American Axle & Manufacturing Holdings Inc (AXL) 2020 Q2 法說會逐字稿

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  • Operator

  • Good morning. My name is Elisa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Second Quarter 2020 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. Jason Parsons, Director of Investor Relations. Please go ahead, Mr. Parsons.

  • Jason P. Parsons - Director of IR

  • Thank you, Elisa, 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 2020 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.aam.com and to 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 10144277. This replay will be available beginning at 1:00 p.m. today to 11:59 p.m. Eastern Time on August 7.

  • Before we begin, 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 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.

  • David Charles Dauch - Chairman & CEO

  • Thank you, Jason, and good morning, everyone. Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.

  • To begin my comments today, I'll provide some remarks on AAM's second quarter financial results, which were adversely impacted by the extended global production shutdowns resulting from the COVID-19 pandemic. AAM sales were $515 million for the second quarter of 2020, as compared to $1.7 billion in the second quarter of 2019.

  • The decrease in our revenues on a year-over-year basis reflects primarily 2 factors. The first relates to the global production shutdowns and reduction in consumer demand due to the COVID-19 pandemic. We estimate that this had an unfavorable impact of approximately $947 million in the second quarter of 2020.

  • In addition, our second quarter 2019 sales included $171 million related to our U.S. iron casting operations. This business was sold in December of 2019 and is therefore no longer part of our sales base in 2020.

  • Adjusted EBITDA for the second quarter of 2020 was a loss of $52.1 million, this compared to an adjusted EBITDA of $266 million in the second quarter of 2019. Our second quarter adjusted EBITDA was down significantly on a year-over-year basis, primarily as a result of the unfavorable impact associated with COVID-19 estimated at $299 million.

  • In addition, our second quarter 2019 adjusted EBITDA included $17 million related to our U.S. iron casting operations. On the upside, we realized the benefit of the cost reduction actions that we initiated in response to much lower expected sales due to the pandemic as well as lower launch costs.

  • Adjusted loss per share for the second quarter of 2020 was $1.79 as compared to an adjusted earnings per share of $0.55 in the second quarter of 2019. From a cash flow perspective, adjusted free cash flow was a use of $161.8 million. This was expected -- an expected result given the production shutdowns that occurred in the first half of 2020.

  • While the second quarter financial results reflect some of the most difficult challenges we have faced at AAM, I believe our second quarter performance also highlighted the resiliency of our company, the flexibility of our operations and our ability to quickly adjust our cost structure.

  • Despite all the challenges we faced in the second quarter of 2020, we also accomplished several important highlights in the quarter. AAM was named GM supplier of the year for the fourth year in a row, a great accomplishment and special recognition from our largest customer. During the quarter, we also issued new unsecured debt at a favorable interest rate in order to refinance our most significant near-term maturity and strengthen our debt maturity profile. And finally, we launched our first eDrive program in China at our Liuzhou AAM joint venture supporting the new Baojun E300 Plus program.

  • While this was an unprecedented quarter for the global economy, the industry and AAM, we took this as an opportunity to adjust our operations, structurally reduce our costs and strengthen our financial profile. Most importantly, we have taken the necessary steps and actions to adjust our global operating procedures to further promote the health and safety of our 20,000 associates worldwide in the midst of the COVID-19 pandemic.

  • With the stabilization of our China operations and the ramp-up of our European and North American operations, we are optimistic about our ability to generate operating profit and positive free cash flow in this new market environment. While things are not back to normal, our global operating teams have done an outstanding job, adjusting and adapting to change while staying focused and disciplined to delivering power principles that guide AAM associates each and every day.

  • While we have seen positive developments recently, there is still a significant amount of uncertainty that exists as it relates to the COVID-19 pandemic and its continued impact on consumer demand and light vehicle production levels. As a result, we are refraining from updating our previously withdrawn 2020 financial outlook.

  • As we continue to ramp up production and adjust our business to the new market demand in the second half of 2020, we are focused on the health and safety of our associates, supporting customer production schedules and launches, utilizing our operational excellence to generate positive financial performance and investing in our future.

  • While we navigate through the numerous challenges this year has presented, we are also focused on positioning AAM for a successful future beyond 2020 and a light vehicle production environment that we expect to be lower than what we have experienced in the last several years.

  • We are taking action to right size and realign this business to be financially successful in a 14 million-unit SAAR environment. As the benefit of our restructuring actions begin to take hold, we are confident in our earnings power and free cash flow generation potential.

  • During these unprecedented times, we are also dealing with significant and disruptive change. At AAM, we are dedicated to not just getting back to normal, but to come out of these challenging times as a stronger, leaner company, positioned for profitable growth and financial success.

  • Before I hand it over to Chris, let me reiterate some key takeaways. First, despite the unanticipated severe drop in production volumes, AAM performed well in the first half of the year and made the necessary adjustments to the business to reduce costs and conserve cash.

  • Second, we see the potential for a solid second half of the year and expect our operating performance to drive profit levels and free cash flow generation.

  • Third, AAM is restructuring the business to drive our earnings power and free cash flow generation at a 14 million-unit SAAR level, and we are confident in our ability to achieve this.

  • Fourth, our recent financial transactions have provided AAM with increased financial flexibility and lengthening our debt maturity profile, giving us an even longer financial runway to operate and work with.

  • And lastly, despite all the near-term challenges, we continue to be focused on profitably growing our business and addressing the key trends within the automotive industry, namely electrification.

  • This concludes my prepared comments for this morning. I thank everyone for your time and attention today and for your continued interest in AAM. Now let me turn the call over to Chris May. Chris?

  • Christopher John May - VP & CFO

  • Thank you, David, and good morning, everyone. I will cover the financial details of our second quarter of 2020 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 start with sales.

  • Sales in the second quarter of 2020 were $515 million compared to $1.7 billion in the second quarter of 2019. Slide 5 shows a walk down of second quarter 2019 sales to second quarter 2020 sales. First, we stepped down our second quarter 2019 sales by $171 million to reflect the sale of the U.S. casting business unit that was completed in December of 2019.

  • We estimate that the impact of COVID-19-related production shutdowns and reductions across the globe in the second quarter of 2020 was $947 million. These reductions impacted us at nearly every manufacturing facility across our global footprint.

  • Other volume and mix was down $40 million year-over-year, and we also continue to see the trend of lower year-over-year middle market pass-through pricing in foreign currency in the second quarter of 2020, resulting in a decrease in sales of $31 million.

  • Now let's move on to profitability. Adjusted EBITDA was a loss of $52 million in the second quarter of 2020. This compares to earnings of $266 million in the second quarter of 2019. You can see a year-over-year walk down of adjusted EBITDA on Slide 6.

  • The first step in our EBITDA walk, similar to sales, is to back out the second quarter 2019 U.S. casting EBITDA to provide a comparable figure after the sale of the U.S. casting business. The estimated impact of COVID-19-related production shutdowns on adjusted EBITDA was $299 million, representing a decremental margin of approximately 32%.

  • As we discussed on our last earnings call, we expected the decremental margins related to the COVID-19 shutdown to be slightly higher in the second quarter than the first quarter as there was a greater impact on our North American operations, especially the full-size truck programs we support.

  • Excluding the impact of COVID-19, we were favorably impacted by volume and mix -- unfavorably impacted by volume and mix by $19 million, and we experienced $7 million of year-over-year pricing. We spent $6 million on COVID-19 inefficiency and start-up costs, which represent cost for PPE, additional cleaning and disinfecting and other costs related to operating adjustments we made in response to the COVID-19 shutdown and ramp-up.

  • As David mentioned, the team has been very focused on cost reductions. You can see the impact of these actions in $22 million in year-over-year savings. This includes actions such as temporary wage reductions, permanent headcount adjustments and reduced discretionary spending. This puts us in line to meet our $60 million cost reduction saving target that we expect to achieve this year.

  • And we also saw continued improvement in lower launch costs and performance of about $6 million in the second quarter of 2020, compared to 2019. All things considered, the AAM team did a good job flexing our variable cost structure, reducing discretionary spending and running the operations effectively in a very uncertain and volatile production environment.

  • Let's take a look at SG&A expense. SG&A including R&D in the second quarter of 2020 was $73.8 million. This compares to $91.3 million in the second quarter of 2019. R&D spending for the second quarter of 2020 was $32 million compared to $33 million in the second quarter of 2019. The reduction in SG&A reflects a portion of our cost reduction activities and excluding R&D, reflects a reduction of nearly 28%. R&D was essentially flat as we continue to invest in key advanced technology initiatives and our upcoming electrification launches.

  • Now let me cover interest and taxes. Net interest expense in the second quarter of 2020 was approximately $52 million as compared to $56 million in the second quarter of 2019. Income tax was a benefit of $43.9 million in the second quarter of 2020 as compared to expense of $6 million in the second quarter of 2019.

  • During the quarter, we began to realize a valuation allowance against our deferred tax assets related to U.S. interest expense carryforwards. As a result, we experienced a lower tax benefit in the second quarter. Going forward, we expect our effective income tax rate for book purposes to be closer to 25%. We do not expect this to impact our projected cash tax payments in the foreseeable future.

  • Taking all of these sales and cost drivers into account, GAAP net loss was $213.2 million or $1.88 per share in the second quarter of 2020, compared to net income of $52.5 million or $0.45 per share in the second quarter of 2019. Adjusted loss per share was $1.79 per share in the second quarter of 2020, compared to earnings of $0.55 per share in the second quarter of 2019.

  • Let's now move on to cash flow and the balance sheet. We define free cash flow to be net cash provided by operating activities less capital expenditures, net of proceeds received from the sale of property, plant and equipment. AAM defines adjusted free cash flow to be free cash flow, excluding impact of cash payments for restructuring and acquisition-related costs.

  • Net cash used in operating activities in the second quarter of 2020 was $142.5 million. Capital spending, net of proceeds from the sale of property, plant and equipment was $35 million in the second quarter of 2020. This is a year-over-year reduction of nearly 70%.

  • Cash payments for restructuring and acquisition-related costs for the second quarter of 2020 were $15.7 million. Reflecting these activities, AAM's adjusted free cash flow in the second quarter of 2020 was a use of $162 million. This cash flow use reflects the impact of our operations being shut down for the better part of the quarter.

  • The net working capital impact for the quarter was relatively neutral as the working capital benefits in the first half of the second quarter were used during the ramp-up of our operations in the back half of the quarter. Also, like our operating and SG&A cost controls, we moved quickly on targeted capital spending reductions to help mitigate the impact in the second quarter.

  • We also took action in the second quarter to strengthen our financial profile. At the beginning of the quarter, we amended our existing credit facility to revise financial maintenance covenants to provide additional flexibility for AAM as we adjust our business for the estimated impact of COVID-19 on current and future global light vehicle production.

  • Later in the quarter, we took advantage of favorable market conditions to issue an 8-year unsecured notes at 6.875% using these proceeds to refinance our senior notes due in 2022. After payment of the 2022 notes in mid-July, we do not have any significant debt maturities until 2024. We also paid down a portion of the revolver that were due during the quarter.

  • Liquidity at the end of June was over $1.6 billion, consisting of available cash and borrowing capacity on AAM's global facilities. When factoring in the payment we made in July to redeem the 2022 notes, we would still have nearly $1.3 billion of liquidity at June 30.

  • While we are not providing formal guidance today, we thought it was important to share with you trends we are seeing. As a reference, we included our breakeven scenario from our May 8 earnings call in your slide deck appendix. That scenario is based on an assumed reduction of AAM sales by 25% to 30% as compared to what we expected for the full year at the beginning of this year.

  • In relation to the sales midpoint of our breakeven scenario, we are seeing trends based on third-party estimates, customer schedules and other inputs. We see production volumes in North America are better. Europe, very similar. China, better. And India and Brazil, we see well below that estimate. In addition, we are confident in our ability to deliver both the $60 million of cost reduction savings and our previously disclosed CapEx figure at $250 million for the full year of 2020.

  • Lastly, we initially estimated approximately $40 million of COVID-19 start-up and supplier inefficiency costs. We are now estimating those expenses in the $30 million to $40 million range. Uncertainty in demand, production schedules and the supply chain remain and can impact any of these assumptions and trends.

  • Despite all the uncertainty that exists, we are cautiously optimistic on the second half of 2020 based on the demand indicators I just covered for the key products we support. We see our customers prioritizing full-size truck, SUV and crossover vehicle production. Low dealer inventory levels continue to suggest pent-up demand that supports current production levels, and we take that as a positive as well.

  • Ultimately, end consumers continue to demand the vehicles, which we supply key systems and components, and that is a good thing for AAM. And as we manage the business for today, we are also setting up well for future profitable growth. For example, we continue to invest in our important electrification initiatives, and we launched our first China eDrive program during the quarter.

  • Investing in the key areas of profitable growth for AAM is a priority and will continue to be. We're moving towards actions to set up AAM for an even stronger future. We are excited for the potential of our future earnings capability and free cash flow generation. I thank you for your time and participation on the call today. I'm going to turn it back over to Jason so we can start the Q&A. Jason?

  • Jason P. Parsons - Director of IR

  • Thank you, Chris and David. We have reserved some time to take questions. (Operator Instructions) So at this time, please feel free to proceed with any questions you may have.

  • Operator

  • (Operator Instructions) The first question today comes from John Murphy of Bank of America.

  • Aileen Elizabeth Smith - Analyst

  • This is Aileen Smith on for John. First question on the balance sheet, almost $900 million in cash appears pretty sufficient to weather through the current crisis. As we think about the back half of the year and cash burn reversing as volume comes back and then look forward into next year, presuming things continue to recover and cash flow improves, can you remind us what you feel comfortable with in terms of a minimum cash level above which you would look to direct capital towards delevering?

  • Christopher John May - VP & CFO

  • Sure. This is Chris May. First, I would remind you that the balance at the end of June also contains the proceeds from the note issuance that we had in the back half of June. And $350 million of that was deployed in July to redeem those notes.

  • We would -- obviously, in a breakeven scenario, the back half would imply a positive free cash flow generation. We would clear up the remaining items in terms of priority, remaining open items in terms of our revolver. And then as we had previously communicated, obviously, funding our organic growth and our R&D initiatives is a top priority for us. And reducing and continuing to reduce our gross debt leverage on the company.

  • Aileen Elizabeth Smith - Analyst

  • Okay. That's helpful. And then a bit more of a longer-term strategic question. There's been a lot of hype more recently around electrification, particularly for light and commercial trucks. However, among some of the incumbent automakers, there also appears to be a push strategically to emphasize or actually even introduce new ICE body-on-frame trucks in their product portfolios.

  • Do you see any burgeoning opportunity for the industry and for Axle from expansion of this high-margin segment? And any discussion or bidding on future programs that you may be involved in?

  • David Charles Dauch - Chairman & CEO

  • This is David Dauch speaking. First of all, electrification is here. It's only going to grow as it relates to this penetration in the market. You understand the various segments. You're talking specifically to the pickup truck side of things. There's obviously a number of new entrants that are coming into that market with their lifestyle and leisure type vehicles.

  • I also expect that Detroit 3 will do what's required to protect their market share on the truck side of things, whether it's IC engine based or electrification based. As you know, we're a leading provider of driveline systems for the IC engine base.

  • We've also been investing heavily in electrification since the 2010 period of time. We've won 3 contracts now, of which, we just launched 1 in China here recently. And we continue to position ourselves to provide product offerings for all the vehicle segments that support the different regions of the world.

  • So we are actively working on truck electrification activities. We're working on crossover vehicle electrification activities as well as front-wheel drive passenger car. We've been successful in the market today. We expect more opportunities to present themselves. We'll win our fair share.

  • At the same time, the OEMs are going to have to make some decisions how much of the work will they do themselves internally. But at the same time, we feel very comfortable about competing in regards to the marketplace and what we need to do to win our fair share of the business.

  • At the same time, I still am a strong believer that the IC engine will be around. We're continuing to grow our business on the IC engine side. And I think with this COVID activity, it's going to force both the OEMs as well as the consumers to assess the value proposition associated with the different technologies.

  • But I still think you're going to continue to see investments by the OEMs especially in the ACES area, the autonomous, connected, electric and shared. It just may be a little bit delayed in some cases by select OEMs. In other cases, they're moving forward and protecting their plants. So hopefully, that addressed your question.

  • Aileen Elizabeth Smith - Analyst

  • Yes. Yes, that's very helpful commentary.

  • Operator

  • The next question comes from Rod Lache of Wolfe Research.

  • Rod Avraham Lache - MD & Senior Analyst

  • There's a lot of puts and takes as you look out to Q3 and Q4 between the strength in trucks that you're seeing and some weakness in certain passenger cars and crossovers. The Thailand business getting wound down. Just a lot of stuff. There's some in-sourcing.

  • I was hoping you might just talk a little bit more about the outlook. And specifically, how that affects the incremental margins that we'll see, which is like a blend of all of these things moving around. Maybe relative to the 32% that you saw here in the quarter, the 33% in your scenario, do you think it gets better? And then how do we think about the incrementals as business recovers hopefully next year?

  • Christopher John May - VP & CFO

  • Rod, this is Chris. I think in terms of thinking about the back half of the year, maybe a couple of perspectives, first, maybe on sales, which would probably tie in with some of the commentary you made as part of your question. And then some thoughts on profitability associated with the movement of some of these pieces.

  • Certainly from a sales perspective, if we think sort of pre-COVID type of activity, you did mention the Thailand operations for us did cease at the end of the second quarter. That's approximately a $20 million per quarter sales headwind, if you will.

  • And then the other large piece is we're converting to the new General Motors SUV full-size truck, which, as we disclosed previously in the year, that would be -- from a sales dollar perspective, has a different architecture, which impacts us related to the items that we talked about coming into the year. Those are probably your main from a sales perspective in terms of second half versus sort of a normal run rate.

  • From an EBITDA perspective, obviously, we would generate additional profitability on the net sales change for the company. And you saw our decrementals in the first quarter sort of in that 28% range. You saw the second quarter sort of in the 32%. We saw a little bit higher when it impacted us on the GM strike impact in the back half of 2019.

  • But from a planning perspective, we're saying it's sort of plus or minus -- just holistically on core sales movement, kind of plus or minus right around that 30%. Now that said, we'll continue our restructuring activities into the back half of the year, where you saw us perform at over $20 million a quarter of that $60 million run rate here in the second quarter. I would expect that to continue at that pace into the back half of the year.

  • I do expect to have some costs associated with COVID-19, and we talked about that between $30 million to $40 million for the full year. You saw its impact at $6 million in the second quarter, as our operations sort of came online in sort of the back half of that quarter. But a little bit maybe better than originally we thought 90 days ago. And obviously, balancing our R&D and SG&A in confines of all the cost structure activity. So hopefully, that provides a little context and color in terms of your question.

  • Rod Avraham Lache - MD & Senior Analyst

  • Yes. That's very helpful. And just secondly, it looks like you're not really significantly pulling back on R&D, but you are on the SG&A side. Are there any kind of long-term consequences that you're anticipating from the posture that you're taking just relative to spending?

  • David Charles Dauch - Chairman & CEO

  • Rod, this is David. We do not see any long-term consequences with some of the restructuring actions that we're taking. We're fully dedicated and committed to supporting continued growth in the electrification space and investing in that product portfolio.

  • At the same time, you know on our conventional products, we had a complete portfolio already. So we feel very good about where we are. We're just reprioritizing and redirecting. And at the same time, cutting costs where appropriate, but don't think it will have any lasting effect on us going forward.

  • Operator

  • Your next question comes from Ryan Brinkman with JPMorgan.

  • Ryan J. Brinkman - Senior Equity Research Analyst

  • Firstly, just how should we think about decremental margin trending over the remainder of the year relative to, I think, 27% in 2Q, should it continue to moderate, just given the outlook for less of your industry production declines? And as your restructuring actions are more fully felt? Or how should we think about that?

  • Christopher John May - VP & CFO

  • Yes, Ryan, this is Chris. Looking at our core kind of movement of our product, we're sort of in that plus or minus right around that 30% range. Obviously, we continue to drive some of our restructuring activity that should benefit some of that a little bit as well as some offset from some of the COVID costs that we articulated in some of my prepared remarks.

  • Ryan J. Brinkman - Senior Equity Research Analyst

  • Okay. Great. And then I saw that announcement relative to the electronic -- the electric drive unit for Baojun. Are you able to provide an update with regard to your conversations with OEMs around electrification generally? Do you think that coronavirus speeds up, slows down or has no impact on electrification?

  • I think there's some thought that disruption from the virus generally speeds up any previously existing transformational trends, such as we've seen in retail or other industries. But just curious how you're thinking about balancing that against, I don't know if automakers may look to delay launches, to try to conserve capital or now lower oil and gas prices, et cetera.

  • David Charles Dauch - Chairman & CEO

  • Yes Ryan, this is David. Clearly, there's an interest by the consumer to support alternate propulsion systems, mainly electrification, but also hybrids. As I said before, we just want to be agnostic to the market, make sure that we have product offerings from an IC engine standpoint, a hybrid standpoint and electrification standpoint.

  • As it relates to the OEMs themselves, I think it's going to vary by OEM. Some are clearly cutting back on some of their electrification spending, while others are maintaining or actually even maybe putting additional investments into that. So I think it's going to vary.

  • I think a lot of it will be dependent upon government regulations in each of the various countries or regions that we operate in and also the incentive spending and the infrastructure that gets put in place to support it. Regardless of what the OEM is doing and the consumer receptivity to it, all we want to do is make sure that we've got product offerings to support the market should it shift further or stronger in the electrification space.

  • Operator

  • The next question is from Brian Johnson of Barclays.

  • Jason Flynn Stuhldreher - Research Analyst

  • This is Jason Stuhldreher on for Brian. I really just kind of had 1 question. If we could revisit the downside protection playbook that you introduced last quarter, trying to address a 14 million SAAR, which I know is a long way down, but it sounds like a North America OE is also sort of calibrating inventories to at this point.

  • I just wanted to try to understand the level of confidence of being able to get the organization not only profitable enough versus historical metrics at that level, but also profitable enough, EBITDA generative enough and cash flow generative enough to support the debt load. And if there would need to be a debt restructuring or recapitalization of some sort at a 14 million SAAR level?

  • David Charles Dauch - Chairman & CEO

  • This is David Dauch speaking. We're highly confident in our ability to restructure our business to that 14 million-unit SAAR level. We want volume to be our friend in the future. So we're taking the necessary actions that we need to in order to realign our business to the new market demand.

  • We've been very clear in regards to what our downside protection playbook is and the elements that make that up. We've essentially exercised every one of the elements that we outlined in the presentation to you all. Obviously, massive reductions in regards to headcount, both salaried and hourly. We've also worked in regards to plant loading and plant consolidation where appropriate. We'll continue to assess those matters as we see how the market ultimately settles out.

  • Clearly, the global volumes have dropped from 90 million to approximately 70 million. The US SAAR has dropped from over 17 million down to a little over 12 million this year. And then again, on the second half of the year, we expect it to be at 14 million-plus, that's why we aligned ourselves up at 14 million.

  • If we need to make further adjustments to our cost structure, then we'll do that. But it's all with the effort of -- again, focused on generating that profitable growth and supporting that operating and financial performance, that will allow us to service the debt going forward.

  • As you all know, we have been a large cash -- positive free cash flow generator. We're using that to support our debt reduction and strengthen our overall balance sheet and financial performance. And I don't see us changing any of that going forward.

  • Clearly, the only thing that we've got to watch and monitor is just sales and then making sure that we can adjust our business accordingly. But I don't see us with any recapitalization at this point in time in our plans. Chris, unless you have any other comments?

  • Christopher John May - VP & CFO

  • No. Jason, as you framed it and you heard David's comments, aligning a very profitable organization at that level of the SAAR/production level, reducing CapEx will allow us to generate meaningful cash flow and service our debt as well as all the needs of the organization at this time.

  • Jason Flynn Stuhldreher - Research Analyst

  • And then maybe just (technical difficulty) there, very helpful color. But is there any sort of minimum EBITDA or free cash flow target that investors could think about in a 14 million SAAR level?

  • Christopher John May - VP & CFO

  • No, I mean, obviously, we continue to perform at top-tier EBITDA margin profile, I would expect that to continue at that level for the company, and we'll continue to generate meaningful cash flow as a company.

  • David Charles Dauch - Chairman & CEO

  • And we're not giving any guidance for the balance of this year. But you understand how we performed in the past. If volume is there, and with our cost structure being adjusted, it should set us up to perform very well in the future.

  • Christopher John May - VP & CFO

  • Yes. And keep in mind, we've articulated in terms of some of our CapEx initiatives, reducing that to 5% or below at these type of levels in the foreseeable future. So that all plays very well to our cash flow profile.

  • Operator

  • Your next question is from Dan Levy of Crédit Suisse.

  • Dan Meir Levy - Director & Senior Equity Research Analyst

  • I wanted to just start by asking [on a] GMT one. I know -- I won't ask to what volume level you're assuming for the year or for the balance of the year. But could you just give us a sense of what type of contribution margin we might expect on the GM business given they're going all out they're trying to squeeze out every unit they can?

  • Should we expect similar contribution margin to what you've done in the high 20% or low 30% range? And I guess I'd ask that question specific to 4Q, when we're going to see a very large year-on-year increase in Q1, I think, it's something like 30% plus. So just any commentary on the contribution margin there?

  • Christopher John May - VP & CFO

  • Yes. So Dan, you heard me articulate on some of the previous questions, sort of corporate blend around that 30% on these movements. You saw that a little higher, especially if you think back to our GM work stoppage back in the fall last year, where you saw a little bit more overweight of the truck on that standpoint, but that's specific to the truck.

  • But now you're seeing -- and typically, we have a little bit higher contribution margin on that profile for our full-size truck platforms. But when you look at it in the entirety of the business, you have to blend it out with everything, and especially in light of these circumstances, [while] you're moving a large population of sales up and down, just not the truck.

  • Dan Meir Levy - Director & Senior Equity Research Analyst

  • Okay. And in the fourth quarter, when it -- an outsized amount of production that doesn't -- I mean that profile sounds like that's in line. Is that correct?

  • Christopher John May - VP & CFO

  • Yes, I mean, correct.

  • Dan Meir Levy - Director & Senior Equity Research Analyst

  • Okay. Second, just a question on electrification. It's a -- your -- the news on the Baojun E300 (inaudible), you've announced it in the past. But could you just give us a sense of exactly what content you're doing in-house on that? What you might be outsourcing being it motors or power electronics?

  • And just what's the broader set of discussions or quoting that you're having with customers? And what are they asking of you in EV? Is it for a full eDrive solution? Is it for components? Just wondering if -- how that might be shifting, if at all?

  • David Charles Dauch - Chairman & CEO

  • Yes. This is David Dauch speaking. Our strategy from electrification standpoint is to address the customer needs that range anywhere from a component state, so think gears and shafts to subassembly states that include differentials to gearboxes, to full integrated 3-in-1 type solutions that involve motors and inverters as well.

  • From a product portfolio standpoint, as we've identified in the past, we've got all the mechanical side of things as far as the gears, the shafts, the differentials, the gearbox capability. We have all the controls and software capability. We've got the integration capabilities.

  • What we lack right now internally within AAM, but we have partnerships that support us, are motors and inverters. And we're not sitting still in those areas, but at the same time, we're leveraging the relationships either guided by the OEM for partners for us to work with or partners that we've developed independently on our own.

  • We're continuing to evaluate what else we need to do in those arenas. At the same time, we have a number of innovation initiatives that we're working on ourselves internally to further promote and optimize the performance of those 3-in-1 type solutions that the OEMs are looking for.

  • When it comes to the OEMs themselves and the regions, I'd say the folks in China tend to ask for more complete solutions -- from gearboxes to complete solutions, including integration of the vehicle. When it comes to the western OEMs, they tend to do the integration themselves. And then it's a variance between the OEMs based on some are looking to do the 3-in-1 solutions themselves, where others are looking for complete solutions. So we just need to manage it at that.

  • But we've got a full depth and breadth of capability from a portfolio standpoint, from components to subassembly to final assembly with the engineering aptitude to support the integration and controls of software that's vital to supporting electrification and then back that up with our operational excellence and performance, we feel we're very well positioned to capitalize in the marketplace.

  • Dan Meir Levy - Director & Senior Equity Research Analyst

  • Okay. That's really helpful color. If I could just get a follow-up on that. Is that -- in terms of the OEMs looking at it, it sounds like they're looking at a broad set of solutions, and it depends on the region and which customer you're talking to, but in-sourcing versus outsourcing, is that still no shift there? I mean you'll have some that are looking to do more in-house, some that are looking to outsource more, no broad shift in the amount looking to outsource or the amount looking to in-source?

  • David Charles Dauch - Chairman & CEO

  • So we haven't seen any change in their behavior rom what we were seeing before. So it's going to be a mixed bag in regards of some OEMs will outsource, and some are contemplating and have made decisions to in-source. But no change because of COVID as a result of that at this time.

  • Operator

  • Your next question comes from Armintas Sinkevicius of Morgan Stanley.

  • Armintas Sinkevicius - Associate

  • Just trying to think through second quarter. Obviously, production was shut down for several months here. But as production started to pick up, the OEMs have emphasized trucks, which is beneficial to you. Just trying to think through what sort of a lift you got in the second quarter and how we should think about that potentially normalizing into the third as they expand their production into other product sets?

  • David Charles Dauch - Chairman & CEO

  • Yes, I mean, this is David. I'll talk first, and Chris can comment on the other side of things. As you said, first of all, we focused on the health and safety of our associates as they came back to work. They received our powering up safety protocols very well. We haven't had any major disruption at any of our facilities. So that's been positive.

  • We've been working in close concert with the OEMs in regards to their production schedules and their launches. Clearly, they prioritize trucks, SUVs and crossovers as their priorities. That positions -- that sits well for us based on how we're positioned. They're focused on their profit pools, which will also help drive our profit pools going forward.

  • We haven't -- the balance of the business, that being crossover vehicles or commercial vehicle. We're just supporting the demand that's out there, which, as Chris covered in his earlier comments, is lower than where we were operating before, and we'll see how that recovers.

  • But overall, we feel very good about the customer schedules. We understand there's a pent-up demand for our product. When you look at the average age of the vehicle, approaching 12 years is going to continue to emphasize that pent-up demand. Obviously, GM is still looking to rebuild inventory from the strike that they had earlier, and that positions us very well to capitalize and benefit from that also. So Chris, I don't know if there's anything you want to add to that.

  • Christopher John May - VP & CFO

  • No, I mean, you're right on in terms of the prioritization of the trucks we experienced in the second quarter, you saw them emphasizing that more mid-quarter and trying to bring those on early more than -- the rest of our product that did start to come out in the back half of June and into July.

  • Armintas Sinkevicius - Associate

  • Okay. And then my other question around Mexico. The plants opened up earlier than expected, consistent with how you were thinking about, David. What are you seeing out of Mexico with regard to how operations are today and the supply chain there?

  • David Charles Dauch - Chairman & CEO

  • Yes. Clearly, Mexico is running 8 to 10 weeks behind the U.S. as it relates to management of the COVID activity. So we're keeping a watchful eye on that, as is the whole industry. Clearly, the industry is only as strong as the value chain, and there's a sizable amount of suppliers that ship product either within Mexico or out of Mexico back to the U.S.

  • Right now, from an overall standpoint, we've got very few supplier issues. We definitely have a couple that we're managing, but nothing that we see jeopardizing production. There's clearly certain regions within Mexico, as the president's managing the health and safety within that country, which are things that we need to watch.

  • As far as the areas that we're operating in right now, we're able to function, we're able to operate, but that could change in a minute, depending on if there's a big outbreak. And so we're prepared and looking at alternative plans in the event that we had to shut some things down. But our priority is to make sure that we can protect the health and safety of our associates first. And protect the schedules and the launches of our customers going forward and do that with the support from our supply base or alternate supply base if required.

  • Operator

  • Your next question comes from James Picariello of KeyBanc.

  • James Albert Picariello - Analyst

  • Can you quantify or put any parameters on what that change in GM architecture impact is relative to your original expectations, as we think about the second half?

  • Christopher John May - VP & CFO

  • Yes. Look, they converted from a full beam rear axle on that platform to an independent rear suspension. So you do lose tubes, brakes, so on and so forth. But if you think about sort of pre-COVID our guide stepping into the year, this was sort of the final phase of the GM truck transition, right?

  • We expected our revenues holistically on that platform, the T1 platform that is, to be down $225 million coming into the year. The bulk of that related to the SUV architecture change, sort of running at a full year. So that would sort of articulate kind of on a quarterly basis what that might impact us -- (multiple speakers) they produce.

  • James Albert Picariello - Analyst

  • Yes. Okay. Was your Thailand business profitable when factoring that $20 million a quarter revenue loss? And was that fully captured in the quarter?

  • Christopher John May - VP & CFO

  • No, I mean our Thailand business is profitable. Oh, you mean prior to the shutdown? Yes, it was a profitable business.

  • James Albert Picariello - Analyst

  • Right. So yes, I'm just saying as we take out the $20 million a quarter, I was just wondering what the -- what that -- so it's like (multiple speakers)?

  • Christopher John May - VP & CFO

  • Think about it the same as the corporate average. It was a good platform for us in Southeast Asia.

  • James Albert Picariello - Analyst

  • Got it. Okay. And as we think about Axle's liquidity, just under $1.7 billion this quarter, would you expect to finish the third quarter at a similar level? I mean I believe you indicated you expect positive second half free cash flow. So I guess I'm just trying to get a sense for maybe the 3Q versus 4Q cadence on free cash flow?

  • Christopher John May - VP & CFO

  • James, don't forget, you'll need to take $350 million of our note redemption out of that liquidity number, right? So you were carrying the proceeds of our June bond issuance in that quarter end number. So that comes out in the third quarter as we redeem those notes. And then the balance of the year, liquidity will change based on our free cash flow profile.

  • James Albert Picariello - Analyst

  • But you do expect the second half free cash flow to be positive?

  • Christopher John May - VP & CFO

  • If we're to achieve breakeven or better, yes, it would have to be. Correct. Because we're negative in the first half.

  • Operator

  • Your last question comes from Joe Spak with RBC Capital Markets.

  • Joseph Robert Spak - Autos and Leisure Analyst

  • David, the Baojun E300, I think that's probably -- I know you've been for a while talking about the 3 electric programs. So I'm guessing it's the third. Maybe you could talk a little bit more what you see in the pipeline or if there's any more programs on the horizon.

  • But also that Baojun is clearly a different vehicle than the vehicles you've been on historically and even different for the eAxle product, where I think the others were sort of a more SUV-type vehicles. So how does the CPV of that Baojun program compare to maybe the other eAxle offerings?

  • David Charles Dauch - Chairman & CEO

  • Yes. Joe, this is a value brand opportunity. So the content per vehicle on this product is much lower than what we were doing on the Jaguar Land Rover I-PACE program. As you know, on the I-PACE program, we're well over the $2,000 or $2,500 range. This is much lower than that, think more component and gearbox-type-related activity here.

  • So it's going to be on a much lower end of the range we've given you before (multiple speakers). But a very important entry into that market, which is a value-driven market, and we expect incremental opportunities to present themselves as a result of this.

  • Michael K. Simonte - President

  • Joe, this is Mike. Joe, real quick. When we think about the content per vehicle available in this market segment, this is not a segment that AAM has historically had much opportunity to play in -- the front-wheel drive passenger car-based vehicles.

  • So for us, even though the content opportunity is relatively small compared to light trucks and crossover vehicles, that type of thing, this is valuable growth for us because this is conquesting a portion of the market where we didn't really play.

  • Joseph Robert Spak - Autos and Leisure Analyst

  • Fair enough. Maybe a second question. We've seen some of your other axle competitors make, I guess, the best thing I would determine, I guess, is software-related [acquires] to gain more engineering competency for electrification systems.

  • And, granted, a lot of those have been more, I think, on the commercial vehicle off-highway side. But I was curious if that's something that AAM has been evaluating, whether it's something you need to do? Or are you comfortable with your organic engineering and organic engineering spend?

  • David Charles Dauch - Chairman & CEO

  • A combination -- we're very comfortable with the engineering resources that we have today, especially as we've invested over the last several years on software and controls engineers, which will lend itself and support electrification going forward.

  • We're very comfortable with the partners that we have in place today and clearly have been able to offer the customers a value proposition for them to source this business. But our job is to continue to enhance that cost performance while advancing the technology and strengthen that value proposition.

  • Over time, I think we'd like to control more of that ourselves, but we have no problem working in technical partnerships, joint ventures, or just a customer supplier relationship as long as we can deliver those value propositions to our customers. And right now, we've been able to demonstrate that and be successful in not only winning new business, but launching new business.

  • As you know, our third -- our second electrification program will be launching next year. That's a very unique, high-performance passenger car, that's got multiple variants off of that. And then we've got a pipeline of other opportunities that span all the different segments that we support in the marketplace today.

  • Jason P. Parsons - Director of IR

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

  • Operator

  • The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.