genedrive Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

There are 10 speakers on the call.

Operator

Good morning. My name is Gary, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle and Manufacturing Second 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.

Operator

As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Speaker 1

Thank you, Gary, and good morning. I'd like to welcome everyone who is joining us on AEM's Q2 earnings call. Earlier this morning, we released our Q2 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.

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 2,000,000,000,000,000,000,000,000 and 59. This replay will be available through August 16. Now 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. And with that said, let me turn things over to AAM's Chairman and CEO, David Dowk.

Speaker 2

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the Q2 of 2024. Joining me on the call today is Chris May, AAM's Executive Vice President and Chief Financial Officer. To begin my comments, I'll review the highlights of our Q2 financial performance. Next, I'll touch on some business development news and commentary about the industry.

Speaker 2

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 with our financial highlights. AM's Q2 of 2024 sales were $1,630,000,000 Adjusted earnings per share was $0.19 per share. Adjusted EBITDA in the 2nd quarter was $208,000,000 or 12.8 percent of sales, and our adjusted free cash flow was approximately 98,000,000 dollars These solid results reflect positive contributions from volume and mix and continued operational performance. Let me provide you some perspectives about our performance.

Speaker 2

Overall, volumes for the industry and for a number of our key platforms were highly were higher sequentially and year over year according to 3rd party forecasters. As you all know, production consistency is very important for EBITDA flow through. Production stability that we experienced in the Q1 continued into the beginning of the second quarter. That stated, we did experience periods of higher than anticipated downtime near the 2nd quarter end. We will closely monitor this trend in the second half of the year.

Speaker 2

On a positive note, in some cases, customers were providing more advanced shutdown notices given the AM time to make necessary cost adjustments. From an operational standpoint, we are making good overall progress as seen by our results. The team continues to work on driving positive operational performance and delivering AM's high standards of operational excellence. I'm also happy to share that we have concluded most of our commercial discussions related to inflation for the year. We do have some minor open discussions remaining, but generally, this is in the rearview mirror for us here in 2024.

Speaker 2

So overall, a good, solid and positive quarter for team AAM. 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 has been awarded business to supply components for a global European OEMs modular vehicle platform that will support a multitude of propulsion systems, including internal combustion, hybrid and electric vehicle derivatives, highlighting certain of our products that are agnostic to powertrain applications. Furthermore, AM will supply a luxury European OEM with helical drive gears for electric drives for a future EV program. This is a nice incremental win for our components business and plays to our strategy of providing comprehensive approach in both components and full systems and providing OEMs with strong optionality for their respective EV powertrain needs.

Speaker 2

We believe our strategy well positions AM to be the supplier of choice. In addition, AAM was recently awarded business to provide traditional axles for a next generation full size van program. This is a great example illustrating an ICE for longer thesis. This program is scheduled to launch later in the decade. Finally, A.

Speaker 2

M. Was named 1 of Newsweek's greatest workplaces for women in 2024. We're very pleased with this award as it is AM's goal to support and promote a diverse, inclusive and safe work environment. Now let's talk about the industry. The wins that I just mentioned reinforces AM view that ICE, hybrid and EV powertrains will coexist for a long time.

Speaker 2

Although we believe electrification technology is compelling, the adoption and consumer acceptance will take time driven by affordability, range performance and charging infrastructure. Meanwhile, AM will continue to manage factors under our control to facilitate this transition and drive profitable growth. This includes making selective investments and closely monitoring technology and policy shifts. In the near term, it appears to us that OEMs are still evaluating future product planning strategies, especially within the propulsion systems, which more clarity is likely to come. As such, the bidding pipeline reflects this current environment.

Speaker 2

What is clear is that the capacity being put in place for EVs has been rescoped, delayed or in some cases canceled. AAM's view is to maintain and develop a deep and diverse product portfolio to support current and emerging powertrain trends and be agnostic to the market. We believe EV adoption by region and by segment will differ materially. On to our guidance. With 2 quarters now completed, we're raising our full year sales and EBITDA guidance.

Speaker 2

AM is now targeting sales in the range of $6,100,000,000 to $6,300,000,000 versus our previously guided sales direction of $6,050,000,000 to $6,350,000,000 Our adjusted EBITDA will be approximately $1,000,000 to $755,000,000 which is higher than the previously communicated $685,000,000 to 7 50,000,000 And our adjusted free cash flow will remain unchanged at approximately $200,000,000 to $240,000,000 Our second half of the year includes multiple significant launches, including the next generation Ram heavy duty program. In addition, we continue to monitor To conclude my remarks and as I have communicated previously, our aim is on the future, and we will continue to drive our efforts towards securing our primary legacy business, which in all honesty is substantially complete, generating strong free cash flow, strengthening our balance sheet and we continue to pay down debt every quarter and advancing our electrification portfolio and positioning AAM for profitable growth. So let me now turn the call over to our Executive Vice President, Chief Financial Officer, Chris May. Chris?

Speaker 3

Thank you, David, and good morning, everyone. I will cover the financial details of our Q2 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. In the Q2 of 2024, AAM sales were $1,630,000,000 compared to $1,570,000,000 in the Q2 of 2023.

Speaker 3

Slide 7 shows a walk of Q2 2023 sales to Q2 2024 sales. Positive volume mix and other was $94,000,000 driven by a number of our key programs and backlog in the quarter, including the GM midsize truck platform in North America and a Cherry SUV platform in China. Metal market pass throughs and FX decreased sales by approximately $20,000,000 and

Speaker 4

both were lower in the quarter.

Speaker 3

Now let's move on to profitability. Gross profit was $217,300,000 in the Q2 of 2024 as compared to $178,200,000 in the Q2 of 2023. Adjusted EBITDA was $208,400,000 in the Q2 of 2024 versus $191,600,000 in the Q2 of last year. You can see a year over year walk down of adjusted EBITDA on Slide 8. In the quarter, volume mix and other added a net $22,000,000 of adjusted EBITDA versus the prior year, resulting in a conversion rate of approximately 23%.

Speaker 3

R and D was higher 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 $16,000,000 driven by a combination of operational improvements, benefits of less production volatility and inflation offsets. Let me now cover SG and A. SG and A expense, including R and D, in the Q2 of 2024 was $105,200,000 or 6.4 percent of sales. This compares to $91,100,000 or 5.8 percent of sales in the Q2 of 2023.

Speaker 3

AAM's R and D spending in the Q2 of 2024 was approximately $44,500,000 The year over year R and D expense increase of $7,000,000 was driven by timing of our engineering spend and programs that we are currently supporting. We expect our R and D spend to be in line with our initial estimates for the year, but it can vary from quarter to quarter. We will continue to support the needs of our business with the appropriate R and D spending levels. That said, we anticipate R and D spend should moderate in the coming years as we finish developing our electric platform technologies and mitigate spending in this area to match current industry powertrain trends. So let's move on to interest and taxes.

Speaker 3

Net interest expense was $41,800,000 in the Q2 of 2024 compared to $44,300,000 in the Q2 of 2023, due in part to lower balance debt balances. In addition, we paid down over $30,000,000 of senior notes in the 2nd quarter, and we continue to lower our debt balances with yet another $50,000,000 pay down of senior notes here in August. In the Q2 of 2024, we recorded income tax expense of $17,200,000 compared to $5,300,000 of income tax expense in the Q2 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.

Speaker 3

We expect our adjusted effective tax rate to be approximately 45% to 50 percent. This elevated book tax rate is a function of the valuation allowance I just described. We also expect cash taxes of approximately $60,000,000 this year. Taking all these sales and cost drivers into account, our GAAP net income was $18,200,000 or $0.15 per share in the Q2 of 2024 compared to $8,000,000 or 0 point which excludes the impact of items noted in our earnings press release, was $0.19 per share in the Q2 of 2024 compared to $0.12 per share for the Q2 of 2023. Let's now move on to cash flow and the balance sheet.

Speaker 3

Net cash provided by operating activities the Q2 of 2024 was $142,800,000 Capital expenditures, net of proceeds from the sale of property, plant and equipment government grants for the Q2 of 2024 were $46,600,000 Cash payments for restructuring and acquisition related activity for the Q2 of 2024 were $1,700,000 Reflecting the impacts of these activities, AAM's adjusted free cash flow was $97,900,000 in the Q2 of 2024. From a debt leverage perspective, we ended the quarter with net debt of $2,200,000,000 and LTM adjusted EBITDA of $740,000,000 calculating a net leverage ratio of 3.0x at June 30. Our focus is to continue to strengthen the balance sheet by reducing debt. AAM ended the quarter with total available liquidity of approximately $1,500,000,000 consisting of available cash and borrowing capacity on AAM's global credit facilities. As for the full year outlook, on Slide 5, we are adjusting our revenue and EBITDA outlook.

Speaker 3

For sales, our target range is at the $6,100,000,000 to $6,300,000,000 for 2024. This sales target is based upon a North America production of approximately 15,800,000 units. As you all know, our sales results are more sensitive to the performance of certain key programs versus just macro changes to the overall industry production. From an EBITDA perspective, our new range is $705,000,000 to $755,000,000 Our adjusted free cash flow target remains at $200,000,000 to $240,000,000 and we anticipate CapEx at approximately 4% of sales. Our adjustments to our guidance are based on what we currently see in future production builds.

Speaker 3

According to third party estimates, the GM T1XX platform forecasted at approximately 1,400,000 units for the full year, with production weighted towards the first half of the year. The 1,400,000 units continues to represent the midpoint of our guidance range. Equally important, in addition to normal seasonality, we are in the process of launching some of AAM's largest next generation programs in the second half of this year. These launches include driveline systems for the next generation GM Delta crossover vehicle program and the next generation Ram medium and heavy duty trucks. As you know, with any launch, there are ramp up costs and volume volatility, some of which can be unpredictable.

Speaker 3

Of course, these important launches will serve as part of the key foundational sales pillars for many, many years to come, and this is a very good position to be in. Furthermore, we are making good progress with our performance initiatives that we have shared with you and have closed most of our commercial discussions for the year.

Speaker 2

Putting all this together, from

Speaker 3

a full year 2024 perspective, we are tracking to deliver year over year margin improvement, have reduced our outstanding debt, continue to win new business, and by the end of the year, we'll completed significant next generation product launches. And this is all really good stuff. So thank you for your time and participation on the call today. Am going to stop here and turn the call back over to David, so we can start the Q and A.

Speaker 4

David? Thank you, Chris

Speaker 1

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

Operator

The first question today is from Joe Spak with UBS. Please go ahead.

Speaker 5

Hey, team. Good morning. Chris, I just want to sort of talk a little bit about second half here. Net inflation performance, I think $24,000,000 year to date. But in thinking about second half, how should we think about that driving the EBITDA?

Speaker 5

Because you mentioned recovery negotiations are underway. I don't know if you could give us some indications of what we could expect there. But then also on a year over year basis, I think you had some warranty issues last year that shouldn't repeat and also the inefficiencies, which have seemingly gotten better. But on the other hand, you just indicated that it's a pretty heavy launch schedule, which might weigh on performance a little bit. So what are you guys embedding, I guess, for performance in the back half?

Speaker 3

Yes. Joe, as you think about what we are stepping into here in the back half, it really the mid talk about the midpoint, obviously, starting with a nice strong first half of the year. But from a production standpoint, just normal production, right, first half, second half, clearly over weighted into a little bit into the first half, whether it's on the full size truck platforms. Europe our European operations are a little bit weighted towards the first half as well. And then you have, let's call it, normal seasonality in the back half of the year, right, just from a production landscape perspective.

Speaker 6

But some

Speaker 3

of the key items we're talking about that will weigh on the back half of the year, of course, are these large transitions we're having for our next generation programs. And these are some, as you know, some key products that support not only revenue generation, but profit generation in the back half. And they can be a little bit volatile as we sort of work through that. So that's a key piece of the second half that obviously will work through the course of the year. And then as we exit in 'twenty five, those will be behind us.

Speaker 3

But from a performance standpoint, we would expect to continue to show continued improvement in our metal forming operations in particular. You can see that trend continuing through their segment disclosures and their margin performance, so I would expect that to continue. From a recovery standpoint, our negotiations are substantially complete. So that's already embedded in our first half and second half run rates. You're not going to get any additional lift per se in the back half of the year versus the first half there.

Speaker 3

So that's sort of, I would call, level from period to period. And then again, a little bit of normal seasonality in the back half. You do have an overweight to some of your fixed costs with the holiday schedules, etcetera, as part of the industry trends. That's how I would think about it. But as we sit here today, stepping into these launches, trying to be measured here with the back half, but we would expect the underlying performance of the business to continue.

Speaker 5

That's helpful. One quick follow-up there. I think before you indicated your like the midpoint of your guide assumed roughly $1,400,000 on the T1. Is that still sort of the going assumption? Or has that changed at all?

Speaker 3

No, that is still the going assumption.

Speaker 5

Okay. And just one more quick one. The e beam contract that was canceled, any update there? I know you're trying to get some recoveries. How are negotiations for that going?

Speaker 2

Well, Joe, this is David. As we indicated to you before, that contract has been canceled or terminated, we've turned in cancellation costs to our customers, and we're still in negotiation with them at this time. So nothing further to announce right now.

Speaker 3

Okay. Thank you.

Speaker 2

Thank you.

Operator

The next question is from Tom Narayan with RBC. Please go ahead.

Speaker 7

The first one is on the 2024 guidance. So if my math is right, you're raising I think the EBITDA by $12,500,000 at the midpoint, but the cash from operations is going down by $16,000,000 dollars Just curious what's driving that? My sense is probably working capital. You've talked about these new launches in H2, but I would think some of those launches maybe were already known about. Just trying to understand what has changed since the last time, I guess, you gave the guidance in this regard on potentially working cap?

Speaker 7

And then I have a follow-up.

Speaker 3

Yes. No, it's really two elements. Our cash tax is up slightly, so that's a piece of it in terms of where our previous guide was. And also, it's going to simply fall down to working capital timing in terms of the balance. We had a favorable adjustment a little bit on our CapEx.

Speaker 3

Cash tax is up a little bit and then the balance is working capital timing.

Speaker 7

Got it. And then my second one, one thing we've noticed this earnings season is that some Tier 1 suppliers and OEMs for that matter have talked about something similar to what you're saying, the R and D coming down, etcetera. And they've decided to increase capital return to shareholders in the form of share buybacks given the depressed market values of their equity. In some cases, we've even seen companies lever up to do buybacks. I know you have that slide that shows a 3 times leverage and $1,500,000,000 of liquidity in your priorities to reduce debt.

Speaker 7

But just curious, as you look at where your stock is trading and potentially pushing investments out, what is your appetite to potentially doing more on the share buyback?

Speaker 2

This is David. Listen, our capital allocation priorities are to continue to be disciplined and support our organic growth and our backlog in new business, continue to pay down debt. We obviously are more highly levered than some of our competitors and some of the other industry peers. At the same time, we're continuing to look at inorganic growth opportunities. So I don't really see a near term future where we're looking at major stock buybacks or shareholder friendly activities.

Speaker 2

But at the same time, those are the 4 allocations of capital, and we'd always look at those. But we try to do what we think is right for the business. But right now, I don't see it deviating from the discipline that we've had in the previous quarters and previous years. Chris, I don't know if there's anything else you want to say.

Speaker 3

Yes. No, Tom, also, we've paid some debt down as a priority capital allocation in the 2nd quarter, and I don't know if you caught in my prepared remarks, we paid yet another $50,000,000 of debt down inside here in the 3rd quarter. So that should be very positive and accretive to our investors as well.

Speaker 6

Got it. Thank you.

Operator

The next question is from Dan Levy with Barclays. Please go ahead.

Speaker 4

Hi, good morning. Thank you for taking the questions.

Speaker 3

I wanted to just

Speaker 4

follow-up on that last question from Tom. And more specifically on the leverage ratio, so I believe you're right now at 3x. Maybe you can give us a sense of just given the current business dynamics and how you're thinking of free cash and the current EBITDA profile, what is a reasonable timeframe to expect to get down to 2x leverage, which then unlocks a greater set of capital allocation opportunities?

Speaker 3

Yes, Dan, this is Chris. Look, if you could if we continue to perform and increase our EBITDA, of course, this would be on a decent macro backdrop, meaning production volumes continue to remain strong, right? We continue to improve our operational performance. We can deliver good EBITDA performance over the next couple of years, strong cash flow generation. You're going to start to enter that ZIP code.

Speaker 3

You can just do I mean, you can do the math, right, over the next couple of years.

Speaker 4

And is any of this is there additional opportunities to flex CapEx down or opportunities on the working capital side?

Speaker 3

Look, if you look at our CapEx spend, it's been at some of the lowest levels in our company's history over the past couple of years. We're very guided to continue to support the appropriate maintenance capital inside the business, which we will not thrift because that's critical to our ongoing operational success. And then it will ebb and flow with the new programs that we launch. From a working capital perspective, we're pretty tight on receivables and payables. I think we've been one of the best benchmarks from an inventory perspective.

Speaker 3

So I do think there's continued cash flow opportunity there, which will squeeze out of the business over the next year or 2, but that continues to fund a good solid delivery of cash flow over the next couple of years.

Speaker 4

Great. And then maybe a follow-up. David, more of a strategic question. Understandably, you were there was a large bidding pipeline and you were trying to expand your portfolio of opportunities. And obviously, that's changed, as you noted in your remarks, and the bidding pipeline has certainly shifted.

Speaker 4

The question is, what is the forward opportunity on bidding? And what are the aspirations for Axle to diversify beyond the core North America truck exposure, which has consistently been your core exposure? Or is the strategy shifting a bit to say okay? Like given where we are right now, this is an exposure we're very happy with and we're happy to flex down some of the spend and stay where we are right now.

Speaker 2

Yes. So Dan, I mean, clearly, our responsibility is to protect the overall health of the company. We're going to continue to focus on driving operational performance and strengthen the balance sheet. But to your point, I mean, we don't control the market and the consumers not readily accepting electrification, which was the path whole industry was going. And everyone's had to throttle back.

Speaker 2

And as I commented, all the OEMs are evaluating their long range product plans right now, and we're hopeful to get some more clarity on that as we go forward here. But meanwhile, there's kind of like an air pocket going through the industry that's impacting us and other suppliers in regards to quoting opportunities, both on the ICE side and especially on the EV side. And what we're doing is, as I said, we're substantially complete in securing our next generation ICE and hybrid business. We're in discussions with a number of customers in regards to looking at contract extensions to some of that business as well beyond the years that we're originally being contemplated. A lot of the EV business, as we said, has been rescoped, retimed, delayed or even canceled.

Speaker 2

So that's impacting not only AM but the industry and our peers. And we're just trying to understand where it is, but meanwhile, we're being selective in regards to where we're placing those investments between the different power chain propulsion systems. Now truck has been a strong point for us. It's going to continue to be a strong point for us, we think, for decades. We're in a solid position with respect to that, so we'll have strong cash generation there.

Speaker 2

But we also recognize that we need to get more diversification with customers as well as geographically in our business. It's part of why we're doing tactical acquisitions like Tech 4 that allows us

Speaker 5

to grow with other customers.

Speaker 2

So that's why I also indicated that electrification strategies are going to vary by region. Obviously, in Asia, especially in China, they're going all in on hybrid and full battery electric vehicles. Europe feels strongly about it as well, but maybe lagging a little bit behind China. And North America, I think everyone's going to be at a holding pattern until we see where the election comes out in the November period of time and consumer acceptance. And you know what the consumer issues are, and it's all about affordability right now.

Speaker 2

It's about range anxiety, and it's about charging infrastructure. And until those issues get fixed, I think it's going to lag in the U. S. For a period of time, which is going to impact all of us, which just means we're going to be making more ICE and EV for a longer period of time ICE and hybrid, excuse me, for longer periods of time. So as I said, so I mean, you either grow organically or you grow inorganically, right?

Speaker 2

And so we're trying to manage both. But the organic growth side of things is slowing down, not just for AM, but just for the industry in general. And so that's why we're also trying to figure out, are there other means for us to grow, both within our current space, meaning auto or there are adjacent markets that we need to leverage our competencies to exercise. Hopefully, that addresses your question.

Speaker 4

That's very helpful. Thank you.

Speaker 1

Yes.

Operator

The next question is from Ittai Micheli with Citi. Please go ahead.

Speaker 6

Great. Thanks. Good morning, everyone. Just a couple of follow ups. You maybe just quantify the top line impact from the second half launches you talked about?

Speaker 3

Yes. We haven't quantified those specifically, Itay, but you can clearly see that embedded inside of if you follow, for example, the midpoint of our guidance, if you have a reasonable conversion rate on our sales, if you're comparing 1st rate or first run rate, half run rate compared to second half, obviously, we'll probably click the step down a little bit to higher contribution margin due to the products that in terms of weighted from trucks first half versus second half. The balance of that will squeeze out as sort of some of the launch impact that you will feel in both the 3rd and 4th quarters.

Speaker 6

That's helpful. And then just maybe thinking beyond 2024, how should we think about the effective cash tax rate for the company? And also,

Speaker 3

if you just need to

Speaker 6

give us a bit of a help on the second half kind of outlook for SG and A?

Speaker 3

Yes. SG and A, we're going to reverse SG and A, we're sort of targeting that 6% to 6.5% range. I would expect that to continue in the back half. I would expect R and D to be relatively flattish near that $40,000,000 a quarter, which is a key piece of that SG and A as well that doesn't necessarily flex with sales. So you got to contemplate that.

Speaker 3

We've not given tax specific guidance for forward looking years, but you can see our recent cash tax rates would probably be very similar going forward. Of course, as you become more profitable, you will pay more cash tax. Effective rate in the U. S. Is 21%.

Speaker 3

We've been higher than that, closer to that 45% to 50% due to some of our interest deduction limitations. So it's going to be probably somewhere between that U. S. Effective tax rate and sort of the higher rate we're experiencing currently right now, meaning as you get more profitable, those limitations start to roll off. So it's going to be somewhere between the 2.

Operator

The next question is from Jake Schall with BNP.

Speaker 8

I just wanted to dig in a little bit on profitability. So obviously, the first half has performed pretty well at that 12.8% level and there's a pretty big fall off in the second half. And I know that in the second half, you're dealing with a combination of lower industry volumes and the RAM and Delta changeovers. So as we look beyond this year, is there are there any structural reasons why the business can't operate in that 12.5% to 13% range?

Speaker 3

Yes. No, it's a great question. And it's always difficult to extrapolate a forward looking full year based on a single quarter, right, because there's a lot of different dynamics that go inside the quarter, inside our business, whether it's launches or normal seasonality. But I guess what I would encourage you is take a look at our full year guidance that we provide today holistically over 12 months. Obviously, our performance trend continues to be positive.

Speaker 3

That's with a decent also volume macro backdrop. And then I would expect performance to continue to drive forward into the years past 2024 and some of these, I'll call it, premium costs associated with launches in the back half start to subside. So I think full year, stepping into next year is a good way to think about it, making a couple of those adjustments for what I just described.

Speaker 8

And then as the overall EV market slows down a little bit, how should we think about the profitability of your EV business? I know you have also the Mercedes AMG in addition to some of the EV programs, But how should we think about that?

Speaker 3

Yes. Our current EV business is only a couple of percent of our current revenues today. But as we go and source and secure new business, especially as it relates to electrification, we have certain financial hurdles that we have instituted and are very focused on as we're looking to win that business and secure that for the future. So our goal and our objective is to continue to strive to have a top performing profile business

Speaker 2

with our ICE, with our

Speaker 3

hybrid and with our EV business.

Operator

Thank you, gentlemen. Your last question comes from John Murphy with Bank of America. Please go ahead.

Speaker 9

Good morning, guys.

Speaker 2

Good morning, John.

Speaker 9

Good morning. Through your commentary, you have the GMV program. You mentioned the van program later in the decade and there's some other comments. It's kind of an indication that the bidding is going fairly well to grow the backlog over time. But we're also seeing this extension of ICE programs, right?

Speaker 9

When I think when you look at your backlog, you'll net out or roll off programs that are that you're exiting or being wound down over time. But some of those may be actually extended. So it just seems like the backlog from a gross basis is getting better and potentially from a net roll off will get better as some of these ICE programs get extended. How do you think about the backlog potential as we grind into the end of the year and into next year that it could potentially be significantly higher than it was

Speaker 3

at the start

Speaker 9

of the year?

Speaker 2

John, I mean, our normal attrition rate is about 100 dollars to $200,000,000 on a given year. This year, it's a little bit higher. Going forward, I mean, what you're going to see is our core ICE and hybrid programs are going to extend further. We don't include that in our backlog. That's part of our base business.

Speaker 2

So we only, in our backlog, show new and incremental business to the base business that we have. Because of this air pocket going through the industry, I it's going to challenge not only us but other suppliers going forward in regards to that backlog. But we still have a healthy backlog at 6 $100,000,000 today, and obviously, we'll update that appropriately at the right time next year. But we're just trying to manage our way through those issues right now. But if you want to factor in extensions on core business today, then certainly our backlog would be going up.

Speaker 2

But that's not how we have historically done it. As I said, we only include new and incremental business to our backlog. I don't know, Chris, if you want to say.

Speaker 3

No, John, you would see our attrition as we thought about it before, obviously, would slow down, right, because our programs, as David indicated, will be extended or also being replaced with additional equivalents going into their next generation of products as well. So that's a critical factor to keep in mind.

Speaker 2

Yes.

Speaker 1

But are you getting actual clarity on that

Speaker 4

at this point? Or is that kind

Speaker 9

a little bit of a guessing game in conjunction with your partners? Are you actually seeing that directly in the next in current schedules and program changeovers?

Speaker 2

Our schedules on our core business today, John, are very strong and holding there. I mean, obviously, we're going through some launch, so it's impacting a little bit of the volume, especially in the Ramin and on the D22 as we highlighted earlier. But the balance of our core business is still very strong. It's just a matter of how long ICE and hybrid are going to continue to run, which we think will be for long periods of time. And listen, the OEMs are essentially adopting and protecting their ICE business, while at the same time making the necessary investments in EV and hedging their bets.

Speaker 2

And we've said, listen, we don't have the deep pocketbook that an OEM has, but we need to be more selective on where we're placed our investments in the EV, and that's exactly what we're doing on certain customers and certain programs and investing in certain technology development. And again, we want to be agnostic to the market. We want to be relevant to the market, and we want to give the OEMs a choice of the propulsion systems Whatever they need, we want to have something on the shelf to support them.

Speaker 3

And John, if you look at some of the recent announcements from some of the OEMs, they were not EV related, which, of course, certainly supports and grow some of our base internal combustion engine and hybrid business.

Speaker 9

Okay, great. Yes, just one comment on the cap allocation stuff. I think paying down debt can be very accretive to the equity over time. So keep that up. Thanks, guys.

Speaker 2

Thanks John. Appreciate it.

Operator

That was our final question. This concludes our question and answer session. I would like to turn the conference back over to David Lim for any closing remarks.

Speaker 1

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

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

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Earnings Conference Call
genedrive Q2 2024
00:00 / 00:00
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