American Axle & Manufacturing Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 10 speakers on the call.

Operator

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. As a reminder, today's conference call is being recorded. At this time, I'd like to turn the floor over to Mr.

Operator

David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Speaker 1

Great. Thank you, and good morning from Detroit. I'd like to welcome everyone who is joining us on AAM's 3rd quarter earnings call. Earlier this morning, we released our Q3 of 2020 3 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.an.com, and through the PR Newswire services.

Speaker 1

You 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 1-eight seventy seven-three forty four-seven thousand five hundred and twenty nine, replay access code 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 additional information, we ask that you refer to our filings with the Securities and Exchange Commission. Also, during this call, we may refer to certain non GAAP financial measures. Information regarding these non GAAP measures as well as a reconciliation of these non GAAP measures to GAAP financial information and Manufacturing Solutions.

Speaker 1

With that, let me turn things over to AAM's Chairman and CEO, David Dowk.

Speaker 2

Thank you, David, and good morning, everyone. Thanks for joining us today to discuss AM's financial results for the Q3 of 2023. With me on the call today is Chris May, our Executive Vice President and Chief Financial Officer. To begin my comments, I'll review the highlights of our Q3 financial performance. I will then provide deeper insights into our operating performance issues and what we are doing to bring AM back to our traditional standards.

Speaker 2

And Next, I'll touch on significant business development news in the quarter as we continue to make excellent strides in 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. AM's Q3 of 2023 sales were $1,550,000,000 AM sales were negatively impacted Continued customer production volatility stemming from supply chain challenges, including lack of labor availability and delivery constraints within the supply base.

Speaker 2

From AAM's perspective, the customer production volatility in the 3rd quarter was significantly greater versus the Q2. This was further exacerbated by the UAW work stoppage that began in the middle of September. From a profitability perspective, AAM's adjusted EBITDA in the 3rd quarter was $157,000,000 or 10.1 percent of sales. The margin performance reflects the negative impact of customer production volatility, including the UAW work stoppage, elevated input costs, Continued operational challenges at certain implants that are having an outsized influence on profitability and a warranty charge in the quarter associated with the casting component. Compounding our matters in the Q3, economic recoveries have not been reached final have not reached final resolution in part because of the distraction of the UAW work stoppage with our top three customers.

Speaker 2

But discussions are very active in the 4th quarter. Taken as a whole, this performance is not up to AM standards, and Chris will provide more details about our financial performance in a few moments. AM's adjusted earnings per share in the Q3 of 2023 was a loss of $0.11 per share. AM generated a strong positive cash flow in the quarter. AM's adjusted free cash flow was very strong and nearly 130 $1,000,000 in the Q3 compared to $46,000,000 last year.

Speaker 2

On Slide 4 of our presentation deck, We have outlined headwinds that we have faced all year. A few stem from the current operating environment and others are AM internal. This is 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 at 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.

Speaker 2

Internally, the combination of labor availability, plant 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 new business with our innovative products and new customers. So looking at Page 5 of our presentation deck, The e beam momentum continues for our company here at AAM. You may recall in the Q1, we announced a significant e beam axle award with Stellantis.

Speaker 2

That was followed up in the Q2 with additional award from an undisclosed Asian OEM for the China market. Today, we're very happy to announce 2 additional e beam awards, 1 from SkyWheel Auto, supporting an electric band program with a 2 in-one e beam axle in China. This program is slated to launch in 2024. The other win is with Mahindra in India. AM will supply EV Maxxles for Mahindra's 2.5 ton light electric truck scheduled for launch in 2025.

Speaker 2

Furthermore, we continue to win programs with our ICE business. AAM will provide PTUs and RDMs for multiple JE Tours, which is a brand of Chery vehicle programs beginning in 2024. In addition, AM will also supply independent front axles for a number of FAW plug in hybrid programs in China beginning in 2025. Today's announcements reinforce AAM's broad EV and ICE product portfolio, our capabilities, our technology and our approach to the market. From a recognition standpoint, we are also very excited to share that AM has been named a 2023 Automotive News PACE Tyler Award Finalist for our innovative electric beam axle with a high speed motor and integrated inverter.

Speaker 2

Our technology can be scaled to cover Class 1 trucks and vans Class 6 Commercial Vehicles. Since 2020, AM has received 5 Automotive News PACE and PACE pilot awards, demonstrating the company's innovation leadership in electrification. To conclude my opening remarks, let's talk about our updated guidance, and please refer to Slide 6 of our presentation deck. AAM is now targeting sales of $6,000,000,000 to 6,100,000,000 adjusted EBITDA of approximately $660,000,000 to $685,000,000 adjusted free cash flow of approximately $200,000,000 to $215,000,000 And According to S and P, 2023 North American production approximates 15,200,000 units. However, as you all know, our sales performance is more dependent on production of certain significant platforms with specific customers.

Speaker 2

Related to the UAW work stoppage, Our guidance assumes the resumption of production by the 1st week of November and an overall work stoppage impact of approximately $70,000,000 to $100,000,000 in sales and $25,000,000 to $40,000,000 in adjusted EBITDA. I assure you that AM's management team continues to work with a strong resolve to navigate in these dynamic and challenging times. In addition, AM 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 AM for profitable growth. Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Chris May. Chris?

Speaker 3

Thank you, David, and good morning, everyone. I will cover the financial details of our Q3 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 Q3 of 2023, AAM sales were $1,550,000,000 compared to $1,540,000,000 in the Q3 of 2022.

Speaker 3

Slide 8 shows a walk of Q3 2022 sales to Q3 2020 sales. Positive volume mix and other was $55,000,000 driven in large part due to our backlog. The UAW work stoppage had a $15,000,000 negative impact to sales in the quarter. And lastly, metal market pass throughs in FX 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 Manufacturing.

Speaker 3

And in the Q3, 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 $131,000,000 in the Q3 of 2023 as compared to $177,000,000 in the Q3 of 2020 Adjusted EBITDA was $156,800,000 in the Q3 of 2023 versus $198,400,000 last year. You can see the year over year walk down of adjusted EBITDA on Slide 9. In the quarter, volume, mix and other added $15,000,000 of adjusted EBITDA, reflecting a 27% contribution margin on AAM's higher sales.

Speaker 3

The UAW work stoppage had a $4,000,000 impact to the quarter. In addition, we experienced a warranty charge of $13,000,000 associated with the casting component from our Metal Forming business unit. The combination of net inflation, performance, launch costs and other impacted EBITDA by approximately $30,000,000 in the quarter. The primary drivers behind this bucket were operational inefficiencies at certain underperforming plants and net year over year inflation in several of our cost areas. Collectively, these drivers caused excessive labor costs that represented approximately half of this total, net inflation of about 20% to 30% of this total and excessive scrap and premium freight for most of the remainder.

Speaker 3

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 and A. SG and A expense, including R and D, in the Q3 of 2023 was $81,800,000 5.3 percent of sales.

Speaker 3

This compares to $85,700,000 or 5.6 percent of sales in the Q3 of 2022. AAM's R and D spending in the Q3 of 2023 was approximately $35,000,000 As we indicated entering into 2023, R and D will trend in the $35,000,000 to $40,000,000 range per quarter as we continue to invest in our electric drive technology, capitalizing on the growing number of and Manufacturing. Let's move on to interest and taxes. Net interest expense was $43,700,000 in the Q3 of 2023 compared to $39,400,000 in the Q3 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.

Speaker 3

In the Q3 of 2023, our income tax was a $2,000,000 benefit as compared to a benefit of $5,700,000 in the Q3 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 freight is driven by the recording of a valuation allowance that we have discussed in previous calls. We also expect cash taxes of approximately $55,000,000 to $60,000,000 this year. Taking all this into account, our GAAP net income was a loss of $17,400,000 or $0.15 per share in the Q3 of 2023 compared to a net income of $26,500,000 or $0.22 per share in the Q3 of 2022.

Speaker 3

Adjusted earnings per share, which excludes the impact of items noted in our earnings press release was a loss of $0.11 per share in the Q3 of 2023 compared to earnings of $0.27 per share in the Q3 of 2022. Let's now move to cash flow and the balance sheet. Net cash provided by operating activities for the Q3 of 2023 was $178,300,000 Capital expenditures that the proceeds from the sale of property, plant and equipment for the Q3 of 2023 were 47,500,000 Cash payments for restructuring and acquisition related activity for the Q3 of 2023 were $5,000,000 Reflecting

Speaker 2

the impact of these activities,

Speaker 3

AAM generated adjusted free cash flow of $135,800,000 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 $2,200,000,000 and LTM adjusted EBITDA of 682,000,000 calculating a net leverage ratio of 3.3x at September 30.

Speaker 2

As for the rest of

Speaker 3

the year, Slide 6 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're targeting a range of $6,000,000,000 to $6,100,000,000 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 1,300,000 to 1,350,000 units this year, roughly flattish at the midpoint year over year. Our guidance also assumes that production resumes and begins to ramp up during the 1st week of November from the UAW work stoppage.

Speaker 3

We estimate that the impact of the work stoppage will reduce sales by $70,000,000 to $100,000,000 and adjusted EBITDA by $25,000,000 to $40,000,000 Our adjusted EBITDA target is $660,000,000 to $685,000,000 and our adjusted free cash flow target is $200,000,000 to $215,000,000 This guidance reflects the impacts of the UAW work stoppage, our 3rd quarter performance and warranty charge and tracks with our performance overview on Slide 4. Although we are not providing formal 2024 guidance, we would like to provide a number of initial guideposts or factors to consider. On the cost side, We expect our underperforming plans to positively contribute by early next year. The higher warranty item included in adjusted EBITDA in the Q3 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.

Speaker 3

For the top line, 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 UOW work stoppage. As David mentioned, we are focused on operational improvements as these inefficiencies that we are experiencing are very fixable, making progress with our commercial recovery discussions with our customers and lastly, securing both prospective ICE and EV business. Thank you for your time and participation on the call today. I'm going to stop here and I'll turn the call back over to David, so we can start Q and A.

Speaker 1

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 2. Axle and Manufacturers.

Speaker 2

And

Operator

Our first question today comes from Ryan Brinkman from JPMorgan. Please go ahead with your question.

Speaker 4

Great. Thanks for taking my question, which is on the operating inefficiencies. Of course, the UAW work stoppage was outside your ability to control it. And so I see us called out separately on Slide 9. It would be a great great to get a sense though of the $30,000,000 year over year negative bucket of EBITDA drivers related to net inflation performance launch and other also on that slide.

Speaker 4

How much of that may relate to these operating inefficiencies you're talking about? And then of that amount, how much would you say relates to factors truly outside your control similar to the UEW work stoppage such as customer volatility in customer production, such as with the GM full size truck program, etcetera, versus how much might maybe lie more within your organization and so therefore better within your ability to control and what is your line of sight to mitigating those factors.

Speaker 3

Yes, Ryan, good morning. This is Chris. I'll take the first part of that question. I'll dimensionalize That $30,000,000 from a dollar perspective and then turn it over to David to give you some commentary related to some other elements of your question. So So if you think about the $30,000,000 on a year over year basis, about half of that is driven by labor inefficiencies inside, I would say, our own operations, mostly on the metal form business unit side of the house.

Speaker 3

It's premium labor cost over time. I would call it Excessive cost we had to pay for to bring 3rd 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.

Speaker 3

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 excessive 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 will start to dissipate in the near term. So that sort of dimensionalizes it from a dollar perspective. I'll turn it over to David for some Yes.

Speaker 2

So Ryan, this is David. Chris touched on and you touched on The customer production downtime was much higher in the Q3 than it was in the Q2. We made a choice to hold on to 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 based on their own selection. That drove some premium cost for us that normally we wouldn't carry with us.

Speaker 2

As Chris indicated, we also had some operational inefficiency and throughput issues at a couple of our metal forming plants It's related more towards the powder metal side. Again, that's largely driven because of labor availability issues. Once you have experienced workers that are leaving the business or left the business. You bring new or temporary workers in. There's a learning curve to go through That drives excess of scrap and drives other premium costs in the business, but we've got our hands on it.

Speaker 2

We're getting things stabilized. And As Chris indicated, we feel that we'll have most of that cleaned up by the end of the year, a little bit into the Q1 of next year. We did in the quarter experienced some unexpected downtime at our 3 Rivers facility in on the driveline side of our business. That issue has been addressed. It's resolved.

Speaker 2

It's behind us now. So our real focus is on the metal form side of our business and just continuing to fix and address The issues that are largely within our control, the biggest thing that we don't control in this whole thing is just customer schedules and we experienced a lot of volatility in the Q3.

Speaker 4

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 5. And Manufacturing. And taking into account the pretty plentiful electrification awards, especially on the e beam axle side that you announced in conjunction with 1Q and 2Q earnings, Is there maybe any sort of preview that you might be able to provide for when you announced in January, You've rolled the 2023 through 2025 backlog to reflect 2024 through 2026.

Speaker 4

How that might track or is on pace to track, including relative to the 40% of backlog that was announced last January that related to electrification products.

Speaker 3

Yes, Brian, this is Chris. We're not providing any update to our backlog information. As you know, we customer early will release that with our Q1 earnings call, but you've seen us through the course of the year continue to win in various electric drive, e beam axles, but also on some of our ICE business as well.

Speaker 2

Ryan, this is David. I just expect it to be positively received.

Speaker 4

Okay. Thank you very much.

Operator

Our next question comes from John Murphy from Bank of America. Please go ahead with your question.

Speaker 5

Good morning. This is Federico Merenti on for John Murphy. My first question is, so the UAW strike has raised the labor cost axle labor costs. Do you see any spillover effect?

Speaker 2

Well, I mean, clearly, we're not an OEM, and we don't pay OEM wages nor do any of the other Tier 1s that are out there. But at the same time, we have to be sensitive to the movement that's taking place in regards to So the 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, this again put pressure on the whole industry, not just American Axle or the axle business.

Speaker 2

So we're constantly reviewing our wage and benefit structure. We're looking at that against the market 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 will be downward pressure That will cascade down based on the results of these OEM negotiations, and we'll be prepared to address it appropriately. At the same time, we'll look at what other things that we can do 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.

Speaker 5

Thank you. And then my second question is on Education. So it's great to hear that you won more programs in Asia. And I was wondering, Can you give us an estimate on how those programs are impacting margins? And given that In the last few weeks, everybody is talking about the lower demand in EVs.

Speaker 5

How does this impact your future programs or expectation on electric vehicles.

Speaker 3

Yes. This is Chris. Look, from a margin perspective, As you know, we don't typically discuss margin by specific programs and platforms. But as we look to source and Wind business in this space. We have certain financial hurdles that we are required to maintain, and we wanted to keep that discipline.

Speaker 3

And Manufacturing. And as we go into these negotiations, that is on top of our mind as well. So maintaining a good healthy financial profile is part of our quotation process. And whether it's electrification or ICE programs, that's the discipline we intend to keep.

Speaker 5

Thank you very much.

Operator

Our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.

Speaker 6

Hi, guys. Good morning, James. Can you just provide some additional context on what the specific challenges were at the Oshawa plant downtime in September on the driveline side, just to have some color, some context there.

Speaker 2

I'm sorry, James. This is David. Are you asking about the Three rubbers and the downtime we experienced there? Correct. Okay.

Speaker 2

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. So FTQ and OEE related matters. Like I said, those issues are both resolved as far as the outside supplier as well as our own internal capability. So, we feel comfortable with where we are at this time.

Speaker 6

Got it.

Speaker 3

And then just as

Speaker 6

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 that timeline looked like from ratification to restart back in 20 That would be helpful. Thanks.

Speaker 2

Yes. I mean typically, workers don't go back into the plants until their agreements are 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. Ratification will take several weeks. So by mid November, you can expect probably the 4 to be done and Manufacturers.

Speaker 2

And it will be staggered based on the resolution and timing between Stellantis and GM as well. But let's just say the balance of November. I think a lot of the supply base is especially being encouraged by the OEMs, try to run as much as we possibly could during that downtime to address service parts, aftermarket and production type related things. We've filled up a lot of the inventory. So we should all be in a fairly good shape for now.

Speaker 2

My biggest concern, quite honestly, is what others did with their labor and can they 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 2 to 4 weeks to get these plants back in 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 and a lot of demand On the overall supply chain, which is already fragile to begin with.

Speaker 6

Thanks. Yes.

Operator

And Our next question comes from Douglas Carson from Bank of America. Please go ahead with your question.

Speaker 7

Great, guys. Thank you for the update here. Congrats on some of the EV business you've won. If you could maybe just turn to the balance sheet. I know debt reduction has been and sharp focus and you've done well reducing debt over the last few years.

Speaker 7

If you could just refresh us of where your targets lie and how 2024, 2025 may look as far as your net leverage ratio, which I believe is at 3.3 right now.

Speaker 3

Yes. Good morning, Doug. This is Chris. Yes. In terms of how we are addressing the balance sheet from a capital allocation party, 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.

Speaker 3

We've continued to do that really over the last couple of years each and every quarter. Obviously, in the Q3, we took just a little bit of our 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 is we've articulated publicly many times, has been to drive towards a 2x 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 clip up into the future. So those goals And those objectives and those allocation priorities have not changed.

Speaker 7

That's helpful. And if I could just circle back to the EV wins. In the past, you've put out a backlog for EV. I'm looking at the slide deck, I don't see it. I know the numbers typically pretty strong.

Speaker 7

Can Can you maybe give us an update on what the backlog looks like in EV?

Speaker 3

Yes. We released that earlier in the year, Actually at our CES show in January, it was about 40% of our backlog. We typically update that once a year. I would expect to see something early next year with that.

Speaker 7

Perfect. Okay. Thanks so much.

Speaker 3

Thanks, Doug.

Operator

Our next question comes from Tom Narayan from RBC. Please go ahead with your question.

Speaker 3

Hi, guys. Good morning, Tom.

Speaker 8

Follow ups on some of the questions that just got

Speaker 3

So in the event there is

Speaker 8

a slight snapback post UAW production, just curious as to your guys' production capacity. Presumably, you're not obviously operating at kind of 100% or whatever. But like 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 Axle and Manufacturers.

Speaker 8

Are you seeing this like sharp snapback potential? That's the first question.

Speaker 2

Well, remember, 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 running at the higher capacity levels based on our installed capacity. I expect, as I said earlier, that the customers are going to try to make up lost units because of the work stoppage. Therefore, they'll be pushing the supply base, not just AM, the full supply base to those 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.

Speaker 2

But at the same time, wherever we can Provide a product to support our customers, we're going to do that. And so there will be stress on the system, there's no doubt about it, but it's a design stress 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 are capable of keeping up and that will be the limiting factor for the industry.

Speaker 8

Great. Next one on the EV backlog, you just said that you gave that at CES and you give one again next year. Is there any commentary on that backlog? Are you seeing any vulnerability there? Or Is it safe to say that that's pretty secure as of now?

Speaker 8

Can any cancellations? Any kind of color on that backlog? Thanks.

Speaker 3

Yes. As it relates to our backlog we disclosed earlier in the year, no significant cancellations at this point in time. Okay, great.

Speaker 8

Thanks a lot.

Speaker 5

Thank you.

Operator

Our next question comes from Joe Stack from UBS. Please go ahead with your question.

Speaker 9

Hi, everyone. A couple of questions here. 1, on The operational challenges you listed, which and this sort of chart with the circle is helpful. But what Like what would be the factors that would cause either an acceleration or a delay versus that Getting things back in order by that Q2 'twenty four timeframe. Is it really labor or which is a little bit outside of your control, especially if it's sort of further down the supply chain to your suppliers?

Speaker 9

Or is it more stuff under your control and Manufacturing.

Speaker 2

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 labor scarcity in a couple of our critical metal forming plants. We've now dealt with that. The bigger issue that we're dealing with now is we've got the bodies.

Speaker 2

Some of the bodies don't have the same experience level or skill set level. Therefore, it takes us a little bit longer and 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 bodies, it's a matter for us to get in them trained and up to our standards, which will then help us alleviate those premium costs that we're incurring right now. So I think the biggest issue was just labor availability. I think we've addressed that between permanent hires as well as contractor temporary hires, but the biggest thing now is going to be within our control with respect to getting them up the learning curve and then minimizing the premium costs we're incurring.

Speaker 9

If I could just follow-up there and maybe I misunderstood, but I thought you were sort of implying that there's labor challenges Even broader through the supply chain maybe to your suppliers. Is that not the case? And if those if your suppliers continue to have Some issues or challenges could that in turn impact you upstream?

Speaker 2

Joe, there's still labor availability or scarcity issues in the marketplace across the supply base. So we all run the risk, not just AM, 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, AM has in sourced a lot of work. So we it's within our control in many cases.

Speaker 2

But we do run some risk and we are monitoring several suppliers right now that have labor scarcity

Speaker 9

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, Some of the recoveries were maybe pushed as you had some customers that were somewhat distracted This quarter, maybe if you could quantify that, 1, that would be helpful. But 2, Obviously, your customers are facing increased costs next year and and the year after as well. So it seems like maybe those negotiations, if they are pushed, get a little bit tougher.

Speaker 9

And I'm just Wondering if you have any early insight into how you go after what is rightfully yours, whether that is a lump sum payments or maybe it sort of takes the form of piece price adjustments or maybe even securing future business.

Speaker 2

Yes. Like I said in my remarks, Many of our negotiations in the Q3 where we expected to bring resolution got postponed or pushed into the Q4, and understandably so because of the focus on The work stoppage and the labor negotiations, we've been in earnest discussion with them. We continue, as I mentioned, here in the Q4. There's always dynamic tension that is there. We've got to find a solution that's mutually beneficial to both of us.

Speaker 2

We can't just absorb all the economic inflationary issues that are going on. You know what I'm talking about there. At the same time, it could it's going to be It won't be the same solution, I don't think for every customer. 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 Ultimately, what we need is relief to the inflated cost that we're incurring across the board from material to wages or labor to utilities and freight and other things that we've encouraged encountered over the years.

Speaker 2

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 We dealt with these customers.

Speaker 9

And any sense of the magnitude of recoveries you were expecting in the quarter that got delayed?

Speaker 3

Yes. I wouldn't say magnitude of recoveries per se, Joe. This is Chris. If you look at our last couple of bridges that we provided through these earnings calls. We talked about this quarter 20% to 30% of that $30,000,000 of performance related to net inflation.

Speaker 3

You saw a number of about $14,000,000 we disclosed in the second quarter and another similar number back in the Q1. So that's giving you the magnitude of the inflation headwinds We're facing that we're obviously in active discussion with.

Speaker 9

Okay. Thank you.

Speaker 2

Thanks,

Operator

And ladies and gentlemen, our last question today comes from Dan Levy from Barclays. Please go ahead with your question.

Speaker 6

Hi, good morning. Thanks for taking the questions. Couple of questions on the EV side. First, maybe you

Speaker 5

can just give us a

Speaker 6

sense of The trajectory of your R and D spend on EVs, I know you said the backlog right now is intact, no program delays. But 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 the volume side. What flexibility do you have to defer pieces of spend?

Speaker 3

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, 4 to 8 quarters that we would, From a spend perspective, clip it up to about $35,000,000 to $40,000,000 per quarter. You see us now sort of performing in that range. That's why while we're Building out our electrification platform, while we have won work and beginning some development work for the programs that we have In the event that something was delayed or deferred or something of that nature, obviously, we can manage some of those costs accordingly.

Speaker 2

Again, this is David. The only thing I would say is that, obviously, all the OEMs are going to be reevaluating Their electrification strategies in light of some of the softening of the EVs as far as inventory levels are 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'll spend appropriately going forward, but we wanted to make sure we round out our Okay.

Speaker 6

And the margin impact, Should we think if 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 to EV, so it's Net positive to margins, how should we think of the net margin impact in the event of a slower EV volume outlook? Yeah. Holistically,

Speaker 3

our ICE business is basically how we performed over the last several years, which can be very compelling from a margin perspective. We have high variable profit if it's just incremental volume on our ICE, can be anywhere from 25% to 35% depending on the product set. So So if it's just variable incremental volume on ICE, that's obviously very positive for us. And some of our large electrification wins, some that we earlier are launching latter part of the decade. So that mix obviously is not upon us right now.

Speaker 3

We'll launch some smaller programs, but they'll come in at more full cost, Like any new piece of business, we'll come in at full cost. But a profile, as you know, we've tried to articulate that we're trying to run-in reasonable financial returns for both sides business. But it's very clear that

Speaker 2

we've got size and scale on our ICE business, and we have growing scale on our EV, But you can't expect the margins on EV to be at the same level as ICE right out of the chute. But as that scale grows, then you can expect margins to improve. But clearly, as Chris indicated, we should benefit if there's a slowdown of ICE based on I mean, a slowdown of EV based on ICE margins that we're incurring today.

Speaker 5

Okay. Thank you. And as a

Speaker 6

follow-up, I think what we've heard from Some of the OEMs out there is that in a weaker volume environment, it makes them rethink the level of vertical integration that they have planned because Maybe it takes some longer to get scale or to get the volumes to justify that scale. Is the tone or tenor of your conversations with OEMs with OEMs who maybe initially were a bit more aggressive on vertical integration shifting a bit that there is perhaps a bit more opportunity for that to be outsourced to you?

Speaker 2

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 plans, strategies, what they want to do to your point on vertical integration. They clearly understand our capability. They clearly understand that we're available to help them. Currently, today, we have a cost structure that's Lower than the OEM cost structure.

Speaker 2

Hopefully, we can maintain that as we go forward. So I do expect that there'll be some discussions along those lines in the future.

Speaker 6

Thank you.

Speaker 1

Thank you, Dan. And we thank all of you who have participated on this call and appreciate your AAM. We certainly look forward to talking with you in the future. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
American Axle & Manufacturing Q3 2023
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