American Axle & Manufacturing Holdings Inc (AXL) 2022 Q2 法說會逐字稿

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 & Manufacturing Second Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the floor 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 second quarter earnings call. Earlier this morning, we released our second quarter of 2022 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 2211523. This replay will be available through August 12.

Regarding the Investor Relations calendar, we would like investors to save the date for a technology investor event in the City of Lights, Las Vegas, on January 4, 2023, a day before CES opens. Additional details will be forthcoming in the coming months.

With that said, 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.

Now let me turn things over to AAM's Chairman and CEO, David Dauch.

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the second quarter of 2022. Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.

I will review the highlights of our second quarter financial performance. And next I will touch on some exciting business development news in the quarter, including our recent announcement regarding Mercedes-AMG, a number of new electrification component wins and the completion of our Tekfor acquisition. Lastly, I'll discuss our updated 2022 financial outlook before turning things over to Chris. After Chris covers the details of our financial results, we will open up the call for any questions that you all may have.

So let's begin. AAM second quarter 2022 financial results were impacted by rising input costs and the continuing global supply chain volatility. We cannot control the macro environment, but we can manage our business, which includes the continuity of supply to our customers, product quality and manufacturing optimization, all while position AAM for sustainable profits and free cash flow generation.

AAM's second quarter sales were $1.44 billion. Production shutdowns continue to occur, but to a lesser degree compared to last year, but similar to recent quarters. In our view, OEMs will likely continue to prioritize their light truck output, which is good for AAM. OEMs cannot build their large trucks fast enough as inventory levels on key platforms that we support remain low and consumer demand appears to be resilient. However, we are closely monitoring the macroeconomic background that you are all aware of. As for our products, we believe all-wheel drive and 4-wheel drive mix tend to be more resilient compared to other vehicle features, especially with full-size trucks.

AAM's adjusted EBITDA in the first quarter of 2022 was $195 million or 13.6% of sales. In the quarter, the results were negatively impacted by rising input costs, semiconductor availability and other supply chain constraints. Semiconductor conditions continue to improve, but we believe supply chain challenges will persist into 2023, and in certain regions, these headwinds may take longer to resolve. That said, we remain focused on sales contribution conversion, supporting R&D and mitigating inflationary headwinds.

Chris will cover more details with you. Additionally, we're happy to share that we have made very good progress on commercial inflation recovery discussions with our OEM customers and in line with the expectations that we shared with you last quarter.

AAM's earnings per share in the second quarter of 2022 was $0.19. AAM's adjusted EPS was $0.22 per share. Even with these challenges, AAM continued to deliver positive adjusted free cash flow generation in the quarter. This is a compelling strength of our operating model. AAM's second quarter 2022 adjusted free cash flow was $114 million.

Our capital allocation strategy, supported by our free cash flow is very straightforward. Strengthen the balance sheet, continue with our long-term goals in electrification and conduct smart, high-value bolt-on M&A when it makes tactical and strategic sense. And in the second quarter, we did just add. We deployed capital to a high-value acquisition and continue to pay down gross debt.

Now let's talk about some recent key highlights for the quarter, which you can see on Slide 4. Our electrification dialogues with OEMs continues to be very constructive. The auto manufacturers remain extremely focused with their respective electrification product plans. It is our goal to be a partner and supplier with our strong leadership in electric drive units, subassemblies and components.

Our technical and commercial efforts are experiencing very positive traction and reaction from our customers. In the quarter, we also announced that AAM has begun to supply electric drive units for Mercedes-AMG. This rear-drive unit was recently named a 2022 Automotive News PACE Award finalist. We are very pleased to partner with and support Mercedes-AMG as we continue to grow this relationship.

The P3 drive technology is also garnering interest from other manufacturers. AAM was also awarded numerous electric vehicle component contracts in the quarter with multiple global OEMs. Our proven electric gear and component technology will support both front and rear drive units for these OEMs' respective programs. In addition, our proven in strong electric technology is driving the possibility of various technical partnerships with manufacturers. For AAM, this is an excellent step to further build already solid relationships and support current and future customers, and we see this as a growing opportunity.

Finally, AAM's acquisition of Tekfor became effective on June 1. As a reminder, the acquisition has strong synergy potential, improves our geographic mix and enhances our portfolio in electrification components.

Tekfor generated approximately EUR 285 million in sales in 2021. AAM acquired Tekfor on an enterprise value of approximately EUR 125 million. This purchase adheres to our strategy of high-value, quick return bolt-on acquisitions. While we just closed on this transaction in June 2022, we believe we are on track to bring meaningful synergies in 2023 as we leverage our strengths, capabilities and product portfolio. We are very excited about Tekfor and we once again welcome the Tekfor team to the AAM family.

Now let's talk about our guidance on Slide 5. We've updated our financial outlook to reflect the best information we had available and to take into consideration the completion of the Tekfor acquisition. AAM is now targeting sales of $5.75 billion to $5.95 billion compared to $5.6 billion to $5.8 billion previously; adjusted EBITDA of approximately $790 million to $830 million compared to $785 million to $830 million previously; and adjusted free cash flow of approximately $300 million to $350 million, which is unchanged.

From an end market perspective, our North American production assumption is unchanged at approximately 14.3 million to 14.7 million units as the second half is difficult to predict with a number of macro and supply chain factors. However, we are hoping to see greater volumes in the second half. During these uncertain times, we are managing variables that are under our control, and we believe we are nicely positioned when the production environment improves, driven by strong demand and inventory replenishment. We underscore that the AAM team is confident in successfully navigating these possible future economic challenges with our deep industry experience.

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 business, which we made tremendous progress on, advancing our electrification product portfolio and positioning AAM for profitable growth, especially in the area of electrification.

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 first quarter results 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 second quarter of 2022, AAM sales were $1.44 billion compared to $1.28 billion in the second quarter of 2021. Slide 7 shows a walk of second quarter 2021 sales to second quarter 2022 sales. First, we account for the lower year-over-year impact from semiconductors and supply chain challenges.

While we continue to be impacted by this issue, we did experience year-over-year improvement, which we estimate to be approximately $63 million to sales in the quarter. Positive volume mix and other was $45 million. The Tekfor acquisition contributed $29 million to sales, which effectively represents activity for the month of June. Total market pass-throughs and FX added approximately $27 million.

During the last several quarters, we've continued to see volatility in the primary index-related inputs to the metal-based materials that we purchase. You may recall, we hedged this risk with our customers by passing through the majority of index-related changes. The metal portion of this column reflects these elevated pass-throughs on a year-over-year comparison.

Now let's move on to profitability. Gross profit was $173.5 million in the second quarter of 2022 as compared to $190 million in the second quarter of 2021. Adjusted EBITDA was $195.1 million in the second quarter of 2022 versus $222.6 million last year.

Please refer to our adjusted EBITDA walk on Slide 8. In the quarter, improvements in semiconductor availability and the supply chain added $12 million to EBITDA versus the second quarter of 2021. Volume mix and other added $9 million.

Second quarter material, freight and utility inflation, net of recoveries, negatively impacted EBITDA by $12 million. This is a sequential improvement versus the first quarter impact of $28 million, driven by continued progress of recoveries with customers.

R&D was higher by approximately $5 million, driven by launches and electrification development. And lastly, our new acquisition, Tekfor, also contributed to the quarter for one month's activity of approximately $2 million. We continue to experience year-over-year increases in index-related metal costs, as I mentioned previously, and the retained portion negatively impacted us this quarter was approximately $16 million.

Let me now cover SG&A. SG&A expense, including R&D, in the second quarter of 2022 was $84.8 million or 5.9% of sales. This compares to $86.2 million or 6.7% of sales in the second quarter of 2021. AAM's R&D spending in the second quarter of 2022 was $35.2 million compared to $30 million last year. We continue to control our SG&A costs while investing in and increasing our R&D spend to advance our next-generation electric drive technology platforms.

On a U.S. GAAP basis, you'll notice we recorded a gain on market purchase of our Tekfor acquisition for $11.6 million. This demonstrates some of the value inside of this transaction.

Let's move on to interest and taxes. Net interest expense was $39.5 million in the second quarter of 2022 compared to $47.3 million in the second quarter of 2021. We continue to benefit from debt reduction and refinancing actions in the form of lower interest costs.

In the second quarter of 2022, we recorded income tax expense of $0.6 million compared to an expense of $2.4 million in the second quarter of 2021. For 2022, we expect our effective tax rate to be approximately 15% to 20%. We would expect cash taxes to be in the $50 million to $60 million range. Taking all these sales and cost drivers into account, our GAAP net income was $22.9 million or $0.19 per share in the second quarter of 2022 compared to $16 million or $0.13 per share in the second quarter of 2021.

Adjusted earnings per share, which excludes the impacts of the items noted in our earnings press release, was $0.22 per share in the second quarter of 2022 compared to $0.29 per share for the second quarter of 2021.

Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the second quarter of 2022 was $146.7 million. Capital expenditures, net of proceeds from the sale of property, plant and equipment for the second quarter of 2022 were $42.6 million.

Cash payments for restructuring and acquisition-related activity for the second quarter of 2022 were $8.1 million. Cash payments related to the Malvern fire we experienced in September of 2020 net of recoveries was $2.1 million in the quarter. In total, we expect approximately $30 million to $40 million in restructuring and acquisition-related costs in 2022. This amount now includes the Tekfor acquisition activity.

Reflecting the impact of these activities, AAM generated adjusted free cash flow of $114.3 million in the second quarter of 2022. AAM's strong second quarter cash flow performance provided funding to accomplish multiple capital allocation priorities, those being to invest in Tekfor and continue to pay down additional debt in the quarter.

From a debt leverage perspective, we ended the quarter with net debt of $2.5 billion and LTM adjusted EBITDA of $739 million, calculating a net leverage ratio of 3.4x at June 30. We expect to continue to strengthen AAM's balance sheet by reducing our gross debt and lowering future interest payments. As just mentioned, in the quarter, we reduced our outstanding debt by over $30 million.

Before we move on to the Q&A portion of the call, let me close out my comments with some thoughts on our 2022 financial outlook. As you can see from our press release, we have updated our outlook to $5.75 billion to $5.95 billion of sales and $790 million to $830 million of adjusted EBITDA. Our adjusted free cash flow target of $300 million to $350 million is unchanged.

The update primarily reflects the completion of the Tekfor acquisition. We expect modest EBITDA contribution from Tekfor this year and then increase as our cost synergies are on track for our 2023 delivery. We also contemplated small FX translation and other impacts for the year.

In general, the production environment remains volatile and the availability of labor is a challenge for the industry. As customary, we evaluated the latest and best information we have regarding customer production schedules and operating environments, including inflation headwinds and projected recoveries in currency.

Our North American production assumption for 2022 is unchanged at 14.3 million to 14.7 million units. We expect the cadence of sales and related profitability to align with industry estimates of stronger second half volume timing versus the first half of the year. We continue to assume our customers will prioritize building full-size pickups and SUVs, but we foresee continued volatility in most areas of our business due to macro conditions.

That said, we will continue to focus on what we can control. So for a midpoint check of the year, our focus is on driving optimization, customer recoveries, integrating Tekfor, developing class-leading electrification technology, positioning AAM for 2023 and working 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. 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 2. So at this time, please feel free to proceed with any questions you may have.

(Operator Instructions) And our first question today comes from John Murphy from Bank of America.

I just wanted to just ask a first question on GM trucks. Obviously, inventory is de minimis. And even if the market gets a little bit wobbly here, there's still going to be some inventory rebuild. So there's still potential for huge cap or maybe even upside in volumes over time as we go into 2023 for those trucks. I'm just curious, as you think about the inventory levels and that sell-through, it doesn't seem like there's unit risk, but there might be mix risk. So could you just remind us what your content range is on those trucks? And then also what kind of impact is 95,000 units that have been built but not finalized and delivered to dealers might have on your business or not?

Yes, John, this is Chris. I'll take that content question. Our average full-size North American pickup truck or SUV content is approximately $1,500 to $1,600. And that, of course, would be a blend of front-wheel drive and 4-wheel drive vehicle applications and a blend of the light-duty and heavy-duty trucks. So to the extent that there's stronger mix, for example, on the 4-wheel drive, we're in excess of that. If it's a little bit lighter, 2-wheel drive, we're a little bit under that weight. So hopefully, that sort of parameters and dimensions are content exposure on that vehicle.

And as for the inventory elements for General Motors, look, we see strong schedules going forward, continued demand for this product. We don't anticipate any disruptions in production schedules that we're aware of on a go-forward basis in relation to the item you mentioned there.

Okay. And then just a second question on the AMG rear-drive unit and other e-drive units, can you sort of remind us what the content potential is there on those and what sort of the economics are from a margin and return profile? Are they similar, the margins and returns to corp. average? And how should we think about content on those programs?

Yes. I would think from a margin perspective, John, very similar to corp. average. And as you know, we don't provide margin specific information on particular platforms. But I think corporate average from a broad perspective, and from a content perspective, very high. This is a very high contented vehicle for us. You've heard us articulate from our electric drive units. When we're supplying these applications into these vehicles, we can have content per vehicle in the $2,500 plus range, and it falls right inside of our thought process there. It's a nice application for it. It's a very great application for us.

Our next question comes from Ryan Brinkman from JPMorgan.

I wanted to ask on the AMG win, which means you'll now have content on electrified vehicles ranging from like the 39 horsepower Baojun E300 to the 843 horsepower AMG GT, right? So does this maybe highlight the comprehensiveness of your electrification capabilities? But what also can you say like directionally speaking about the relative competition for or content per vehicle or profitability of components or systems for high-end versus low-end electrified vehicles?

And one of your driveline supplier competitors have stated that they desire to more narrowly target the light vehicle electrification space with only high torque applications. So I thought to get your thoughts on the relative attractiveness of these different ends of the end market.

Ryan, this is David Dauch here. First of all, thanks for your question. We're very excited about the progress that we're making in electrification with the portfolio that we're developing, the interest that we're garnering from our customers. But most importantly, the business that we're announcing and launching. And the Mercedes-AMG is just another example of the innovation, the technologies that our team continues to bring forward.

You know we launched one of the first electric drive vehicles with the I-PACE. At the same time, this product is probably the most complex product that we've ever made because it's a hybrid type application that is still involves an engine as well as an electric assist or electric drive with tremendous horsepower and range capability. So we continue to look at the market, assess the customer needs, which are evolving, trying to understand where we think that sweet spot of the market is. We're developing a portfolio, a range of portfolio of products that is platform-based so we can try to achieve economies of scale, but also satisfy that market.

And we're trying to identify a product whereby we can give you a base electric axle. If you want to feature it up and include torque vectoring and other type of performance features in that, you can do that. If you want to decontent it to be more like what we've seen in some of the Chinese applications, then we can do that as well. So right now, our strategy is working. We're growing in China. We're growing in Europe, and we're also growing in North America with respect to our electrification initiatives.

On the content per vehicle, I think Chris has given you a good indication already with his earlier answer. We're seeing a number of our programs that are north to that 2,000, 2,500 range. When you factor in the motor, the inverter and the gearbox into the equation and whether it's 1 or 2 axles, all depend on the requirements of the vehicle.

And from a competition standpoint, they've got to decide where they want to compete, where we want to -- we have to decide where we want to compete. We're going to concentrate on the light vehicle side. However, parts of the light vehicle side will take us into the lower range of the commercial vehicle side as well. But we'll continue to assess that going forward, but we're concentrating our resources and our efforts on the light vehicle side of the business. But hopefully that addressed your question.

Okay. Yes. And then just my follow-up here is, I think you gave some indication that you're seeing increased traction with recovering some of these non-commodity supply chain costs, et cetera, via negotiations with the automakers. At the same time, what's the latest that's happening with those non-commodity supply chain costs? Could they actually start to come down in the back half even as you get to more recoveries?

Like I know that it seems like freight and diesel and ocean shipping might be coming down. At the same time, is electricity and natural gas still going up or labor? I'm not sure. How are those nonmaterial costs do you think going to net out in the back half of the year and then in relation to the recoveries as well?

Yes. Ryan, this is Chris. I'll take that one. From a nonmaterial type of cost, if you think about some of the items that you listed out there, for example, labor costs, obviously there's some pressure from that standpoint. We've talked about that previously and that would be sticky. Once those start to get elevated, those run rates will start to build in over an extended period of time, meaning into future years. So typically it doesn't ebb and flow.

From a utility standpoint, we've started to increase utility costs in a very meaningful way at the back half of last year. That continues to be very elevated here this year. In the short term, certainly don't see that abating very much in almost any regions of the world, but in particular as it relates to Europe. And then I would call sort of the metal pass-through type of elements that aren't part of the structural BOM, if you will, so those index related. Those change, as you know, every 30 days for us. They continue to kind of go up and down. Some elements are very elevated such as aluminum. That continues to remain very elevated. We've seen scrap sort of trend down a little bit recently, but I wouldn't call 1 or 2 months a trend here. We need to see this play out for a period of time.

So hopefully, that provides a little color to your question.

And our next question comes from James Picariello from BNP Paribas.

Just following up on the inflation conversation. I think in the last quarterly guide, the inflation, the all-in inflation number was like $60 million headwind. I don't know if that's my number or yours, but is that still intact?

Yes, that's correct. That's the number we articulated.

Okay. And the R&D spend for the year, my apologies if I missed this. How is that tracking for the full year in terms of the increase?

Yes. So R&D, you may recall, we articulated coming into the year, we expected to sort of be that sort of $35 million to $40 million a quarter range. The first 2 quarters of this year, we've been right around the $35 million range. We'll continue to invest in our R&D to support the continued growth of our electrification platforms, which is the primary consumer of that, and then launch, of course, current products. And we would expect that $35 million to $40 million range per quarter still to be intact for the balance of the year.

And then also just, James, to double back on your material question, we talked $60 million. Just to say that $60 million net of recoveries. I just want to make sure we're clear with that. So you can see that trend starting to play through the course of the year. We had $28 million in the first quarter, $12 million here in the second quarter, as you saw some of those recoveries take traction. And I would expect sort of that $10 million to $15 million per quarter over the next couple of quarters to get us to that $60 million or so range. So, just articulating a little bit on the timing for that.

Got it. Is there any way to dimension what the recovery looks like on the top line, what's embedded there?

Yes, we've not provided that information for a variety of reasons, but we've been focused on the net impact to the company.

Yes. Okay. Last quick one for me. Just in terms of the debt repayment, do you have a targeted magnitude for the full year in terms of your debt reduction?

We paid another $25 million down on our term loan be in the second quarter similar to the first quarter. We paid some additional form debt down. I would expect to continue to deploy some of our free cash flow generation through the balance of the end of the year into gross debt reductions as well. We've not quantified specifically how much per quarter, but that's in sort of the ZEB code that you've seen us over the past couple of quarters do, we'll continue to do that on a go-forward basis. At least that's our current thinking as we sit here today.

(Operator Instructions) Our next question comes from Jason Spak (sic) [Joseph Spak] from RBC Capital Markets.

It's Joe. One quick housekeeping. I know you said how much Tekfor contributed in the quarter. I didn't hear how much you're expecting for the balance of the year? Like how much are the sort of revenue guidance raise, I guess, was related to Tekfor? Was that all of it? And basically everything else is unchanged?

Yes. Pretty much that's the case, Joe. It's actually a tad bit higher than that. We do have a little reduction for some foreign currency translation, but principally think about that as the bulk of Tekfor coming on for the balance of the year.

Okay. And then just secondly, going back to the AMG one. Like I was wondering if you could just sort of talk a little bit about how that had -- if that sort of opened up sort of other discussions either within Mercedes or potentially with other automakers. I mean I know a lot of times, even within automakers, they'll try something out on newer technology on sort of higher end vehicles and then try to sort of cascade things down. And obviously, this is a very high-performance product, but there's clearly applications for a broader range of products. So is there anything that you could sort of point to that sort of come up in your conversations with Mercedes or other customers to that effect?

Joe, this is David. Again, like you said, I mean, there's a lot of technology that's garnered from the rating side. Other technology is garnered from the performance group, so the OEMs. In this case, with Mercedes it's the AMG group. So we're honored to be a partner with them and to be selected by them to provide this very unique product that we brought forward to them.

Like I said in my earlier comments, it's probably the most complex product that we've ever made. We did it in partnership and side-by-side developing it with AMG. It's clearly gotten their attention as well as people -- other people's attention within the Mercedes organization. I expect that you'll see other variants that will come off of this using this type of product, but also will open us to share with them the balance of our portfolio. And then they've got to make their individual decisions as far as how much they want to do themselves versus what they may offer to the supply base. All we want to do is make sure that we're positioned very favorably to capture any new and incremental business should they decide to put it on the outside.

As I also indicated in my comments, there are other OEMs that are interested in this technology now that it's in the public marketplace. And so we're hopeful that we can solidify some new business on that as well.

And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to David Lim for any closing remarks.

Thank you. And we thank all of you who have participated in this call and appreciate your interest in AAM. We certainly look forward to talking with you in the future. Thanks.

And with that, we'll conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.