American Axle & Manufacturing Holdings, Inc.

Good morning, everyone. My name is Jamie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle and Manufacturing Third Quarter 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 and the number one on your telephone keypads. If you would like to withdraw your questions, please press the star key and then the number two. As a reminder, today's conference call is being recorded, and I would now like to turn the conference call over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Thank you, and good morning. I'd like to welcome everyone who is joining us on AAM's third quarter earnings call. Earlier this morning, we released our third quarter of 2021 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. To listen to a replay of this call, you can dial 1-877-344-7529, replay access code 10159521. This replay will be available beginning at 1 p.m. today through 1159 p.m. Eastern Time, November 12th. Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to our filings with the Securities and Exchange Commission Also, during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is available on our website. With that, let me turn things over to AAM's Chairman and CEO, David Dowk.

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the third 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 third quarter 2021 results. I'll then touch on some exciting business development news, including the electrification announcements with RE and our largest customer, General Motors. And lastly, we'll discuss the ongoing supply chain challenges 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. So let's begin. AM delivered solid operating performance in the third quarter of 2021, despite unprecedented supply chain challenges that impacted industry production in the third quarter. When we reported second quarter earnings, our expectation was that the worst of the shortage was behind us. This turned out not to be the case. Production volatility, stemming from the semiconductor chip shortage, took another leg down, which eventually forced OEMs to idle production at many facilities, including their full-size truck plants that were largely protected previously. However, the AM team did a great job in managing these obstacles and factors under our control, resulting in solid financial performance. AM sales for the third quarter of 2021 were $1.21 billion, down approximately 14% compared to $1.41 billion in the third quarter of 2020. The decrease in our revenues on a year-over-year basis primarily reflects the impact of the semiconductor supply chain disruptions of nearly $245 million. North American industry production was down approximately 25% according to third-party estimates. Light truck production was down 20% year-over-year, and volumes on our core platforms decreased significantly from a year ago. The industry is at a point where a lack of inventory is beginning to impact retail sales. Data supply on key products that we support were at or below 30 days, with certain platforms in single digits and large SUVs closer to 20 days. Once the supply chain issues are resolved, which will take some time, we foresee an extended recovery to meet customer demand and replenish dealer inventories. AM is in a great position to benefit from the strong demand in light trucks, especially pickups and SUVs and the replenishment of crossover vehicles. AM suggested EBITDA in the third quarter of 2021 was 183 million, or 15.1% of sales. This compares to 297 million last year. Excluding the impact of metal markets and currency, our EBITDA margins would have approximated 19%. This is a testament to our optimization efforts and our strong cost control, yielding strong EBITDA conversion. AM's adjusted EPS in the third quarter of 2021 was $0.15 per share compared to $1.15 in the third quarter of 2020. As for cash flow, we continue to generate positive pre-cash flow in the third quarter. AM's adjusted pre-cash flow was approximately $69 million. Earlier this year, we announced a development agreement with REIT. We are pleased to share that we have secured an initial platform business award with our partner, And AM plans to supply REE with high-performance electric drive units for its highly modular and disruptive REE corner technology that enables full-flat EV chassis for multiple applications. This is a great electrification opportunity for AM, and it's validation of our innovative industry-leading advanced electric drive technology. And we're excited to build upon this win with REE going forward. Investors and other interested parties may have an opportunity to see our wheel and drive units and other EDU portfolio on display at trade shows beginning in January of 2022. In addition, AM announced today that we will be supplying track right differentials for the new GMC Hummer EV. These differential sub-assemblies distribute power generated by the electric drive motor to the left and right wheels. This enhances the experience for drivers looking for exceptional vehicle performance both on and off-road. We are very happy to support GM on this great product, and we look forward to supplying GM for their future electric driveline needs. Our strategy and approach to the market continues to take hold. Our opportunity to succeed in full electric drive units, sub-assemblies, and components are well displayed with these two announcements. As we all know, electrification is coming fast, and it is a great growth opportunity for AM. We have a strong product portfolio in EDUs and E-beam axles, gearboxes, sub-assemblies, and components. As such, our technology is garnering interest around the globe from new and established OEMs, from small cars to light commercial vehicles. We are in numerous discussions with manufacturers, and our business prospects look very positive. Because of our deep driveline experience, we believe we have an edge among the competition, especially when it comes to systems integration and NVH. Before I transition to Chris, I want to talk about the industry supply chain challenges and our financial guidance. What the industry has and continues to experience is unprecedented. The lack of semiconductor availability continues to drive high production volatility with very minimal warning. Additionally, rising commodity costs, labor shortages, logistical challenges, and port delays continue to stress the value chain. We are hoping to see semiconductor stabilization over the next successive quarters, but it's difficult to ascertain when the industry will return to normal as global demand for chips remains strong and new capacity will take time to come online. We expect this issue will continue well into 2022 and possibly into 2023. That said, our priority at AM is to execute our game plan, which means to produce high-quality products deliver on time, and be cost efficient to support our customers and protect the continuity of supply, regardless of the operating conditions, and we're doing just that. One of the management's top priorities is to diligently optimize the cost structure and improve efficiency, and we are doing that. Now let's discuss our financial guidance. Operating uncertainty continues in the fourth quarter, especially with the availability of semiconductors and rising commodity prices. And as such, we have updated our guidance. For the full year, we now target revenue in the range of $5.15 to $5.25 billion, adjusted EBITDA in the range of $830 to $850 million, and adjusted free cash flow of approximately $400 million. Chris will provide more details about our guidance in his prepared remarks. In conclusion, We had a good and solid operating quarter. We did what we do best, that is, we delivered operational excellence. The team delivered positive adjusted earnings and adjusted free cash flow under a very difficult operating environment. We are confident that our strong operating fundamentals should support solid financial performance, especially as volumes recover over time. In the meantime, we continue to secure our core truck, SUV, and crossover business and and generate strong cash flow to fund our electrification future. In addition, we will continue to invest in advancing our electrification platform technology and our overall EV portfolio to serve multiple vehicle segments. Our goal is to be the electrification supplier of choice for the broader OEM community, and we are making significant strides to bring our vision to reality. Clearly, the future is very bright for AM. Chris?

Thank you, David, and good morning, everyone. I will cover the financial details of our third quarter results with you today. I will also refer to our earnings slide deck as part of my prepared comments. So let's go ahead and begin with sales. In the third quarter of 2021, AAM sales were $1.2 billion compared to $1.4 billion in the third quarter of 2020. Slide 7 shows a walk of our third quarter 2020 sales to third quarter 2021 sales. First, we add back the impact of COVID-19 from the third quarter of 2020 of approximately $87 million. Then we account for the unfavorable impact of the semiconductor shortage, which we estimate to be approximately $245 million in the third quarter of 2021. During the quarter, we experienced this unfavorable impact on most of our product lines as our global customers took downtime at engine and transmission plants, passenger car and crossover vehicle plants, and full-size truck plants at multiple points during the quarter. Metal markets and FX accounted for an increase in sales of $86 million. During the past several quarters, we have continued to see an increase in the primary index-related inputs to metal-based materials that we purchase. You may recall we hedged this risk with our customers by passing through the majority, but not all, of these index-related changes. The metal portion of this column reflects these elevated pass-throughs on a year-over-year basis. For the first three quarters of 2021, metal markets in foreign currency have increased our revenues by approximately $212 million, and we expect this to be well over $300 million for the full year. Now, let's move on to profitability. Gross profit was $165.6 million, or 13.7% of sales, in the third quarter of 2021, compared to $249.8 million in the third quarter of 2020. Adjusted EBITDA was $183.2 million in the third quarter of 2021, or 15.1% of sales. This compares to $297.1 million in the third quarter of 2020. You can see a year-over-year walkdown of adjusted EBITDA on slide 8. The return of COVID volumes added approximately $16 million, but was more than offset by the negative impact from the production volatility stemming from the semiconductor disruptions in the amount of $83 million. Last year, we also had a $22 million benefit from an ED&D recovery and a customer settlement that did not recur in 2021. But even through all these disruptions of the quarter, AA have still delivered $17 million of net performance. As I just mentioned in our sales highlights, we are facing significant year-over-year increases in commodity metal markets. The retained portion impacting this quarter, plus foreign currency, was $31 million. You can see on our EBITDA walk the dynamic this has on our margin calculations. If you exclude the impact of this pass-through dynamic, our margins would have been significantly higher, as noted on our walk. Let me now cover SG&A. SG&A expense, including R&D, in the third quarter of 2021 was $90.5 million or 7.5% of sales. This compares to 4.7% of sales in the third quarter of 2020. AAM's R&D spending in the third quarter of 2021 was $34.7 million compared to $18 million in the third quarter of 2020. Recall, we received significant engineering and development recovery last year of approximately $15 million. The third quarter of 2021 incurred a sequential quarterly increase in R&D in line with our expectations. We will continue to focus on controlling our SG&A costs while at the same time investing in technologies and innovations to achieve our pivot to electrification. We do expect R&D spend to increase in the coming quarters as we launch new programs and continue to pursue meaningful opportunities in the electric vehicle business as we experience significant customer interest in our new products and technology. Now let's move on to interest and taxes. Net interest expense was $47 million in the third quarter of 2021, compared to $50.5 million in the third quarter of 2020. We expect this favorable trend to continue as we benefit from continued debt reductions. In the third quarter, we redeemed $100 million of our six and a quarter notes due 2025 and refinance the remaining $600 million balance. In the third quarter of 2021, we recorded an income tax benefit of $13.6 million compared to a benefit of $22.5 million in the third quarter of 2020. As we near the end of 2021, we expect our effective tax rate to be approximately 10 to 15%. We would also expect our cash taxes to be in the $25 to $30 million range. Taking all these sales and cost drivers into account, Our gap net loss was $2.4 million, or $0.02 per share, in the third quarter of 2021, compared to an income $117.2 million, or $0.99 per share, in the third quarter of 2020. Adjusted earnings per share, which excludes the impacts of items noted in our earnings press release, was $0.15 per share in the third quarter of 2021, compared to $1.15 per share in the third quarter of 2020. Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the third quarter of 2021 was $89.8 million compared to $249.5 million last year. Capital expenditures net of proceeds from the sale of property, plant, and equipment for the third quarter of 2021 was $33.2 million. Cash payments for restructuring and acquisition-related activity for the third quarter of 2021 were $9 million. The net cash outflow related to the recovery from the Malvern fire we experienced in September of 2020 was $3.5 million in the quarter. However, we anticipate the Malvern fire did 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 $55 to $65 million in cash payments for restructuring and acquisition costs in 2021. Reflecting this end, Reflecting the impact of this activity, AAM generated adjusted free cash flow of $69.1 million in the third quarter of 2021. From a debt leverage perspective, we ended the quarter with net debt of $2.6 billion and LTM adjusted EBITDA of $930.2 million, calculating a net leverage ratio of 2.8 times in September 30th. We are focused on improving the balance sheet and delivering on our goal to improve our leverage this year. We have made meaningful progress on reducing our gross debt outstanding and reducing our leverage ratio by more than a full turn as of the end of the third quarter. Before we move on to the Q&A portion of the call, let me close out my comments with some thoughts on our 2021 financial outlook. As you can see from our press release, we have revised our outlook to $5.15 to $5.25 billion of sales, which includes approximately $300 billion of metal market pass-throughs in foreign currencies. We expect adjusted EBITDA to be in the range of $830 to $850 million. Just as a reminder, investors need to consider the impact of the metal market pass-throughs as it relates to our margin calculations when comparing from period to period. In periods, an environment such as this is meaningful. We expect to generate approximately $400 million of adjusted free cash flow in 2021, or nearly 50% adjusted free cash flow to adjusted EBITDA conversions. We expect our capital expenditures at less than 4% of sales as our capital reuse and optimization efforts continue to deliver results. Our updated outlook is based on the latest and best information we have regarding customer production schedules. We continue to assume our customers will prioritize building full-size pickup trucks and SUVs through the end of the year with minimal disruptions. However, the operating environment remains choppy, with multiple factors posing a risk to the supply chain. As volumes begin to normalize, we should be in a great position to leverage that environment to generate profits and cash flow. This, in turn, will be used to support our highly advanced research and development initiatives in electrification and solidly position us for future profitable growth aligned with our capital allocation priorities. 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.

David? 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.

And ladies and gentlemen, once again, if you would like to ask a question, please press star and then one on your touchtone phones. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. Our first question today comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, guys. Morning, John. Just a, I guess a first simple question. You know, we look at fourth quarter, you know, supply sales are up a little bit from the third quarter, but EBITDA is down a little bit. You know, I'm just curious, you know, one, you know, if you can explain that and two, Do you think we are kind of scraping along the bottom here, and it's probably not going to get much worse for you, but the timing of it getting much better is still kind of TBD and probably sort of mid-next year?

Yeah, John, I'll go ahead and comment on the margin piece as it kind of sequentially goes from Q3 to Q4 as it relates to our sales. So a couple things to keep in mind as we transition from the third to the fourth quarter is sort of embedded in a little bit of our commentary as it relates to our metal market pass-throughs, I would expect. We would expect an uptick in those pass-throughs in the fourth quarter, so you're starting to see a little bit of continued lift on our revenues associated with that pass-through, which, as you know, impacts our margins but also elevates our sales sort of on a cost basis. Also, you know, things that we talked about we would see inside of the fourth quarter, you have normal sequential lower production days. The seasonality associated with the fourth quarter usually impacts Our profitability and margins from that perspective, nothing unusual there. But we're also in the process now of launching a couple of key programs. That's to support General Motors' facility at Oshawa as they bring that online, as well as some key electrification programs. So we'll have inside of that quarter some discrete project expense associated with that. And then lastly, you may recall from the second quarter, we built a benefit with our inventory build through the, I would call, impact associated with the delays of production. Some of that benefit will unwind in the back half of the year. We see that happening more inside of the fourth quarter than the third quarter. And probably a little bit of that will carry into 2022 as we unwind those inventories. Those are kind of the main points associated with that. And as it relates to your comments in terms of maybe bouncing around the bottom, I would, you know, turn back to David's comments. He mentioned his prepared remarks. Hopefully this is the truck with some improvement from here. But obviously that uncertainty remains in front of us.

Yeah, John, this is David. Let me just add to what Chris said there. Clearly, we thought the trough would be a second quarter. It shifted here to the third quarter, largely because of the outbreak of COVID in Southeast Asia, specifically the Malaysia area. Obviously, that impacted not only the normal crossover and passenger car, but spilled into pickups and SUVs as well, which was unfortunate and impacted our sales. We do see the semiconductor issue starting to stabilize, and as I said, it'll get better each quarter going forward, but it's not going away anytime soon until incremental capacity comes online. What we're not going to see go away anytime soon is the impact of COVID-19 still and the issues associated with labor availability. and then these raw material price increases in the metal market that we don't see going away anytime soon either. So we've got wage inflation issues out there, raw material economic issues that are out there, and just overall labor availability challenges that are going to continue in the industry for, I think, an extended period of time.

Okay, and then just a second question around mix. I mean, obviously you're a beneficiary with GM trucks and trucks in general, but given those inventories are still incredibly tight, it doesn't seem like that mix will unwind on you next year and probably will take some time before it even turns negative sometime in 2023. How do you think about that? And how do you think about the addition of Oshawa coming on next year, presuming chips come back, right, because you can't produce truck stop chips. But, I mean, what does Oshawa mean for you next year? And ultimately, when there's a catch-up in production and inventory, you know, is that something that's going to be like a plus 20, 30% on an annual basis? I mean, how do you think about where that can go and how that might be even governed by capacity constraints, you know, second half 22 or probably more into 2023?

Yeah, so let me start. I think, Chris, if you want to add, you can. But, you know, clearly, you know, the OEMs have been protecting their profit pools and we have the and the mix that you're talking about there. Again, their vehicle content mix doesn't necessarily equate to our vehicle content mix because our products are very similar. They go in each of the different vehicles that they're producing there. So we don't see a big change there, but we do see volumes still being strong, especially as we're starting to see the semiconductor issues start to stabilize. Our customers are bringing back assembly plants, especially this week, and we're seeing a lot of assembly plants come back up and running. With respect to the GM Asha, with them coming on board next year, obviously that's a big benefit for American Axles. We're going to be the exclusive supplier into that facility for the different product mix that they have there, and we'll benefit greatly from that. GM is protecting that plant just like they protected the other truck plants to the best of their ability, but obviously with the semiconductor issue easing, They should be able to do that, and that will bode well for not only them but also us moving forward here. In addition, other customers, again, they're protecting their truck and SUV mixes as well, and we're seeing those benefits, that being Ford and Stellantis. So we see a pent-up demand that's there. We see, obviously, historical low inventory levels that are out there. We think it will take a minimum of 24 months to replenish, the value chain, and therefore we see some bright days ahead of us as it relates to our ability to generate cash, pay down debt, and fund our electrification growth of the future.

Great. Thank you very much.

Thanks, John.

Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.

Hi. Good morning, and thank you for taking the question. Thank you. I wanted to just start by looking at the third quarter. And if I just focus on the volume piece alone in your EBITDA walk in sales, that was a 27% sacramental margin. That's pretty good. I mean, we're seeing much higher numbers out of others. So just wondering, just given the start-stop nature of out of production, why you've been able to contain this to a 27% decremental margin. Is it, is there the benefit of mix? Are you continuing to build inventory and that's helping to sort of smooth this out a little bit? So just a little color on the decremental in the third quarter.

Yeah, Dan, this is Chris. Certainly understand that perspective. Look, as we think about the volatility associated with production, you know, we rely very heavily on our core operating system and our ability to kind of navigate the ups and downs of the production cycles. There are times where we try to lean into benefiting by building inventory for consistency. But the other side of that equation is we also benefit by rapid, quick responses to changes in production to mitigate the impact it would have on our contribution margins. So I think the team has done a great job here in the third quarter. As you know, we had some benefit of inventory in the second quarter. We spiked out. We had probably a little bit here in the third quarter, but nowhere near what we saw in the second quarter. But it's quick reaction times, it's mitigation of those premium costs associated with that, and a good purchasing department coordinating with our supply base to minimize any disruptions there. That's how I would describe it.

And as we're thinking about the incremental margin, just on the volume piece alone, as volumes get better, there's no reason to expect it wouldn't be in the typical 25% plus range. Is that fair to assume?

Yeah, I mean, in terms of as it relates specifically to volume, that 25% to 30% is that typical range we would experience. If it's overweighted towards some of our higher profitable full-size truck applications, obviously that's a little bit higher than that from both an incremental or decremental. You know, that would be outside of the fact that, you know, we do look forward to expanding some of our investments in R&D and any other factors associated with that. But just from a pure change in volume, yeah, that's typically what we would expect.

Great, thank you. My second question is an interesting update there on the EV front, the differentials for Hummer. Maybe you could just give a sense, first of all, what the types of content per vehicle that you have. And then are you going to be engaging more broadly on the entire Ultium platform with GM? I mean, just give a sense of how this could lead to additional content wins with GM on the EV side.

Yeah, Dan, this is David. Clearly, GM's got to define their strategy first in regards to what they may make themselves with their Altium platform strategy versus where they need their supplier partners. No different than what they do on ICE business today. Clearly, we're playing a role with General Motors today on the ICE business, and we're going to play a role with General Motors on electrification business going forward. The Hummer is one of the first... tuning with them over the next several years as they roll out their electrification strategy, and we further demonstrate our advanced innovative technology. We think we have some industry-leading technology. We've received very favorable feedback from General Motors and other customers regarding that technology. It's just we just need to determine, you know, what each of the OEMs want to do. You know, in your case specifically, the GM, you asked the question, but we're highly confident that we'll be able to, you know, going forward. We're an industry leader when it comes to beam axles today, as well as supplying EDUs. And don't forget, as I mentioned in my earlier comments, we're one of the only companies that can supply components, sub-assemblies, gearboxes, and full EDU and electric beam axles. So we feel very good about our chances to grow in the electrification space.

Great. Thank you. Very helpful. Appreciate it.

Yeah. Thanks, Dan.

Our next question comes from Joseph Speck from RBC. Please go ahead with your question.

Thanks. Good morning, everyone. Good morning, Joe. So I guess I'm just curious because you guys are in a pretty good position to help out here. IHS basically had the full-size trucks for GM down about 15%. year over year, it sounds like you're saying you didn't build more, you don't think you built more inventory, you know, this quarter, the more that happened in the second quarter. So is that sort of what you shipped to that program, and then you think the unwind happens more, you know, in fourth quarter and into 22? I just want to, like, you know, have a finer point on some of your comments there.

Yeah, Joe, I wouldn't think about it in the context of just For example, GM full-size truck, this would be inventory inside of our walls that we would build, whether it be whip or finished goods, that would have either built ahead of us schedules or tried to level build as schedules moved around on us. So you can benefit from that on a capture of your absorption of overhead and labor costs into that. So the thought process would be as that inventory sort of crescendoed up in the second and third quarter, again, a little bit more in the second quarter versus the third, we will begin to run that inventory down in the fourth quarter or a little bit into the early part of next year as well. And as that happens, again, this is our internal inventories, that benefit will unwind itself. It's neutral. It's a zero-sum game across the board as your inventories move up and down. But it doesn't exactly correlate to how you would think about from a General Motors full-size truck application. It could be across all our products.

Okay, so that's the absorption benefit from your inventory. But do you have any sense in terms of of, like, how much of a benefit there may have been from vehicles where you ship product that might not have been fully completed and then wholesaled?

Yeah, I think that would be difficult for us to ascertain how our customers are positioning those vehicles at their assembly plants.

Okay. And then just, you know, as we think about, you know, and I appreciate your sort of comments earlier about flexing up and flexing down. So it doesn't seem, I mean, like your sort of view on incremental margins as we sort of, you know, think about 22, are all that change? It just is going to, you know, the factors, the other factors that will sort of dictate the margin profile just be, I guess, one, the stability of the schedule so you don't have to, you know, go up, go down, and two, what happens with raw materials?

Yeah, I think there's a couple things to think about. Obviously, we're not providing any 22 guidance. It's still very volatile at this point. But, you know, the volatility of production schedules and that cadence and the contribution of margin associated with that, obviously, you need to take into consideration. We do expect to continue to increase R&D. I'm not associated per se with production, but if you're thinking about movement from year to year. And look, at the end of the day, as you hear from every other supplier, right, we're continuing to face rising material, labor, and transportation costs, and we've got to look to mitigate that and navigate those challenges between here and next year. So, I mean, we do face that. On the good side, you know, we expect good control of a lot of our input costs at our factory, meaning our conversion costs, you know, our productivity programs, our restructuring programs that we've implemented over the last year or so are mitigating some of those and optimizing our controllable elements of that. But those other pieces, you know, are very real that we're working through.

Maybe just a quick follow-up. So it sounds... It sounds like you're running R&D right now between $35 million, $40 million. Is that the right base? Annualizing that, is that the right base for 2022, or is there even further investment that needs to happen?

Yeah, I would say over the past several quarters, we've been running more between $30 million to $35 million. I would expect it to transition more towards $35 million to $40 million investment.

over the course of the next... Yeah, I was talking about the back half implied, I think. Sorry.

Yeah, this quarter drill was 35, and I would expect that to step up from there between the 35 to 40 range. Okay.

Thank you very much.

And ladies and gentlemen, our final question today comes from Brian Johnson from Barclays. Please go ahead with your question.

Yeah, just a quick housekeeping question and a more strategic one, which we actually can continue in a few weeks with our conference. The housekeeping one is Um, we used to pay a lot of attention to scrap, um, and that, that kind of, I think for you or metal dye might've been a profit center at some point. Is there anything vis-a-vis this scrap you generate in the high spot prices for steel that when you ought to be that that's kind of visible in the financials or is it not really meaningful anymore?

Look, you know, when we, when we do sell our scrap and obviously a scrap markets increase, we do get a slight benefit from that, but it's not significant to our financial statements.

Okay. The second is to kind of think about the position in EVs, particularly where we could take you. I think one thing I'm struck by is a lot of the mechanical engineering over the years, you know, that resulted in your torque transfer products, your drive transfer products, other suspension products. You know, I think what we demonstrate is a lot of that can be handled by software, for example, to adjust suspension systems, the drop torque transfer. So I guess two things, you know, Where are you internally on that software development and can we really kind of give you a bigger place at the table when an OEM sort of sees the light like so many startups have and says, you know, I should really be thinking about using software to do a lot of the things I used to do mechanically? I know that's kind of a broad strategic question, but I just want to tee it up.

Yes, Brian, this is David. Clearly, there's a strong demand out there for software engineers and controls engineers as the market and the industry is pivoting to electrification, no different than inside our company as well. We already had a decent base or a good base. We're adding every day to our software and controls engineering capability because the demand is just going to be very large as we go forward, especially as the industry pivots to electrification over time. So we're already offering and adding those services, you know, to our partnership with RE. At the same time, you know, we've taken our innovative and advanced technology with our electric drive unit and integrated it into their platform design that gives them the efficiency and the volume metrics that they're looking for, meaning you can put more people in the different vehicles and support their RE technology or their RE corner technology, So we're very excited about their technology married up with our technology and leveraging both of our software controls capabilities. But we continue to look at how we can just add organically or look strategically as to what we can do to strengthen our software controls capability just because we see the greater demand in the future.

Okay, great. Thanks a lot. I look forward to chatting in a few weeks.

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

Ladies and gentlemen, with that, we'll conclude today's question and answer session as well as today's conference call. We do thank you for participating. You may now disconnect your lines.