MoonLake Immunotherapeutics Q1 2024 Earnings Call Transcript

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May 3, 2024

There are 7 speakers on the call.

Operator

Good morning.

Speaker 1

My name is Jason, and I will be your conference facilitator today.

Speaker 2

At this time, I

Speaker 1

would like to welcome everyone to the American Axle and Manufacturing First Quarter 2024 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. As a reminder, today's call is being recorded. I would now like to turn the call over to Mr.

Speaker 1

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

Operator

Thank you, and good morning from Detroit. I'd like to welcome everyone who is joining us on AAM's Q1 earnings call. Earlier this morning, we released our Q1 of 2024 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.

Operator

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 944-4230. This replay will be available through May 10. Before we begin, I'd like to remind everyone on 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.

Operator

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

Speaker 2

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the first quarter of 2024. Joining me on the call today is Chris May, AM's Executive Vice President and Chief Financial Officer. To begin my comments, I'll review the highlights of our Q1 financial performance. Next, I'll touch on some business development news and provide commentary about the industry.

Speaker 2

After Chris covers the details of our financial results, we will open up the call for any questions that you may have. So let's begin. AAM's Q1 of 2024 sales were $1,610,000,000 AM's adjusted earnings per share was $0.18 per share and our adjusted free cash flow was a use of $21,000,000 1st quarter production environment was relatively more stable compared to previous quarters, supporting our production system efficiency. Volumes on our key programs were also stronger than a year ago. From a profitability perspective, AAM's adjusted EBITDA in the Q1 was $206,000,000 or 12.8 percent of sales.

Speaker 2

The year over year margin improvement stemmed from the benefits of production stability, stronger volumes and our improvement initiatives. Our results demonstrate on a sequential basis that we are experiencing good traction with our performance plans. Margins for both of our business units increased in the Q1 from the Q4. So 2024 is off to a solid start. Chris will provide more details about our overall financial performance during the prepared remarks.

Speaker 2

Let me talk about some business updates, which you can see on Slide 4 of our presentation deck. We are very pleased to announce that AM, working with our key partner, Innovance, will supply Xpeng DD with 3 in-one electric drive units in China. The start of production is slated for later this year. Thus far, our shipments are approaching almost 500,000 electric drive units in China over the last several years. This clearly demonstrates AM technology and the market demand for our electric drive systems.

Speaker 2

Furthermore, we won contracts with multiple European OEMs to supply electric vehicle components. In addition to our strong ICE and hybrid business, our 2 pronged electrification strategy of providing full electric drive systems and components for electric vehicles well positions AM to take advantage of the growing global electrification market. Now let's talk about the industry. Although timing is fluid, electric vehicles has established a footing in the developed markets. However, in the near term, OEMs are reformulating their respective powertrain strategies given a recent consumer adoption rates, especially here in North America.

Speaker 2

What this means is current ICE platforms will run longer than originally expected and their potential could even be additional future generations of ICE vehicles, especially with hybrid applications. Either way, this is highly beneficial for American Axle. I've said this before, the market is the boss and the end customer will ultimately influence what is moving through the showroom. While battery technology, charging infrastructure and cost structure improve over time, AM will continue the development of our electric product portfolio and further position ourselves to be agnostic to changes in propulsion system technologies. But as a company, AIM is very focused on maximizing our current product portfolio and driving profitable growth.

Speaker 2

But given the dynamics I just mentioned, it's not a growth at all cost approach. We will be disciplined, we will seek appropriate returns and we will make hard but necessary decisions while pursuing new business, especially in the area of electrification. In other words, any business we take on must make business sense and add value to our company. From an ESG perspective, we are also very pleased to announce that we recently published our 2023 sustainability report. Some of the key highlights from that report include: we achieved ISO 5,001 certification at all of our manufacturing facilities We received 21 quality performance awards.

Speaker 2

We exceeded our 2023 U. S. Renewable and carbon free energy goals. We increased our supplier diversity spend year over year by 12%, and we launched a global transportation campaign to reduce emissions. Clearly, AAM is committed to properly growing our business, but in a sustainable and socially responsible way.

Speaker 2

Let's quickly talk about our guidance. The strong first quarter performance gives us added confidence about our full year guide. However, the year is still early and much can change between now December 31. As such, our guidance remains unchanged for now. AIM is targeting sales of $6,050,000,000 to $6,350,000,000 our 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 To conclude my remarks, and as I have communicated previously, our aim is on the future, and we will continue to drive our efforts towards securing our primary legacy business, and we made great progress on that, generating strong free cash flow, strengthening our balance sheet, advancing our electrification portfolio and positioning AM for profitable growth.

Speaker 2

So with that, let me now turn the call over to our Executive Vice President and Chief Financial Officer, Chris May. Chris?

Speaker 3

Okay. Thank you, David, and good morning to everyone. I will cover the financial details of our Q1 2024 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.

Speaker 3

In the Q1 of 2024, AAM sales were $1,610,000,000 compared to $1,490,000,000 in the Q1 of 2023. Slide 8 shows a walk of Q1 2023 sales Q1 2024 sales. Positive volume mix and other was $114,000,000 driven in part by our backlog with key programs, such as GM's midsized truck and a Cherry SUV in China. In addition, we've had better than expected volumes on certain programs, including the T1XX platforms. Pass throughs and FX increased sales by approximately $6,000,000 The increase was mainly from metals, which were higher than a year ago.

Speaker 3

Now let's move on to profitability. Gross profit was $198,500,000 in the Q1 of 2024 as compared to $160,600,000 in the Q1 of 2023. Adjusted EBITDA was $205,600,000 in the Q1 of 2024 versus $175,400,000 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 a net $31,000,000 of adjusted EBITDA versus the prior year, resulting in a profit conversion rate of approximately 27 percent.

Speaker 3

R and D was lower year over year as timing of R and D spend can be lumpy from quarter to quarter. And net inflation performance in other was favorable by $8,000,000 driven by a combination of the efficiency benefits of less production volatility and our operational improvement initiatives, partially offset by inflation costs. Let me now cover SG and A. SG and A expense, including R and D in the Q1 of 2024 was $98,300,000 or 6.1 percent of sales. This compares to an identical $98,300,000 or 6.6 percent of sales in the Q1 of 2023.

Speaker 3

AAM's R and D spending in the Q1 of 2024 was approximately $37,000,000 We expect our R and D spend to be flattish year over year and anticipate about $35,000,000 to $40,000,000 per quarter on average, but as I mentioned, this amount can vary from quarter to quarter. We anticipate R and D spending should moderate in the coming years as we finish developing our electric platform technologies. Let's now move on to interest and taxes. Net interest expense was $41,000,000 in the Q1 of 2024 compared to $45,000,000 in the Q1 of 2023, due in part to lower debt balances. In addition, we paid down over $10,000,000 of debt in the quarter.

Speaker 3

In the Q1 of 2024, we recorded income tax expense of $15,900,000 compared to no tax expense in the Q1 of 2023. This increase in our elevated effective tax rate was driven by higher profitability and an expense for valuation allowances, primarily related to interest expense deduction limitations in the U. S. As we head into 2024, we expect our adjusted effective tax rate to be approximately 40% to 45%. This elevated book tax rate is a function of the valuation allowance I just described.

Speaker 3

We also expect cash taxes of approximately $50,000,000 to $55,000,000 this year. Taking all these sales and cost drivers into account, our GAAP net income was $20,500,000 or $0.17 per share in the Q1 of 2024 compared to a net loss of $5,100,000 or 0 point 0 $4 per share in the Q1 of 2023. Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was $0.18 per share in the Q1 of 2024 compared to a loss of $0.01 per share for the Q1 of 2023. Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the Q1 of 2024 was $17,800,000 Capital expenditures, net of proceeds from the sale of property, plant and equipment for the Q1 of 2024 were $44,900,000 Cash payments for restructuring and acquisition related activity for the Q1 of 2024 were $5,700,000 Reflecting the impact of these activities, AAM's adjusted free cash flow was a seasonal use of $21,400,000 in the Q1 of 2024.

Speaker 3

From a debt leverage perspective, we ended the quarter with a net debt of $2,300,000,000 and LTM adjusted EBITDA of 723,500,000 dollars calculating a net leverage ratio of 3.2x at March 31. Our focus is to continue to strengthen the balance sheet by reducing our debt. AAM ended the quarter with total available liquidity of approximately $1,400,000,000 consisting of available cash and borrowing capacity on AAM's global credit facilities. As for the full year outlook on Slide 6, it remains unchanged from when we initially provided 2024 guidance on February 16. For sales, our target range is at $6,050,000,000 to dollars to $6,350,000,000 for 20.24.

Speaker 3

This sales target is based upon a North America production of approximately 15,800,000 units and assumptions for our key programs remain unchanged from our previous outlook. As you all know, our sales results are more sensitive to performance of these key programs versus just macro changes to overall industry production. Relative to past quarters, the production environment

Speaker 2

was less volatile, and we

Speaker 3

hope this trend continues for the balance of the year. From an EBITDA perspective, the range remains at $685,000,000 to $750,000,000 and our adjusted free cash flow target is $200,000,000 to $240,000,000 Although, Q1 financial results were off to a good start, the year is just beginning. However, from a timing perspective, later in the year, several key programs that we support will be launching and transitioning to new models. In addition, certain third party estimates have the T1XX platform production to be first half weighted in their latest forecasts. This compares to an almost even split first half versus second half when we gave our guidance back in February.

Speaker 3

But all that said, we're making great progress on the performance drivers in our business, and we look forward to the remainder of 2024 and continuing driving positive results. Thank you for your time and participation on the call today. Going to stop here and turn it back over to David, so we can start Q and A. David? Thank you, Chris

Operator

and David. We have reserved some time to take questions. I would ask that you please limit your questions to no more than 2. So at this time, please feel free to proceed with any questions you may have.

Speaker 1

Our first question comes from Joe Spak from UBS. Please go ahead.

Speaker 4

Thanks. Good morning, gentlemen. Look, it was obviously a stronger quarter. And I think Street was looking for to reiterate the guidance. Is that really, in your view, just sort of some of the cadence of some of the key programs?

Speaker 4

I think the midpoint of your guide assumed about 1,400,000 T1s from GM, but maybe you could confirm that. And like for there to be some upside, is it really would you say more execution driven at this point?

Speaker 3

Joe, this is Chris. Yes, so let's a couple of points in there to start. Yes, our midpoint of our guidance is approximately 1,400,000 units on the GM full size truck platform that remains consistent from where we were a quarter ago in our view from that perspective. But in terms of drivers, I would expect through the course of the year for us to continue to remain on a progressive trend of improvements and hold sticky performance that we achieved here in the Q1, but obviously, we got to continue to build on this momentum. I think about the back half of the year, we have some large transitions going on in some of our key platforms that we support that are converting into new models.

Speaker 3

So that would impact some of our volumes in the back half of the year. And we're starting to see a little bit of some light truck downtime here in the second quarter from one of our customers, and they talked about that publicly on their calls. But at the end of the day, I think we're in a pretty good spot where we sit here in the Q1, and we got things yet to play out through the year. Hopefully, that addresses your question.

Speaker 4

Yes. No, I appreciate it. What about just on R and D spend? Spend? I mean, I think in the past you sort of said, you expect to run sort of a $40,000,000 pace.

Speaker 4

I think it might have been a little bit below that this quarter. But I'm just wondering if you think there's an opportunity to rethink some of that spend or push some of that spend as David sort of mentioned, right, like clearly some electrification plans have been pushed. So I wanted to understand how you're thinking about that spend going forward?

Speaker 3

Yes. So included in our guidance for this year, meaning 2024, we are expecting to spend closer towards that $40,000,000 per quarter range. We're just shy of that here in the Q1. It does move around from quarter to quarter. We experienced last year of quarters where it was over that average in some instances where it was less than that amount, but throughout the course of the year, very close to about $35,000,000 to $40,000,000 a quarter.

Speaker 3

We have a lot of activity going on, obviously, last year inside of our business developing our electrification platform. We expect that to continue here into this year. We have a fair amount of interest in some of our key products and platforms, and we're also getting ready to launch some key programs over the next couple of years as well. So those will continue to consume some R and D dollars. And these new programs are both ICE, hybrid and as well as EV programs.

Speaker 3

It's not exclusive to EV.

Speaker 4

So it's launch and customer driven. There's you don't really see sort of an opportunity to sort of either pull back a little bit or push some of that spend. Considering maybe there's a little bit of a bigger inflection?

Speaker 3

Yes. In the near term, I would expect the run rate to be pretty consistent. But as we've said a couple of times, we would expect over the next year or 2 as our platform technologies, especially as it relates to electrification, start to mature and in a good spot, you will start to see that, call it, development side start to step down. I would expect to see some benefits in the, call it, midterm associated with that.

Speaker 4

Thanks, guys.

Speaker 1

The next question comes from Dan Levy from Barclays. Please go ahead.

Speaker 5

Hi, good morning. Thank you for taking the questions. Wondering if you could just start by addressing metal forming, sequential step up. You had talked on the last call that you're going to continue to see progress

Speaker 3

on some of these operational

Speaker 5

issues in terms of to where metal forming stands and what are the additional steps to improve it from here?

Speaker 2

Yes, Dan, this is David. We saw some marked improvement in regards to our metal forming operations, but still not where we wanted to be. The biggest thing we need to do was stabilize some of the operations, which we've done for the most part. Now it's just a matter of rebuilding the profitability of some of the select plants or select product lines. We had, as you know, some major labor scarcity issues out there.

Speaker 2

We've addressed a lot of those issues by reloading some of our plants, changing the compensation structure at some of the existing plants and bringing talent in from other areas. So manpower isn't as big of a problem as it was in the past before. One of the areas we do have still in manpower that's a challenge is just skill sets a little bit different today than what it was before, meaning that we need to put more training and emphasis into their development, which takes a little bit longer when it comes to production efficiencies and all. But overall, we're pleased with the progress that we're making. Overall, our 4 gs business continues to run very strong, meaning the steel forging business.

Speaker 2

We've got some issues in powder metal that we're working our way through. That's really highlighted what we highlighted before to you. And we continue to make favorable progress in that area, and we will quarter to quarter as we go forward also. Chris, I don't know if you want to comment.

Speaker 3

Yes. You can see the trend in our margin trajectory of that business segment for us in terms of metal forming. Our performance here in the Q1, Dan, was the best it's been in the last four quarters. So that has been especially sequentially. Those steps that we're taking, you're seeing translate into positive performance for us, and we expect that to continue.

Speaker 5

So as far as cadence through the rest of the year, is it fair to assume that there is a continued positive cadence?

Speaker 3

Yes. I would expect so, especially on a year over year basis because if you may recall, on a year over year basis, it really started to sort of step down from a margin performance in the Q2 of last year and then sort of dropped off in the 3rd. But we're now starting to see that upswing, and we still have a little bit of work to do to drive some further improvements there. Again, we made a lot of activity in the 4th quarter. We saw a lot of activity in the Q1.

Speaker 3

A lot of it appears to be sticky in terms of performance run rates. We got to continue to hold those and then build upon those going

Speaker 5

forward. Okay. Thank you. My second question is just on resource allocation and specifically on CapEx where the last few years your CapEx has been running pretty low, roughly $200,000,000 over the last year CapEx as a percent of sales in the call it the 3% range. You're talking about going to something in the 4%, 4.5% range this year.

Speaker 5

But David, you alluded in your prepared remarks that automakers are rethinking some of their plans. You are seeing platforms getting extended. I'm just wondering why there isn't maybe more of an opportunity for CapEx to structurally stay below, call it, that $200,000,000 range closer to 3% of sales as you're seeing an extension of these platforms. What is the runway to keep CapEx maybe low?

Speaker 2

Yes. If you remember, historically, AM ran in that 4% to 6% of sales. When we bought MPG, our CapEx jumped up to that 6% to 8% of sales. We made a commitment to everyone to get down in that 4% to 5% range and then ultimately below 4%. We've been disciplined in regards to the administration execution of that CapEx management to your point that we've been running between 3% 4% the last of years here.

Speaker 2

We've got some big things that we're launching as far as next generation product. That product will run for a long time, so we've got to upgrade some of the equipment there. So that's driving some CapEx needs there. Obviously, there's electrification programs and other new ice and hybrid business in our backlog as well that we've got to be able to support. So where we can be disciplined and cut costs and manage the CapEx tighter, we'll do that.

Speaker 2

But we have to make the necessary investments in order to protect the product programs that we committed to our customers and also support how we want to run our operations going forward. But you know us well enough that we're very disciplined in that area. We've demonstrated it based on our performance the last several years, and we'll continue to look at tightening that down. It only helps us to manage it very tightly because it allows us just to pay down debt, strengthen the balance sheet or continue to fund electrification growth and or look at other tactical acquisitions that we can work on.

Speaker 5

Just in general, if companies are OEMs are extending the life of their platform, that presumably all else equal would reduce your CapEx because you've already incurred that spend, correct?

Speaker 2

Well, we have obviously an established portfolio today as far as equipment and stuff, and we got normal maintenance on that. But at the same time, as I said, the key thing is many of our big programs, our key platforms are going through next gen products, and there are some revisions to that. Once those products get launched, I think you're right. I think that it will be more in a maintenance capital mode and not so much the bigger investment that we're having to spend now for the next generation products. So we're kind of getting hit both ways in regards to next generation product as well as electrification, but at the same time that next generation product will subside over the next few years as we get those programs launched.

Speaker 5

Okay. Thank you.

Speaker 1

Thank you, gentlemen. Your last question comes from Federico Miranda from Bank of America. Please go ahead.

Speaker 6

Good morning, guys.

Speaker 3

Good morning, Frederic. So one

Speaker 6

quick question on the second half. So your larger customer talked about the ramp of EV production in the second half. And if I heard correctly, you said that part of it might be in the guidance. What's the risk to that number in case that customer, I don't know, they have, let's say, a delay in the production ramp?

Speaker 3

Well, I think you're referring to their electrification platform. Our commentary in terms of production volume second half is on their, I'll call it, traditional ICE platform for the full size truck, and we articulated that at about 1,400,000 units at the midpoint, and we continue to see still good solid demand for that. As you know, they've articulated some of their cadence through the year on the build of that platform. But if they continue to drive demand for that vehicle, there's either upside or downside to that, depends on their production cadence.

Speaker 6

Thank you. And the second question I have is on the restructuring sorry, restructuring actions. Could you give us some details on what you expect to be the payback time and the magnitude of the savings that those actions are going to generate?

Speaker 3

Yes. We continue I mean, our guide for this year is somewhere between $15,000,000 to $25,000,000 in terms of restructuring, call it, cash and P and L and integration. So some of that relates to integration of some previous acquisitions that are nearing completion. But in addition, we do have some restructuring activity to optimize our business and reduce our cost structure. All that is already included inside, at least for the current year, inside of our guidance ranges that we have provided.

Speaker 3

But some of the initiatives that we're taking in terms of fixed capacity reductions, I. E, a plant reduction, will provide us future benefits and continue to drive us terms of margin enhancement performance going forward.

Operator

Thanks, Frederico. 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.

Speaker 1

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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