American Axle & Manufacturing Holdings, Inc.

Good morning. My name is Jason, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle and Manufacturing first quarter 2024 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'd 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 star, then two. As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Thank you, and good morning from Detroit. I'd like to welcome everyone who is joining us on AAM's first quarter earnings call. Earlier this morning, we released our first quarter of 2024 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 944-4230. This replay will be available through May 10th. Before we begin, I'd like to remind everyone on 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 AM's Chairman and CEO, David Dowd.

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AM's financial results for the first quarter of 2024. Joining me on the call today is Chris May, AM's Executive Vice President and Chief Financial Officer. To begin my comments, I'll review the highlights of our first quarter financial performance. Next, I'll touch on some business development news and provide commentary about the industry. After Chris covers the details of our financial results, we will open up the call for any questions that you may have. So let's begin. AM's first quarter of 2024 sales were $1.61 billion. AM's adjusted earnings per share was 18 cents per share, and our adjusted free cash flow was a use of $21 million. First quarter production environment was relatively more stable compared to previous quarters, supporting our production system efficiency. The volumes on our key programs were also stronger than a year ago. From a profitability perspective, AMS adjusted EBITDA in the first quarter was $206 million, or 12.8% of sales. The year-over-year margin improvement stemmed from the benefits of production stability, stronger volumes, and our improvement initiatives. Our results demonstrate on a sequential basis that we are experiencing good traction with our performance plans. Margins for both of our business units increased in the first quarter from the fourth quarter. So 2024 is off to a solid start. Chris will provide more details about our overall financial performance during the prepared remarks. Let me talk about some business updates, which you can see on slide four of our presentation deck. We are very pleased to announce that AM, working with our key partner in advance, will supply XPain DD with three-in-one electric drive units in China. The start of production is slated for later this year. Thus far, our shipments are approaching almost a half a million electric drive units in China over the last several years. This clearly demonstrates AM technology and the market demand for our electric drive systems. Furthermore, we won contracts with multiple luxury European OEMs to supply electric vehicle components. In addition to our strong ice and hybrid business, Our two-pronged electrification strategy of providing full electric drive systems and components for electric vehicles well positions AM to take advantage of the growing global electrification market. Now let's talk about the industry. Although timing is fluid, electric vehicles have established a footing in the developed markets. However, in the near term, OEMs are reformulating their respective powertrain strategies given a recent consumer adoption rate, especially here in North America. What this means is current ICE platforms will run longer than originally expected, and there potentially could even be additional future generations of ICE vehicles, especially with hybrid applications. Either way, this is highly beneficial for American Axle. I've said this before, the market is the boss, and the end customer will ultimately influence what is moving through the showroom. While battery technology, charging infrastructure, and cost structure improve over time, AM will continue the development of our electric product portfolio and further position ourselves to be agnostic to changes in propulsion system technologies. But as a company, AM is very focused on maximizing our current product portfolio and driving profitable growth. But given the dynamics I just mentioned, It's not a growth at all costs approach. We will be disciplined, we will seek appropriate returns, and we will make hard but necessary decisions while pursuing new business, especially in the area of electrification. In other words, any business we take on must make business sense and add value to our company. From an ESG perspective, we are also very pleased to announce that we recently published our 2023 sustainability report. Some of the key highlights from that report include we achieved ISO 5001 certification at all of our manufacturing facilities. We received 21 quality performance awards. We exceeded our 2023 U.S. renewable and carbon-free energy goals. We increased our supplier diversity spend year-over-year by 12%, and we launched a global transportation campaign to reduce emissions. Clearly, AM is committed to properly growing our business, but in a sustainable and socially responsible way. Let's quickly talk about our guidance. The strong first quarter performance gives us added confidence about our full year guide. However, the year is still early and much can change between now and December the 31st. As such, our guidance remains unchanged for now. AM is targeting sales of $6.05 to $6.35 billion. our adjusted EBITDA of approximately $685 million to $750 million, and adjusted free cash flow of approximately $200 to $240 million. To conclude my remarks, and as I have communicated previously, our aim is on the future, and we will continue to drive our efforts towards securing our primary legacy business, and we've made great progress on that, generating strong free cash flow, strengthening our balance sheet, advancing our electrification portfolio, and positioning AM for profitable growth. So with that, let me now turn the call over to our Executive Vice President and Chief Financial Officer, Chris May. Chris?

Okay, thank you, David, and good morning to everyone. I will cover the financial details of our first quarter of 2024 with you today. I will also refer to the earnings slide deck as part of my prepared comments. So let's go ahead and begin with sales. In the first quarter of 2024, AAM sales were $1.61 billion compared to $1.49 billion in the first quarter of 2023. Slide 8 shows a walk of first quarter 2023 sales to first quarter 2024 sales. Positive volume mix and other was $114 million driven in part by our backlog with key programs such as GM's midsize truck and a Cherry SUV in China. In addition, We've had better than expected volumes on certain programs, including the T1XX platforms. Metal market pass-throughs in FX increased sales by approximately $6 million. The increase was mainly from metals, which were higher than a year ago. Now, let's move on to profitability. Gross profit was $198.5 million in the first quarter of 2024, as compared to $160.6 million in the first quarter of 2023. Adjusted EBITDA was $205.6 million in the first quarter of 2024 versus $175.4 million last year. You can see the year-over-year walkdown of adjusted EBITDA on slide 9. In the quarter, volume, mix, and other added a net $31 million of adjusted EBITDA versus the prior year, resulting in a profit conversion rate of approximately 27%. R&D was lower year over year, as timing of R&D spend can be lumpy from quarter to quarter. And net inflation, performance, and others was favorable by $8 million, driven by a combination of the efficiency benefits of less production volatility and our operational improvement initiatives, partially offset by inflation costs. Let me now cover SG&A. SG&A expense, including R&D in the first quarter of 2024, was $98.3 million, or 6.1% of sales. This compares to an identical 98.3 million or 6.6% of sales in the first quarter of 2023. AM's R&D spending in the first quarter of 2024 was approximately $37 million. We expect our R&D spend to be flattish year over year and anticipate about $35 to $40 million per quarter on average, but as I mentioned, this amount can vary from quarter to quarter. We anticipate R&D spending should moderate in the coming years as we finish developing our electric platform technologies. Let's now move on to interest and taxes. Net interest expense was $41 million in the first quarter of 2024 compared to $45 million in the first quarter of 2023, due in part to lower debt balances. In addition, we paid down over $10 million of debt in the quarter. In the first quarter of 2024, we recorded income tax expense of $15.9 million compared to no tax expense in the first quarter of 2023. This increase in our elevated effective tax rate was driven by higher profitability and an expense for valuation allowances, primarily related to interest expense deduction limitations in the U.S. As we head into 2024, we expect our adjusted effective tax rate to be approximately 40% to 45%. This elevated book tax rate is a function of the valuation allowance I just described. We also expect cash taxes of approximately $50 to $55 million this year. Taking all these sales and cost drivers into account, our GAAP net income was $20.5 million or $0.17 per share in the first quarter of 2024 compared to a net loss of $5.1 million or $0.04 per share in the first quarter of 2023. Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was 18 cents per share in the first quarter of 2024 compared to a loss of one cent per share for the first quarter of 2023. Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the first quarter of 2024 was $17.8 million. Capital expenditures Net of proceeds from the sale of property, plant, and equipment for the first quarter of 2024 were $44.9 million. Cash payments for restructuring and acquisition-related activity for the first quarter of 2024 were $5.7 million. Reflecting the impact of these activities, AM's adjusted free cash flow was a seasonal use of $21.4 million in the first quarter of 2024. From a debt leverage perspective, We ended the quarter with a net debt of $2.3 billion and LTM adjusted EBITDA of $723.5 million, calculating a net leverage ratio of 3.2 times at March 31st. Our focus is to continue to strengthen the balance sheet by reducing our debt. AAM ended the quarter with total available liquidity of approximately $1.4 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities. As for the full-year outlook on slide 6, it remains unchanged from when we initially provided 2024 guidance on February 16th. For sales, our target range is at $6.05 to $6.35 billion for 2024. This sales target is based upon a North America production of approximately 15.8 million units, and assumptions for our key programs remain unchanged from our previous outlook. As you all know, our sales results are more sensitive to performance of these key programs versus just macro changes to overall industry production. Relative to past quarters, the production environment was less volatile, and we hope this trend continues for the balance of the year. From an EBITDA perspective, the range remains at $685 to $750 million, and our adjusted free cash flow target is $200 to $240 million. Although first quarter financial results were off to a good start, the year is just beginning. However, from a timing perspective, later in the year, several key programs that we support will be launching and transitioning to new models. In addition, certain third-party estimates have the T1XX platform production to be first-half weighted in their latest forecasts. This compares to an almost even split, first half versus second half, when we gave our guidance back in February. But all that said, we're making great progress on the performance drivers in our business, and we look forward to the remainder of 2024 and continuing driving positive results. Thank you for your time and participation on the call today. I'm going to stop here and turn it back over to David so we can start 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.

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 Q&A roster. Our first question comes from Joe Speck from UBS. Please go ahead.

Thanks. Good morning, gentlemen. Good morning, Joe. You know, look, it was obviously, you know, a stronger quarter than I think, you know, the street was looking for, to reiterate the guidance. Is that really, in your view, just sort of, you know, some of the cadence of some of the key programs? I think the midpoint of your guide assumed about 1.4 million T1s from GM, but maybe you could confirm that. And like, you know, for there to be, you know, some upside, is it really, would you say, more execution driven at this point?

Hey, Joe. Good morning. This is Chris. Yeah, a couple points in there to start. Yes, our midpoint of our guidance is approximately 1.4 million units on the GM full-size truck platform. That remains consistent from where we were a quarter ago in our view from that perspective. But in terms of drivers, you know, I would expect, you know, through the course of the year for us to continue to remain on a progressive trend of improvements and hold sticky performance that we achieved here in the first quarter. But obviously, we've got to continue to build on this momentum. I think about the back half of the year, we have some large transitions going on in some of our key platforms that we support that are converting into new models, so that would impact some of our volumes in the back half of the year. And we're starting to see a little bit of some light truck downtime here in the second quarter from one of our customers, and they talked about that publicly on their calls. But at the end of the day, you know, I think we're in a pretty good spot where we sit here in the first quarter, and we've got some things yet to play out through the year. Hopefully that addresses your question.

Yeah, no, I appreciate it. What about just on R&D spend? I mean, I think in the past you sort of said, you know, you expect to run sort of a $40 million pace. I think it might have been a little bit below that this quarter. But I'm just wondering if you think there's an opportunity to, you know, rethink some of that spend or push some of that spend because, as David sort of mentioned, right, like clearly some electrification plans have been pushed. So I wanted to understand how you're thinking about that spend going.

Yeah, so included in our guidance for this year, meaning 2024, you know, we are expecting to spend closer towards that $40 million per quarter range. We're just shy of that here in the first quarter. It does move around from quarter to quarter. You know, we experienced last year quarters where it was over that average and in some instances where it was less than that amount, but throughout the course of the year very close to about $35 to $40 million a quarter range. You know, we have a lot of activity going on. Obviously, last year, inside of our business, developing our electrification platform. We expect that to continue here into this year. We have a fair amount of interest in some of our key products and platforms, and we're also getting ready to launch some key programs over the next couple of years as well. So those will continue to consume some R&D dollars. And these new programs are both ICE, hybrid, and as well as EV programs. It's not exclusive.

So it's launch and customer-driven. You don't really see an opportunity to sort of either pull back a little bit or push some of that spend. Instead, maybe there's a little bit of a bigger inflection.

Yeah, in the near term, I would expect the run rate to be pretty consistent. But as we've said a couple of times, we would expect over the next year or two, as our platform technologies, especially as it relates to electrification, start to mature and associate with that. Thanks, guys.

The next question comes from Dan Levy from Barclays. Please go ahead.

Hi, good morning. Thank you for taking the questions. Wondering if you could just start by addressing metal forming, sequential step up. You know, you had talked on the last call that you're going to continue to see progress on some of these operational issues in terms of labor availability and, you know, output and whatnot. So maybe you could just talk to where metal forming stands and what are the additional steps to improve it from here?

Yeah, Dan, this is David. We saw some marked improvement in regards to our metal forming operations, but still not where we want it to be. The biggest thing we need to do is stabilize some of the operations which we've done for the most part. Now it's just a matter of rebuilding the profitability of some of the select plants or select product lines. We had, as you know, some major labor scarcity issues out there. We've addressed a lot of those issues. by reloading some of our plants, changing the compensation structure at some of the existing plants, and bringing talent in from other areas. So manpower isn't as big of a problem as it was in the past before. One of the areas we do have still in manpower that's a challenge that we need to put more training and emphasis into their development, which takes a little bit longer when it comes to production efficiencies and all. But overall, we're pleased with the progress that we're making. Overall, our forging business continues to run very strong, meaning the steel forging business. We've got some issues in powder metal that we're working our way through. That's really what we highlighted before to you. and we continue to make favorable progress in that area, and we will quarter to quarter as we go forward also. Chris, I don't know if you want to comment.

Yeah, you can see the trend in our margin trajectory of that business segment for us in terms of metal forming. You know, our performance here in the first quarter, Dan, was the best it's been in the last four quarters. So that has been, especially sequentially, those steps that we're taking, you're seeing translate into positive performance for us, and we expect that to continue.

So as far as cadence through the rest of the year, is it fair to assume that there's a continued positive cadence?

Yes, I would expect so, especially on a year-over-year basis, because if you may recall, on a year-over-year basis, it really started to sort of step down from a margin performance in the second quarter of last year and then sort of troughed off in the third. But we're now starting to see that upswing, and we still have work to do to drive some further improvements there. Again, we made a lot of activity in the fourth quarter. We saw a lot of activity in the first quarter. A lot of it appears to be sticky in terms of performance run rates. We've got to continue to hold those and then build upon those going forward.

Okay.

Thank you.

My second question is just on resource allocation and specifically on CapEx where The last few years, your CapEx has been running pretty low, you know, roughly $200 million over the last year. You know, CapEx has a percent of sales, you know, and we call it the 3% range. You're talking about going to something in the 4%, 4.5% range this year. But, you know, David, you alluded in your prepared remarks that, you know, automakers are rethinking some of their plans. You are seeing platforms getting extended. And just wondering why there isn't maybe more of an opportunity for CapEx to structurally stay below, call it that, $200 million range, closer to 3% of sales, as you're seeing an extension of these platforms. What is the runway to keep CapEx maybe low?

If you remember, historically, AM ran in that 4% to 6% of sales. When we bought MPG, our CapEx jumped up to that 6% to 8% of sales. We made a commitment to everyone to get down to that 4% to 5% range and then ultimately below 4%. We've been disciplined in regards to the administration and execution of that CapEx management to your point that we've been running between 3% and 4% the last couple of years here. We've got some big things that we're launching as far as next generation product. That product will run for a long time, so we've got to upgrade some of the equipment there. That's driving some CapEx needs there. Obviously, there's electrification programs and other new ICE and hybrid business in our backlog as well that we've got to be able to support. So where we can be disciplined and cut costs and manage the CapEx tighter, we'll do that. But we have to make the necessary investments in order to protect the product programs that we committed to our customers and also support, you know, how we want to run our operations going forward. But... You know us well enough that we're very disciplined in that area. We've demonstrated it based on our performance the last several years, and we'll continue to look at tightening that down. It only helps us to manage it very tightly because it allows us just to pay down debt, strengthen the balance sheet, or continue to fund electrification growth and or look at other tactical acquisitions that we can work on.

Just in general, if OEMs are extending the life of their platform and That presumably all else equal would reduce your capex because you've already incurred that spend, correct?

Well, we have obviously an established portfolio today as far as equipment and stuff, and we've got normal maintenance on that. But at the same time, as I said, the key thing is many of our big programs, our key platforms, are going through next-gen products, and there are some revisions to that. Once those products get launched, I think you're right. I think that it will be more in a maintenance capital mode and not so much the bigger investment that we're having to spend now for the next-generation products. So we're kind of getting hit both ways in regards to the next-generation product as well as electrification, but at the same time, that next-generation product will subside over the next few years as we get those programs launched.

Okay, thank you.

Thank you, gentlemen. Your last question comes from Federico Marendi from Bank of America. Please go ahead.

Good morning, guys. Good morning, Federico. One quick question on the second half. So your larger customer talked about the ramp of EV production in the second half. And If I heard correctly, you said that part of it might be in the guidance. What's the risk to that number in case that customer, I don't know, they have, let's say, a delay in the production ramp?

Well, I think you're referring to their electrification platform. Our commentary in terms of production volume second half is on their, I'll call it traditional ICE platform for the full-size truck, and we articulated that at about 1.4 million units at the midpoint. And we continue to see still good, solid demand for that. As you know, they've articulated some of their cadence through the year on the build of that platform. But if they continue to drive demand for that vehicle, there's either upside or downside to that. Depends on their production cadence.

Thank you. And the second question I have is on the restructuring actions. Could you give us some details on what do you expect to be the payback time and the magnitude of the savings that those actions are going to generate?

Yes, we continue. I mean, our guide for this year is somewhere between $15 to $25 million in terms of restructuring, call it cash and P&L, and integration. So some of that relates to integration of some previous acquisitions that are nearing completion. But in addition, we do have some restructuring activity to optimize our business and reduce our cost structure. All that is already included inside at least for the current year, inside of our guidance ranges that we have provided. But some of the initiatives that we're taking in terms of fixed capacity reductions, i.e., a plant reduction, will provide us future benefits and continue to drive us in terms of margin enhancement performance going forward.

Thank you, and have a great weekend.

Thank you. Thanks, Frederico, 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.

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