Q4 2024 American Axle & Manufacturing Holdings Inc Earnings Call
Rocco: Good morning. My name is Rocco, and I will be your conference facilitator today.
Speaker Change: Thank you and good morning, I would like to welcome everyone, who is joining us on Aam's fourth quarter earnings call earlier. This morning, we released our fourth quarter of 2024 earnings announcement, you can see this announcement on the Investor Relations page of our website www Dot M dot com and through the PR Newswire services.
Speaker Change: You can also find supplemental slides for this conference call on the Investor page of on one side as well so listen to a replay of this call you can dial 1877344 75 to nine.
Speaker Change: Access code 2689053.
Speaker Change: The replay will be available through February 21st.
Speaker Change: Before we begin I'd like to remind everyone that the matters discussed on this call may contain comments and forward looking statements that are subject to risks and uncertainties, which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed for additional information. Please reference slide.
Speaker Change: Two of our Investor presentation, or the press release that was issued today related to this.
Speaker Change: <unk> earnings announcement.
Speaker Change: Also during the call we may refer to certain non-GAAP financial measures and information regarding these non-GAAP measures as well as the reconciliation of the non-GAAP measures to GAAP financial information is available in the presentation.
Speaker Change: Today's call is not intended and does not constitute an offer to sell or the solicitation of an all party subscribe for or buy securities of M. <unk> in any jurisdiction.
Speaker Change: Such offers or solicitations are not permitted by law and subject matter of today's call will be addressed in the proxy statement that will be filed with the SEC.
Speaker Change: Investors should read the information in the proxy statement in its entirety when it becomes available information regarding the participants and proxy solicitation is contained in <unk> case in Aam's annual proxy materials filed with the SEC and then valley's case and valleys equivalent filings and announcements made in accordance.
Speaker Change: With alcohol U K law with that let me turn things over to Aam's, Chairman and CEO David Dauch.
Speaker Change: Thank you David and good morning, everyone. Thank you for joining us today to discuss Aam's financial results for the fourth quarter and full year of calendar year 2020 for joining me on the call today are Chris May <unk> Executive Vice President and Chief Financial Officer.
Speaker Change: To begin my comments today I'll review, the highlights of our fourth quarter and full year of 2024 financial performance.
Speaker Change: Next I'll cover our 2025 financial outlook.
Speaker Change: And after Chris covers the details of our financial results I'll provide some concluding remarks about our exciting dollar in combination and then open it up for questions that you all may have.
Speaker Change: So let's begin.
Speaker Change: Hey closed the year out strong by continuing to make good operational progress in generating solid adjusted free cash flow in the quarter.
Speaker Change: And the fourth quarter of 2024 sales were $1 4 billion.
Speaker Change: And for the full year AAM sales were approximately $6 1 billion.
Speaker Change: From a profitability perspective, aam's adjusted EBITDA in the fourth quarter was 161 billion or 11, 6% of sales for the full year Aam's adjusted EBITDA was $749 million or 12, 2% of sales.
Speaker Change: Am's adjusted earnings per share in the fourth quarter of 2024 was a loss of <unk> <unk> per share for the full year. Adjusted EPS was a positive 51 cents per share.
Speaker Change: Adjusted free cash flow was $79 million in the quarter and 230 million for the full year in 2024.
Speaker Change: For 2020 for AAM delivered on our financial targets that we had outlined at the beginning of the year. We came in at the high end of our original adjusted EBITDA range and exceeded the midpoint of our adjusted free cash flow target.
Speaker Change: These were achieved while the industry experienced production revisions throughout the year.
Speaker Change: A solid performance by a as we manage the factors that are under our control and we remain focused on operational efficiency.
Speaker Change: Let's talk about a couple of recent business updates on slide four of our presentation deck.
Speaker Change: We outlined in the past that it was our near term objective to secure our core legacy driveline business that began with our announcement several years ago, where a M secured contracts of more than 10 billion of lifetime revenues with next generation full size truck axles with multiple customers.
Speaker Change: Today, we announced we have secured a contract extension to supply power transfer units for the Ford Maverick and Bronco sport vehicles.
Speaker Change: With this latest award we have secured our next generation core business for years to come.
Speaker Change: Two weeks ago, we also announced our transformational combination with outlay, which will create a leading global driveline and metal forming supplier with significant size and scale.
Speaker Change: We have high conviction that this will create a significant value for our shareholders I'll talk more about this exciting deal a little bit later today.
Speaker Change: From a business perspective, our strategy has been consistent we continue to strive to improve and optimize our operations drive EBITDA and free cash flow generation and manage factors under our control and we're going to remain disciplined and focused on these priorities.
Speaker Change: Yeah.
Speaker Change: Before I hand, it over to Chris on the call, let's talk about our 2025 financial outlook.
Speaker Change: From an end market perspective, we forecast North American production of approximately $15 1 million units.
Chris May: We are also monitoring multiple factors that can swing production, including interest rates tariffs inventory levels and the overall financial health of the consumer.
Speaker Change: Slide five illustrates am's 2025 financial outlook.
Speaker Change: Hey M is targeting sales in the range of five eight to six point over $5 billion.
Speaker Change: Adjusted EBIT to EBITDA of approximately $700 million to $760 million.
Speaker Change: Adjusted free cash flow of approximately $200 million to $230 million.
Speaker Change: As I said earlier after Christmas financial commentary I'll have some additional remarks regarding our recently announced strategic combination without like now let me turn the call over to Chris Chris.
Chris May: Thank you David and good morning, everyone I will cover the financial details of our fourth quarter and full year 'twenty four results and our 2025 outlook with you today I'll also refer to the earnings slide deck as part of my prepared comments. So let's go ahead and begin with sales.
Chris May: In the fourth quarter of 2020 for Aam's sales were $1 3 billion compared to 1.46 billion in the fourth quarter of 2023.
Chris May: Slide eight shows the walk of fourth quarter 2023 sales to fourth quarter 2024 sales.
Chris May: Mix and other lowered sales by $61 million as North American production declined by approximately 3% and we were impacted by the timing of launches of new next generation products.
Chris May: Pricing was $5 million in the fourth quarter and metal market pass throughs and FX lowered net sales by approximately $16 million as both were lower year over year.
Chris May: For the full year of 2020 for AAM sales were $6, one 2 billion as compared to 6.08 billion for the full year of 2023.
Chris May: The primary drivers of the increase were volume and mix, partially offset by lower metal market pass throughs and FX.
Chris May: Now, let's move on to profitability.
Chris May: Gross profit was $154 3 million in the fourth quarter of 2024 as compared to a $154 9 million in the fourth quarter of 2023.
Chris May: Adjusted EBITDA was $160 8 million in the fourth quarter of 2024 versus $169 5 million last year.
Chris May: You can see the year over year walk down of adjusted EBITDA on slide nine.
Chris May: In the quarter, a decline in volume mix and other impacted adjusted EBITDA by $20 million in the fourth quarter versus the prior year.
Chris May: R&D was slightly lower year over year and performance was $10 million favorable.
Chris May: For the full year of 2020 for Aam's adjusted EBITDA was $749 2 million and adjusted EBITDA margin was 12, 2% of sales.
Chris May: For the full year. This was an 80 basis point margin improvement as we delivered favorable year over year performance every single quarter. This year.
Chris May: Let me now cover SG&A.
Chris May: SG&A expense, including R&D in the fourth quarter of 2024 was $89 million or six 4% of sales. This compares to $95 7 million or six 5% of sales in the fourth quarter of 2023.
Chris May: Aam's R&D spending in the fourth quarter of 2024 was approximately $37 7 million a slight decline from last year.
Chris May: As we head into 2025, we will continue to focus on controlling our SG&A costs.
Chris May: We expect R&D expense to be down on a year over year basis by approximately $20 million as we optimize our spend in this area to reflect current market requirements.
Chris May: Yeah.
Chris May: Let's move on to interest and taxes net.
Chris May: Net interest expense was $37 3 million in the fourth quarter of 2024 compared to $42 9 million in the fourth quarter of 2023.
Chris May: In the fourth quarter of 2024, we recorded income tax expense of $6 8 million compared to $5 8 million in the fourth quarter of 2023.
Chris May: As we head into 2025, we expect our adjusted effective tax rate to be approximately 30%.
Chris May: Taking all these sales and cost drivers into account our GAAP net loss was $13 7 million or <unk> 12 per share in the fourth quarter of 2024 compared to a net loss of $19 1 million or 16 cents per share in the fourth quarter of 2023.
Chris May: Adjusted earnings per share, which excludes the impact of items noted in our earnings press release was a loss of six cents per share in the fourth quarter of 2024 compared to a loss of <unk> <unk> per share in the fourth quarter of 2023.
Chris May: However for the full year of 2024 and adjusted earnings per share was 51.
Versus a loss of <unk> <unk> per share in 2023.
Chris May: Let's now move to cash flow and the balance sheet net.
Chris May: Net cash provided by operating activities for the fourth quarter of 2024 was $151 2 million compared to $52 9 million in the fourth quarter of 2023.
Chris May: Capital expenditures net of proceeds from the sale of property plant and equipment for the fourth quarter of 2024 were $77 6 million.
Chris May: Cash payments for restructuring and acquisition related activity for the fourth quarter of 'twenty, 'twenty, four or $5 6 million.
Chris May: Reflecting the impact of these activities and generated adjusted free cash flow of $79 2 million in the fourth quarter of 2024.
Chris May: For the full year of 2024 I'm.
Chris May: Generated adjusted free cash flow of $230 million compared to $219 million in 2023.
Chris May: Our increased cash flow was driven by our stronger operational performance inventory reductions and lower interest costs.
Chris May: From a debt leverage perspective, we ended the year with a net debt of $2 $1 billion and LTM adjusted EBITDA of $749 2 million calculating a net leverage ratio of two eight times at December 31.
Chris May: This is down nearly a half a turn from a year ago at December 31 2023.
Chris May: During 'twenty 'twenty four we redeemed all of our remaining 2026 senior notes for a total of nearly $130 million, including approximately $46 million in the fourth quarter.
Chris May: AAM ended 2024 with total available liquidity of approximately $1 5 billion consisting of available cash and borrowing capacity on the ames' global credit facilities.
Chris May: Before we move to the Q&A portion of the call. Let me provide some thoughts and details on our 2025 financial outlook.
Chris May: And our earnings Slide deck. We've included walks from our 24 actual results were 2025 financial targets and you can see those starting on slide 11.
Chris May: 2025 will bring about many exciting opportunities for <unk> to grow and drive value creation. The guidance figures. We are providing today are on an M stand alone pre combination basis, and do not reflect any cost or expenses related to the announced combination with Ali.
Chris May: For sales, we are targeting a range of five eight to 6.05 billion for 2025.
Chris May: To begin the sales target is based upon our north American production of approximately $15 1 million units at the midpoint and certain assumptions for our key programs such as we anticipate gm's full size pickup truck and SUV production in the range of one three to one 4 million units.
Chris May: In addition, we are assuming the pending sale of our commercial vehicle axle business in India will be completed by the end of the first half of 2025 and our financial guidance reflects that timing as you can see on our work.
Chris May: From an EBITDA perspective, we are expecting adjusted EBITDA in the range of $700 million to $760 million. Let me provide some color on the key elements of our year over year EBITDA walk that is on page 12.
Chris May: We expect decremental margins for our volume and mix change to be slightly lower than our average of 25% to 30% as our India commercial vehicle margins are lower than our overall average.
Chris May: As mentioned earlier, our focus on optimizing our spend in R&D should yield a year over year improvement of $20 million.
Speaker Change: And AAM expects to deliver continued cost reductions operational productivity and deliver year over year efficiency gains and you can see the year over year performance improvements is a net favorable $15 million on our work.
Speaker Change: On page 10 from an adjusted free cash flow perspective, we are targeting approximately $200 million to $230 million in 2025.
The main factors driving our cash flow changes are as follows.
Speaker Change: We have higher capital expenditures stemming from investments for our largest truck platforms next generation products. These are the cornerstone for aam's revenues and profitability for a long time to come.
Speaker Change: Even with the scale of these programs, we've been leveraging our installed capital base driving purchasing efficiency and operational effectiveness and we are targeting capex as a percent of sales in 2025 up approximately 5%.
Speaker Change: Lower outstanding debt also means lower cash interest of approximately $10 million.
Speaker Change: We do see higher cash taxes in 2025, and the range of $60 million to $70 million in total which is approximately 15 million higher than 2024.
Speaker Change: As for working capital. We believe we have continued opportunities across all areas of our working capital in 2025 and expect good performance in this area.
Speaker Change: And lastly, while not included in our adjusted free cash flow figures, we estimate our restructuring payments to be in the range of $20 million to $30 million for 2025, as we look to further optimize our business and further reduce fixed costs.
Speaker Change: While we do not provide quarterly guidance, we do want to provide some perspectives on timing in 2025 as it relates to revenue cadence for the year due to early January downtime at key customers and the continued ramp curve of a key next generation programs launched in North America, We anticipate the first quarter sales per production day.
Speaker Change: To be lower relative to the remainder of the year.
Speaker Change: In addition, we expect a normal seasonal cash flow use in the first quarter of the year.
Speaker Change: So taking all that in what does it mean it means on a standalone basis M is driving increased margins.
Speaker Change: Delivering strong and steady cash flow.
Speaker Change: And positioning that portfolio to support arguably one of the best automotive product franchises around that being North American light trucks, and when we combine with Darling and its complementary product set and performance capabilities. This will be an even more exciting company.
Speaker Change: 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 now for his closing remarks regarding our upcoming combination David.
David Dauch: Thanks, Chris and before we go into the Q&A session I wanted to discuss our transformational combination with valley that we announced on January 29.
David Dauch: This compelling strategic combination brings together two complementary global tier one suppliers to create a leading global driveline and metal forming company in the world.
David Dauch: Simply a M plus dally creates a more balanced and more resilient company with revenues on a non adjusted combined basis of approximately $12 billion combined adjusted EBITDA margin, including 300 million of run rate synergies of approximately 14%.
David Dauch: We anticipate de one net leverage after the impact of the transaction financing of approximately two five times, including synergies.
David Dauch: Following the close of the transaction, we expect strong earnings accretion in the first full year.
David Dauch: Upon closing and will become a top 10, North American and top 25 global supplier.
David Dauch: From a diversification standpoint, the combined business benefits greatly from a more balanced customer mix and geographic presence.
David Dauch: We anticipate our gym constitute trinity to reduced to 25% post close from approximately 40% today.
David Dauch: As to our geographic presence, our north American independents reduces the 54% from 73% today, while our European and Asian exposure grows.
David Dauch: This improved geographic balance allows us to better serve our customers where their operations are located which positions us to grow the business that we already have and importantly gained new customers.
David Dauch: In summary, the strategic combination provides a more robust business model positioned to deliver higher earnings and cash flow.
David Dauch: Sadly as a market leading high technology and engineering group, which is comprised of two operating business units G can automotive and you can powder metallurgy.
David Dauch: You can't automotive as a leader in the development and production of site chefs prop chefs all wheel drive systems E drive systems and E powertrain components.
David Dauch: She can powder metallurgy is a global leader of high performance and position powder metal products for the automotive and industrial markets.
David Dauch: This transaction brings together a complementary product portfolio with dollar strength since side chess, coupled with a M strength and axles.
David Dauch: On slide 18, you'll see that dollar is a pioneer of automotive CV joints and as the number one global supplier side chefs in the world.
Science has to deliver power to the wheels for ice hybrid and electric vehicles.
David Dauch: <unk> possesses industry, leading technology, and strong vertical integration, which complements and expands aam's existing capabilities.
David Dauch: As the industry transitions to electrification the content per vehicle opportunity for side chess increases. This is another great benefit of the power train agnostic product line.
David Dauch: This strategic combination is expected to deliver approximately $300 million of synergies, we expect run rate savings to be approximately 60% achieved after year two and the remainder are substantially achieved by the third year after the deal closes.
David Dauch: The transaction positions Ams for high margin potential.
Our earnings accretion and strong cash flow and a strong balance sheet.
David Dauch: We're already making plans to integrate our two businesses. So that when we close we will confidently hit the ground running to achieve these synergies.
David Dauch: We have a solid track record of delivering with other deals that we have completed over the years.
David Dauch: Furthermore, our competence to achieve these synergies is very high based on the robust process that we were required to undertake in order to announce our 300 million synergy number.
David Dauch: This process included detail in person diligence sessions for 10 work streams, which are conducted over multiple weeks between a M. In Dallas management teams with the support of our respective global consulting firms.
David Dauch: This process ultimately resulted in both a quantified synergy report and has supported an opinion being issued by an outside accounting firm.
David Dauch: Our processes to identify greater opportunities or what we call a market basket well in excess of our targets. This supports our ability and our high confidence level to deliver the Senate do synergy opportunities.
David Dauch: As such on Slide 21, you can see the cash flow generation potential is very strong.
David Dauch: Based on reported figures plus the realization of full synergies or 5% of revenues based on the implied combined market cap of the company. This implies at very attractive 50%.
David Dauch: Say, it again, 50% free cash flow yield.
David Dauch: Now, let's transition to financing the balance sheet and capital allocation.
David Dauch: We have fully committed financing in place to support this transaction and we expect to raise approximately $2 2 billion of new debt financing to refinance refinance dialysis existing debt and fund the cash purchase price of the deal.
David Dauch: In closing this deal is anticipated to be approximately net leverage neutral before synergies and we expect to have ample liquidity available to us.
David Dauch: Regarding capital allocation historic the aim is focus on organic growth and debt pay down that will remain true in the near term. However, as a combined organization with greater size and scale and higher free cash flow generating capability. We can now target a more balanced capital allocation policy.
David Dauch: <unk>.
David Dauch: Once we are below two and a half times net leverage including a strong consideration of returning capital to our shareholders.
David Dauch: Finally on the regulatory front.
Speaker Change: I'm in Dallas have already done a significant amount of analysis and preparatory work and have already action a number of items.
David Dauch: On February 7th a M submitted its U S regulatory filing.
David Dauch: Additionally, a M is progressing with other country filings and engaging with appropriate regulators.
David Dauch: We expect regulatory approval and closing in the fourth quarter of this year and we're happy to share that initial customer feedback has been supportive given the complementary nature of the product and the customer portfolios.
David Dauch: We are extremely excited about the strategic combination.
David Dauch: It will create an organization with meaningful size and scale and synergy opportunities.
David Dauch: A more robust business model based on compelling strategic rationale and industrial logic.
David Dauch: Powertrain agnostic product portfolio, while realizing enhanced diversification.
David Dauch: A strong experienced and blended management team with a proven track record for success.
David Dauch: Significant margin and earnings accretion, while accelerating opportunities for growth.
David Dauch: And finally strong value creation for all stakeholders, including an enhanced capital allocation policy in the near future.
David Dauch: In conclusion.
David Dauch: AAM delivered strong 2024 financial results.
David Dauch: We are positioned to have a solid year in 2025 as a standalone company.
David Dauch: And we are excited about the future strategic combination with alloy.
Speaker Change: So thank you for your participation today before I turn it over to David Lim to start the Q&A portion of the call. We also want to let you know that we are planning to do investor meetings in New York and Boston for current and prospective shareholders, who have shown interest in a M D.
Speaker Change: These gains will be held on February 24th in February 25th respectively.
Speaker Change: Please feel free to email David that limb at a M Dot Com to register your interest I will now turn it back over to David Lim to start the Q&A portion of our call David.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Operator can you start with the question and answer session. Please.
Speaker Change: Absolutely at this.
Speaker Change: However, I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Speaker Change: Today's first question comes from John Murphy Bank of America. Please go ahead.
Speaker Change:
John Murphy: Guys just a couple.
Speaker Change: Here.
John Murphy: David when you were mentioning or Chris maybe when youre going through the walk on the outlook you mentioned mixing environment I'm. Just curious if you could talk about sort of that in the context of a GM trucks and then also.
John Murphy: Ram HD, what your expectations are on those two specific programs for mix.
John Murphy: So you know the underpinning at the macro level, John a $15 1 million in North American units overall.
John Murphy: From the tier one perspective or the GM full size truck I should say you know think about the range of our revenue mix anywhere from $1 3 million units. The one 4 million units for the full year.
John Murphy: And then some of our other top platforms like for example, the upcoming Ram HD platform. As you know has been transitioning our model years at the end of last year beginning of this year.
John Murphy: Picture, we would see that relatively flattish year over year, because there was declines in the fourth quarter, we expect lower volumes in the first quarter, but then picking back up the production run rates in the second quarter and beyond.
John Murphy: Okay.
John Murphy: Got it.
John Murphy: Yeah.
John Murphy: And a T. One is is there something going on with mix in their platform, where you think it might be less rich creamy let for a four by four <unk> or is it.
John Murphy: That makes it relatively flat.
John Murphy: Yes, it's relatively flat we continue from that perspective, we continue to see strong robust demand on the H D. The heavy duty side.
John Murphy: In terms of let's call it platform mix inside of that and obviously strong.
John Murphy: Mixed all saw on the SUV, but from a four wheel drive perspective relatively flat.
John Murphy: Got it and then just a follow up on Delhi, the R&D, it's down $20 million in the Capex down $50 million in your outlook for 2025 is that is there kind of a is that organic or is there some kind of a precursor of understanding that you might be able to use some of the gap the capital down a particular on the capacity side and some of the R&D.
Speaker Change: From some of their products.
John Murphy: The overlay and N C.
John Murphy: Even before you get to the to the close or is this really you know stuff that you're doing purely on an organic basis. Yeah. This is purely Olga organic John.
John Murphy: The guidance is our Standalone company guidance perspective.
Speaker Change: Got it and then just lastly, Delhi you mentioned the customer reception was was pretty good or actually very good I should say.
Speaker Change: Can you talk about the customer reception outside of the D. Three and the incumbent European companies. I mean has there been any your commentary from the Asian brands of the Chinese brands.
Speaker Change: Yeah that might lead you to believe that you might have a real revenue synergies above and beyond what we're talking about so far.
David: Yes, John This is David you know again.
David: On the Detroit three everybody was very positive with regards to the additional discussions we had with them.
John Murphy: Outside of the Detroit three to your question.
John Murphy: Our people are excited about two complementary businesses coming together.
John Murphy: Product portfolio becomes more expensive therefore, we'll be able to cross sell and have greater opportunities with different customers around the world. They liked the stability in the technology and the innovation that both companies bring to the table. So that's important at the same time I remember you know DALI has very important joint venture in Chile.
John Murphy: Anna.
John Murphy: There's obviously a relationship that we want to maintain and continue there and grow that there'll be meetings there'll be upcoming with respect to the leadership of that joint venture and the ultimate customers, but.
John Murphy: But it's been a we're all positively received you know in Europe, and Asia and here in North America. So we're very happy with what the initial feedback from our customers.
John Murphy: That's great. Thank you very much guys.
John Murphy: <unk>.
Speaker Change: Thank you and our next question today comes from James Picariello, who was bad.
Please go ahead.
Speaker Change: Hey, guys, it's Jake on for James So I think we all appreciate the level of detail you've given us on some of these cost synergies and how that flows through to pro forma free cash flow.
Speaker Change: Can you just talk a little bit about maybe any top line synergies you see yeah, especially given the kind of co brand portfolios.
Speaker Change: Well, it's as I, just mentioned I mean, you're bringing together two very complementary businesses, whose product portfolios, you'll support and are complementary and expansive to one another.
Speaker Change: So theres going to be cross selling opportunities, we think with multiple customers you know globally around the world. So we definitely see opportunity for revenue growth that that way.
Speaker Change: Yeah, we also you'll.
Speaker Change: Recognize and understand that you know that.
Speaker Change: They're testing out there in an innovative and technology, leading based company. We've done similar things, we presume both have positioned ourselves very well on the electrification front you know when the markets take off there and obviously that's going to vary by region of the World, where China is already a leading an active Europe has moved along because the seal two requirements change you mean.
Speaker Change: Getting tougher and then in North America, we know that it's slowing down a little bit here under the Trump administration, but regardless of the administration, we're putting ourselves in a position that we have a product.
Speaker Change: Powertrain agnostic product portfolio that can support the consumer requirements in the market requirements on a go forward basis, and we see tremendous opportunity and flexibility and optionality with our portfolio, especially as we bring these two dynamic and positive companies together.
David: Thanks, David.
Speaker Change: Also just kind of help me with the free cash flow bridge.
Speaker Change: So at the midpoint of your EBITDA. Your EBITDA was down about 30 million of Capex up about $50 million he pads to hold.
Speaker Change: Our free cash flow more or less flat year over year.
So is there any working capital benefit that's driving that and should we think about some sort of a potential unwind and.
Speaker Change: 26 or is this number that could potentially continue to move higher all once we get through the next generation.
Speaker Change: Yep.
Speaker Change: Thank you.
Speaker Change: Yeah. Jim This is Chris I'll take that you can see our free cash flow bridge on page 13 of our earnings deck, you know another contributor to favorable cash flow as we do expect some favorability as it relates to lower interest expenses as we've been paying down our debt.
Speaker Change: From a working capital perspective, that's going to be a key driver for US here in 2025, you know from an inventory perspective, we see still continued opportunity there from a turns basis you know we've been relatively flat year over year, which means we have opportunity to continue to reduce that down to levels. We ran pre COVID-19 and things are stabilizing across the industry and <unk>.
Speaker Change: <unk> from our payables and receivables or let's call. It the traditional type of working capital elements. We we see some additional opportunity inside those types as well so.
Speaker Change: We're excited to get out that working capital and I would not really envision any unwind of inventory or others as we cleared through 25 on the structural changes for working capital.
Speaker Change: Very helpful. Thank goodness.
Speaker Change: Thank you.
Speaker Change: And our next question today comes from Edison you with Deutsche Bank. Please go ahead.
Speaker Change: Hey, Thank you for taking our questions and good morning first one go ahead Todd.
Speaker Change: Good morning wanted to ask on the on the transaction and it may be more of a strategic a higher level point of view.
Speaker Change: It seems that we've seen a lot of suppliers kind of go the opposite way, where they're getting smaller right.
Speaker Change: Kind of the year.
Speaker Change: They approach us.
Speaker Change: It's getting bigger and and expanding so I'm curious you know you look down wherever it 345 years, what do you think the supplier landscape looks like is it going to kind of be more your direction that more people are going to consolidate or do you think that actually there's other kind of counter trend that's been happening over the last couple.
Speaker Change: A years actually is.
Speaker Change: It goes.
Speaker Change: So this is this is David Dauch I do I've been saying for years that I feel is the automotive market needs to consolidate both at the OEM level as well as and especially at the supplier level I'm still true to my conviction that way and my beliefs in our thought process. Our team feels very strongly about that that's why we've done a law.
Speaker Change: Lot of the acquisitions that we've done the biggest wanted to do what we did those M. P. G back in 2017, but now this is even bigger here with dollar here in 2025, we think the markets are very uncertain very dynamic and you need size and scale to be able to weather the storm and and be in a.
Speaker Change: Position that you can you know balance you know the requirements that are out there and there's new challenges every day that the market brings or countries or regions brain and we need to be in a position to leverage those global resources. Those expansive resources that we have but most importantly, when its all of a sudden done we've got to bring solutions to our.
<unk> that meet their needs and ultimately meet the market needs minions, the consumer and what they want and we think you know, bringing together two complementary companies.
Speaker Change: Companies with an expansive product portfolio, that's very complementary to one another with very little overlap.
Speaker Change: We're doing just what the market and what our customers need and we're very pleased with the strength that they have with their leadership team combined with our leadership team will blend that together will have a a leading and proven management team that has tremendous experience and we'll be able to manage that.
Speaker Change: Effectively going forward.
Speaker Change: Yes, there are some people that are taking.
The actions to reduce their constant tricil D in different regions or actually getting out of certain businesses. What we're trying to do is make sure that we have a powertrain agnostic portfolio that can meet the requirements are no matter what the market conditions are on a global basis.
Speaker Change: And we're still true to that at the same time, we recognize that each region requires a different strategy, but holistically. There's there's a way that we can balance that out and in and be efficient from an operation standpoint, and from a product development and from a cash management standpoint going forward. So long answer to your question, but the short.
Speaker Change: Answer to it is we feel very strongly that the markets will continue to consolidate going forward. That's the whole premise of our strategic.
Speaker Change: Rationale industrial logic and not only do we feel that way the Dalai Board and management team feels that way as well and others that I've talked to in the industry also feel that way.
Speaker Change: I appreciate I appreciate the insights follow up on on the dollar side for those of US maybe not as as close of your EBIT.
Speaker Change: Got a bit of time to do work there.
Speaker Change: Chinese business, the China business is actually quite strong I think maybe too many people's surprise.
Speaker Change: Can you maybe from your perspective.
Speaker Change: Maybe describe what why that is given just the the level of competition. There you know I think we're what kind of.
Speaker Change: The U S. Because they give us the impression that the local suppliers would be doing much better. So just curious as to why maybe you think there actually are holding up quite well it'd be doing quite well there.
Speaker Change: I mean, I think you have to recognize first and foremost the the two joint venture partners that'd be in <unk> and that being GKN and the management teams and you know the strategy that they put together for that JV that JV is 35 years old.
Speaker Change: It's been a lot of experienced there, they're they're tailored and design, China for China as far as support the local market they've got an effect of our product portfolio heavily weighted towards has shafts, but also supporting all wheel drive and electrification and E powertrain components for that market, which is what's in <unk>.
Speaker Change: Demand Oh, they've got a competitive cost structure and the L and a supportive management team that is growing both with the domestic Chinese manufacturers or Oems as well as with the international or Western Oems that are doing business in China. So credit to those two organizations. So we had nothing to do with that.
Speaker Change: However, what we want to do is make sure that we not only maintained our relationship but build on that relationship, especially as our product portfolio expands as a combined business.
Speaker Change: And then we will look to bring other operational excellence and support you know to that joint venture going forward, but you know don't mess with something as you said, it's performing very well.
Speaker Change: So we just got to meet that management team, that's over there and that new partner going forward and you'll appropriate medians will take place first and foremost between Dalai and their existing partner and then we'll follow up with the appropriate meetings with myself and others to meet their leadership team and positioned ourselves and talk about what the future holds.
Speaker Change: Great. Thank you very much.
Speaker Change: Yeah.
Speaker Change: Thank you and our next question comes from Doug Karson with Bank of America. Please go ahead.
Doug Karson: Great guys. Good morning, thanks for hosting the call.
Speaker Change: Good.
Speaker Change:
Speaker Change: I'm kind of excited about the scale getting bigger.
Speaker Change: In my career, I think reading agencies kind of like you bigger.
Speaker Change: Auto suppliers.
Speaker Change: I'll give you some math relative to the market pressures.
Speaker Change: And you actually you know merging with a company that had lower leverage then.
Speaker Change: Then a M and the combined entity I think out of the gate. If you said it would be about two and a half turns of leverage.
Speaker Change:
Speaker Change: You've made some comments at.
Speaker Change: Maybe going forward, you'll be able to harvest some of that cash.
Speaker Change: Cash flow to get back to equity rather than.
Speaker Change: The delevering that we've seen the last few years. So one way to just kind of explore that a little bit and then separately.
Speaker Change: I know the agency has kind of commented, but do you think longer term you could safely get you the combined entity more into the mid.
Speaker Change: Double b range, rather than single B range for ratings, given the scale almost double.
Speaker Change: Yeah, Doug Yes, a few questions in there this is Chris I'll take that.
Speaker Change: Cracker at a few of those first of all we agree with your enthusiasm about the size and scale.
Speaker Change: But as it relates to Delevering.
Speaker Change: You listen to some of our comments, we talked about you know at two and a half times, we would open up to some additional capital allocation.
Priorities.
Speaker Change: But before that happens, we will continue to reduce and strengthen our balance sheet down into the two and a half times. So we will continue to prioritize the organic growth will continue to prioritize debt repayment and drive a stronger and stronger balance sheet through that process. So I think that's a key point to keep in mind and then we would have a balanced portfolio a balanced capital allocation.
Speaker Change: And going forward, which would still include an element of debt reduction as well it wouldn't be solely want overweight one versus the other right.
Speaker Change: But longer term obviously driving.
Speaker Change: Higher ratings.
Speaker Change: Critical to cost of capital, but so we're focused on the elements of those whether the agencies rewrite us or not that's up to them, but we're focused on strengthening the balance sheet, reducing our leverage the size and scale free cash flow to debt ratios things of that nature elements of our business that are that are good for the business will ultimately drive to a stronger company.
Speaker Change: And hopefully we will reflect in our ratings over time.
Speaker Change: Great. That's helpful and then maybe as a quick follow up.
Speaker Change: There's obviously lots of headlines around tariffs and steel prices and I know that you've got some pretty good pass through our capabilities and steel can you just kind of refresh us on how you're looking at some of those commodity risks out there in the market broadly.
David Dauch: Yeah, Doug This is David I'll take the first shot at it and Chris can comment on that but.
Speaker Change: You know and others know and we've been very forthright that our long standing policy has been to buy and build local in the regions that we support in that we serve and that's proved very effective to us in mitigating tariff risk that we're experiencing in the past, but also potentially experience here in the future. We will obviously look to <unk>.
Speaker Change: Mitigate any other impacts that may happen once they you know they they get announced in regards to what's going on between the U S with Canada.
Speaker Change: In Mexico, and we'll see where that goes in March.
Speaker Change: With respect to steel and the aluminum side right now.
Speaker Change: We have very minimal exposure as you know our U S steel or aluminum is sourced here locally.
Speaker Change: So we feel very good about where we are that way. We just got to understand what the details are going to be with respect to the tariff strategy or policies between the U S, Mexico, and Canada as well as any other countries that may be involved in a longer term, but your overall like I said, our strategy is to buy and build local.
Speaker Change: And that benefits us when you have no tariff issues with trade war issues are that are taking place so Chris any other talents yeah.
Speaker Change: You referred to some of the pass through mechanisms if if this activity.
Speaker Change: Brings more volatility to the input cost not tariff related but that are driving the commodity costs that go into our product as you know, we pass around 80% plus up and down to the customer by contract on this so we are insulated and protected from some of that site that terrorists, but the the market inputs that investor purchases through our supply base. So that's a nice.
Speaker Change: <unk> mechanism for the company.
Speaker Change: Yeah that is good.
Speaker Change: Thanks, guys. That's it from me.
Doug Karson: Thanks, Doug I appreciate it.
Speaker Change: [noise]. Thank you and gentlemen, your last question today comes from Dan Levy with Barclays. Please go ahead.
Speaker Change: Hi, Joshua on for Dan today. Thanks for taking my question I had a question on just backlog and bidding dynamics I know you've said in the past couple of quarters that there's a bit of air pocket.
Speaker Change: The OEM to consider that you have your plans and there's not a day that there was an extension on the <unk> program, which I guess would not be included in our backlog just wanted to see how it was that good things are going with bidding and if you're seeing a greater I guess extension interest right now.
Speaker Change: Yeah. So this is David and I'll, let Chris talk from there as we've said all along with the with the OEM is reevaluating their product portfolios right now it is creating a bit of an air Pi pocket in regards to some of the sourcing here in the initial years been you know, let's say over the next three years.
Speaker Change: But at the same time, you know we've been very forthright in regards to what our backlog has been over the last three years and there's not a meaningful change there.
Speaker Change: For 25 or slightly lower just based on some of the the re timing and revise them of some of the programs that the customers put forward I think the more.
Speaker Change: Most important thing for US is a big swing that we're seeing right. Now is we're still actively quoting about $1 billion five of new and incremental opportunities and again, our backlog is only new and incremental we don't count any replacement business and that but on that new and incremental business that we're quoting in.
Speaker Change: In the past couple of years that was heavily weighted towards electrification like 75% to 80% today that has swung the other way, where we still have some electrification in it but it's more heavily weighted towards ice and hybrid applications going forward. So we're very excited about is the fact that.
Speaker Change: Yeah, one we've got our next generation business, essentially and substantially secured which I covered in my earlier remarks.
Speaker Change: Two we're actively quoting out a billion five of new and incremental business and it's right in our wheelhouse of our ice and hybrid business today, but at the same time three we have already have an existing portfolio and that portfolio will expand with delay that better positions us for the powertrain.
Speaker Change: It's a portfolio to quote on more electrification requirements as they evolve based on the different markets globally around the world and then we'll also be able to leverage the global footprint of the two organizations to better positions are positioned ourselves from a cost effectiveness standpoint, so that we improve our hit rate of trying.
Speaker Change: When that new business going forward, but the.
Speaker Change: Overall, we feel good about the market basket of opportunities are there is an air pocket going through the industry not only for AAM, but many suppliers, but most importantly, a lot of the programs are being extended.
Speaker Change: Which is a positive because that allows us to continue to drive operational efficiency and financial performance, which we delivered in 'twenty four and we were positioned to deliver as a standalone company and 25.
Speaker Change: Obviously, we've conveyed what we think the synergies are and the incremental opportunities when we bring delta and American axle together.
Speaker Change: I was actually a follow up on that of the of the RMB declined year over year would you say a lot of that is when you would be spending given the slowdown in assuming there's an uptick in hybrid over the next couple of years would that require any incremental spending would be on your car.
Speaker Change: I used to be of your portfolio or was that kind of already including what you already have.
Speaker Change: Yeah, I would say injustices, Chris the R&D decline is to align really with current market requirements and demands of our customers part of our elevated spend over the past year or two as to two has been to build out our E drive portfolio, which we now have in place and has gained a lot of traction in China and other markets as well.
Speaker Change: So that's sort of done and behind us. So we can now start to reap the cost benefits and sort of repositioning with the current market dynamics and harvest those savings this year and we would expect going forward.
Speaker Change: Nice thing about the hybrid applications for us in many cases uses the exact same product as our ice vehicle products. So theres not a lot of R&D associated with that so that's a that's a perfect alignment of some of that powertrain applications between ice and a hybrid perspective.
Speaker Change: Gosh, Okay. Thank you. Thanks, Jeremy I think that was our last.
Speaker Change: Question and we thank all of you have participated on this call and appreciate your interest in a M. We certainly look forward to talking with you in the future.
Speaker Change: Thank you. This concludes today's conference call you May now disconnect your lines and have a wonderful day.
Speaker Change: Okay.
Speaker Change: Yeah.