AAM - NYSE

Good morning, my name is Chad and I will be your conference facilitator today. At this time, I would like to welcome everyone to American Axle & Manufacturing First Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. I would now like to turn the conference over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Thank you and good morning. I would like to welcome everyone who is joining us on AAM's First Quarter Earnings Call. Earlier this morning, we released our first quarter of 2021 earnings announcement. You can access this announcement on the Investor Relations page of our website www.aam.com and through the PR Newswire services.

Thank you, David and good morning everyone. Thank you for joining us today to discuss AAM's financial results for the first quarter of 2021. 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 review the highlights of our first quarter 2021 results. Next, I'll touch on some exciting recent business announcements with Ford and REE and lastly, we will discuss the challenges within the supply chain and our financial outlook. After Chris covers the details of our financial results, we will then open up the call for any questions that you may have. In the first quarter 2021, AAM delivered solid operating performance and strong cash flow generation. Although the industry is facing continuity of supply issues, we continue to navigate through these challenges while delivering very strong results. AAM sales for the first quarter 2021 were $1.43 billion, up approximately 6% compared to $1.34 billion in the first quarter of 2020. The increase in our revenues on a year-over-year basis primarily reflects the recovery from COVID-19 related industry shutdowns that we experienced last year. Although North American industry production was down 4% according to the third party estimates, light truck production was up 5% year-over-year and volumes on our core platforms increased 9% year-over-year. Furthermore, light truck inventory and a number of the key platforms that we support remained extremely low. Consumer demand for light trucks remained strong and our customers are building them as much and as fast as possible.

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 begin with sales. In the first quarter of 2021, AAM sales were $1.43 billion compared to $1.34 billion in the first quarter of 2020. Slide 8 shows a walk of first quarter 2020 sales to first quarter 2021 sales. First, we add back the impact of COVID-19 of approximately $169, then we account for the unfavorable impact of the semiconductor shortage which we estimate to be approximately $64 million inside the quarter. On a year-over-year basis, we are impacted by GM's transition from a rear beam axle to a new lightweight and highly efficient independent rear drive axle for GM's new full-size SUV which impacted sales by about $38 million. The first quarter of 2021 is the last quarter of this year-over-year impact to occur. Other volume and mix were negative by $26 million. Pricing had an unfavorable impact of $4 million on a year-over-year basis. Metals and FX accounted for an increase in sales of $44 million. During the last six months, we have continued to see an increase in the primary index related inputs to the metal based materials that we purchase. You may recall, we hedged this risk by passing with our customers bypassing 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 $227.1 million or 15.9% of sales in the first quarter of 2021 compared to $195.3 million or 14.5% sales in the first quarter of 2020. Adjusted EBITDA was $262.9 million in the first quarter of 2021 or 18.4% of sales. This compares to $213.3 million in the first quarter of 2020 or 15, 9% of sales. As David mentioned, this was AAM's highest first quarter adjusted EBITDA margin in our company's history. You can see a year-over-year walk down of adjusted EBITDA on Slide 9. We benefited from the contribution margin on the increase in net sales from last year, but most importantly, we continued our strong cost reduction actions reflecting a year-over-year benefit of $28 million. Let me now cover SG&A.

Thank you, Chris and David. We have reserved some time to take questions. I would ask that you please limit your questions to no more than two. So at this time, please feel free to proceed with any questions you may have.

And the first question today will come from Rod Lache with Wolfe Research. Please go ahead.

This is Shreyas Patel on for Rod. Just wanted to pick up on that last point about the second quarter. You did mention it is going to be the trough in terms of the semi issue, Any ways you can kind of frame the magnitude of the decline based on what you're seeing and how confident are you that supply is coming back, it's starting to come online and by the second half should improve.

Yes, I would tell you the truth. This is Chris. We disclosed for our first quarter impact from a revenue perspective, a decline of $64 million. What I would tell you our expectation in second quarter is it will be greater than that. And then that would moderate along that in the second half of the year on a quarter-by-quarter basis. That's how I would frame it as we sit here today from a revenue perspective and then obviously a little bit more, I would call customer scheduled disruption in the second quarter versus the first quarter, we'll have a little bit of temporary inefficiencies inside of our production schedules, which will just again sort of be discrete with inside in the second quarter.

And then in the quarter, it looked like performance and cost performance was quite good. I think it was I think was plus 28 million year-over-year. I was just wondering was there any semi, were there any supply chain costs in the quarter and maybe what are some of the factors that really drove the strong performance?

Yes, I would say inside of that, inside of our first quarter, we did experience a little bit of drag as it relates to metal-market indices. You know we do pass that through, but we only passed about 90% through, so it was slightly a little bit negative from that perspective and a little bit associated with the premium freight as we coordinated our supply logistics through the semiconductor issues. But in terms of a year-over-year holistically performance, you may recall in the second quarter of last year is COVID was on setting upon the entire industry. We announced and discussed significant cost saving measures for the balance of the year and you may recall we talked about the quarterly run rate of nearly $20 million. So the first quarter last year didn't have that benefit in if you will, we are still experiencing and benefiting from those initiatives we started really in the second quarter of last year that continued through the balance of last year and the beginning of this year.

Okay. And then just lastly on the agreement with REE, just wanted to understand a little bit more about the scope of this, of this agreement, so it looked like this was going to be co-developed, a co-developed propulsion system for commercial applications so that be something, is that, is that going to be different from what you already have developed on the light vehicle side in terms of, in terms of your product portfolio and then yes is, is this kind of an exclusive agreement so they would work with this year, this propulsion system would go into their platform going forward? Just trying to get a sense of that.

Yes, this is David Dauch speaking. As we've communicated to all of you before that, we've been working very actively in regards to our next-generation products for electrification and our designs are modular and scalable. At the same time, we've integrated the motor, the inverter, and the gearbox and into the EVU. So there is a much smaller packaging space. We want to drive power density and performance and performance. Electrification is really measured in the form of efficiency. We're seeing all of that and we designed the product, so that it can meet various vehicle segments and support the different regions of the world. And clearly we're adopting and transitioning that product to be able to support a re-automotive designs, design needs so that we can support not only their, but our e-mobility solutions for the marketplace. But this gives them an opportunity to even enhance their product even more as far as the designs that we've come up with. We're integrating that into their chassis design. So it's a full flat type design for commercial vehicle type application. We feel very good about the relationship and the partnership and are excited about what the future holds for our two organizations. We're an aggressive timeline to develop the product for them, but we have a strong foundation that we're already working from expected that we can bring this to the market sooner than later.

Okay. Because, okay, so. So it's kind of leveraging your existing product, and so we kind of think about content per vehicle, kind of similar to what you've talked about in the past I think $2500 something like that.

Yes. But the only thing I would comment to that is there is four per vehicle, so the kind of entry should be much higher for us based on the application and the design strategy to support their platform design, chassis design.

The next question will come from Ryan Brinkman with JPMorgan. Please go ahead.

Thanks for taking my question. I guess this is the third quarter in a row now you've pretty substantially exceeded sort of either your own margin guidance or consensus expectations, and I realize you've got some difficult year-over-year margin comparison in the back half of the year, but still wanted to sort of check in on the likelihood of incrementals decelerating from like 61% in 1Q to something more like 16% in the remaining quarters of the year and then maybe just kind of looking beyond all this noise with regard to COVID a year ago and semis and commodities this year. How are you sort of generally thinking about normalized margin potential as we move beyond the current period including maybe relative to what your answer might have been prior to COVID?

This is Chris. Yes, certainly you're spot on, a lot of noise the puts and takes with COVID and semis but sort of maybe remove that from our conversations and also kind of look a little bit of our performance in the first quarter. Always a challenge to extrapolate a full year and run rate performance from a particular quarter. But in terms of key elements to think of on a go-forward basis, certainly a lot of the cost initiatives and restructuring initiatives we've been putting in place over the last 12 months you continue to see that benefit the company. I would expect that to continue to benefit the company on a go-forward basis. So in discrete in terms of the first quarter relative to the, I would say balance of the year of this year, again excluding semi and a little bit of the impact associated with that in the second quarter but timing lines, R&D was a little light in the first quarter. Our full year how we typically look at that perspective from anywhere from $30 million to $40 million a quarter, $35 million to $40 million a quarter, we're a little light in the first quarter that will sort of ebb and flow with the launching of our electrification activity, but we think sized right to support our objectives, pricing from a year-over-year pricing impact in terms of the first quarter again a little light that comes on. Usually in the a little bit second, third, and fourth quarters for us and then the cadence of our launches was a little bit late in the first quarter from a project expense that comes on line in the back half of the year a little bit, but big picture, we expect you can see our full year guidance, you do the math on it, it's nearly 17% at the high end of our ranges, running at a very strong healthy pace business and continued opportunity to grow margins based on our continued attacking our cost structure and optimization of footprint and throughput clearly within line of sight in our guidance would indicate that.

Okay. And then, yes, again another on the collaboration with REE announced today. I realize they're using our fully flat or skateboard type chassis, but I'm not sure, can you remind with this technological solution qualify it's a so-called hub motor approach and then maybe a related question. I think previously you haven't been as interested in expanding at least organically to compete more in the commercial vehicle drive line market than you do now. Just given all of the considerable investments that incumbents already have there and what that might imply for margin, et cetera, but I'm just curious with all of the technological change taking place that could potentially different remediate maybe a lot of the current investments and with some of the things that you're looking at with REE et cetera if it might make sense or you might be evaluating potential organic expansion into that end market?

Yes, we're very excited about the technology that we've developed. We're very excited about the technology that we've seen regarding motor we develop. Combined together, we think that we bring differentiating technology to the marketplace to serve multiple vehicle segments, including the commercial vehicle space, so yes, we're very excited about possibly expanding there certain markets that we have today and the REE Automotive flat chassis will allow us to open up some of those other type market applications for, so we're excited, but at the same time the technology that we're bringing to the table for them gives them more freedom and functionality for their customers as well and will strengthen their product offerings to the marketplace. So we think it can just be a tremendous opportunity for us to work together to address the market where we both can benefit greatly from the partnership.

And the next question will come from John Murphy with Bank of America. Please go ahead.

I just wanted to ask a first question on GM's trucks and maybe even some of your Lux products that have been protected by the customers so far. If there were incremental pressures that came from chip shortages in the second quarter on production, would you have a higher than normal decremental margin in the second quarter and then also if we think about those potential losses not saying they're actually going to happen, but potential losses, do you think there is capacity to catch back up on some of that lost production specifically on GM's trucks. It seems like they're kind of running hard, not a lot of room to make up that production, but so would that just be net loss of production, they couldn't be made back up later in the year if you see losses specifically around GM's trucks?

Yes, John, this is David. I'm trying to look at the other way, it's how can that incremental margin. GM has got their products protected from semiconductor chip issue. They have clearly prioritized their full-size truck, we're seeing the benefit of that, they're seeing the benefit of that and that's fantastic news. Right now, they are running their plants flat out max over time where they can. At the same time, you saw or heard in their earnings announcement, they plan on bringing the St. Catharine's facility on board, so that will add incremental - not St. Catharine's, excuse me, the Oshawa facility on board. So, that will bring incremental capacity to them going forward in the marketplace. Remember, their inventory levels are extremely low right now because they haven't fully recovered from the strike that took place over a year ago and then obviously things were impacted with COVID, but right now we just see pedal to the metal with respect to the GM full-size truck platform.

So maybe if you could take that another way, David, I mean I think we kind of think historically they did 1.6 million to 1.7 million on those trucks and you're right now, I think capacity is right around 1.2 plus or minus love to hear your thoughts on that. But as you're bringing Oshawa on, where do you think that takes that up to and what is the potential upside in revenue maybe to take the other side of the coin, right. I agree with you.

Yes, has it around 1.35 million units for that platform. What we're closer in line with that. And that does not include Oshawa, so we expect that number to go north of that based on the volume that they ultimately intend to produce out of that facility.

Okay, that's very helpful and then just a second question on the re-agreement. As you think about the change of the powertrain or potential change powertrain architecture and I would say, this would be only in limited cases. You look at sort of hub set up, however you want to, whatever you want exactly call it, what does that mean for your content because I guess in some ways a pessimist would say within you're basically eliminating axles in that in that set up but the reality is, I think you have a lot of content potential there anyway. So I mean can you just help us think about what that means for you as far as content then if there is any real significant risk to your somewhat more traditional set up even on EVs going forward?

Yes. So, John, this is David again. On the traditional products. I mean obviously enjoys from content per vehicle today with electrification was similar architectures, but in the integrated design. As I mentioned with the motor, the inverter, and the gearbox. We actually, we think that we can improve our content or increase our content on the traditional let's say driveline system that's in place. With respect to the REE Automotive and their approach, which is heavily weighted towards the commercial vehicle, but it can obviously expand other vehicle segments, our content per vehicle should go up greatly because there is for everyone is the vehicles that are there. So we feel really good about where we are. Our product that we design, develop, is getting a lot of attention, both from the traditional OEMs, as well as some of the new entrant OEMs as evident by the partnership and collaboration we're putting together with REE and the partnerships that they already have in place with Mahindra and Hino and some of the other customers that they're working with and have announced. So again, we're extremely excited about our technology, extremely excited about the receptivity from the various customers and happy to be adding to our partnership with respect to be REE Automotive.

Yes, I was going to say you call a couple of months ago when we laid out a lot of our next generation of architectures. Right. We focus very much on it being scalable, modular and kind of adapt to a lot of different platforms. This is textbook of what we're talking about

Just, I'm sorry, just one follow-up on that kind of set up the payload and towing capacity. How does that compare from a more traditional axle set up as opposed to these hub motor set ups if you will. I mean are these are for lighter duty commercial vehicles or could it be kind of things that really truly compete with body on frame typical set ups?

I mean it's still to be proven out going forward here. I think over time it's more of the light, light side. But at the same time, I think it going to be enhanced to can be enhanced to compete at the other side, but I still think you're going to have body and frame vehicles for an extended period of time. We just want to make sure that we're in a position that we can be agnostic to the market and have the traditional ICE and hybrid applications available, while also have an electric offerings in the different forms that we're talking about the, in the traditional design firm but from an electrification standpoint, but now also with this REE Automotive design that has come to the marketplace on this. Well, I say a load floor flat load for EV chassis.

The next question comes from James Picariello with KeyBanc. Please go ahead.

I've got a content question as well, but maybe of the more traditional variety. Can you provide any CTV color on the power transfer units you're supplying to the Bronco Sport?

Typically on our all-wheel drive applications where we're supplying front meaning module in a PTU, think of it as a $1000 to $1200 range and on the Bronco Sport, we're always supplying the BTU so it's roughly half or slightly less than that is how you should think about it from that perspective.

Okay, that's helpful. And the company took an accelerated depreciation charge in Brazil during the quarter. Last year at this time, it was in Thailand you concurrent with axles exit from the country there. Just wondering what your thoughts are on the company's future in Brazil?

We still see a very strong future in Brazil. We're just responding to customers change in their strategy.

The next question will come from Dan Levy with Credit Suisse. Please go ahead.

Thank you for taking the questions. First, just a question on, on the guidance for the year and maybe the cadence for how the year plays out and specifically, could you give us a sense for maybe how much premium freight you incurred in the first quarter, how we should expect that over the course of the year. And then just second as far as the dynamic on commodities goes because I know that you know there is a lot of it is pass-through, but maybe you could give us a sense for the cadence on what you expect on the metal market or commodity side and how much, what the spill through effect into 2022 might be?

Yes sure that this is Chris first on your premium freight sort of mentioned earlier in the call we spent, I would say maybe a few million dollars inside of the first quarter of premium freight for a variety or reasons since most of it related to coordinating with our supply chain and some of the disruptions that we've been talking about, I would expect that to increase a little bit here into the second quarter and then sort of dissipate for the back half of the year, from a premium freight perspective. As it relates to metals, just as a reminder, we, the metal pass-through elements of our agreements are really contractual by design and they're sent to certain indices inside of the market depending on the metal. These preferences reflect current market pricing every 30, 60, or 90 days, and they will reset automatically through that process. So as metal goes up, we will reset prices and it's typically anywhere from a 30-day to 90-day lag on the change of the indices. So that dynamic both with our supply base as well as with our customer base and it will pass-throughs. So you have over a period of time, this flows very well together during different quarters once a while can get just from a timing perspective a little this coupled but then reconnects subsequent quarter that makes sense. So based on current prices today, you will see the impact for us in the first quarter. If they go down, our metal fasteners would go down. If they go up next month, they will go up. So it's hard to predict on a go forward basis, as they are subject to market conditions.

So let's just assume that prices stay flat versus going forward into 2022 by there won't be as much of an effect, because most of the lag is a little more limited. Is that correct?

Yes. So it's States prices stay flat to where they are today. So you may, if you look back at the indices as I sort of mentioned, they've been trending up sort of month to month to month to month or through the first quarter. So you'll have some kind of re-calibration in the second quarter as I mentioned, you have a little bit of a lag. And then they would run reflect on there.

Okay, great, thanks. I guess my second question, I just wanted to do out and think about the cycle, the second, we have this massive inventory rebuild ahead given just how tight the inventory is and how strong the demand has been. And so whenever the supply gets back online and probably tells us that you're potentially well positioned into 2022, it could maybe help accelerate deleveraging. So I know you can't take any action right now given there is a lot of macro uncertainty, but maybe you can give us a sense that you have better visibility and if you're earning stream starts to accelerate, you could give us a sense of what type of options that opens up, what the playbook is what are the things that you might be doing which you weren't doing right now. I assume that there is some opportunity to accelerate the prepayment of that, what's the flexibility there. And how does that affect EV development. So what is an accelerating cycle and a large inventory rebuild enables you to do that, you can do today that should not be as much of today?

This is David Dauch. As we indicated, we see a very bright future and a very strong demand for the various platforms we support for years to come, especially because of where the inventory levels are and because of the consumer demand that exist in the marketplace. As I said, as fast as the OEMs can build them the consumers are buying them, so I think it's going to take an extended period of time to rebuild the inventory levels, that's going to put us in a very healthy position to generate a lot of cash for our business. We'll use that cash as we always have to continue to support our organic growth, a big shift in our organic growth is towards electrification. So, we will continue to fund our R&D and electrification and then get on with the intent of profitably growing our backlog of new business. In addition, we will stay very focused and very disciplined with respect to paying down debt and we will accelerate paying down debt much like we just paid $100 million this past quarter with respect to further supporting our commitments to get this balance sheet where it needs to be. Chris, I don't know if you want to add to that?

Dan, this is Chris. You asked, what type of debt we would have prepayable. Our entire term loan stack that's due in 2024 is pre-payable at par at any time and then the bonds in the subsequent years are now starting to fall in the call position. So we have a lot of options available to us to address that.

The next question will come from Joseph Spak with RBC Capital Markets. Please go ahead.

If we go back in time a little bit, we know that the GM sort of made a sourcing decision on sort of the actuals for the new pickup you retain some they took some in-house. They've obviously been protecting that program which I think overall sort of help you. I guess what I'm curious to know is, and what I have less visibility into is sort of the mix within the mix of that and whether you think the plants and programs within that pickup truck mix have favored the axles you supply do you have any sense of that?

Between GM and AAM will make it all the axles we can to support their vehicle production and as they expand their vehicle production, we expect that we'll be making more axles going forward.

Joe, keep in mind we supply the heavy duty the SUV and the splits only on the light duty. Right so and those others ones grow we benefit from that directly.

Yes. Joe, as we've said you before they have an installed capacity. They will utilize that installed capacity and the incremental growth has been supported by.

And then maybe just to go back to the joint development agreement with REE, I guess, can you just talk a little bit more about this like what types of vehicles. Do you expect I guess or a range of vehicles. Do you expect this to be applicable for and maybe a little bit, if you can sort of who's doing what and like how far into the propulsion like the propulsion system do you go. I think they, I believe they might have sort of like a skateboard architecture as well. I'm assuming like you're not getting into that element, but any more color there would be helpful.

Yes, we're not getting into their course of the skateboard or the modular platform. What we're doing is integrating our newly innovative designs with the integrated motor, inverter, and gearbox capability into the wheel-end configurations for all four wheels that allows them to have an even lower and more compact fully flat chassis that supports multiple vehicle program applications heavily weighted on the commercial vehicle side of things, but it can expand multiple segments.

Okay. So it's better suited for larger vehicles is the, is the application or?

It can be a scaled up and down the vehicle segments but targeted towards the middle to higher end right now.

Your last question comes from Brian Johnson with Barclays. Please go ahead.

Thank you. Just want to follow up we, everyone focuses driveline rightly as the big segment. However, it looks like some pretty dramatic margin improvement in metal forming, the businesses in part you got from metal dying that had some issues. So could you maybe talk a little bit about the margin expansion there and where it could go?

Yes, Brian, this is David. I'll make some first our initial comments and Chris can pick up from there. But obviously we took over the metal dying operations and incorporate into our operations, which were as large or larger we've really worked very hard over the last three years as you're aware to fully integrate that capability. We've consolidated facilities, we've increased capacity utilization at the remaining facilities, we've optimized the workforce appropriately to the new market demand. At the same time, we've integrated a lot of AAM advancements from an operating standpoint into the facility which drive throughput in productivity. So we're very pleased about that. We've been able to minimize some of the CapEx expenditures that each of the individual companies may have spent because of some excess capacity that existed there, because of the market conditions that are out there right now in our buying power in the marketplace. We've been able to pick up some new business in the metal forming side as well. One, because of some of the open capacity, but also our buying power from the skill s standpoint. That's been very positive for our company. At the same time, we've got a proven reputation initially from an operational excellence standpoint, and we're seeing customers come to us to protect their continuity of supply in this dynamic environment. Chris, I think you want to add.

Yes, Brian, as you think about the margin performance in that business unit, what historically quite strong for us as well, 16%, 17%. You're now seeing it sort of it the 18% to 19% plus and the vast majority just has to do with that capacity rationalization both from physical plant, also throughput optimization in terms inside our factories, but also some purchasing power with our strong and steel buys and things like that have also benefited this group as that was part of the thesis, when we acquired MPG and how we benefit this business unit.

And then Brian, this is David again. The other thing I would say you're thinking traditional forgings only for metal forming, but we've also do a lot of work there in regards to the central business. So think powder metal connecting rods and core powder metal parts and we're also doing some high pressure die casting from an aluminum standpoint in that business segment.

Good second questions but more housekeeping prompted by the trade all behind your headquarters. As we kind of think about Q2, is there any sort of shipments that you were able to book leaving the factory particularly allow that may or may not, when you kind of talk about the end of 2Q to the extent there are shutdowns or production disruptions in 2Q that in effect the parts are on their way. So you might see a little dip in terms of orders or is it more, even if that happens because of the rebuild that another colleague talk competitor call you talked about, you're not really worried about that.

Brian, this is Chris. The customers for the most part, take delivery our docks. They do ship around and do ship truck, but once they take our dock that is our sale. Okay, that would be the simple way to think about it.

So could there be some work in process that they wouldn't need order in 2Q?

That would probably most likely depend on their initial July shutdown plans. But again, they will book weekly orders, they take delivery at our dock. We book the sale.

Okay. Thank you, Brian 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.