American Axle & Manufacturing Holdings, Inc.

Good morning and welcome to the American Axle and Manufacturing Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to David Lim, Head of Investor Relations. Please go ahead.

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 2020 earnings announcement. You can access this announcement 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 is 525-2586. This replay will be available through November 11th. Regarding the investor relations calendar, we would like investors to mark their calendars for our technology event in Ride and Drive in Las Vegas on January 4th, 2023. With that said, I'd 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. Now, let me turn things over to AM's Chairman and CEO, David Dock.

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AM's financial results for the third quarter of 2022. Joining me on the call today are Mike Simani, AM's President, and Chris May, AM's Vice President and Chief Financial Officer. I'd like to begin today's call by addressing the media activity from yesterday regarding AM. We put out a press release earlier this morning addressing it. While it is our long-standing policy not to publicly comment on market rumors and media speculation, we feel it is important to state that we are not engaged in any discussion to sell the company and that we are not otherwise for sale. In the ordinary course of business and executing our strategic plan, We continuously monitor market conditions and assess industry developments, and we regularly consider strategic opportunities that serve the best interests of the company and its shareholders. Finally, we do not intend to make any further comments or respond to any inquiries regarding these matters on this call. That said, the agenda for today's call is as follows. I'll review the highlights of our third quarter financial performance. Next, I'll touch on some exciting business development news inside the quarter regarding wins with electrification and significant wins with our traditional business. Lastly, I'll discuss our updated 2022 financial outlook before turning things over to Chris. After Chris covers the details of the financial results, we'll open up the call for any questions that you all may have. So let's begin. Overall, AM's third quarter 2022 financial results were impacted by higher-than-expected production volatility and year-over-year inflation. AM's third quarter sales were $1.5 billion. As we exited the second quarter, we anticipate a relatively more stable operating environment in the second half of this year. However, a number of our customers continued to adjust production volumes throughout the entire quarter, mainly driven by a continued semiconductor supply chain challenges, and labor availability issues. We experienced this across multiple vehicle segments, in particular, full-size trucks that we support. Most of this volatility was experienced with short lead time notification. In addition, we are closely monitoring the macroeconomic backdrop underpinned by the rising rate environment and the inflationary pressures. That said, even though we have short-term volatility, we believe large truck demand remains resilient over time. as many individuals and businesses rely upon them for work and personal preference. In addition, all-wheel drive and 4x4 mix tend to be more inelastic compared to other vehicle features, especially with a full-size truck segment. AMs adjusted even in the third quarter of 2022 was 198 million, or 12.9% of sales. In the quarter, there were several puts and takes, including volume and mix, and Chris will cover the specifics with you shortly, but we remain focused on factors that we can control, including sales contribution conversion, investing in R&D initiatives, and mitigating inflationary headwinds. Furthermore, we continue to make progress to our OEM commercial recovery discussions, and we are on track with what we had told you previously. However, let me underscore that Supply chain challenges, including semiconductors and labor shortages, are very much with us. In our view, we believe normalization may not occur until well into 2023 and possibly beyond. AM's earning per share in the third quarter of 2022 was $0.22 per share. AM's adjusted EPS was $0.27 per share. AM continues to deliver positive adjusted free cash flow generation in the quarter, a hallmark of our operating model. AM's third quarter 2022 adjusted free cash flow was $46 million. We have a very straightforward capital allocation strategy supported by our free cash flow generation, and that's clearly to strengthen the balance sheet, invest in electrification technology, and conduct smart, high-value bolts on M&A when it makes sense, such as we recently did with our Tech 4 acquisition. And in the third quarter, we reduced our long-term debt by an additional $50 million. Now let's talk about some recent and very exciting key highlights, which you can see on slides four and six of our investment package. Let's start with the electrification. Our technical and commercial efforts in the electrification continue to experience very positive traction. Having a solid technology base and growing product portfolio are opening up multiple dialogues with OEM customers. The auto manufacturers are extremely focused on the future of mobility, and they need partners with a proven track record in technology and operational excellence. It's the goal of AEM and this leadership team to be a key OEM partner in electrification propulsion from components to full systems. As such, we're very happy to announce our first E-Beam Axle Award with ECA Mobility for its 2.5-ton light commercial vehicle. ECA is a leader in commercial vehicles in India, manufacturing a complete range of EVs, fuel cell EVs, and alternative fuel vehicles with a focus on low total cost of ownership. In addition, we were awarded contracts to supply gears for Volvo Cars' next-generation electric drive units. Volvo is a premier global brand known for its focus on safety. With EECA and Volvo Cars, you're hearing us talk about new customers, markets, and geography. This is aligned with our vision of our electrification growth and emphasis on our ability to grow in electric drive units and components. And as a testament to our engineering and innovation, AM was awarded not two, but three PACE awards this year. We received a PACE award for our P3 electric drive on the Mercedes-AMG GT63 SE performance vehicle, a PACE innovation partnership award for our high-level collaboration with Mercedes-AMG, and a PACE pilot innovation award for our highly integrated three-in-one wheel and electric drive which incorporates and integrates a motor, a gearbox, and an inverter into a compact, power-dense form function. This technology is applicable on multiple vehicle segments, from compact cars to full e-beam axle applications on light commercial vehicles, and is scheduled to launch with a customer in 2024. These three PACE awards add to the two PACE awards that AM received in 2020 for our Advanced Electric Drive Unit and OEM collaborations. In the span of approximately two years, we have been recognized with five PACE awards related to our electrification technology. In addition to the great news in electrification, we continue to win significant new business on our conventional programs. AM was selected as a new axle supplier for the GM Colorado and Canyon vehicles beginning in model year 2023. These are very exciting vehicles, and we're proud to partner with GM on this important vehicle segment. Our wins are not limited to North America. Cherry Automotive Company Limited has selected AM to supply power transfer units and rear drive modules for its new SUV program. Although we are limited on the details of what we can share, this new SUV is fantastic and is well positioned to add upon Cherry's success and expand our customer and revenue base in a very important market. Now let's talk about our guidance on slide seven. We have updated our financial outlook to reflect the best information we have available and to take into consideration the current operating environment. AM is now targeting sales of $5.75 to $5.85 billion compared to what we had earlier communicated at $5.75 to $5.95 billion. Adjusted EBITDA of approximately $745 to $765 million compared to $790 to $830 million previously. and adjusted free cash flow of approximately $300 million compared to $300 to $350 million previously. From an end market perspective, in addition to normal production seasonality, fewer production days in the fourth quarter versus third quarter, we expect the fourth quarter operating environment to be very similar to that we experienced here in the third quarter, including the continuation of higher than previously anticipated volatility in truck production. Already here in the fourth quarter, We have received numerous schedule adjustments as customers have reduced shifts, lowered overtime, and outright canceled production relative to prior plans. That stated, during these turbulent times, AIM is very focused on the core operational values that differentiate us from the other suppliers through the cycle. We will adhere to smart cost control and look to improve efficiency. We will maintain the high quality of our products, achieve on-time delivery, and support the continuity of supply to our customers. At the same time, we'll continue to invest in electrification and new mobility. Although no two cycles are alike, we underscore that the AM team has deep industry experience and is confident in successfully navigating the near-term environment. In conclusion, our aim is on the future, and we will continue to focus on generating strong free cash flow, strengthening our balance sheet, securing our traditional and next-generation business, advancing our electrification product portfolio, and positioning AM for profitable growth, especially in the area of electrification, while building shareholder value. Let me now turn the call over to our Vice President and Chief Financial Officer, Chris May. Chris?

Thank you, David, and good morning, everyone. I will cover the financial details of our third quarter results for 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 third quarter of 2022, AAM sales were $1.54 billion compared to $1.21 billion in the third quarter of 2021. Slide 9 shows a walk of third quarter 2021 sales to third quarter 2022 sales. First, we account for the change in the year-over-year impact from semiconductors and supply chain challenges. While we continue to be significantly impacted by this issue, we did experience a year-over-year lower negative impact. which we estimate added approximately $136 million to sales in the quarter. Positive volume mix and other was $113 million, and the Tech 4 acquisition contributed $92 million to sales. And lastly, metal market pass-throughs and FX lowered net sales by approximately $10 million, with metal up and FX lower inside of that net number. Now let's move on to profitability. Gross profit was $177.4 million in the third quarter of 2022 as compared to $165.6 million in the third quarter of 2021. Adjusted EBITDA was $198.4 million in the third quarter of 2022 versus $183.2 million last year. Please refer to our adjusted EBITDA walk on slide 10. In the quarter, the year-over-year change in semiconductor availability and volume mix and other added $43 million and $13 million respectively to adjusted EBITDA. Third quarter, material, freight, and utility inflation, net of customer recoveries, negatively impacted EBITDA by $12 million. This pacing is consistent with our full year estimate and continues progress of recoveries with customers. R&D was slightly higher by approximately $1 million and continues to run in the range of $35 to $40 million per quarter. With a full quarter of Tech Forward in our third quarter 2022 results, the acquisition contributed approximately $9 million of EBITDA inside the quarter. During the latter part of the quarter, we experienced a significant drop in key metal market indexes that are an input component of our products. In particular, scrap steel indexes. As we have described previously, as rates change, there is a valuation and cost timing for customers, suppliers, and internal inventory to run at new levels. That is what's happening here, and understanding this detail point is important. As a result of this rapid index drop of nearly 39 percent from July 1st to September 30th, we experienced the opposite effect on our inventory valuations and cost of goods sold versus what we realized in the second quarter of 2021 when rates rapidly increased. You may recall that we shared with you at that time there was a $16 million positive benefit inside the second quarter of 2021 for this dynamic. Conversely, as prices rapidly declined in the quarter, we effectively expensed inventory that was purchased at a higher level through our P&L. Let me now cover SG&A. SG&A expense, including R&D, in the third quarter of 2022 was 85.7 million or 5.6% of sales. This compares to 90.5 million or 7.5% of sales in the third quarter of 2021. This is a 190 basis point in fruit. AAM's R&D spending in the third quarter of 2022 was $35.4 million compared to $34.7 million last year. We continue to control our SG&A costs while efficiently investing in R&D to advance our next generation electric drive platforms. Let's move on to interest and taxes. Net interest expense was $39.4 million in the third quarter of 2022 compared to $47 million in the third quarter of 2021. We continue to benefit from debt reduction, and previous refinancing actions in the form of lower interest costs. In the third quarter of 2022, we recorded an income tax benefit of $5.7 million compared to a benefit of $13.6 million in the third quarter of 2021. The benefit of the quarter was a result of a mix of earnings and valuation allowances on a jurisdictional basis. For the balance of the year, we expect our effective adjusted tax rate to be approximately 10% to 15%, and we would expect cash taxes to be in the range of $40 to $45 million. Taking all these sales and cost drivers into account, our GAAP net income was $26.5 million, or 22 cents per share, in the third quarter of 2022, compared to a net loss of $2.4 million, or two cents per share, in the third quarter of 2021. Adjusted earnings per share, which excludes the impacts of items noted in our earnings press release, was 27 cents per share in the third quarter of 2022, compared to 15 cents per share in the third quarter of 2021. Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the third quarter of 2022 was $85.2 million. Capital expenditures, net of the proceeds from the sale of property, plant equipment for the third quarter of 2022 were $46.6 million. Cash payments for restructuring and acquisition-related activity for the third quarter of 2022 were $4.7 million, and cash payments related to the Malvern fire we experienced in September of 2020 net of recoveries was $2.5 million in the quarter. In total, we continue to expect approximately $30 to $40 million in restructuring and acquisition-related costs in 2022. Reflecting the impact of these activities, AEM generated adjusted free cash flow of $45.8 million in the third quarter of 2022. From a debt leverage perspective, we ended the quarter with a net debt of $2.5 billion an LTM-adjusted EBITDA of $754.2 million, calculating a net leverage ratio of 3.3 times at September 30th. This is down from a leverage ratio of 3.4 times at June 30th. In addition, as David mentioned earlier, we've created an additional $50 million down on our Term Loan B inside of the quarter. We expect to continue to strengthen AAM's balance sheet by reducing our gross debt and lowering future interest payments. Year-to-date, we've reduced our total debt by approximately $100 million. Before we move on to Q&A, let me close out my comments with some perspectives on our 2022 financial outlook. As you can see from our press release, we have updated our outlook to $5.75 to $5.8 million of sales, $745 to $765 million of adjusted EBITDA, and adjusted free cash flow target of approximately $300 million. We reduced our top end sales by $100 million and at the midpoint, $50 million. The sales decline is driven by greater production volatility versus our prior forecast, primarily in key light truck platforms we support. By way of figures, our current forecast estimate is approximately 50 to 100,000 full-size truck units lower in the second half of 2022 versus our previous guidance. On a sales per production day basis, we would expect the fourth quarter to be very similar or slightly lower to that of what we experienced in the third quarter. As for the new adjusted EBITDA targets, the midpoint change can be summarized as follows. Lost contribution margin of approximately $30 million on lower net sales, which reflects the weighting impact of a high concentration mix of lower full-size trucks, the impact of metal costs and related Q3 inventory absorption impact of $20 million, and a net amount of inefficiencies of $5 to $10 million due to this volatility. What is really important to note here, once production is more stable and predictable, these issues will most likely not be with us. In addition, with lower metal market pricing on select commodities, once we pass through this lag period, this should be very good for AAM. Lastly, our cash flow conversion remains strong, as evidenced by our guidance, and continues to be a priority for the company. So in conclusion, we'll continue to focus on what we can control, including driving optimization, successfully negotiating customer recoveries, integrating the Tech4 acquisition, developing class-leading electrification technology, and positioning AEM for 2023 and executing on our capital allocation plan. 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.

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.

Thank you. We will now begin our question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our auspices. And the first question will be from Ryan Brinkman from J.P. Morgan. Please go ahead.

Hey, great. Thanks for taking my question. Could you maybe give an update on the pace and progress of negotiations with customers to recover premium non-commodity costs? I think maybe you'd already been a little less impacted by higher commodity costs because you'd had an above average level of pass-through arrangements in your country. But nobody had anything in there with regards to the the non-commodity cost too. I see pricing still negative. I don't know. What do you think the outlook is for that going forward? And we would just love to get your take on, I know you have less exposure to Ford, but I guess they handed out a billion dollars in the quarter, which allowed some other companies to beat. Maybe the automakers that you're in discussions with, you have more exposure to, might be a little bit taking a different cadence of reimbursement or something. How should we think about this issue?

Brian, this is David. I'll make some initial comments if Chris wants to chime in again. But as we've said, and I said in my prepared remarks, we continue to make meaningful progress with all of our customers on a global basis with respect to some of the commercial and economic recoveries. We clearly have some more work to do just based on the continued level of increases that keep coming into our company. I would characterize the discussions as being very fair and balanced with our customers, some better than others. balance, and we definitely are on track with what we said we would do in this area. A big challenge that we're still facing as an organization and as an industry is especially the energy and the utility issues, especially in the European market. That's a big issue that we're going to have to continue to address as we go forward here. But overall, I characterize them as being fair and balanced discussions, meaningful progress made, but more work to do.

Yeah, Ryan, this is Chris. I would offer a couple other data points aligned in with your question. I know you made some reference to some activity here inside of the third quarter. You know, I would refer you back to some of our previous commentary on this where, you know, in the first quarter of this year, we were almost $30 million off from an inflation standpoint on that topic. And you notice we closed that gap pretty meaningfully inside of the second quarter with a lot of our customers, almost cut that exposure in half, and we were now running at that kind of much lower rate. due to those negotiations in the first half of the year. And then secondarily, you also commented on the pricing element inside of our walks. This is our annual year-over-year long-term negotiated pricing arrangements with our customers. You know, we stepped into this year. We told you it would be around $40 million. This is just consistent with that. That's outside the scope of the economic recoveries that you're referring to.

Okay, great. Thanks. And could you just maybe comment on the last question a bit more on the The Chevrolet Colorado GMC Canyon win, it's an important one, I think. It's a conquest. And a lot of what's been going on at Axel the last number of years has had to do in part with your relationship with GM. Their decision to insource a portion of their full-size truck platform and then later with their strategy around Ultium drives. So you're still winning business there. What does this say about the relationship with them and how it could potentially evolve over time?

So Ryan, this is David. We have a very strong relationship with General Motors. We value the relationship that we have with them. We've had a strategic partnership for well over 25 plus years. We're their largest driveline supplier. We're honored to pick up this Colorado Canyon business. We've conquested this from our largest competitor in this space. It's an important vehicle segment that continues to do very well in the marketplace. So we're excited to launch it next year, which is great. At the same time, we've been GM Supplier of the Year six years in a row, so they look to us with solid operating experience and performance and technology leadership and outstanding quality, much like many of the other OEMs do. We expect a long-term positive relationship with General Motors going forward, including activity on electrification. And that's about all I can really say at this point in time. But we're highly confident in our technology. We feel very good about our relationship with General Motors, and we'll continue to look to maintain and strengthen that relationship as we go forward. Great. Thank you. Thanks, Ryan. Thanks, Ryan.

The next question is from John Murphy from Bank of America. Please go ahead.

Good morning, guys. I just wanted to follow up on the outlook here. I mean, you know, a number of times you alluded in the call about that the fourth quarter would be similar to the third quarter, and then you gave us some puts and takes, so I appreciate that. But, I mean, as you think about your key product volumes in the fourth quarter versus the third quarter, are you saying they're going to be relatively similar? And then, Chris, you said there was some negatives on the contribution margin side or the EBITDA side of $30 million on contribution margin, $20 million on metals, and then $5 to $10 on volatility. that would kind of indicate, you know, all else equal that you're looking for sort of $60 million lower on EBITDA versus I think the third quarter, right? And the fourth quarter implied EBITDA is $155 to $175. So, I mean, you know, that would take us down to the $140-ish range, and you're applying $155 to $175. So there might be some good guys that are occurring in there. So really just kind of if you can help us walk or kind of explain what you're thinking about on this sequential – third quarter, fourth quarter on the top line and then on this EBITDA line as well?

Yes, certainly, John. Let me just sort of recalibrate. When I articulated the guidance walk of the volume MX, the inventory, and a little bit of efficiency, that was for the full year. That was not just the fourth quarter. So I was articulating the elements that were going on inside of our third quarter and fourth quarter combined, walking to our previous guidance, to our current guidance from a full year perspective, not just the fourth quarter. So that would be sort of point one. But as you think about going from Q3 into Q4, our commentary on a production day basis, so think about the fourth quarter has three or four less production days than the third quarter. We would expect our revenues on a production day basis or our volumes to be similar to the third quarter, but holistically, collectively for the quarter, would be less because of less production days, if that makes sense. Yep. So as we walk from Q3 to Q4, I mean, the elements obviously would be lower volume and mix just holistically with the lower production days that I just articulated with you. We should see some benefit with the absence of that inventory absorption issue kind of somewhat behind us. We'll experience probably a little bit more of that if metal continues to come down inside of the fourth quarter, and then that will be behind us. You take those two elements, and then you've got some puts and takes around the horn on a variety of other elements that are pretty close to getting you walking to our midpoint of that range.

Okay, that's helpful. And then just to follow up on the 50 to 100,000 trucks that you think are going to be out of the schedule, you know, in the fourth quarter, they could have been in the schedule because of supply chain disruptions. Do you think that will be made up quickly as we get into early 2023? Or is this the kind of thing where these get, you know, put on the side or, you know, that production run just gets put off indeterminately?

Yeah, so I would tell you on the $50,000 to $100,000 reference that you made, again, that was for the entire back half of the year, so second half of the year versus our previous thought 90 days ago. We experienced some of that decline in the third quarter, and we're obviously projecting a little bit of that decline versus our previous estimate inside of the fourth quarter. But as David mentioned on his prepared remarks, we continue to see expectation of demand for those full-size vehicles and how their production schedules came into next year, you know, I think it's a little too early to call, but we're still holistically bullish on those platforms. It's across multiple customers as we think of 2023 and beyond.

But you're understanding that's pure supply chain disruption. It has nothing to do with inventory building in a channel where the dealers are in transit. This is purely supply chain issues.

Yeah, John, this is David. I mean, the three big things impacting all of us in the industry right now, clearly semiconductors, but the supply chain issues themselves have become a much greater issue. And those supply chain challenges are really driven because of labor shortage or labor availability issues that are out there. I do expect there's still a pent-up demand for these products that are out there. I do think the OEMs will continue to balance the desired inventory levels that they want to put in place in order to continue to benefit and lower incentives, but at the same time, they've got to replenish the shortage in inventory that's out there, and that's why I think this pent-up demand will continue. The big issue really just comes down to is getting stability back in the supply chain so that they can consistently run their facilities on a normal basis versus the volatility that we're experiencing, and no immediate notice on shutdowns, which creates a lot of problem for the supply base, AM included.

Very helpful. Thank you, guys.

The next question is from Rod Lachey with Wolf Research. Please go ahead.

Rod Lachey Good morning, everybody. David, I'm not asking you to comment on GKN specifically. You already told us that you won't. But I just wanted to get your thoughts on how you're thinking about the market strategically. Do you think that broader consolidation is worth exploring Do you think it happens over time? Because the last time a combination of driveline suppliers was proposed, the synergies were pretty big. So I just wanted to get high level. Just how are you thinking about the market and how things kind of play out in this space?

Yeah, Rod, as I've said before, and you and I have talked, I still believe that there will be consolidation that will take place in the auto space, both from an OEM standpoint, you're already starting to see that, or select partnerships that are coming together because everyone can't afford to do things on their own and manage current ICE business as well as the transition to electrification mobility. I think you'll see further consolidation within the supply base. As we've said all along, we want to be a consolidator At the same time, we're going to manage our priorities based on a capital allocation standpoint, and our focus right now is supporting our organic growth and our strength in our balance sheet. At the same time, you've seen us take strategic actions from an intergrantic standpoint, but within our capital structure with the recent things that we've done with the Tech4 acquisition, and some previous things before that. But, again, I do think there will be a consolidation in the space. I think it's going to be healthy for the industry when it's all said and done. But that's about all I can really say or comment on at this point in time.

Okay. I appreciate that. And I wanted to ask just to clarify that I'm seeing in Q4 year-over-year revenue growth from 1.2 last year to 1.4 billion this year, and it looks like kind of similar, maybe just a tad lower revenue in the fourth quarter versus the third quarter, but you also had that $20 million inventory charge in the third quarter. So I'm just curious about what am I missing that drives the sequential decline in EBITDA?

Sequential decline, or are you referring to Q4 of last year?

Look, Q4 of last year to this year, you have higher revenue. but similar EBITDA. And then sequentially, it looks like similar revenue, but lower EBITDA. So either way, it would just be helpful to get a little bit of a bridge from you.

Sure. Well, if you think, let's start with the sequential Q3 to Q4. You know, at the midpoint, our revenues are implied to be down from the third quarter, over $100 million down. and Q4, you do get a benefit of the reversal of that inventory absorption benefit and net everything else, there's a small puts and takes around the horn that sort of walks you right into the midpoint of our guidance. If you think about Q4 of last year into Q4 of this year, you know, very similar, as you mentioned, volume and mix is up. But don't forget this year we do have those net inflationary factors that we talked about. We've been running that $10 to $15 million a quarter now since the second quarter of this year. FX in metal, still while declining down, is up from last year. And you may recall in the fourth quarter of last year, our R&D expense was very low. We had a favorable benefit of some customer reimbursements for that that we're not expecting to occur here in the fourth quarter of this year. And then we got a little bit of favorable productivity that will drive it up a little bit from there on a year-over-year basis. That's how I would think about last fourth quarter to this fourth quarter.

Okay. Thank you. Yep.

Thanks, Rob.

The next question is from James Piccarello from BNP Paribas. Please go ahead.

Good morning, guys. Can you just confirm, so what is the full-year commodities impact now with the additional $20 million you cited within the guide? Commodity.

Oh, commodity impact. Yeah, so we have experienced through the first, you know, we do disclose this as a standalone item inside of our year-over-year walks from a combined FX and combined with our metal in terms of productivity. So, Sales impact was $56 million. Profit was down $26 million. So that was excluding the $20 million inventory item. So that inventory item would be on top of that. And then right now, some metal indexes are starting to trend down into the fourth quarter, like I mentioned, scrap steel. But some of them have not. Like aluminum continued to sort of hang around sort of the consistent level over the past couple of months. Magnesium is also in a very similar spot. Those are key inputs for us. So we've not disclosed a specific amount for the fourth quarter, but that's where we've been trending. They've been trending down a little bit holistically for us.

Okay, understood. And then just on the inventory absorption timing of this $20 million, just want to make sure I fully understand it. So regardless of commodities pricing for next year, this impact will get unwound in 2023 or will it still be dependent on certain market dynamics?

No, I mean it's effectively unwound itself. So now once we step into a lower run rate with metal, we'll start to realize that benefit of the lower metal costs running through our P&L. You probably have another quarter here, meaning the fourth quarter as we step down even further. But this should be a good thing for AAM going forward. Assuming that will stay the same. As you know, they change every 30 days, and they can move quick in either direction like we experienced in the third quarter.

Right, or every two hours, right? Yes. Just on the Tech 4 acquisition, the $9 million positive contribution, is that trending ahead of expectations? It just seems like a pretty decent contribution right from the start here regarding that acquisition.

Yeah, so that's effectively a 10% EBITDA margin on the Tech 4 business. That was sort of the, you know, we accorded them on June 1. That was pretty close to our expectation in terms of the near term. You know, we thought it would be, you know, high single digits, and we're pretty much on track for that. Our synergy potential and expectations would be for that to step up, as we mentioned, more into 2023. But, you know, we're pretty much in line with what we thought. You know, below, obviously, our average, but we from a synergy perspective for us.

Right. Thank you.

Yep.

Again, if you have a question, please press star then 1. The next question is from Joe Spack from RBC Capital Markets. Please go ahead.

Good morning, everyone. Thanks. Good morning, Joe. I think, Chris, you may have sort of just answered this, but just to be clear on the inventory adjustment, Is there still an impact in the fourth quarter? And then going forward from there, you should start to benefit if prices stay lower? Or is that really still done for now, I guess on a year-over-year basis?

Yeah, so this dynamic happens. It's really an inventory valuation perspective from an accounting perspective. how it runs through our P&L. So if it drops again dramatically, which, as you know, is good for us, you will continue to expense out higher-priced inventory, sort of think of it in a period where your revenue reimbursement from your customer is lower. It'll pass within a quarter, and then it's good when you're into the lower metal market run rates from there. So if the extent they drop even further in the fourth quarter, maybe you have a little bit of an impact to that, but, again, you'll start to benefit from the lower metal costs holistically.

Okay. So I guess the view is that impact in the third quarter mostly sort of gets you to current sort of spot pricing levels for the metals.

Yeah, it's pretty close. It was driven by predominantly scrap steel, which was a lack of decline. And you saw this, as I mentioned in my prepared remarks, we actually had the opposite phenomenon happen in the second quarter of 21, which was a very positive benefit. So think of it just sort of unwound itself over the course of the last 12-plus months as metals have come back down.

And then, David, look, I know, as sort of Rod mentioned, I sort of heard your comments on deals, and I know you don't like to comment on speculation. I guess, again, stepping aside from any specific – deal. This isn't the first time we've seen your company in, um, speculatory news about, um, uh, a transaction. So I was wondering, and, and, you know, this is imagining that in the past has also expressed, I guess, some frustration evaluation. So maybe you could just add a little bit in terms of, you know, board and management psyche when you sort of see, see the, the market reaction to, to, to these news and how, how you think about that, uh, going forward.

Well, obviously, the news articles are a distraction to the management team in our business with respect to what came out and what we have to do to go forward and put out a public statement with respect to the companies not for sale, hasn't been for sale. So it's disappointing that we have to do that and redirect our management time. But at the same time, we want to be very clear to the investment community and our stakeholders that we are not for sale. We have a job to do. We have a business to run. Part of our business is not only to grow organically, but to look at what can we do to grow inorganically. We're going to continue to assess the market and look at what we can do to strengthen our company as far as our balance sheet, show growth in the marketplace, at the same time continue to deliver the profitable results that we do as a company. So we'll continue to look at the market conditions and the opportunities that present themselves. That's just doing a good job from a management and leadership standpoint with the proper support from governance. But at the same time, all I can do is just be clear again that we're not for sale. Okay. Thank you very much. Thanks, Joe.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to David Lim for any concluding remarks.

Thank you, Chad. 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.

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