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spk12: Good morning. My name is Chad and I will be your conference facilitator today. At this time, I would like to welcome everyone to American Axle in Manufacturing, first quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the star key then the number one on your telephone keypad. If you would like to withdraw your question, please press the star key, then the number two. As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.
spk06: Thank you, and good morning. I'd like to welcome everyone who is joining us on AM's first quarter earnings call. Earlier this morning, we released our first quarter of 2021 earnings announcement. You can access this announcement online on the investor relations page of our website, www.aam.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. To listen to a replay of this call, you can dial 1-877-344-7529, replay access code 10152565, This replay will be available beginning at 1 p.m. today through 1159 p.m. Eastern Time, May 14th. Before we begin, I'd like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risk and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to our filings with the Securities and Exchange Commission. Also, during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is available on our website. With that, let me turn things over to AEM's Chairman and CEO, David Dowk.
spk10: Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AM's financial results for the first quarter of 2021. Joining me on the call today are Mike Simani, AM's president, and Chris May, AM's vice president and chief financial officer. To begin my comments today, I'll review the highlights of our first quarter of 2021 results. Next, I'll touch on some exciting recent business announcements with Ford and RE, and lastly, we'll discuss the challenges within the supply chain and our financial outlook. After Chris covers the details of our financial results, we will then open up the call for any questions that you may have. In the first quarter of 2021, AM delivered solid operating performance and strong cash flow generation. Although the industry is facing continuity of supply issues, we continue to navigate through these challenges while delivering very strong results. AM sales for the first quarter of 2021 were $1.43 billion, up approximately 6%, compared to $1.34 billion in the first quarter of 2020. The increase in our revenues on a year-over-year basis primarily reflects the recovery from COVID-19-related industry shutdowns that we experienced last year. Although North American industry production was down 4%, according to third-party estimates, light truck production was up 5% year-over-year, and volumes on our core platforms increased 9% year-over-year. Furthermore, light truck inventory on a number of the key platforms that we support remained extremely low. Consumer demand for light trucks remained strong, and our customers are building them as much and as fast as possible. We believe the demand environment for these products will continue for an extended period of time. AM's adjusted EBIT in the first quarter of 2021 was $262.9 million, or 18.4% of sales. This margin performance is a first quarter record for AAM. This compares to $213.3 million last year, or 15.9% of sales. In addition to benefiting from higher production levels, our intense focus on optimizing the business and flexing our cost structure to align with the global market demand contributed greatly to our performance in the first quarter of 2021. AAM's adjusted EPS in the first quarter of 2021 was 57 cents per share compared to 20 cents per share in the first quarter of 2020. Cash flow generation was strong in the quarter. We generated adjusted free cash flow of over $174 million compared to $83 million in the first quarter of 2020. Our operating performance and commitment to reducing capital spending drove this high level of free cash flow. Furthermore, we prepaid over $100 million of our term loan in the quarter. As we previously stated, we are committed to reducing our debt and strengthening our balance sheet throughout 2021. On the business front, we are happy to announce that we are providing both air-cooled and liquid-cooled power transfer units, which are part of our EcoTrac product family, for the all-new Ford Bronco Sport. This is a great new product offering from Ford that is being very well received in the marketplace. And as for electrification, We're excited to announce that AM and RE Automotive have agreed to jointly develop an exciting new electric propulsion system for e-mobility. As we shared in our last call, RE Automotive is a leading provider of e-mobility solutions. The company's core innovation includes integrating traditional vehicle components into the wheel, allowing for a flat and modular platform. AM's partnership with RE intends to incorporate our lightweight, highly efficient next-generation electric drive units which feature fully integrated high-speed motors and inverters into RE's highly modular technology that enables a fully flat EV chassis for multiple commercial vehicle applications. The electric drive units will be developed at AM's Advanced Technology and Development Center here in Detroit. We are very excited to partner with RE Automotive to bring new EV mobility technologies to the market. This is an important step in growing AM's electric propulsion business and expanding our addressable market. In addition, our electrification dialogue with multiple OEMs continues to intensify, and our technology, engineering, and new product offerings are attracting strong global interest. 2021 will be an exciting year for us in this space. Our engineering teams, in collaboration with our technical partnerships with Inovance and Hoffer Engineering, are quickly achieving technology advancements for our next generation of products. On a separate but related matter, we are also pleased to announce that AM will receive a grant from the US Department of Energy in support of the development of our three-in-one electric drive unit. This award further recognizes AM's technology and innovation to support new energy vehicles. As for our current generation of electric vehicle products, we are presently in the process of launching multiple new programs globally including components, sub-assemblies, and electric drive units. These innovations and advancements are allowing AM to compete to win business with our traditional customer base, while also positioning AM to win business with new OEM entrants in the space. We're also very pleased to announce that we recently published our 2020 sustainability report. I'm very proud to say we exceeded our initial sustainability goals this year, this past year, and now are in the process of setting even higher goals. AM's sustainability program is set by our cultural values and strategic principles as a company that stress teamwork, diversity and inclusion, community involvement, and respect for the environment. Our sustainability program has become more transparent in consideration of the interests of our shareholders, customers, suppliers, associates, and other stakeholders. We are deeply committed to profitably growing our business in a way that is sustainable and socially responsible. Before I transition to Chris, I want to talk about our current operating environment and our financial guidance. In my 35-year career in the industry, I've never seen such stress on the value chain stemming from shortages in semiconductors, labor, steel, containers, and port delays, and the rising commodity prices that we're experiencing. We believe the second quarter of 2021 will be the trough of the semiconductor shortage issue with improvement in the second half of the year. However, we expect this issue will carry into 2022. For AM, we will continue to work with our customers and our extended supply base to protect continuity of supply. Although there is significant operating uncertainty, especially with the availability of semiconductors, we continue to maintain our current financial guidance. In fact, based on what we know today, and assuming our customers continue to prioritize full-size truck production with minimal disruption, we can see a path to the high end of our ranges. Our current guidance remains as follows. From a revenue standpoint, $5.3 to $5.5 billion. On an adjusted EBITDA basis, $850 to $925 million. And adjusted free cash flow, $300 to $400 million. Operationally, our business is running extremely well. We continue to manage our expenses, improve our operational efficiency, and tightly control capital expenditures. Even with all the pressures we face, we believe 2021 can be an outstanding year for AM. And this has the AM team both very motivated and excited. With that, let me now turn the call over to our Vice President and Chief Financial Officer, Chris May. Chris?
spk02: Thank you, David, and good morning, everyone. I will cover the financial details of our first quarter results with you today. I will also refer to the earnings slide deck as part of my prepared comments. So let's begin with sales. In the first quarter of 2021, AAM sales were $1.43 billion compared to $1.34 billion in the first quarter of 2020. Slide 8 shows a walk of first quarter 2020 sales to first quarter 2021 sales. First, we had back the impact of COVID-19 of approximately $169. Then we account for the unfavorable impact of the semiconductor shortage, which we estimate to be approximately $64 million inside the board. On a year-over-year basis, we were impacted by GM's transition from a rear beam axle to a new, lightweight, and highly efficient independent rear drive axle for GM's new full-size SUV, which impacted sales by about $38 million. The first quarter of 2021 is the last quarter of this year-over-year impact to occur. Other volume and mix was negative by $26 million. Pricing had an unfavorable impact of $4 million on a year-over-year basis. Metals and FX accounted for an increase in sales of $44 million. During the last six months, we have continued to see an increase in the primary index-related inputs to the metal-based materials that we purchased. You may recall we hedged this risk with our customers by passing through the majority of index-related changes. The metal portion of this column reflects these elevated pass-throughs on a year-over-year comparison. Now, let's move on to profitability. Gross profit was $227.1 million, or 15.9% of sales, in the first quarter of 2021, compared to $195.3 million, or 14.5% of sales, in the first quarter of 2020. Adjusted EBITDA was $262.9 million in the first quarter of 2021, or 18.4% of sales. This compares to $213.3 million in the first quarter of 2020, or 15.9% of sales. As David mentioned, this was AAM's highest first quarter adjusted EBITDA margin in our company's history. You can see a year-over-year walkdown of adjusted EBITDA on slide 9. We benefited from the contribution margin on the increase in net sales from last year, but most importantly, we continued our strong cost reduction actions, reflecting a year-over-year benefit of $28 million. Let me now cover SG&A. SG&A expense, including R&D, in the first quarter of 2021 was $90 million, or 6.3% of sales. This compares to a similar amount in the first quarter of 2020, or 6.7% of sales. AEM's R&D spending in the first quarter of 2021 was $32 million compared to $37 million in the first quarter of 2020. AEM has been able to capture an increase in sales with no net increase in SG&A expense. We will not only continue to focus on controlling our SG&A costs, but also further our investments in key technologies and innovations, with an emphasis on electrification. This emphasis includes an appropriate level of funding to be successful and meet our objectives, but it also includes shifting resources from traditional product support to new technology development in a very cost-effective manner. Let's move on to interest and taxes. Net interest expense was $48.2 million in the first quarter of 2021 compared to $48.7 million in the first quarter of 2020. We expect this favorable trend to continue as we benefit from continued debt reductions. In the first quarter of 2021, we recorded income tax expense of 8.8 million compared to 3.3 million in the first quarter of 2020. As we continue into 2021, we expect our book effective tax rate to be approximately 20%. We would expect cash taxes to be in the $30 to $40 million range for 2021. Taking all these sales and cost drivers into account, Our gap net income was $38.6 million, or $0.33 per share, in the first quarter of 2021 compared to a loss of $501.3 million, or $4.45 per share, in the first quarter of 2020. Adjusted earnings per share excludes the impact of the items noted in our press release. Adjusted EPS for the first quarter of 2021 was $0.57 per share compared to $0.20 per share in the first quarter of 2020. Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the first quarter of 2021 was $179 million compared to $139 million last year. Capital expenditures net of proceeds from the sale of property, plant, and equipment for the first quarter was $40 million. Cash payments for restructuring and acquisition-related activity for the first quarter of 2021 were $23 million. The cash outflows related to the recovery from the Malvern fire we experienced in September of 2020 net of insurance proceeds were $11 million in the quarter. However, we anticipate the Malvern fire to have a neutral cash impact for the full year as timing of cash expenditures and cash insurance proceeds align over time. In total, we would expect $50 to $65 million in restructuring and acquisition costs in 2021. This is no change from prior guidance. Reflecting the impact of this activity, AM generated adjusted free cash flow of $174.1 million in the first quarter of 2021. From a debt leverage perspective, we ended the quarter with net debt of $2.8 billion and LTM adjusted EBITDA of $769 million, calculating a net leverage ratio of 3.6 times at March 31st. This continues the trend of a declining leverage ratio and keeps us on track for delivering at least a full-term leverage reduction this year. Based on AAM's strong free cash flow in the first quarter of 2021, we prepaid over $100 million on our term loans. We continue to expect to strengthen AAM's balance sheet by reducing our gross debt and lowering future interest payments. In fact, subsequent to the end of the first quarter, AAM paid an additional $89 million on our term loans. Before we move to the Q&A portion of the call, let me close my comments with some thoughts on our 2021 financial outlook. we are reiterating our targets that we provided on February 12th of this year. Our outlook encapsulates the best information we currently have regarding customer production schedules, their prioritization of building full-size pre-cups and SUVs, and the uncertain backdrop related to semiconductors. As David indicated, based on these inputs and assumptions, we can see a trend to the high end of the guidance ranges we provided. The strong free cash flow number is a result of the focused restructuring and cost reduction initiatives year-over-year margin growth, working capital optimization, and reduced capital spending. Our EBITDA and free cash flow generation will be used to fund our R&D programs, support our future growth, and reduce leverage as we are very focused on improving our financial profile. While we do not provide quarterly guidance, I would expect the second quarter impact related to semiconductors to be greater than the first quarter based on recent customer announcements and supply chain challenges. AAM continues to lay a solid framework for long-term success and shareholder value. We continue to invest in electrification to develop highly efficient electric drive units, sub-assemblies, and components that are a compelling value to OEMs that will drive our growth. Our customers continue to award us business on core platforms that will yield strong cash flows well into the future, and core to AAM, we are passionately focused on managing our cost structure, optimizing our performance, and delivering best-in-class results. At the end of the day, the first quarter of 2021 was a fantastic start to the year. We also understand there are near-term challenges and uncertainties related to the supply chain that we must manage and navigate. But this management team is confident in addressing these challenges. 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 the Q&A.
spk06: Thank you, Chris and David. We have reserved some time to take questions. I would ask that you please limit your questions to no more than two. So at this time, please feel free to proceed with any questions you may have.
spk12: Thank you. At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the roster. And the first question today will come from Rod Lash with Wolf Research. Please go ahead.
spk05: Hey, this is Shreyas Patel. I'm for Rod. Hey, just wanted to pick up on that last point about the second quarter. You know, you did mention it's going to be the trough in terms of the semi-issue. Any way you can kind of frame the magnitude of the decline based on what you're seeing and And how confident are you that supply is coming back, is starting to come online and by the second half should improve?
spk02: Yeah, I would tell you, Chris, this is Chris. You know, we disclosed for our first quarter impact from a revenue perspective, a decline of $64 million. What I would tell you, our expectation in the second quarter is it will be greater than that. And then that would moderate below that in the second half of the year on a quarter-by-quarter basis. That's how I would frame it as we sit here today from a revenue perspective. And then obviously with a little bit more I would call customer schedule disruption in the second quarter versus the first quarter, we'll have a little bit of, you know, temporary inefficiency inside of our production schedules, which will just, again, sort of be discreet within sight of the second quarter.
spk05: Okay. Okay. And then, you know, in the quarter, you know, it looked like, you know, performance, and the cost performance was quite good. I think it was plus $28 million year over year. I was just wondering, were there any supply chain costs in the quarter, and maybe what were some of the factors that really drove the strong performance?
spk02: Yeah, I would tell you, inside of our first quarter, we did experience a little bit of Drag as it relates to metal market indices, you know, we do pass that through, but we only pass about 90% through. So it was slightly a little bit negative from that perspective. And a little bit associated with premium freight as we, you know, coordinated our supply logistics through the semiconductor issues. But in terms of a year-over-year holistically performance, you may recall in the second quarter of last year as COVID was setting upon the entire industry, We announced and discussed significant cost-saving measures for the balance of the year. And you may recall we talked about a quarterly run rate of nearly $20 million. So the first quarter last year didn't have that benefit in it, if you will. We are still experiencing and benefiting from those initiatives. We started really in the second quarter of last year that continued through the balance of last year and the beginning of this year.
spk05: Okay. And then just lastly, on the agreement with RE, I just wanted to understand a little bit more about the scope of this. of this agreement. So it looked like this was going to be a co-developed propulsion system for commercial applications. Is that going to be different from what you already have developed on the light vehicle side in terms of your product portfolio? And then is this kind of an exclusive agreement? So this propulsion system would go into their platform going forward, just trying to get a sense of that.
spk10: Yeah, this is David Zau speaking. As we've communicated to all of you before, we've been working very actively in regards to our next-generation products for electrification, and our designs are modular and scalable. At the same time, we've integrated the motor, the inverter, and the gearbox into the EDU, so there's a much smaller packaging space. We wanted to drive power density and performance. And performance and electrification is really measured in the form of efficiency. We're seeing all of that. And we've designed the product so it can meet various vehicle segments and support the different regions of the world. And clearly, we're adopting and transitioning that product to be able to support reautomotive designs and design needs worldwide. so that we can support not only theirs but our e-mobility solutions for the marketplace. But this gives them an opportunity to even enhance their product even more as far as the designs that we've come up with. We're integrating that into their chassis design so it's a full flat type design for commercial vehicle type application. We feel very good about the relationship and the partnership and are excited about what the future holds for our two organizations. We're at an aggressive timeline to develop the product for them, but we have a strong foundation that we're already working from. I expect that we can bring this to the market sooner than later.
spk05: Okay. So it's kind of leveraging your existing product. And should we kind of think about content per vehicle kind of similar to what you've talked about in the past? I think it's like $2,500, something like that?
spk10: Yeah, but the only thing I would comment to that is there's, you know, four per vehicle. So the content should be much, much higher for us based on the application and the design strategy to support their platform design, chassis design.
spk05: Okay, great. Thanks so much.
spk10: Thank you.
spk12: The next question will come from Ryan Brinkman with J.P. Morgan. Please go ahead.
spk00: Hi, thanks for taking my question. I guess this is the third quarter in a row now. You've pretty substantially exceeded sort of either your own margin guidance or consensus expectations. And I realize you've got some difficult year-over-year margin comparison in the back half year, but still wanted to sort of check in on the likelihood of incrementals decelerating from like 61% in one Q to something more like 16% in the remaining quarters of the year. And then maybe just kind of looking beyond all this noise with regard to COVID a year ago and semis and commodities this year. How are you just sort of generally thinking about normalized margin potential as we move beyond the current period, including, you know, maybe relative to what your answer might have been, you know, prior to COVID.
spk02: Yeah. Good morning. This is, this is Chris. You know, certainly you're spot on a lot of noise and quits and takes with COVID and semis, but sort of maybe remove that from our conversation and also, you know, kind of look a little bit of our performance in the first quarter and Always a challenge to extrapolate a full year and run rate performance from a particular quarter. But in terms of key elements to think of on a go-forward basis, certainly a lot of the cost initiatives and restructuring initiatives we've been putting in place over the last 12 months, you continue to see that benefit the company. I would expect that to continue to benefit the company on a go-forward basis. So in discrete in terms of the first quarter relative to the, I would say, balance of the year of this year, Again, excluding semis and a little bit of the impacts associated with that in the second quarter, but timing-wise, R&D was a little light in the first quarter. Our full year, how we typically look at that from a perspective of anywhere from $30 million to $40 million a quarter, $35 million to $40 million a quarter, we were a little light in the first quarter. That will ebb and flow with the launching of our electrification activity, but we think sized right to support our objectives. Pricing from a year-over-year pricing impact in terms of the first quarter, again, a little light. That comes on usually in the little bit second, third, fourth quarters for us. And then cadence of our launches was a little bit light in the first quarter from a project expense. That comes on the back half of the year a little bit. But big picture, you know, we expect, you can see our full year guidance. You do the math on it. It's nearly 17% at the high end of our ranges, you know, running at a very strong, healthy-paced business and continued opportunity to grow margins based on our continued attacking of our cost structure and optimization of footprint and throughput clearly within line of sight, and our guidance would indicate that.
spk00: Okay. And then, yeah, again, another on the collaboration with re-announced today. I realize they're using a fully flat or skateboard-type chassis, but I'm not sure. Can you remind, would this technological solution qualify as a so-called hub motor or approach. And then maybe a related question. I think previously you haven't been as interested in expanding, at least organically, to compete more in the commercial vehicle driveline market than you do now, just given all of the considerable investments that incumbents already have there and what that might imply for margin, et cetera. But I'm just curious, with all of the technological change taking place that could potentially disintermediate maybe a lot of the current investments and with some of the things that you're looking at with REIT, et cetera, if it might make sense or you might be evaluating potential, you know, organic, you know, expansion into that market.
spk10: Yeah, we're very excited about the technology that we've developed. We're very excited about the technology that we've seen, you know, REIT Automotive develop. Combined together, we think that we bring differentiating technology to the marketplace to serve multiple vehicle segments, including the commercial vehicle space. So, yes, we're very excited about possibly expanding the served markets that we have today, and the reautomotive flat chassis will allow us to open up some of those other type market applications for us. So we're excited, but at the same time, the technology that we're bringing to the table for them gives them more freedom and functionality for their customers as well, and will strengthen their product offerings to the marketplace. So we think it can just be a tremendous opportunity for us to work together to address the market where we both can benefit greatly from the partnership.
spk00: Okay. Thank you.
spk10: Yep.
spk12: And the next question will come from John Murphy with Bank of America. Please go ahead.
spk07: Good morning, guys. Good morning, John. We just wanted to ask a first question on – GM's trucks and maybe even some of your Lux products that have been protected by your customers so far. If there were incremental pressures that came from chip shortages in the second quarter on production, would you have a higher than normal decremental margin in the second quarter? And then also, if we think about those potential losses, not saying they're absolutely going to happen, but potential losses, do you think there's capacity to catch back up on some of that loss production, specifically on GM's trucks. It seems like they're kind of running hot. There's not a lot of room to make up that production. So would that just be net loss production that couldn't be made back up later in the year if you see losses specifically around GM's trucks?
spk10: Yeah, John, this is David. I'm trying to look at it the other way. It's how can I get that incremental margin? GM's got their products protected from a semiconductor chip issue. They've clearly prioritized their full-size trucks. We're seeing the benefit of that. They're seeing the benefit of that. That's fantastic news. You know, right now they're running their plants flat out, max overtime where they can. At the same time, you saw or heard in their earnings announcement that, you know, they plan on bringing the St. Catherine's facility on board. So that will add incremental, not the St. Catherine's, excuse me, the Oshawa facility on board. So that will bring incremental capacity to them going forward in the marketplace and Remember, their inventory levels are extremely low right now because they haven't fully recovered from the strike that took place, you know, over a year ago. And then obviously things were impacted with COVID. But right now, you know, we just see pedal to the metal with respect to the GM full-size truck platform.
spk07: So maybe if we could pack that another way, David, I mean, I think we kind of think, you know, historically they did 1.6, 1.7 million on those trucks. I mean, right now I think capacity is right around 1.2 plus or minus. Love to hear your thoughts on that. But as you're bringing Ashwa on, where do you think that takes that up to and what is the potential upside in revenue? Maybe you could take the other side of the coin, right? I agree with you.
spk10: Yeah, IHS, you know, has it around 1.35 million units for that platform. You know, we're closer in line with that, and that does not include Oshawa. So we expect that number to go north of that based on the volume that they ultimately intend to produce out of that facility.
spk07: Okay, that's very helpful. And then just a second question on the re-agreement. You know, as you think about the change of the powertrain, potential change of powertrain architecture, and I would say this would be only in limited areas, cases. You know, as you look at that sort of hub setup or however you want to, you know, whatever you want to exactly call it, you know, what does that mean for your content? Because I guess in some ways the pessimist would say, hey, listen, you're basically eliminating axles in that, you know, in that setup. But the reality is I think you have a lot of content potential there anyway. So, I mean, can you just help us Think about what that means for you as far as content and if there's any real significant risk to your somewhat more traditional setup, even on EVs going forward.
spk10: Yes. So, John, this is David again. On the traditional products, I mean, obviously we enjoy the sort of content of a vehicle today with electrification, with similar architectures, but an integrated design, as I mentioned, with the motor, the inverter, and the gearbox design. we actually think that we can improve our content or increase our content on the traditional, let's say, driveline system that's in place. With respect to the reautomotive and their approach, which is heavily weighted towards the commercial vehicle, but it can obviously expand other vehicle segments, our content for vehicles should go up greatly because there's four for every one of the vehicles that are there. So we feel really good about where we are, our product, that we've designed and developed is getting a lot of attention both from the traditional OEMs as well as some of the new entrant OEMs. That's evident by the partnership and collaboration we're putting together with REE and the partnerships that they already have in place with Mahindra and Hino and some of the other customers that they're working with and have announced. So, again, we're extremely excited about our technology, extremely excited about the receptivity from the various customers, and happy to be adding to our partnership with respect to Rio Automotive.
spk02: Hey, John, this is Chris. Go ahead. I was going to say, a couple months ago, when we laid out a lot of our next generation of architectures, we focused very much on it being scalable, modular, and can adapt to a lot of different platforms. This is a textbook of what we're talking about.
spk07: I'm sorry, just one follow-up. On that kind of setup, the payload and towing capacity, how does that compare from a more traditional axle setup as opposed to these hubs? motor setups, if you will? I mean, are these for lighter-duty commercial vehicles, or could these be the kind of things that really truly, you know, compete with, you know, body-on-frame, you know, typical setups?
spk10: Yeah, I mean, it's still to be proven out going forward here. I think over time, you know, it's more on the light side, but at the same time, I think it can be enhanced to compete at the other side. But, you know, I still think you're going to have body-on-frame vehicles for an extended period of time. We just want to make sure that we're in a position that we can be agnostic to the market and have the traditional ICE and hybrid applications available while also having electric offerings in the different forms that we're talking about, the traditional design but from an electrification standpoint, but now also with this reautomotive design that's come to the marketplace on this, what do I say, flat load for EV chassis.
spk07: Very helpful. Thank you, guys.
spk10: Thank you, Jeff.
spk12: The next question comes from James Piccarello with KeyBank. Please go ahead.
spk11: Good morning, guys. I've got a content question as well, but maybe of the more traditional variety. Can you provide any CPV color on the power transfer units you're supplying to the Bronco support?
spk02: Typically, on our all-wheel drive applications where we're supplying CPV, front, meaning a rear drive module and a PTU. Think of it as a $1,000 to $1,200 range. And on the Bronco Sport, we're only supplying the PTU. So it's roughly half or slightly less than that is how you should think about it from that perspective.
spk11: Okay. That's helpful. And the company took an accelerated depreciation charge in Brazil during the quarter. Last year at this time it was in Thailand. You're concurrent with Axel's exit from the country there. Just wondering what your thoughts are on you know, the company's future in Brazil.
spk10: We still see a very strong future in Brazil. We're just responding to customer change in their strategy.
spk11: Yep. Okay, thanks.
spk12: And the next question will come from Dan Levy with Credit Suisse. Please go ahead.
spk01: Hi, good morning. Thank you for taking the question. First, just a question on the guidance for the year and maybe the cadence for how the year plays out. And specifically, could you give us a sense for maybe how much premium freight you incurred in the first quarter, how we should expect that over the course of the year? And then just second, as far as the dynamic on commodities goes, because I know that there's a lot of it is passed through, but maybe you could give us a sense for the cadence on what to expect on the metal market or commodity side and how much, you know, what the spill-through effect into 2022 might be.
spk02: Yeah, sure. This is Chris. First on your premium freight, sort of as I mentioned earlier in the call, you know, we spent, I would say, maybe a few million dollars inside of the first quarter on premium freight for a variety of reasons, most of it related to coordinating with our supply chain and some of the disruptions that we've been talking about. I would expect that to increase a little bit here into the second quarter and then sort of dissipate for the back half of the year from a premium freight perspective. As it relates to metals, just as a reminder, you know, the metal pass-through elements of our agreements are really contractual by design and they're set to certain indices inside of the market depending on the metal. These prices reflect current market pricing every $30,000. 60 or 90 days, and they will reset automatically through that process. So as metal goes up, we will reset prices, and it's typically anywhere from a 30- to 90-day lag on the change of the indice, so that dynamic both with our supply base as well as with our customer base, and it will pass through. So you'll have, over a period of time, this flows very well together. During different quarters, once in a while, it can get just from a timing perspective a little discoupled, but then it reconnects the subsequent quarter, if that makes sense. So based on current prices today, you see the impacts for us on the first quarter. If they go down, our metal passers would go down. If they go up next month, they'll go up. So it's hard to predict on a go-forward basis as they're subject to market conditions.
spk01: So let's just assume that prices stay flat going forward. into 2022 by, you know, there won't be as much of an effect because most of the lag is a little more limited. Is that correct?
spk02: Yeah, so prices stay flat to where they are today. So you may, if you look back at the indices, as I sort of mentioned, they've been trending up sort of month to month to month through the first quarter. So you'll have some kind of recalibration in the second quarter. As I mentioned, you have a little bit of lag, and then they would run flat from there.
spk01: Okay, great. Thanks. My second question, I just want to zoom out and think about the cycle for a second. You know, we have this massive inventory rebuild ahead given just how tight the inventory is and how strong the demand has been. And so whenever the supply gets back online and probably tells us that you're potentially well positioned into 2022, you know, it could maybe help accelerate the leveraging. So I know you can't take any action right now given there's a lot of macro uncertainty. but maybe you could give us a sense as you have better visibility. And if your earning stream starts to accelerate, you could give us a sense of, you know, what types of options that opens up, what the playbook is, what are the things that you might be doing, which you weren't doing right now? I assume that there's some opportunity to accelerate the prepayment. What's the flexibility there, you know, and how does that affect EV development? So what is an accelerating cycle of, and a large inventory rebuild enable you to do that you can't do today, that you're not doing as much of today?
spk10: This is David Douk. As we indicated, we see a very bright future and a very strong demand for the various platforms that we support for years to come, especially because of where the inventory levels are and because of the consumer demand that exists in the marketplace. As I said, As fast as the OEMs can build them, the consumers are buying them. So I think it's going to take an extended period of time to – Rebuild the inventory levels. That's going to put us in a very healthy position to generate a lot of cash for our business. We'll use that cash as we always have to continue to support our organic growth. A big shift in our organic growth is towards electrification, so we'll continue to fund our R&D and electrification, and then, again, with the intent of profitably growing our backlog of new business. In addition, we'll stay very focused and very disciplined with respect to paying down debt, and we'll accelerate paying down debt, much like we just paid $100 million this past quarter with respect to further supporting our commitment to get this balance sheet where it needs to be. Chris, I don't know if you want to add to that.
spk02: Dan, this is Chris. You asked what type of debt we would have prepayable. Our entire term loan stack that's due in 2024 is prepayable at any time, and then the bonds in the subsequent years are now
spk03: to us to address that okay yeah thanks dad the next question will come from joseph stack with rbc capital markets please go ahead uh thank you everyone um you know if we go back in in time a little bit um you know we know that um the GM sort of made a sourcing decision on sort of the axles for the new pickups, and you retained some, and they took some in-house. They've obviously been protecting that program, which I think overall has sort of helped you. I guess what I'm curious to know is, and what I have less visibility into, is sort of the mix within the mix of that, and whether you think the plants and programs within that pickup truck mix have favored you know, the axles you supply. Do you have any sense of that?
spk10: Between GM and AM, we're making all the axles we can to support their vehicle production. And as they expand their vehicle production, we expect that we'll be making more axles going forward.
spk02: Joe, keep in mind, you know, we supply the heavy-duty, the SUV, and the splits only on the light-duty, right? So as those other ones grow, we benefit from that directly.
spk10: Joe, as we've said to you before, they have an installed capacity. They're utilizing that installed capacity, and the incremental growth has been supported by AAM.
spk03: Okay. And then maybe just to go back to the joint development agreement with RE, Can you just talk a little bit more about this? Like, what types of vehicles do you expect, I guess, or range of vehicles do you expect this to be applicable for? And, you know, maybe a little bit, if you can, sort of who's doing what and, like, you know, how far into... the propulsion system do you go? I believe they might have sort of like a skateboard architecture as well. I'm assuming you're not getting into that element, but any more color there would be helpful.
spk10: Yeah, we're not getting into their core space of the skateboard or the modular platform. What we're doing is integrating our newly innovative designs with the integrated motor inverter and gearbox capability into the wheel end configurations for all four wheels that allows them to have an even lower and more compact, fully flat chassis that supports multiple vehicle program applications, heavily weighted on the commercial vehicle side of things, but it can expand multiple segments.
spk03: Okay, so it's better suited for larger vehicles is the application?
spk10: It can be scaled up and down the vehicle segments, but targeted towards the middle to higher end right now.
spk03: Okay. Okay. Thank you very much. Yep. Thank you.
spk12: Thank you. Gentlemen, your last question comes from Brian Johnson with Barclays. Please go ahead.
spk09: Thank you. Just, you know, I want to follow up. You know, everyone focuses on driveline, rightly so, because it's a big segment. However, it looks like some pretty dramatic margin improvement in metal forming. You know, the businesses in part you got from Metaldyne that had some issues. So could you maybe talk a little bit about the margin expansion there and where it could go?
spk10: You know, Brian, this is David. I'll make some initial comments, and Chris can pick up from there. But, you know, obviously, you know, we took over the Metaldyne operations and incorporated into our operations, which were as large or larger. You know, we've really worked very hard over the last three years, as you're aware, to fully integrate that capability. We've consolidated facilities. We've increased capacity utilization at the remaining facilities. We've optimized, you know, the workforce appropriately. to the new market demand. At the same time, we've integrated a lot of AM advancements from an operating standpoint into the facility, which drives throughput and productivity. So we're very pleased about that. We've been able to minimize some of the CapEx expenditures that each of the individual companies may have spent because of some excess capacity that existed there. Because of the market conditions that are out there right now and our buying power in the marketplace, We've been able to pick up some new business in the metal forming side as well, one, because of some of the open capacity, but also our buying power from a steel standpoint. That's been very positive for our company. At the same time, we've got to prove our reputation in the industry from an operational excellence standpoint, and we're seeing customers come to us to protect their continuity of supply in this dynamic environment. Chris, anything you want to add?
spk02: Yeah, Brian, as you think about the margin performance in that business unit, it was historically quite strong for us as well, 16%, 17%. You're now seeing it sort of at the 18% to 19% plus. And the vast majority does have to do with that capacity rationalization, both from physical plant, also throughput optimization in terms of inside our factories, but also some purchasing power with our strong and broad steel bonds. and how it would benefit this business unit.
spk10: Yeah. And then, Brian, this is David again. The only other thing I would say is, you know, you're thinking traditional forging is only for metal forming, but we've also, you know, are doing a lot of work there in regard to the sintered business. So think powder metal connecting rods and core powder metal parts. And we're also doing some high-pressure die casting from an aluminum standpoint in that business segment.
spk09: Good. Second question is a bit more housekeeping prompted by the train whistle behind your headquarters. As we kind of think about Q2, is there any sort of shipments that you were able to book leaving the factory, particularly in Salau, that may not, you know, when you kind of talk about the end of 2Q, to the extent there's shutdowns or production disruptions in 2Q, that in effect the parts are on their way, so you might see a little dip in terms of orders? Or is it more even if that happens now, because of the rebuild that another competitor colleague talked about. You're not really worried about that.
spk02: Brian, this is Chris. The customers, for the most part, take delivery at our docks. They do ship rail. They do ship trucks. But once they take delivery at our dock, that's our sale.
spk09: That would be the simplest way to think about it. So could there be some work in process that they wouldn't need to order a 2-2?
spk02: That would probably most likely depend on, you know, their initial July shutdown plans. But, again, they'll book weekly orders. They take delivery at our dock. We book the sale.
spk09: Okay, great. Thanks.
spk06: Okay, thank you, Brian. 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. Thank you.
spk12: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.
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