American Axle & Manufacturing Holdings Inc (AXL) 2024 Q3 法說會逐字稿

Good morning.

My name is Betsy, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the American Axle & Manufacturing third-quarter 2024 earnings conference call.

(Operator Instructions) 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.

I'd like to welcome everyone who is joining us on AAM's third quarter earnings call.

Now earlier this morning, we released our third quarter of 2024 earnings announcement.

You can access this announcement on the Investor 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.

Now, to listen to a replay of this call, you can dial 1 (877) 344-7529, replay access code 1531572.

The replay will be available through November 15.

Before we begin, 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.

With that, 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 third quarter of 2024.

Joining me on the call today is Christopher May, AAM's Executive Vice President and Chief Financial Officer.

To begin my comments, I'll review the highlights of our third quarter financial performance.

Next, I'll touch on some business development news and commentary about the industry.

After Chris covers the details of our financial results, we will open up the call to any questions that you all may have.

So let's begin with our financial highlights.

AAM's third quarter of 2024 sales were $1.5 billion.

Adjusted earnings per share was $0.20 per share.

Adjusted EBITDA in the third quarter was $174 million or 11.6% of sales.

And adjusted free cash flow was $75 million.

AAM delivered year-over-year financial performance driven by productivity and operating efficiencies, resulting in margin expansion despite lower sales versus last year.

Let me provide you with some high-level perspective on what unfolded in the quarter.

Overall, North American volumes for the industry were down approximately 5% from last year and 9% sequentially.

In addition, two of our largest programs are in the different stages of launch, which we continue to support.

This was partially offset by year-over-year volume growth in the GM T1XX platform.

Operationally, we are making positive strides, and this can be seen in our EBITDA results.

The AAM team remains highly focused on driving efficiency, cost, and utilization.

Simply, we're managing factors that are under our control and look forward to further positive performance.

Now, let's talk about some business updates, which you can see on slide 4 of our presentation deck.

We are very pleased to announce that AAM was awarded business to supply an electric beam axle to a Chinese OEM.

The launch is scheduled for 2025, and this win reflects our ability to combine our strong technology and experience in beam axles and electric drives.

Furthermore, AAM will support a well-known premium luxury performance European OEM with electric vehicle components.

These two wins are examples of our capabilities in the EV market.

We can provide dynamic component and subsystems to full turnkey e-Drives and e-Beam systems.

Let's talk about our legacy business.

We continue to gain traction with supporting ICE programs.

Last quarter, we announced a win for a van program.

And recently, we have been awarded multiple ICE components for several OEMs.

In our view, combustion engines will be around for a long time, and as you know, this is good for AAM.

In sum, AAM's comprehensive product portfolio well positions the company to support OEMs' various propulsion needs.

And finally, last month, we announced the sale of our India commercial vehicle axle business for a purchase price of $65 million.

We anticipate this deal will close in the fourth quarter of this year.

This is a highly favorable transaction for AAM, and this sale allows us to strengthen our focus on light vehicle, ICE, hybrids and full electric passenger car, pickup truck, and SUV and van applications on a global basis.

In addition, it provides us additional financial flexibility.

Now, let's talk about the industry.

AAM's view is that ICE, hybrid, and EV powertrains will coexist for a very long time, particularly in the US market.

We have seen others adjust electric vehicle take rates down over the past year or so, which is reaffirming our view.

What will drive electric vehicle adoption will be factors such as affordability, range, charging availability and electrical infrastructure.

In the near term, it appears to us the OEMs are still evaluating their future product planning strategies.

This includes balancing investment spend, capacity, program profitability, and consumer preferences.

This is clearly impacting electrification programs, and we are starting to see a renewed interest in ICE and hybrid platforms, including program extensions.

As for our own investments, we will invest as needed to maintain our product and technology leadership across multiple propulsion systems.

AAM is very focused on profitable growth and achieving adequate returns.

Onto our financial guidance.

With three completed, we are adjusting our full year sales, EBITDA, and adjusted free cash flow ranges as follows: AAM is now targeting sales of $6.1 billion to $6.15 billion, adjusted EBITDA of approximately $715 million to $745 million, and adjusted free cash flow of approximately $200 million to $220 million.

The tightening reflects our latest assumption of North American industry production and volume output of certain platforms, including those that are in launch.

In addition, we continue to monitor overall industry inventories, which have been rising.

We are also monitoring transaction prices, incentive spending and overall interest rates.

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, which is substantially complete; generating strong free cash flow, which we continue to deliver; strengthening our balance sheet, and we've been disciplined about paying down debt; advancing our electrification portfolio, and we've demonstrated incremental wins in that space; and positioning AAM for continued profitable growth.

Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Christopher May, for the financial details.

Chris?

Thank you, David, and good morning to everyone.

I will cover the financial details of our third quarter 2024 results with you today.

And I will also refer to our earnings slide deck as part of my prepared comments.

So let's go ahead and begin with sales.

In the third quarter of 2024, AAM sales were $1.5 billion compared to $1.55 billion in the third quarter of 2023.

Slide 7 shows a walk between third quarter 2023 sales to third quarter 2024 sales.

Lower volume, mix, and other was $23 million, driven primarily by lower customer production volumes on certain vehicle programs that we support.

Metal market pass-throughs and FX decreased sales by approximately $19 million, and both were lower year-over-year in the quarter.

Now, let's move on to profitability.

Gross profit was $171.3 million in the third quarter of 2024 as compared to $130.6 million in the third quarter of 2023.

Adjusted EBITDA was $174.4 million in the third quarter of 2024 versus $156.8 million in the third quarter of last year.

You can see the year-over-year walk-down of adjusted EBITDA on slide 8.

In the quarter, lower volume, mix and other reduced our adjusted EBITDA by approximately $9 million versus the prior year.

R&D spend was higher year-over-year, based on program requirements and timing.

However, sequentially, it was lower by $4 million as we look to optimize our R&D expense.

And lastly, but most importantly, net inflations, performance, and other was favorable to adjusted EBITDA by $28 million, driven by a combination of operational improvements, cost controls, and elimination of a warranty charge in the prior year.

All of these activities ultimately resulted in a stronger year-over-year margin performance on lower sales.

Let me now cover SG&A.

SG&A expense, including R&D, in the third quarter of 2024 was $94.6 million or 6.3% of sales.

This compares to $81.8 million or 5.3% of sales in the third quarter of 2023.

The increase was primarily due to higher R&D and other costs.

AAM's R&D spending in the third quarter of 2024 was approximately $40.1 million.

We will continue to support the needs of our business with the appropriate R&D spending levels.

That said, we anticipate R&D expense should moderate in the coming years as we adjust our spending in this area to mirror current industry powertrain trends.

Let's move on to interest and taxes.

Net interest expense was $38.1 million in the third quarter of 2024 compared to $43.7 million in the third quarter of 2023, due in part to lower debt balances.

In addition, we paid down approximately $50 million of principal on our 2026 senior notes in the third quarter, which we announced previously, and we'll continue to opportunistically pay down our debt.

In the third quarter of 2024, we recorded an income tax benefit of $12.1 million compared to $2 million in the third quarter of 2023.

For the full year, we now expect our adjusted effective tax rate to be approximately 25% to 30%.

This reduction in overall rate versus previous estimates is primarily due to the favorable tax benefit incurred in the third quarter.

We also expect cash taxes of approximately $50 million to $55 million this year.

Taking all these sales and cost drivers into account, our GAAP net income was $10 million or $0.08 per share in the third quarter of 2024 compared to a net loss of $17.4 million or a loss of $0.15 per share in the third quarter of 2023.

Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was $0.20 per share in the third quarter of 2024 compared to an adjusted loss of $0.11 per share for the third quarter of 2023.

Let's now move to cash flow and the balance sheet.

Net cash provided by operating activities for the third quarter of 2024 was $143.6 million.

Capital expenditures, net of proceeds from the sale of property, plant, and equipment, for the third quarter of 2024 were $72.9 million.

Cash payments for restructuring and acquisition-related activity for the third quarter of 2024 were $3.9 million.

Reflecting the impact of these activities, AAM's adjusted free cash flow was $75 million in the third quarter of 2024.

From a debt leverage perspective, we ended the quarter with net debt of $2.1 billion and LTM adjusted EBITDA of $758 million, calculating a net leverage ratio of 2.8 times at September 30.

Our focus is to continue to strengthen the balance sheet by reducing debt.

AAM ended the quarter with total available liquidity of approximately $1.5 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities.

I also want to provide some additional insight into the sale of our commercial vehicle axle operations in India that David mentioned and that we announced earlier in the third quarter.

The sales price is $65 million and is expected to close before the end of the year, pending regulatory approval.

This operation generated approximately $156 million in sales in the last 12 months as of June 30 and approximately $10 million in adjusted EBITDA for the same period.

Upon closing, this transaction will be both margin and leverage favorable to AAM.

So, as David said, this is a good deal for us.

As for the full year outlook, on slide 5, we are adjusting our revenue, adjusted EBITDA and adjusted free cash flow outlooks.

For sales, our target range is at $6.1 billion to $6.15 billion for 2024.

This sales target is based upon a North America production of approximately 1.5 million units at the midpoint.

As you all know, our sales targets are based upon current customer production, production of certain key platforms, launch schedules, and the macro business environment.

From an EBITDA perspective, we tightened our full year range to $715 million to $745 million, previously $705 million to $755 million.

Our adjusted free cash flow target is $200 million to $220 million, and we anticipate CapEx to be approximately the same as stated before at 4% of sales.

Let me provide you with some additional color on our guidance.

According to third-party estimates, the GM T1XX platform is forecasted at approximately 1.4 million units for the full year, which continues to represent the midpoint of our guidance range.

Our implied quarterly cadence of sales and profitability also reflects the timing of the launches of two of our top programs, some early fourth quarter customer downtime related to supply chain disruptions due to the impact of hurricanes and overall volume seasonality.

Putting all this together, AAM delivered year-over-year performance for the third quarter, while effectively managing critical launches.

On a year-to-date perspective, we continue to deliver year-over-year margin improvement.

We have reduced our outstanding debt by nearly $100 million and continue to win new business.

That said, 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 Lim, so we can start the Q&A.

David?

Thank you, Chris and David.

We have reserved some time to take your 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.

(Operator Instructions) Ryan Brinkman, JPMorgan.

Hi.

Thanks for taking my questions.

Maybe starting with the comment on slide 5, I see that your outlook is predicated upon North America light vehicle production of 15.5 million, so seemingly in keeping with S&P Global Mobility's outlook for 15.48 million.

Just wanted to check if you think there might be some downside risk to that, given that some other suppliers, Lear in particular, assumed below S&P production levels in 4Q, primarily in Europe, but also in North America.

I know you're less exposed to Europe.

There's some caution around some of the Stellantis programs, I think where you might have some exposure.

Just what's the latest that you're seeing in terms of this evolving Detroit 3 inventory correction actions so far here in 4Q?

Yeah.

Good morning, Ryan.

This is Chris.

I'll take that question.

Yes, our macro guidance is predicated upon the number you referred to that you see in our press release.

As you know, as we build our forecast also for the fourth quarter, we do take into consideration current customer releases and production schedules that we are experiencing, either in October or what we project over about the next six to eight weeks.

From our perspective, as you know, a couple of our large programs are going through some critical launches, and those -- continue to monitor those volumes very closely.

So they're generally down and ramping up as they go through these launches.

And also, from a macro perspective, we do see some intermittent downtime, but we try to reflect those in our current schedule estimates and bake that into our current guidance.

So between here and the end of the year, of course, the year is not over, but we are looking at customer schedules and accounting for that impact that we see on the ground, not just the macro assumption.

Okay.

Thanks.

And then, lastly for me, maybe just to follow up on some of your comments about the sale of the commercial vehicle axle operations in India.

Just wanted to check whether that includes the totality of your business in India, if anything remains.

I know you were excited about some of those light commercial vehicle e-Beam awards there.

Presumably, that's sold as well.

Does anything remain?

And then, are there other operations, whether commercial vehicle operations globally -- I know you've got a small business in the UK or Scotland, right?

Anything else globally, maybe even beyond commercial vehicles?

Was this something opportunistic?

Did somebody come to you?

Or were you kind of thinking we're looking for ways to improve our margin profile and financial leverage and there could be other avenues to doing that as well?

Yes.

So, Ryan, this is David.

To address your question, we're only selling two facilities in India of the three manufacturing facilities that we have.

We're selling the Pune and the Chennai facilities.

We're holding on to our facility in Chakan.

The Pune and Chennai facilities were dedicated to commercial vehicle applications.

The Chakan facility does a lot of other work for light vehicle-type systems.

We've just made a strategic decision as an organization to concentrate our efforts more on the light vehicle and passenger car, light truck, and SUV and van side and less on the commercial vehicle space.

Clearly, it helps us from a financial standpoint, improves our financial liquidity, as we talked about, and just allows us to concentrate our resources, both human capital and financial capital, in the light vehicle space, as I mentioned.

We still will maintain a large presence in India as it relates to our business and technical office there.

So we're still committed to the Indian market.

But at the same time, our real focus is going to be on light vehicle systems.

Thank you.

Yeah.

Thanks.

Thanks, Ryan.

John Murphy, Bank of America.

Hi.

Good morning, guys.

I'm going to ask the -- sort of the obvious question about the implied in the fourth quarter of about $142 million in EBITDA at the midpoint.

And Chris, I think you kind of just guided to this in some of the schedules and stuff.

But is the bulk of this the Ram HD changeover and some downtime at GM trucks that's really kind of the sequential pressure point?

Or are there other things that are going on?

Yeah.

No, I think you captured it actually with your comments.

Obviously, North America production overall quarter-to-quarter, as you know, is down.

That impacts our component side of the business.

We do have a couple of large programs in launch as they're kind of ramping up to their full volumes through the back half of this year, and then hopefully, will exit into next year quite strong.

You do have your normal seasonality, as you know, in the fourth quarter.

But also, I will point, the beginning of October started a little slow.

There were some supply chain bumps associated with some of the weather or hurricane events that we experienced here in North America.

That's how I would construct how you think about the fourth quarter.

Okay.

And then, just a follow-up.

That leads to two very different stories between the first three quarters and the fourth quarter on EBITDA margin.

You're looking at something that's about 12.5% for the first three quarters and then about 10% for the fourth quarter.

So, as we think about 2025, and I doubt you want to go there in detail, but as we think about the walk-off point for 2025 numbers, is the first three quarters, at this mid-12% EBITDA margin, much more representative of how we should be thinking about sort of the base to walk off for 2025?

Yes.

So I understand your question.

I will start with we are not providing 2025 guidance here today.

However, as you think about this year into next year, I would not use the fourth quarter as a launching pad.

I think based upon all the different elements and production nuances of each and every quarter we experienced here in 2024, I think you need to look at the whole year in totality.

Great.

That's very helpful.

And just one clarification.

You're just on the Ram HD, right?

The other RAM pickups, you guys have little to no content.

Is that correct?

We do supply some components, but the primary driveline systems, we are on the HD platform, so the 2500 series and higher.

And those inventories are tight.

Okay.

Great.

Thank you.

Thanks, John.

Thanks.

Joe Spak, UBS.

Good morning, everyone.

David, I know we're not going to talk about '25, but I did want to sort of touch on one portion that I know you'll update next quarter, which is -- which relates to sort of the backlog because it doesn't seem like maybe there's very many major awards being awarded right now.

But I know you won some stuff that you highlighted today.

But you did also mention some program extensions.

So I think you normally consider about $100 million to $200 million of attrition.

If we consider both those factors, which is, new awards might be a little bit constrained, but attrition is a little bit lower, from a net basis, do you expect much of a difference from what we've seen over the past few years?

Yes.

Well, Joe, good morning.

Let me just say this, I'll start on the attrition side.

Typically, we attrit somewhere between $100 million and $200 million a year.

This year was a little bit on the higher side.

In the future, we expect it to be a little bit more on the lower side, but within that range.

So that's point number one.

Point number two is, we do not contemplate extensions in our new business backlog.

We consider that to be the base business.

But obviously, that's good for our business overall.

But we do have several customers that are talking to us about contract extensions right now, which is, like I said, positive.

And then, as it relates to new business side of things, as I mentioned before in previous calls, there's an air pocket kind of going through the industry right now as OEMs are relooking at their long-range product plans, re-timing, re-scoping their programs.

AAM is no different than any of the other suppliers.

We'll all be impacted by that.

It's just a matter of when they come forward with new business opportunities.

The most important thing for us is, we've got the majority of our current business locked up.

Now, we're talking about extensions on that business.

We're still winning incremental programs, but to your point, not super large programs, but incremental programs.

But we are seeing new opportunities present themselves that we weren't seeing in the past year on ICE and hybrid programs, in addition to the electrification programs that we were previously quoting on.

So hopefully, that addresses your question.

Yeah.

And maybe one quick follow-up and maybe it's a definitional thing.

I just want to understand -- like I understand you're not baking in sort of program extensions, but if that were to occur, your attrition would go lower, right?

Because when the program ends, is it not in that attrition number?

Correct.

Those programs would extend, your attrition would drag down.

Okay.

We're on the same page.

Okay.

And then, Chris, I think one of the things that investors are starting to sort of think about here with -- post the election is tariffs, obviously, but also steel prices.

Can you just remind us what happened last time with some of the steel actions globally and how that impacted you, if at all, and how you are protected or mitigated on that?

Yes.

So, our commodity business is -- it's really sort of two elements.

We have pieces that are based upon the commodity element or the inputs to steel and other items that we purchase.

As you know, we generally have contractual arrangements with our customers to pass up and down those commodity changes, protects us 80% to 90% of those changes, either a pass-up of additional cost or pass-up of an additional save, depending how those commodities move.

As it relates to some of the other components, whether it's aluminum or steel, we did experience some tariff elements back in the 2017, '18, '19 time frame.

But as you know, part of our philosophy has been to buy and source in the regions for which we produce, which helps mitigate some of the impact of the tariffs specifically, though not completely immune to that.

We are a global supplier, and we do source globally.

But we do try to focus on that regionalization for sourcing.

So that does insulate us from some of that activity.

Where you did see some pressures in terms of like base prices increases because others had tariffs, I think we are generally able to mitigate a lot of that through the scale of our buy and negotiations with our supply base.

Okay.

Thanks for that reminder.

Appreciate it.

Dan Levy, Barclays.

Hi.

Good morning.

Thank you for taking my question.

I wanted to ask about the EBITDA bridge in the third quarter, $28 million of positive performance, inflation.

Maybe you could just unpack some of the benefits there.

I know there's a point here of $13 million of favorable warranty, but still even absent that, a pretty good result.

And then maybe you could just remind us of sort of what is left in terms of inflation unwind benefit

[eventually]?

Yeah, certainly.

I'll take that here, Dan.

This is Chris.

So if you take the $28 million, you're spot on, one of the largest chunks in there was a year-over-year $13 million item related to our warranty, which leaves us still with $15 million of sizable year-over-year performance.

Generally speaking, that performance was split between both of our business units, meaning the driveline and the metal forming groups.

We saw a very concentrated effort to continue to have -- and we talked about this, probably, each of the last four quarters -- continuing to heavily focus and double down on productivity and performance enhancements in our metal form group.

You're seeing those dollars flow through, similar with the driveline as well.

And it was really across the spectrum of all their cost elements.

And I think this -- hopefully, that addresses your question for the bridge.

Yes.

And then, just in terms of sort of any remaining low-hanging fruit on perhaps whether it's metal forming underperformance or other inflationary items that you're recovering on?

Yeah.

So let's -- I'll do that in reverse.

In terms of the inflationary items, we mentioned, I think it was last quarter's call, that we generally have most of our negotiations with our customers done.

So from an inflationary either recovery or incurrence, I think we're pretty much set for this year.

We're in a pretty good spot.

You may recall last year, a lot of that was backweighted in the fourth quarter, some of those recoveries.

We've concluded that sort of here midyear, and I think we're in a really good position as a company from that perspective.

As it relates to performance, our expectation, we talked about this a year ago, is to continue to drive performance improvements, especially on our metal forming operations.

We've seen sequential improvements there, subject to volume puts and takes, but seen sequential improvements in metal forming.

Our view -- our belief is, we continue to have performance enhancements to drive that business into further productivity and productivity over the next couple of quarters into next year as well.

So we expect continued performance in that group.

Great.

Thank you.

As a follow-up, with this environment and I think the expectation by some that the election outcome could drive an extended ICE tail, maybe you could give us a sense of what that means for the resource outlays at American Axle.

You had talked a little bit to some reduction in R&D.

What does this say about the CapEx trends, et cetera?

Just anything on the resource outline would be helpful.

Thank you.

Yeah.

Dan, I would think about it this way, especially as programs could potentially be extended or additional vehicle platforms may be launching on ICE or hybrid that, that plays very well to us.

As you know, we have a strong installed capability and capacity inside of our factories that will allow us then to minimize capital investment to support those programs or extensions.

From an R&D perspective, as I mentioned in some of my prepared comments, we would expect some of that R&D spend to moderate based upon all in on electrification development to a more balanced portfolio, of which, we have a very strong footing in both the ICE and hybrid applications here today.

So, we would see some additional benefits on the R&D side as well.

So punch line, benefit from an installed capacity that can support a lot of capability and production on ICE and hybrid today without a lot of new investment dollars to drive that further and then also some benefits on the R&D side.

Great.

Thank you.

That's helpful.

Tom Narayan, RBC.

Hi.

Thanks for taking the questions.

Two follow-ups to stuff that's already been asked.

The first one, I just want to confirm, if I'm looking at that Q4 implied versus Q3, except for the hurricane -- I just wanted to be sure -- so all these items, the platforms, the production cuts that you already knew about, was this already known that the dynamic that Q4 would be kind of more depressed versus Q3, I guess, except the hurricane?

Or was there something new that's kind of changed when you gave -- as opposed to when you gave your guidance in Q2?

Yeah.

Tom, this is Chris.

Yes.

What I would tell you is clearly a couple of pieces to that.

Certainly, there's been some puts and takes with the launches on our two top programs, that being the Ram and the GM midsize crossover vehicle.

As they've gone through launches, some of those have kind of counterbalanced between third and fourth quarter.

And we've seen some choppiness a little bit in terms of production schedules that we didn't experience or expect 90 days ago.

We've seen that inside of the fourth quarter as well for a little bit, as well as some -- what appears to be maybe some inventory management from the OEMs.

But this is a pretty dynamic environment from a production standpoint.

It's not as crazy, I would say, as it was a year or two ago, but there's still a fair amount of variability here that we continue to navigate and learn on a weekly basis at some level.

But I think we've been doing a pretty good job managing our way through it.

Okay.

And then, a follow-up on the tariff question.

Maybe you could remind us what happened in 2018, 2019 on an OEM exposure level.

On one level, you're more exposed to US.

D3 should be a benefit potentially.

But then, you had called out today winning business from a European luxury OEM and a Chinese OEM.

So to what -- maybe you can remind us how that affected based on OEM exposure in the last round of this.

And also, how this impacts your strategy to conquest OEM business?

Does it make you favor more domestic OEM targets?

Or -- yeah, those are the questions.

Tom, this is David Dauch.

As Chris said earlier in a previous response, our policy is to buy and build local in the regions that we serve.

We're a global company, so we do have some business being moved around the world.

But most of the time, we have it in the local region.

Therefore, we're not as impacted by the tariff implications, especially for a company our size.

That was also reflective previously back when other tariffs were put into place.

Yeah, we had some impact, but not to the extent that you would expect a company our size to encounter.

And again, a lot of that goes back to our policy of buy and build local.

So we're not showing a preference towards any OEM.

What we're doing is managing risk, being selective about what programs, what customers, what products we're going after to make sure that we can get the proper and adequate financial returns on the business.

At the same time, we're managing our overall profitable growth and trying to make sure that we can partner with those that we think are going to be able to not only identify the growth, but ultimately be able to deliver and sustain the growth from an OEM standpoint.

And Tom, this is Chris.

One other consideration you mentioned, for example, our China Axle win that we talked about here today.

We've announced a few other wins in that region in the past couple of quarters.

Generally speaking, that product is for the local market.

So it's not exported out.

So it's really not a tariff issue from our end OEM customer standpoint.

Got it.

Okay.

Thank you.

James Picariello, BNP.

Hi, guys.

I've got a quick one on FX and commodities.

And then, because I'm so creative, I also have a question on tariffs.

FX, commodities were a positive contributor to EBITDA in the quarter.

Was this driven by the peso primarily?

And just how are you positioned for the fourth quarter?

Should this stay positive for you?

Yeah.

So in terms of -- James, this is Chris.

In terms of the third quarter, we were favorable profitability-wise on commodities and FX, and that was split relatively equal.

Most of that did relate to the peso from an FX standpoint.

Look, as you know, the peso has been -- it's moved around quite a bit this year, right?

It's been in its lows in the 16s, again in the 17s, now it's run up and it's kind of seeding back a little bit.

Generally speaking, if you think about our exposure on the peso, we buy MXN5 billion to MXN6 billion -- or consume MXN5 billion to MXN6 billion a year.

And sort of a rolling 12-month average, we're already 70% to 80% hedged on those from previous hedges.

You get a little bit of a leeway or movement with the spot.

So could you get a little bit of continued strength if it stays at MXN20 or so from an FX rate?

Possibly.

But generally, the closer you get to the current day, the more we have already hedged and that's closed out.

Got it.

That's helpful.

And then, just on your Mexico footprint and the tariff potential we'll all have to navigate from here, if certain OEMs were to prioritize their US capacity to max out full frame production, right, depending on the tariff scenario, how should we consider your driveline capacity optionality and your North America footprint?

If the industry does tilt toward running US plants to max utilization, do you guys have a similar lever to pull or not necessarily?

Yeah, James.

This is David.

Clearly, we're trying to drive utilization of our factories to be 85% or greater at all times just from an efficiency and performance standpoint.

We've built in flexibility into our North American production capability between the US and Mexico.

That production capability has flexibility to a certain extent.

But at the same time, if incremental investments are required in the US, then we'll evaluate that.

But we're clearly going to try to leverage the installed capacity that we have to minimize CapEx going forward.

But we'll do what is necessary in order to protect our customers and their programs.

Yeah.

If I could just squeeze one quick one.

Regarding the divestitures, did you share the EBITDA impact that's going out with the two India plants?

Yes, James.

This is Chris.

So on an LTM basis, for the last 12 months, this will be as of the second quarter, but sales were a little over $150 million. LTM

EBITDA is about $10 million.

Thanks.

This concludes our question-and-answer session.

I would like to turn the conference back over to David Lim for any closing remarks.

Great.

Thank you, Betsy, and we thank all of you who have participated on this call and appreciate your interest in AAM.

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.

You may now disconnect.