American Axle & Manufacturing Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2024

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 4th Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.

Operator

As a reminder, today's event is being recorded. At this time, I'd like to turn the floor over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Speaker 1

Thank you, Jamie, and good morning, everyone. I'd like to welcome everyone who is joining us on AEM's 4th quarter earnings call. Earlier this morning, we released our Q4 of 2023 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.aem.com, and through the PR Newswire services. You can also find supplemental slides for this conference call on the Investor page of our website as well.

Speaker 1

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 270,3442. This replay will be available through February 23. 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.

Speaker 1

Information regarding these non GAAP measures as well as reconciliation of these non GAAP measures to GAAP financial information is available on our website. With that, let me turn things over to AAM's Chairman and CEO, David Dowc.

Speaker 2

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the Q4 full year of 2023. Joining me on the call today are Chris May, our Executive Vice President and Chief Financial Officer. To begin my comments today, I'll review the highlights of our Q4 and full year 2023 financial performance. Next, I'll cover our achievements in 2023 on both our electrification and legacy businesses.

Speaker 2

After Chris covers the details of our financial results, we will open up the call for any questions that you all may have. So let's begin. From a big picture standpoint, AAM's 4th quarter operating results were negatively impacted by the UAW work stoppage. However, our performance was on track with our improvement objectives that we shared with you on the last call, ending a challenging 2023 on a positive trajectory. In addition, we continue to generate positive cash flow and pay down our debt along the way.

Speaker 2

AM's Q4 of 2023 sales were $1,500,000,000 and for the full year, AM sales were approximately 6,100,000,000 dollars From a profitability perspective, AM's adjusted EBITDA in the 4th quarter was $169,500,000 or 11.6 percent of sales. For the full year, AM's adjusted EBITDA was $693,300,000 or 11.4 percent of sales. AM's adjusted earnings per share in the Q4 of 2023 was a loss of $0.09 per share. For the full year, AM's adjusted EPS was also a loss of $0.09 per share. For the full year, AAM's adjusted free cash flow was $219,000,000 This cash flow was deployed in 2023 to support debt reduction and electrification investments to position us for future growth.

Speaker 2

Chris will provide additional information regarding the details of our financial results in a few minutes. On Slide 4 of our presentation deck, we are providing an update to our performance objectives overview slide that we initially shared with you in the last quarter. First, we experienced more customer stability in the latter part of Q4, and that trend has continued into the Q1 of 2024, which is a positive. However, it is early in the year, and we remain optimistic but a little cautious. The UAW work stoppage ended in the 4th quarter and impacted plants have all resumed production, and we now consider this matter closed in its entirety.

Speaker 2

As for commercial recoveries, we concluded a number of discussions at the very tail end of the year with positive results. We accomplished our primary objectives for 2023 and now have a few customers to close out in the Q1 here in 2024. We're also making steady progress on improving operations at a number of underperforming plants, And we're on track with our objectives and progress has been good. We'll continue to allocate the necessary resources to get these plants back to AAM standards and in the time frame that we noted on the chart. Overall, we feel very good about the glide path we are on to resolve the aforementioned topics.

Speaker 2

Let me now talk about business updates and the 2023 highlights, which you can see on Slides 56. New for the quarter, we are very pleased to announce that AM will supply Dongfeng with final drive units for a 4 wheel drive plug in hybrid SUV program in the China market. We're also happy to share that AM will provide e locking differentials to a Mahindra SUV program launching here in 2024. And lastly, we have begun shipping electric vehicle components to VinFast for its midsized electric vehicle program from our recent Tech 4 acquisition. On the recognition side, AM's China operations was recently recognized by SAIC GM for quality excellence and supply chain stability and also earned an excellent supplier of the year award from Cherry itself.

Speaker 2

On Slide 6, it clearly highlights that 2023 was a challenging year for many perspectives, but it also was an eventful year for us with many accomplishments. I just want to highlight a few of those accomplishments. After sharing with you our e beam awards with ECA Mobility and Jupiter, we announced a significant win with Stellantis, supplying 3 in-one e beams for future EV program launched in the latter part of the decade. This was soon followed up with an E beam award announced with Skywell and Mahindra. In addition, our cutting edge E beam technology is a PACE pilot award finalist.

Speaker 2

As you already know, we won multiple PACE awards for electric driving customer collaboration over the years. So I'm excited about what we continue to do in that area. Our technology is certainly being recognized and it gives us further confidence about our competitiveness. In addition, our legacy business continues to gain traction globally. We announced awards with FAW Group supplying independent front axles for multiple plug in hybrid vehicle models and with J Tour providing power transfer units and rear drive modules for multiple all wheel drive SUV programs.

Speaker 2

These awards signify AIM's broad product portfolio that supports multiple powertrain configurations. Finally, in 2023, AAM was recognized with a number of business and DEI awards. In particular, Forbes named AM 1 of America's Best Employers for Diversity in 2023. AM continues to make great strides in diversity, equity, inclusion as well as environmental sustainability, and we look forward to publishing our new sustainability report in the near future. Now let's talk about our strategy, and we'll continue to secure our legacy core business, which we've made very good progress on.

Speaker 2

We're improving and optimizing our operations. We're driving EBITDA and free cash flow performance and generation. And as you know, our business model is designed to yield solid conversion with consistent volumes, and those volumes are getting stronger. At the same time, we'll continue to invest in electrification and solidify our position as a global leader in e Propulsion Systems, providing the OEMs with cost effective high value solutions from EB Maxels and electric drive units and to components as well. However, the reality in the industry is that however, the reality is the industry is in an air pocket as OEMs reassess their respective electrification strategies driven by many factors, including consumer adoption, electric infrastructure, cost and government regulations, just to name a few.

Speaker 2

As these factors are being weighed, AM will continue to run our aforementioned playbook and be ready for any shifts and powertrain needs. Before I turn it over to Chris, let me discuss our 3 year business backlog and our 2024 full year financial outlook that was included in our press release this morning. AM expects our gross new business backlog covering the 3 year period of 2024 through 2026 to be approximately $600,000,000 For the backlog breakdown, please refer to Slide 7. About 50% of our backlog stems from electrification, and this is up from last year, which was at 40%. We expect the launch cadence of our backlog to be $300,000,000 in 20.24, dollars 175,000,000 in 2025 $125,000,000 in 2026.

Speaker 2

The new backlog nicely encompasses a mix of ICE and electric programs, including pickups, CEV programs in Asia and additional model variance for other sophisticated electric drive units to highlight a few. Our backlog factors in the impact of updated customer launch timing, our latest customer volume expectations and does not include replacement business just and only new and incremental business. And the backlog encapsulates recent OEM powertrain trends and timing estimates. From a launch standpoint, we have 19 launches in calendar year 2024, which should drive growth over the next several years. 2024 is a big year for AM in terms of launch activity.

Speaker 2

In addition to our healthy $300,000,000 new business backlog this year, we have major replacement business launches taking place already in the beginning of this year, and particularly with the Ram heavy duty truck, the ICE version and GM midsize CUV platforms. Both of these sizable and popular platforms will continue to help fuel AAM's business into the next decade. So let's talk about 2024 from an end market perspective. We forecast production at approximately 15,800,000 units for our primary North American market. We are monitoring multiple factors that can swing production, including interest rates and the health of the consumer.

Speaker 2

Slide 8 illustrates AAM's 2024 financial outlook. AM is targeting sales of $6,050,000,000 to $6,350,000,000 adjusted EBITDA of approximately $685,000,000 to $750,000,000 and adjusted free cash flow of approximately $200,000,000 to $240,000,000 In the longer term, we'll continue to stay focused on securing our core business, generating strong free cash flow, strengthening our balance sheet, advancing our electrification portfolio and positioning AM for profitable growth. Team AM looks forward to a positive and productive 2024. That concludes my formal remarks. Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Chris Mann.

Speaker 2

Chris?

Speaker 3

Thank you, David, and good morning, everyone. I will cover the financial details of our Q4 and full year 2023 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 Q4 of 2023, AM sales were $1,460,000,000 compared to $1,390,000,000 in the Q4 of 2022.

Speaker 3

Slide 11 shows a walk of Q4 2022 sales to Q4 2023 sales. Positive volume mix and other was $158,000,000 driven in part by our backlog and certain platforms not impacted by the UAW work stoppage. The UAW work stoppage had an $84,000,000 negative impact to sales in the quarter. And lastly, metal market pass throughs and FX lowered net sales by approximately $1,000,000 with metals lower and FX higher. For the full year of 2023, AM sales were $6,100,000,000 as compared to $5,800,000,000 for the full year of 2022.

Speaker 3

The primary drivers of the increase were volume and mix, the 5 month contribution from our Techfor acquisition and AAM's new business backlog, partially offset by the UAW work stoppage and lower metal market pass throughs. Now let's move on to profitability. Gross profit was $154,900,000 in the Q4 of 2023 as compared to

Speaker 2

20

Speaker 3

$1,000,000 in the Q4 of 2023 versus $157,700,000

Speaker 1

last year.

Speaker 3

You can see a year over year walk down of adjusted EBITDA on Slide 12. In the quarter, volume, mix and other added a net $39,000,000 of adjusted EBITDA versus the prior year. The UAW work stoppage had a $23,000,000 negative impact to the quarter. R and D was slightly higher year over year to support product launches and our electrification advancements. And maybe most importantly, net inflation performance in other was $13,000,000 favorable as plant efficiency improvement objectives remained on track, and we concluded a number of commercial discussions at the tail end of last year.

Speaker 3

For the full year of 2023, AAM's adjusted EBITDA was $693,300,000 and adjusted EBITDA margin was 11.4 percent of sales. Let me now cover SG and A. SG and A expense, including R and D in the Q4 of 2023, was $95,700,000 or 6.5 percent of sales. This compares to $88,500,000 or 6.4 percent of sales in the Q4 of 2022. AAM's R and D spending in the Q4 of 2023 was approximately $40,000,000 As we head into 2024, we will continue to focus on controlling our SG and A costs and investing in our electric drive technology.

Speaker 3

We expect R and D to be flattish year over year. We anticipate about $35,000,000 to $40,000,000 per quarter on average, although it can be lumpy as we expect the annual pace of spending to moderate in the coming years as we finish developing our electric platform technologies. Let's move on to interest and taxes. Net interest expense was $42,900,000 in the Q4 of 2023 compared to $36,900,000 in the Q4 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 Q4 of 2023, we recorded income tax expense of $5,800,000 compared to an expense of $4,100,000 in the Q4 of 2022. The unusual book rate for the quarter includes the recording of valuation allowances that we have discussed in previous calls. As we head into 2024, we expect our adjusted effective tax rate to be approximately 25% to 30%. Taking all these sales and cost drivers into account, our GAAP net loss was $19,100,000 or $0.16 per share in the Q4 of 2023 compared to net income of $13,900,000 or $0.11 per share in the Q4 of 2022. Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was a loss of $0.09 per share in the Q4 of 2023 compared to a loss of $0.07 per share in the Q4 2022.

Speaker 3

For the full year of 2023, AAN's adjusted loss per share was $0.09 versus earnings of $0.60 in 2022. Let's now move to cash flow and the balance sheet. Net cash provided by operating activities for the Q4 of 2023 was $52,900,000 Capital expenditures, net of proceeds from the sale of property, plant and equipment for the Q4 of 2023 were $55,900,000 Cash payments for restructuring and acquisition related activity for the Q4 of 2023 were $7,500,000 Reflecting the impact of these activities, AAM generated adjusted free cash flow of $4,500,000 in the Q4 of 2023. For the full year of 2023, AAM generated adjusted free cash flow of $219,000,000 compared to $313,000,000 in 2022. As a team, we remain focused on free cash flow conversion, including managing CapEx effectiveness and efficiency and reducing cash restructuring payments.

Speaker 3

From a debt leverage perspective, we ended the year with net debt of $2,200,000,000 and LTM adjusted EBITDA of $693,000,000 calculating a net leverage ratio of 3.2x at December 31. This is down from 3.3x leverage ratio at September 30, 2023. In 2023, we lowered our senior gross debt by over $140,000,000 including over $85,000,000 in the 4th quarter. We will continue to strengthen the balance sheet by reducing our outstanding indebtedness. AAM ended 2023 with total available liquidity of approximately 1 $500,000,000 consisting of available cash and borrowing capacity on AAM's global credit facilities.

Speaker 3

Before we move to the Q and A portion of the call, let me provide some thoughts on our backlog and 2024 financial outlook. In our earnings slide deck, we've included walks from 2023 actual results to our 2024 financial targets, and you can find those starting on Slide 14. From a backlog perspective, the industry is at a juncture where OEMs are reformulating their electric vehicle product plans and timing, driven by a variety of factors. Similar to the industry, AAM is not immune to these crosscurrents, and our new 2024 to 2026 backlog reflects timing of this environment. However, the good news here is under various scenarios, our base core business can remain quite strong for longer.

Speaker 3

Demand for our new next generation business we are launching should be robust and possibly extend further, and all that is good for AAM. Let's talk about our guidance for 2024. For sales, we are targeting the range of $6,050,000,000 to $6,350,000,000 for 2024. This sales target is based upon a North America production of approximately 15,800,000 units and assumptions for our key programs. New business backlog launches of approximately $300,000,000 and attrition of approximately $220,000,000 We are cautiously optimistic that the supply chain has found better footing to support more stability versus the past several years, but we are monitoring this very closely.

Speaker 3

From an EBITDA perspective, we are expecting adjusted EBITDA in the range of $685,000,000 to $750,000,000 And let me provide some color on the key elements of our year over year EBITDA walk that is on Page 15. We expect to convert our year over year product volume and mix at approximately 25% variable profit. As mentioned earlier, our R and D spending will be flattish year over year as we invest in our future and support electrification products and projects that we are in various stages of development. AAM expects to deliver cost reductions, operational productivity commercial actions to mitigate inflationary costs and deliver year over year efficiency gains. You can see year over year performance improvements as a net favorable $35,000,000 on our walk.

Speaker 3

And lastly, we expect a net negative impact due to metal markets and FX, the majority of this related to the strengthening of the Mexican peso. On Page 16, from an adjusted free cash flow perspective, we are targeting approximately $200,000,000 to $240,000,000 in 2024. The main factors driving our cash flow changes are as follows. We have higher capital expenditures stemming from key launches and investments such as automation. A number of these launches are related to our large next generation core programs that we secured, and we are targeting CapEx as a percent of sales of approximately 4% to 4.5%.

Speaker 3

We're also expecting moderately higher cash interest and taxes. Lastly, while not included in our adjusted free cash flow figures, we estimate our restructuring payments to be in the range of $15,000,000 to $25,000,000 for 2024 as we look to finalize the integration of recent acquisitions and further optimize our business. We continue to focus on the reduction of these type of expenditures. In addition, we expect to use the free cash flow generated in 2024 to continue to reduce debt, further solidify our position electrification and take advantage of select market opportunities to support growth should they arise. We are excited about AAM's cash flow generation as we launch over $10,000,000,000 of next generation full size truck axle programs with multiple customers from mid decade to beyond 2,030.

Speaker 3

From a CapEx perspective, our goal is to remain under 5% of sales, but there could be years that we may spike over that mark depending on launch cadence. As it relates to cadence for the year, sales cadence is similar to 2023 with 1st and 4th quarters being lower than the 2nd and third quarters. And as depicted on our Slide 4 of our deck, we anticipate exiting the listed challenges by the 2nd quarter. From a cash flow perspective, we expect a seasonal cash flow use in the Q1. Overall, we're expecting a more stable operating environment relative to 2023.

Speaker 3

As underperforming plants hit operational stride, costs stabilize and additional productivity improvements are achieved, AAM should generate nice future EBITDA conversion, setting up the opportunity for continued financial performance. Thank you for your time and participation on the call today. I'm going to stop here and turn the call back over to David so we can start Q and A.

Speaker 2

David? Thank you, Chris and David.

Speaker 1

We have reserved some time to take

Operator

Our first question today comes from Dan Levy from Barclays. Please go ahead with your question.

Speaker 4

Hi, good morning. Thanks for taking the questions. I wanted to start with just a couple of questions on the 24 EBITDA walk. Maybe you could just clarify a couple of items here. The metal markets and FX, just what are you assuming in terms of peso transaction headwinds anything on the commodity side?

Speaker 4

And then maybe I see R and D is a $5,000,000 headwind. What are the puts and takes within that? How much is R and D related to EB programs versus core R and D on ICE?

Speaker 3

Yes. Dan, good morning. This is Chris. I'll take both those questions. We'll start with the R and D, then we can talk about the FX and metals.

Speaker 3

From an R and D perspective, this really gets us to a run rate of about $40,000,000 a quarter, up from $155,000,000 in 2023 to $160,000,000 in 2024. Principally, this continues to be the build out of some of our electrification platforms. So as David mentioned, we do have some large, would call it, replacement business launching this year, which will require a little bit from an R and D perspective, more on the D side. And so that really that's why we said sort of year over year, we see it flattish. From a metal market and FX perspective, as you can see on that walk, it is minus $20,000,000 Most of that is just simply related to the strengthening of the Mexican peso.

Speaker 3

As you know, we're a peso. We use about MXN 5,000,000,000 to MXN 6,000,000,000 a year inside of our Mexico operations. It's about a point 5 lower than our experience in 2023. So we're sort of in that 18 to 18.25 range of our estimate going forward and that's a blended rate with our hedges as well as some floating.

Speaker 4

Okay. And the peso assumption, is that now is a full true up or there's still some hedges outstanding that in the future, once those reset, that would be an additional headwind based on where the peso is?

Speaker 3

We're on a consistent, I would call it a 3 year rolling hedge program. So we're constantly hedging 3 years out at various levels from a risk management perspective, and it will ultimately depend on the underlying spot rate to how you place those forwards into the subsequent 1, 2 or 3 years.

Operator

Great.

Speaker 4

The second question is on the backlog, where essentially 40% of the prior backlog, 50% of the current backlog gets you to similar electrification bookings. Maybe you could just provide some context on those figures in light of the slowdown, some of the push out of programs that we've seen, how much of this is booked and solid versus still based on maybe their EV assumptions from the OEM?

Speaker 3

Yes. Dan, I'll take the first crack at that as well. At least from a I mean, these are all booked programs. Obviously, we're subject to volume estimates from our consumer or our customer, a variety of other inputs and our own judgment on those. And yes, while it clicked up from last year, meaning from a percent of the backlog, from 40% to 50%, keep in mind, inside of 'twenty three, we were launching a fair amount of our DRIVE units with AMG and some others as well.

Speaker 3

So some of those started production already. So this is some incremental wins that we had that will launch over the next couple of years. But from an absolute dollar, it's flat, but we've already started to record the actual revenue of some of prior backlog in 2023, and that continues to grow.

Speaker 4

Great. Thank you.

Operator

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

Speaker 5

Hi, good morning, everyone.

Speaker 3

Good morning,

Speaker 5

James. Just on your EV program exposure, just any way to think about the EV programs you have in your backlog that you're reporting in the rolling 3 year figure relative to your key platform OEM exposure, just in terms of what that overlap could look like as we consider the possibility for EV programs to get further get pushed and or delayed just in terms of what that replacement legacy production benefit could be or what that dynamic looks like?

Speaker 2

So James, this is David. Let me take a crack and Chris can add to it. First of all, there's a delay in EV programs that's good for our business. We can generate strong margins in that area, strong cash flow, continue to fund our electrification growth going forward, at the same time, continue to pay down debt and work on tactical acquisitions where it makes sense. So we see that as a positive for us.

Speaker 2

At the same time, we're going to continue to develop the portfolio that we need for electrification. As Chris has already highlighted, I highlighted in my comments, we continue to win new electrification awards. But to your point, many of the customers are rescoping their program, their content per program and the volumes that go with that. And so our backlog, as we said earlier, is growing year over year. We're quoting 1.5 $1,000,000,000 of new and incremental business, of which greater than 75% of that is electrification based.

Speaker 2

But most of what we're working on is the latter part of the decade. So I think you're going to see, as the OEMs sort out their plans over the next, let's say, 12 to 24 months because I think it may take that long because ultimately the market is the boss and they've got to put their portfolio in place to be able to support what the consumer demand is. So we'll adjust accordingly, but any delay in EV is only going to ask for more ICE to get inventories where they need to be, which like I said earlier is a positive thing for AUM. So Chris, I don't know if there's anything you want to add or not?

Speaker 3

Yes, specifically to the electrification products inside of our backlog, there's not a lot of overlap with our existing ICE business. As you know, AMG is going into multiple derivatives, as we talked about previously, so that continues to expand on that set. But some of the announcements over the last year that we've talked about, especially in the China and India markets, those are incremental to us. But we do see a little bit of overlap on the component side. So the extent that ICE is stronger, obviously, our ICE business would pick up any slack from the component side.

Speaker 3

That's how I would think about electrification backlog.

Speaker 5

That's helpful. And then just my follow-up is as certain OEMs consider a pivot to hybridization or an emphasis on it, as a full driveline supplier, what could be the conceivable fastest turnaround to get an existing ICE Drive line to incorporate hybrid? Just high level thoughts on that.

Speaker 2

Yes. James, for us, the product components and subassemblies that we manufacture between ICE and hybridization are very similar to one another. So we can get to the market very quickly without a lot of change. It's really what the OEMs how they want to identify the type of hybridization that they want to put into their vehicles. But again, that could be a positive for our company.

Speaker 3

Yes. Absolutely. And James, keeping perspective, a few years back, some of our customers had some large truck platforms that were hybrid. It was the exact same axle for us.

Speaker 5

And that would entail additional content for you potentially as well, right?

Speaker 3

There is potential, especially on some of our VCS business as they have depending on, obviously, how they what type of engine sizes, etcetera, inside of a vehicle, but potentially, yes. Thank you.

Speaker 2

Yes, thanks.

Operator

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

Speaker 6

Good morning, guys. Surprisingly, I have more questions on the backlog. When you look at this 50% that's EV, does that include EV and hybrids? And I wonder if you could maybe give us a split there. And also, Chris, on Slide 14, you gave us this great 220,000,000 attrition against the 300,000,000 gross.

Speaker 6

So we had a net new business backlog in roll on in 24,000,000 of $80,000,000 I just wonder if you have some similar guidance or something you'd give us there for 'twenty five and 'twenty six so we could back into a net new business backlog?

Speaker 3

Yes. So let's start with the first question. As it relates to our EV backlog, it's all bev with the exception technically of the AMG product. As you know, we supply is technically a hybrid, but it is an electrified axle. But the rest is all bev in terms of that half, not hybrid.

Speaker 3

In terms of how we think about attrition going forward, as you know, this was a little bit larger year for us. There was a couple of platforms that we supplied that ceased production. But as you go forward, we typically think about somewhere between $100,000,000 to $200,000,000 of attrition on an annual basis. So you can use midpoints of those going forward for the time being.

Speaker 6

Okay. And then just one more follow-up. I mean, in this, you are not accounting for potential upside in the mid CUV program that GM is relaunching, the RAM HD, any upside in GMT programs or the full size truck at GM? I mean, there's no accounting for that at all in this backlog whatsoever.

Speaker 2

No, that's all our core business. And the only thing we have the backlog, John, is doing incremental business. We consider that to be a replacement business, which is part of our core financials.

Speaker 6

Okay. And Chris, you mentioned margins on this near and long term on this backlog as it rolls on. If you could just kind of talk about maybe the difference between the EV and the ICE backlog

Speaker 3

margins? Yes. We've not provided specific margin guidance on splits from EV to our ICE business in the future. But as we've stated previously, our goal is to drive maximum financial performance of these to ultimately replicate what we have today. But that has a long way to go.

Speaker 3

They have long tails before they reach volume, etcetera. They'll go through a normal cycle of a product, right? They'll have investments upfront, they'll have low volume start up and then they'll get into volume later in their life cycle.

Speaker 2

It's no different. I mean, we're generating strong margins on our ICE business today. But because we got size and scale, the EV business doesn't have the size and scale today. So you can naturally expect those margins will be lower. But as that size and scale grows over time, you can expect that we'll stay focused on delivering on our financial hurdles.

Speaker 6

Very helpful, guys. Thank you so much.

Speaker 2

Thanks, John.

Operator

Our next question comes from Wai Naidong from Deutsche Bank. Please go ahead with your question.

Speaker 7

Hi. Thank you so much. Can you guys hear me?

Speaker 3

Yes. Good morning.

Speaker 7

Good morning. I was wondering if you can provide an update on the labor situation. It was a very helpful slide including the deck. Maybe if you can go into any sort of like latest changes in the availability of labor? And then what kind of improvement you're anticipating and that's embedded within the outlook?

Speaker 2

Yes. Wini, this is David. Labor is going to continue to be the problem for the industry going forward here. It's not just American Axle issue. It's an industry and just an overall economic issue.

Speaker 2

There's a scarcity in labor that's out there today. Clearly, we're doing our necessary things in order to secure our labor going forward. We're making adjustments in base ways and fully loaded labor cost. We're bringing incremental workers in where we need to even temps if we have to. We're investing heavily in automation and robotics right now to address any shortfalls that we might have on the labor side.

Speaker 2

And we're obviously driving productivity and efficiency to try to free up labor in our existing plants that can be reallocated to other facilities or other work within those facilities. So and we're also looking at flat consolidation opportunities as well to free up labor, so we can transfer it to other locations. Increase in the increase in cost associated with employing that labor that's going to be sticky and be here that we're going to have to find a way to offset as we go forward or pass through.

Speaker 7

That's very helpful. And I guess in related terms, I was wondering if you can maybe break down the last bucket in the EBITDA walk. Obviously, inflation from labor is a headwind as you said, but what are the other breakdown in buckets that you're hoping to generate, whether it's from recoveries from customers or some of the planned efficiencies that you're planning to generate?

Speaker 3

Yes. And Wendy, I think you're assuming to our year over year walk of the $35,000,000 of performance improvement and what inflation is embedded in there? Is that

Speaker 7

Yes. What are the different buckets that are embedded in that performance?

Speaker 2

How are we offsetting labor in there? Yes.

Speaker 3

So as we think about inflation stepping into 2024, we will have labor inflation, as everyone will. And we do have other inflation embedded from some of our purchase components. But through some of our core plant productivity initiatives, we're offsetting much of that labor inflation. That would be our expectation. Same with anything from the supply base or have commercial arrangements with our customers question.

Operator

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

Speaker 8

Thanks. Good morning, everyone. Maybe just a couple more on the backlog. David, you sort of mentioned this air pocket where which makes sense because people are figuring out what to do with EVs and delaying it, but then they're also extending some ICE programs. So I think like last year, you talked about a $1,500,000,000 quoting funnel.

Speaker 8

Is there any sort of update on that activity?

Speaker 2

Joe, as I was saying earlier, we still have about $1,500,000,000 of new and incremental quoting opportunity today, heavily weighted towards electrification. But as the customers are sorting out that LRPP, it may adjust the timing of some of what we're quoting out as far as the launch cadence of that. But also, as I mentioned, it may be those launches will most likely be later in the decade versus mid decade. That's really what we see right now.

Speaker 8

Okay. And then, Chris, an answer to when you're answering John's question before about the attrition in the outer years, you talked about that continuous sort of plan for $100,000,000 to 200,000,000 dollars I guess conceptually why if your customers are extending programs, why wouldn't it be at a lower level, if there's extending some of the current programs are on?

Speaker 3

Yes. So I mean, the $100,000,000 Jo, it's a great question. Dollars 100,000,000 to $200,000,000 I mean, we have tens of hundreds of different programs we have through our entire global franchise of sales. Some are smaller engine programs or transmission programs or driveline programs. Occasionally, they'll cease production of a vehicle like, for example, exhaust Delantis ceased production of the Jeep Cherokee last year.

Speaker 3

So those are types of things that will fall into the attrition bucket. If they're extending programs, you have the chance to mitigate some of that attrition is higher, right? So maybe they'll continue engine production on certain size engines for an extended period of time, which will add very well to our component business. So it is a little bit of a mix of a lot of factors, but you do have vehicle nameplates that from time to time or sub transmissions or sub engines that simply cease production and replace with something else.

Speaker 2

Again, Joe, I think it just goes back to what are the OEMs going to do with their long range product plans. But as Chris indicated, they've already made some decisions to cancel certain programs or stop manufacturing programs. We're going to feel that spike or that impact periodically. But historically, we're going to be in that $100,000,000 to $150,000,000 in normal attrition. And then when you get into some of the higher years, it can be $200,000,000 $200,000,000 plus, right?

Speaker 2

But it's been pretty consistent in that 100 to 200 range, and we've been able to offset that. Obviously, with this air pocket that I'm talking about, hopefully, some of the extensions of these programs that we're starting to see will cover up some of the attrition that's there. But the big thing for us is to make sure that we can demonstrate incremental and profitable growth going forward. And most of that that we're working on right now is electrification base, which is going to be that latter part of the decade. So that's that airpark that we talked about between now and then, but it can be filled with incremental volume as the production ramps up and the Zara ramps up and inventory gets to desired levels.

Speaker 3

Yes. So just like big picture, generally speaking, yes, to your underlying thesis. So if programs are extended, that's generally good for us.

Speaker 8

Okay.

Speaker 3

Thanks for the color.

Speaker 2

Thanks, Joe.

Operator

And ladies and gentlemen, our final question will come from Tom Narayan from RBC. Please go ahead with your question.

Speaker 9

Hey, guys. Thanks for taking the question. So there was a large European OEM who was saying that they expected in 2024 they would have to make meaningful concessions to the suppliers because of cutting production on EVs. They just have to make those agreements whole. Just curious if this is something you guys anticipate, there's some choppiness of orders moving around that the contracts you guys have with your OEM customers such that they would have to compensate you guys if they're shutting down particular EV schedules, etcetera?

Speaker 2

Well, clearly, anytime you have a program adjustment, whether it's ICE or hybrid or EV and investments are being made and volumes aren't being realized or programs are being delayed, there's commercial discussions that need to take place. Those are taking place with all the OEMs or all the suppliers that have made investments to support the OEMs, especially as they're adjusting some of those timings. AM is not excluded from those discussions. So we're in discussion with our different OEMs, just trying to better understand their long range product plans, understand the timing and the rescoping of their programs and then understanding the impact that it may have on the business cases and the plans that we put together. Obviously, where we can redeploy assets if need be or allocate those assets to other business, we'll do that between ICE, hybrid and EV.

Speaker 2

But at the same time, with their sunk investment in regards to some of the R and D activity that's taking place, we'll need to make sure we're recovering appropriately. So what I'd say, I guess.

Speaker 9

Okay. And then a lot of folks are thinking that 2024 could be a year of M and A in the auto space. You have volumes not necessarily growing that much. Counter to that would be obviously high financing costs. You guys do have a little bit of leverage.

Speaker 9

But just curious to see your guys' appetite towards being maybe acquisitive in 2024?

Speaker 2

Well, we've said all along that we want to be a consolidator, and we actually started that activity back in 2017 with the acquisition of MPG. We've also done some other tactical acquisitions since that time, the latest one being the Techfor acquisition that we did last year. We'll continue to look at what I'll call tactical M and A right now that we can operate within our current capital structure. But if there's other opportunities that make business sense for us that ultimately strengthen the company going forward and position us as an organization. Going forward, we'll look at those opportunities as well.

Speaker 2

And we got a fiduciary responsibility to do those types of things. So we'll definitely keep M and A on our radar screen.

Speaker 9

Okay. And then I could sneak one final one. Sorry, David. Chinese OEMs potentially entering Europe and obviously Europe, but then maybe even producing locally in the U. S.

Speaker 9

Just curious as to how you guys think about this? Is this something a customer subset that maybe you're underexposed to? Could you easily pivot to more Chinese OEM exposure should this happen?

Speaker 2

Thanks. Well, the good news is we're growing our China business, especially on the electrification and the PHEV side of the business. They're becoming global OEMs. They're clearly on the offensive now where before they were looking at just satisfying their demand within the country of China, but they're obviously attacking or positioning themselves in Europe very aggressively right now mechanisms that they need to put into place to protect some of their businesses, meaning the automotive businesses, whether that's tariffs or other types of things to level the playing field. But ultimately, it means game on.

Speaker 2

And the low cost producer can produce the quality product that the consumer desires is going to win in the long run. So it's just going to elevate the game of every one of the OEMs. And technology will be a differentiator as we go forward. But the Chinese have vertically integrated the bev side of the business. But I also think it's important to point out a couple of things is, I don't think bevs are going to make up 100% volume on a global basis anytime soon.

Speaker 2

So ice and hybrid and even hydrogen will play a meaningful role going forward. I also think in Europe, the luxury cars are pretty well dominated by the Europeans. So they get that's a tough market to crack because of the performance that goes with that. And that same thing holds true here in North America from truck and SUV and crossover standpoint, but especially truck and SUV, there's very loyal buyers in those areas. So they're new entrants, a growing entrant, and they're going to gain market share.

Speaker 2

But at the same time, it's an opportunity for companies like us and other suppliers.

Speaker 9

Got it. Thanks so much, guys.

Speaker 2

Jamie, I think that was our last question.

Operator

Ladies and gentlemen, that was our last question. I'd like to turn the floor back over to you, Mr. Lim, for any closing remarks.

Speaker 1

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

Operator

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

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Earnings Conference Call
American Axle & Manufacturing Q4 2023
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