this?
Speaker Change: evolving Detroit 3 inventory correction actions, you know, so far here in 4Q.
Chris May: Good morning, Ryan. This is Chris. I'll take that question. Our macro guidance is predicated upon the number you refer to that you see in our press release. As you know, as we build our forecast also for the fourth quarter, we do take into consideration current customer releases and production schedules that we are experiencing either in October or what we project over about the next six to eight weeks.
Chris May: and bake that into our current guidance. So between here and the end of the year, of course the year's not over, but we are looking at customer schedules and accounting for that impact that we see on the ground, not just a macro assumption.
Speaker Change: Okay, thanks. And then lastly for me, maybe just to follow up on some of your comments about the sale of the commercial vehicle axle operations in India. Just wanted to check whether that includes the totality of your business in India, if anything remains. I know you were excited about some of those light commercial vehicle e-beam awards there. Presumably that's sold as well. Does anything remain? And then are there other operations, whether commercial vehicle operations globally? I've got a small business in the UK or Scotland, right? Anything else globally, maybe even beyond commercial vehicles? Was this something opportunistic? I mean, did somebody come to you or were you kind of thinking, you know, we're looking for ways to improve our margin profile and financial performance?
David Lim, Christopher May
David Lim: Yes, Ryan, this is David. To address your question, we're only selling two facilities in India of the three manufacturing facilities that we have.
We're selling the Puna and the Chennai facilities.
We're holding on to our facility in Chalkin.
David Lim: The Puna and Chennai facilities were dedicated to commercial vehicle applications. The Chalkin facility does a lot of other work for light vehicle type systems. We've just made a strategic decision as an organization to concentrate our efforts more on the light vehicle and passenger car, light truck and SUV.
and Vanside and less on the commercial vehicle space.
David Lim: Clearly, it helps us from a financial standpoint, improves our financial liquidity as we talked about, and just allows us to concentrate our resources, both human capital and financial capital, in the light vehicle space, as I mentioned. We still will maintain a large presence in India as it relates to our business and technical office there.
David Lim: So we're still committed to the Indian market, but at the same time, our real focus is going to be on light vehicle systems.
Thank you. Yeah, thanks.
Thank you.
Speaker Change: The next question comes from John Murphy with Bank of America. Please go ahead.
Good morning guys, you know, I'm going to ask the
Speaker Change: The sort of the obvious question about the implied in the fourth quarter of about $142 million in EBITDA at the midpoint. Chris, I think you kind of just got into this and some of the schedules and stuff, but is the bulk of this the RAM HD changeover and some downtime at GM Trucks that's really kind of the sequential pressure point, or are there other things that are going on?
Speaker Change: Yeah, no, I think you captured it, actually, with your comments. Obviously, North America production overall, quarter to quarter, as you know, is down. That impacts our component side of the business.
Speaker Change: We do have a couple of large programs in launch as they're kind of ramping up to their full volumes through the back half of this year, and then hopefully will exit into next year quite strong.
Speaker Change: You do have your normal seasonality, as you know, in the fourth quarter, but also, you know, I will point the beginning of October started a little slow. There were some supply chain bumps associated with some of the weather or hurricane events that we experienced here in North America. That's how I would construct how you think about the fourth quarter.
Speaker Change: And then just to follow up, I mean, that leads to two very different stories between the first three quarters and the fourth quarter on EBITDA margin. I mean, you're looking at something that's about 12.5% for the first three quarters and then about 10% for the fourth quarter. So as we think about 2025, and I doubt you want to go there in detail, but if we think about the walk-off point,
Speaker Change: for for 2025 numbers is the first three quarters at this mid 12% EBITDA margin much more representative of how we should be thinking about sort of the the base to walk off off for for
2025.
Speaker Change: Yes, I understand your question. I will start with, you know, we are not providing 2025 guidance here today. However, as you think about this year into next year, I would not use the fourth quarter as a launching pad. I think based upon all the different elements and production nuances of each and every quarter we experienced here in 2024, I think you need to look at the whole year in totality.
Speaker Change: Great, that's very helpful. And just one clarification, you're just on the RAM HD, right? The other RAM pickups, you guys have little to no content, is that correct?
Speaker Change: We do supply some components but the primary driveline systems we are on the HD platform so the 2500 series and higher. And those inventories are tight. Okay great, thank you.
Thanks.
Speaker Change: Dauch, David Lim, Christopher May, David Lim, Christopher May, David Lim, Christopher May,
Speaker Change: The next question comes from Joe Spak with UBS. Please go ahead.
Speaker Change: Good morning everyone. David, I know we're not going to talk about
Speaker Change: 25. But I did, you know, I did want to sort of touch on one
Speaker Change: portion that I know you'll update next quarter which is which relates to sort of the backlog because
Speaker Change: It doesn't seem like maybe there's very many major awards being awarded right now, but I know you won some stuff that you highlighted today. But you did also mention some program extensions. So I think you normally –
consider about a hundred to two hundred million of attrition.
Speaker Change: if we consider both those factors, which is new awards might be a little bit constrained but attrition is a little bit lower, from a net basis do you expect much of a difference from what we've seen over the past few years?
Yeah.
Speaker Change: Well Joe, good morning. Let me just say this, I'll start on the attrition side. Typically, we attrit somewhere between 100 to 200 million a year. This year was a little bit on a higher side. In the future, we expect it to be a little bit more on the lower side.
but within that range.
Speaker Change: So that's point number one. Point number two is we do not contemplate extensions in our new business backlog. We consider that to be the base business, but obviously that's good for our business overall. But we do have several customers that are talking to us about contract extensions.
right now, which is, like I said, positive.
Speaker Change: And then as it relates to new business side of things, as I mentioned before in previous calls, there's an air pocket kind of going through the industry right now, as OEMs are re-looking at their long-range product plans, re-timing, re-scoping their programs.
Speaker Change: AM's no different than any of the other suppliers, we'll all be impacted by that. It's just a matter of when they come forward with new business opportunities.
Speaker Change: The most important thing for us is we've got the majority of our current business locked up Now we're talking about extensions on that business. We're still winning incremental programs But to your point not super large programs, but incremental programs
Speaker Change: But we are seeing new opportunities present themselves that we weren't seeing in the past year on ICE and hybrid programs, in addition to the electrification programs that we were previously quoting on. So hopefully that addresses your question.
Speaker Change: Yeah, it may be one quick follow-up and maybe it's a definitional thing I just want to understand like I understand you're not speaking in sort of program extensions But if that were to occur your attrition would go lower, right? Because when when the program ends is it not in that attrition number?
Speaker Change: correct correct those programs would extend your attrition would drive down okay okay okay we're on the same page okay and then Chris
And I think one of the things that investors are
Speaker Change: starting to sort of think about here with, you know, post the election is, you know, tariffs obviously, but also
Speaker Change: You know steel prices. Can you just remind us what happened last time? with some with some of the steel actions globally and how that impacted you and if at all and now you Are protected or mitigated on that?
Speaker Change: Yes, so our commodity business is really sort of two elements. We have pieces that are based upon the commodity element or the inputs to steel and other items that we purchase. As you know, we generally have
Speaker Change: Contractual arrangements with our customers to pass up and down those commodity changes protects us You know 80 to 90 percent of those changes Either a pass up of additional cost or pass up of an additional safe depending how those commodities move
Speaker Change: You know as it relates to some of the other components whether it's aluminum or steel, you know we did experience some tariff elements back in the 2017 1819 time frame
Speaker Change: But as you know, part of our philosophy has been to buy and source.
Speaker Change: in the regions for which we produce, which helps mitigate some of the impact of the tariff specifically, though not completely immune to that, you know, we are a global supplier and we do source globally, but we do try to focus on that regionalization for sourcing, so that does insulate us from some of that activity.
Speaker Change: The next question comes from Dan Levy with Barclays. Please go ahead.
Hi, good morning. Thank you for taking the questions.
Speaker Change: I wanted to ask about the EBITDA bridge in the third quarter, $28 million of positive performance inflation. Maybe you could just unpack some of the benefits there. You know, I know there's a point here of $13 million of favorable warranty, but it's still, you know, even absent that, a pretty good result. And then maybe you could just remind us of sort of...
You know what is
What is left in terms of inflation, unwind benefit?
Chris May: Yeah, certainly. I'll take that here, Dan. This is Chris. So if you take the $28 million, you're spot on. One of the largest chunks in there was a year-over-year $13 million item related to our warranty, which leaves us still with $15 million of sizable year-over-year performance.
Chris May: We saw, you know, a very concentrated effort to continue to have, and we talked about this, you know, probably each of the last four quarters, continuing to...
Chris May: Heavily focus and double down on productivity and performance enhancements in our metal form group. You're seeing those dollars flow through Similar with the drive line as well. So and it was really across the spectrum of all their cost elements
and I think this hopefully that addresses your question.
for the bridge.
Speaker Change: Yes, and then just in terms of sort of any remaining low-hanging fruit on perhaps whether it's metal forming under performance or, you know, other inflationary items that you're recovering on.
Speaker Change: Yeah, so let's do that in reverse. In terms of the inflationary items, you know, we mentioned, I think it was last quarter's call, that we generally have most of our negotiations with our customers done. So from an inflationary either recovery or incurrence, I think we're pretty much set for this year, we're in a pretty good spot.
Speaker Change: You may recall last year a lot of that was back-weighted in the fourth quarter, some of those recoveries. We've concluded that sort of here mid-year, and I think we're in a really good position as a company from that perspective.
Speaker Change: As it relates to performance, you know, our expectation, we talked about this a year ago,
is continue to have performance enhancements.
Speaker Change: to drive that business into further productivity and productivity over the next couple of quarters into next year as well. So we expect continued performance in that group.
Speaker Change: Great, thank you. As a follow-up, you know with this environment and I think the expectation by some that
Speaker Change: the election outcome could drive an extended ice tail. Maybe you could give us a sense of what that means for the resource outlays at American Axel. You had talked a little bit to you know, some reduction in R&D, you know, what does this say about the CapEx trends?
et cetera.
Speaker Change: Is there anything on the resource outline? Yeah, cool. Thank you.
Thank you.
Speaker Change: Yeah, Dan, I would think about it this way, especially as programs could potentially be extended or additional vehicle platforms may be launching on ICE or hybrid, that that plays very well to us. As you know, we have a strong installed capability and capacity inside of our factories that will allow us then to minimize capital investment.
support those programs or extensions.
Speaker Change: From an R&D perspective, as I mentioned in some of my prepared comments, we would expect some of that R&D spend to moderate based upon
Speaker Change: a very strong footing in both the ICE and hybrid applications here today, so we would see some additional benefits on the R&D side as well. So, punchline, benefits from an installed capacity that can support a lot of capability and production on ICE and hybrid today without a lot of new investment dollars to drive that further, and then also some benefits on the R&D side.
Thank you. Thank you.
Great. Thank you. That's helpful. Sure.
Speaker Change: The next question comes from Tom Narion with RBC. Please go ahead.
Tom Narion: Hi, thanks for taking my questions. Two follow-ups to stuff that's already been asked. The first one, I just want to confirm, if I'm looking at that Q4 implied versus Q3,
Tom Narion: Except for the hurricane. I just want to meet me be sure so
all these items, the platforms.
and the production cuts that...
David Lim, Christopher May
Tom Narion: as opposed to when you gave your guidance. [inaudible]
in Q2.
Speaker Change: Yeah, no, what I would tell you is clearly, you know, a couple pieces to that. Certainly, there's been some puts and takes with the launches on our two top programs, that being the RAM and the GM midsize crossover vehicle. As they've gone through launches, some of those have kind of counterbalanced between third and fourth quarter. And, you know, we've seen some choppiness a little bit in terms of production schedules that we didn't experience or expect, you know, 90 days ago. We've seen that inside of the fourth quarter as well for a little bit,
Speaker Change: It's not as crazy, I would say, as it was, you know, a year or two ago, but there's still a fair amount of variability here that we continue to navigate and learn on a weekly basis at some level.
Speaker Change: but I think we've been doing a pretty good job managing our way through it.
Okay, and then a follow-up on the tariff question.
David Dauch, David Lim, Christopher May
Speaker Change: How that affected, based on OEM exposure in the last round of this, and also how this impacts your strategy to, you know, conquest OEM business. Does it make you favor more domestic OEM targets? Or, yeah, those are the questions.
Thanks.
Speaker Change: Tom, this is David Dauch. As Chris said earlier in a previous response, our policy is to buy and build local in the regions that we serve. We're a global company so we do have some business being moved around the world but most of the time we have it in the local region.
Speaker Change: That was also reflective previously back when other terrorists were put into place. Yes, we had some impact, but not to the extent that you would expect a company our size to encounter. And again, a lot of that goes back to our policy of buy and build local.
Speaker Change: So, you know, we're not showing a preference towards any OEM. What we're doing is managing risk, being selective about what programs, what customers, what products we're going after to make sure that we can get the proper and adequate financial returns on the business.
Speaker Change: At the same time, we're managing our overall profitable growth and trying to make sure that we can partner with those that we think are going to be able to not only identify the growth, but ultimately be able to deliver and sustain the growth from an OEM standpoint.
Chris May: And Tom, this is Chris. One other consideration you mentioned, for example, our China Exel win that we talked about here today. We've announced a few other wins in that region in the past couple of quarters. Generally speaking, that product is for the local market. So it's not exported out. So it's really not a tariff issue from our end OEM customer standpoint.
Got it. Okay. Thank you.
Speaker Change: The last question today comes from James Piccarello with BNP. Please go ahead.
Speaker Change: Hi, guys. I've got a quick one on FX and commodities.
Speaker Change: And then, because I'm so creative, I also have a question on tariffs.
Speaker Change: FX Commodities were a positive contributor to EBITDA in the quarter. Was this driven by the peso primarily? And just how are you positioned for the fourth quarter? Should this stay positive for you?
Chris May: Yeah, so in terms of, excuse me, this is Chris. In terms of the third quarter we were favorable profitability-wise on commodities and FX and that was split relatively equal. Most of that did relate to the peso from an FX standpoint. Look, as you know, the peso has been
Speaker Change: It's moved around quite a bit this year, right? It's been in its lows in the 16s, again in the 17s. Now it's run up and it's kind of seating back a little bit.
Speaker Change: Generally speaking, if you think about our exposure on the peso, we buy 5 to 6 billion, or consume 5 to 6 billion pesos a year.
Speaker Change: on sort of a rolling 12-month average, we're already 70% to 80% hedged on those from previous hedges. You get a little bit of leeway or movement with the spot. So could you get a little bit of continued strength if it stays at 20 or so from an FX rate, possibly?
Speaker Change: But generally, the closer you get to the current day, the more we have already hatched and that's closed out.
Speaker Change: Got it. That's helpful. And then, yeah, just on your Mexico footprint and the tariffs potential.
We'll all have to navigate from here.
Speaker Change: If certain OEMs were to prioritize their U.S. capacity to max out full-frame production,
Speaker Change: right, depending on the tariff scenario. How should we consider your driveline capacity optionality and, you know, your North America footprint if the industry does tilt toward running U.S. plants to max utilization? Do you guys have a similar level of lever to pull or not? Not necessarily. Thanks.
Speaker Change: Yeah, this is David. I mean, clearly we're trying to drive utilization of our factories to be 85% or greater at all times, just from an efficiency and performance standpoint. We've built in flexibility into our North American production capability between the U.S. and Mexico. That production capability has flexibility to a certain extent.
Speaker Change: But at the same time, if incremental investments are required in the U.S., then we'll evaluate that. But we're clearly going to try to leverage the install capacity that we have to minimize CapEx going forward. But we'll do what is necessary in order to protect our customers and their programs.
Speaker Change: Yeah, if I could just squeeze one quick one regarding the divestitures. Did you share the Yibidal impact that's going out with the two India plants?
Chris May: Yes, James, this is Chris. So, on an LTM basis, the last 12 months, this would be as of the second quarter, but sales are a little over $150 million. The LTM EBIT is about $10 million.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to David Lim for any closing remarks.
David Lim: Great, thank you Betsy, and we thank all of you who have participated on this call and appreciate your interest in AEM. We certainly look forward to talking with you in the future. Thank you.
Speaker Change: and Christopher May, David Lim, Christopher May, David Lim, Christopher May, David Lim,