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?