AAM - NYSE

Good morning, everyone, my name is Jamie and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Second Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. As a reminder, today's call is being recorded. At this time, I'd like to turn the conference 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 second quarter earnings call. Earlier this morning, we released our second 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. 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 10156999. This replay will be available beginning at 1:00 PM today through 11.59 PM Eastern Time August 6. 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 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 second 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 second quarter 2021 financial results. Next, I'll touch on some exciting business development news in the quarter including announcements with the Chinese EV OEM deal and our recent communication about GM's Oshawa plant. And lastly, we will discuss the ongoing and unprecedented 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. AAM delivered strong operating performance in the second quarter 2021 navigating industry production volatility stemming from the continuity of supply challenges. These challenges were greater than what we originally anticipated at the beginning of the quarter, but our team did an excellent job in managing these obstacles resulting in solid financial results.

Thank you, David. And good morning everyone. I will cover the financial details of our second quarter results with you today. I will also refer to the earnings slide deck as part of my prepared comments. So, let's go ahead and begin with sales. In the second quarter of 2021, AAM sales were $1.28 billion compared to $515 million in the second quarter of 2020. Slide 7, shows a walk of second quarter 2020 sales to second quarter 2021 sales. First, we add back the impact of COVID-19 from second quarter of 2020 of approximately $947 million. Then we account for the unfavorable impact of the semiconductor shortage which we estimate to be approximately $162 million in the second quarter of 2021. Other volume mix and pricing was negative by $99 million. Metals and FX accounted for an increase in sales of $82 million. During the last several quarters, we have continued to see an increase in the primary index related inputs to metal-based materials that we purchased. You may recall, we hedged this risk with our customers by passing through the majority of index-related changes. The metal portion in this column reflects those elevated pass-throughs on a year-over-year comparison. Now, let's move on to profitability. Gross profit was $190 million or 14.8% of sales in the second quarter of 2021, compared to a loss of $99 million in the second quarter of 2020. Adjusted EBITDA was $222.6 million in the second quarter of 2021 or 17.3% of sales, this comparison to a loss of $52.1 million in the second quarter of 2020. You can see a year-over-year walk down of adjusted EBITDA on Slide 8. We benefited from the contribution margin on the increase in net sales from last year as we continue to experience positive permits and performance. As a result of short notice production schedule changes and receipt of long lead inventory items such as steel, our raw WIP and finished goods inventories increased in this quarter. This drove a $16 million benefit from inventory absorption timing, we should reverse out in the second half of the year as we anticipate reducing inventories during that timeframe. As we mentioned throughout the quarter, our schedules were more volatile than expected, but we were able to close the latter part of the quarter on a strong note. Now let me cover SG&A. SG&A expense including R&D in the first quarter of 2021 was $86 million or 6.7% of sales. This compares to 14.3% of sales in the second quarter of 2020 as revenues rapidly declined last year due to COVID-19 related shutdowns.

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 our first question today comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, everyone. This is Aileen Smith on for John.

Good morning.

First question, as your automaker customers have clearly been benefiting on the margin side from very favorable pricing in the tight inventory environment. Have they in anyway been more cooperative with recovery mechanisms for let's call the stop and go production environment that you and others have experienced with the semiconductor shortage? We've heard from some suppliers that automakers have been receptive to cost recoveries were those suppliers have had to buy spot buy semiconductors to avoid disruption. But just wondering if that's extended to automakers also helping out on cost overrun for logistics and manufacturing or other buckets for those suppliers that are just trying to meet their customers with very choppy schedules and releases?

This is David Dauch speaking. First and foremost, we've been able to work with our suppliers and our OEMs with respect to protecting semiconductor supply to our business. So there's been no need to have to go to the customer to ask for relief there or protecting as they're prioritizing and allocating chips accordingly, we're adjusting and following their lead with respect to that. With respect to any premium costs are being incurred because of some of the supply and other shortages in the marketplace. We deal with that on a case-by-case basis, with each of the respective customers. And I don't really want to go any further from a detailed standpoint on that. But the customers have been very understanding of the situation that's out there at the same time they're asking for some paint sharing in the process, which we've been supportive of. At the same time, we're all just trying to protect continuity, supplying and keep the industry rolling.

Okay that's helpful. And then, second I wanted to ask a question around the EBITDA margins. Obviously, we've seen a bit of a return to normal, but it's still incredibly strong margin performance from some pretty elevated quarters over the past year. But can you help us bridge how you landed, what I think will probably be a 16 or sub 16 margin in the second half of the year to get to your full year outlook versus where you stood in the second quarter? We've got the volume environment that will probably be sequentially better. But what offsetting factors are there to that, is it commodities, mix or just cost lingering through the value chain?

Good morning Aileen, this is Chris May. Yes certainly, if you think about our second quarter performance or first half, very similar in terms of strong performance, bridging that to the second half. A couple points I would sort of emphasize with you. I would expect some benefit as some of the semiconductor sales return off of an obviously, second quarter of the trough. So we'll have a benefit there, we'll have a benefit of some continued performance. Offsetting some of that is a couple of different items. One of which you see in our year-over-year EBITDA walk bridge where we had some benefit of a build of inventory in the second quarter that will actually bleed out through the back half of this year, neutral to the whole year it's just a timing difference, but if you think about how we're advancing also some of our electrification initiatives, new business opportunities. So we're going to step up some of our product engineering spend associated with that this is things we've been sort of dialoguing with you and others over the past six months little light weight on the first half of the year, it's going to be a little heavier in the back half of the year in terms of product engineering spend. Mechanically, some of the timing of our price decreases year-over-year are a little bit more weighted to the second half of the year that will impact us a little bit. And as you know, metal markets and others continue to rise here throughout this quarter and expect it to rise a little bit into the second half of the year, you'll have a little bit of impact associated with margin associated with that as well. Those are the primary elements and again we'll pick up some sales and benefit from performance as well to mitigate some of that.

Great that's very helpful color. And one last question on the balance sheet if I may. Clearly you continue to make good progress in generating cash and delevering. Can you remind us what your timeframe is to get to, a sub two times, net leverage target is that something that could be theoretically achieved in the next 12 months. And then as you get to that target that you've talked about in the past, how might the capital allocation framework change in anyway?

Yes in terms of a two times leverage target as you know, we're obviously we're 2.5 times here in the second quarter making meaningful progress already year-to-date, you've heard us articulate our objective to get to two times and the goal there well, we've not laid a specific targets there obviously sooner rather than later is our objective. And then when you get into that level of framework from a leverage perspective that certainly opens to capital allocation playbook. But at that point, I think that's when we would start to have some further dialog on that topic.

Okay. Thanks for taking the questions.

Thank you.

Our next question comes from Rod Lache from Wolfe Research. Please go ahead with your question.

Thanks, everybody. Really nice to see these incrementals in the quarter and frankly I'm bit surprised just given the short notice production volatility. But just to Aileen's question it does look like those decrementals in the back half are very high or at least that's what's implied by your guidance? And I'm just wondering, I understand the timing of pricing. But I'm wondering if you are sensing that there is any change in production schedules that would also be contributing to that or are you actually gaining or still having limited confidence in production in the short run?

Yes Rod, this is David. I'll make a couple of comments, I'll turn to Chris. Obviously OEMs have been protecting their major core platforms to manage their profit pools. We AAM have benefited greatly as many other suppliers with respect to that. Obviously, we took our first downtime this week, with respect to some of the GM's full-size truck platform at select plants, that's all coming back online starting next week so that's positive. We do still continue to see extended downtime with respect to some of our crossover vehicle business and clearly the uncertainty that we're managing in the marketplace and we just need to understand that can be a challenge for the balance of this year and as I indicated will carry into 2022. But we think our major core platforms will be protected going forward, but we also need to be prepared because we didn't expect the GM stuff to go down this week. But we have to adjust with our customer base and we've done that. And we just utilize that time efficiently to give our people a blow, do maintenance in our facility and then just catch up on some service part aftermarket type work. So and actually we turned a negative into a positive. But Chris, any comments you want to make to Rod's question?

Yes I mean just, I mean I've listed out sort of the key drivers on the previous question. But if you think about for example that inventory absorption and that's a 50 basis point margin impact on us in the second half and that's truly just a timing within the year it's neutral in total. And if you think about the other elements as well a lot of them are timing driven. And you see we didn't change for example the top end of our margin or our EBITDA guide, which would imply a lot of this stuff was previously known to be timed at different points throughout the year.

Okay. And then just secondly, it looks like you're going to get to that two turns of net leverage over the next year or so. And it sounds like that, that should provide you with a lot more flexibility for acquisitions or other things. Can you just talk a little bit about the opportunities that you're seeing particularly assets that would be complementary to you on electrification. And also organically, if you could just provide any color on the magnitude of bidding opportunities that you see at this point?

Yes so Rod, this is David. I'll start with the latter question first. We're quoted about $1.5 billion worth of new and incremental opportunity for our business, which is consistent with how we have been quoting in the past. The biggest difference is the fact that the mix of that quoting now has shifted dramatically to hybrid and electric vehicles, whereby about 80% of what we're quoting today is in that category, which is a positive, because that's where the industry is pivoting to and shifting to. And we're seeing quotation opportunities especially based on the technology days that we've had with our various customers, the excitement that we've garnered with the products that our engineers have developed. And now it's just a matter of converting some of those RFQs or RFIs into book business going forward. So we're very excited about what that has to hold going forward. When it comes to the acquisition side as I noted in my prepared remarks, we did a small bolt-on acquisition in the core powder metal business. And again, we want to be smart about that, we've said that where it's appropriate to consolidate the traditional business that we can leverage our size and our scale and get synergies and have a financial benefit to the overall business. We're going to act on those types of things, especially as our capital structure and balance sheet becomes even stronger. And then we see more opportunities both on the metal forming side of our business as well as on the driveline side. But we also want to keep in front of us there are certain things that we want to do to strengthen our vertical integration capabilities or partnership capabilities with respect to electrification. And clearly will keep that as a priority as well when we're looking at acquisitions.

Great. Thank you.

Our next question comes from Ryan Brinkman from JPMorgan. Please go ahead with your question.

Hi. Thanks for taking my question. Wanted to check in with regard to the still relatively new venture within events in China, so a couple of questions around that. Firstly, I realize Magna also operates its integrated electric drive unit business via a joint venture in their case with LG Electronics, although I think BorgWarner has claimed some benefits to having all capabilities within one company. So wanted to get your thoughts on that, what advantages or disadvantages, either approach may have if any. And on a related note, with regards to the new NIO win, I'm curious if you think the venture with Inovance helps with go-to-market strategy or customer introductions in China, where they're based in, if these customer introductions might also confer some benefits on the component or other side for you, such as with differentials as well as for complete electric drive units?

So, Ryan, this is David. As it relates to the NIO business, the NIO business is a sub-assembly work that we won directly from an AMM standpoint with NIO. We did not have or need any involvement from our partner Inovance with respect to that. That's just a bonding and a building relationship that we've established with NIO, as they continue to grow their market share in China and they have greater demands and needs for their product to the performance of that product, they really turned to us based on our overall capabilities, especially in the area of NBH. So that's been a big positive for us in regards to building that relationship. On the Inovance question, Inovance has certainly been a good partner for us in China. They've helped us introduce us to many startup OEMs, as well as other OEMs within the China market. We are clearly growing our business in China with Inovance's support and leadership in some cases. So that's been a positive for us and we expect further growth opportunities. We're jointly developing some next-generation products today that will only strengthen our capability as far as product offerings to the marketplace, whether it be in China or globally around the world and our relationship is going very positive. As we've said before, when it comes to the market, we don't necessarily have to be completely vertically integrated in order to win business, we're bringing the value proposition to the table with the partners that we have today and we have been successful in winning our fair share of the business. Clearly, as we go forward and we'd like to strengthen our knowledge and capability there, but it doesn't mean that we have to do everything ourselves. But the partnership within Inovance is going very well right now.

Okay. Thanks. And then the last question is about how you have been named as the 100% sole supplier up front and rear pickup truck axles for production at GM's Oshawa, Ontario facility. How should we be thinking about this in the context of your earlier having gone from I think 100% to a more like 65% of the content on GM full-size pickups as that program transitioned from the K2XX to T1 architecture. Does this potentially signify any kind of shift in how GM thinks about producing these components in-house versus outsourced? Or is GM maybe already at capacity in terms of what driveline components they can produce out of Arlington and they didn't want to make an additional investment, whereas you already had some excess capacity, maybe more nearby. And then on this topic, as GM insources driveline capabilities for its Ultium drive program. Do you think as they reallocate resources that might in the future, they could reassess, how much of the non-Ultium pickup driveline work they want to do in-house and maybe benefiting American Axle?

Yes. Let me talk to the traditional side of the business before I talk about electrification. Clearly, GM made a decision, we understood that decision and we've executed that decision with GM in regards to, they decided to take a portion of the light duty pickup truck program only in-house into their Grand Rapids facility. That business is running, we help them get that business started, and they are running that business essentially to the capacity that they've installed. So that's positive for them, obviously impacted us. But we've overcome that, and we've managed that through our financials over the last several years. I'll remind everyone on the heavy duty and on the SUV, GM did not in-source any of that work and we're the supplier of that business directly. All the incremental capacity programs that GM has had have all come towards American Axle. So that's positive in regards to our relationship, the latest being the Oshawa program and we're very grateful for their confidence in us. At the same time we've earned it based on our performance and the value propositions that we brought to them for decades, but even here lately. So our relationship with GM is very, very strong. They need us, we need them on the traditional products today at the same time, we've had very good involvement with their senior leadership in regards to our technology and electrification. We recognize and understand what they're doing on the Ultium platform, both from a battery and from an EDU standpoint. That will apply to many segments within their vehicle models. But at the same time, as they shared with us, if there is a good value proposition from the supply base and it benefits General Motors, then they will entertain that and we're highly confident and they recognize that we have some value propositions offer them in the field of electrification. So more to come, nothing more to say at this point in time, but we're very confident about where our relationship is with General Motors.

Great. Thank you.

Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.

Hey. Good morning, thank you for taking the question. I'm sorry if I missed this earlier, but in the second quarter, how much did mix play a role in the strong margin? And maybe you could just comment on what you're expecting for mix into the second half?

Yes. Dan, this is Chris. Clearly with the semiconductor impact here inside of the second quarter the focus of our end customers, whether it be Stellantis or General Motors and others, their emphasis has been building full-size truck applications to really the detriment of some of their crossover vehicles. So, you do get a small benefit associated with mix in terms of our overall revenue profile. We would expect that to continue for a little bit here into the third quarter. But as they bring those facilities back online that will sort of, obviously I would call it mitigate more towards our previous normal mix through the course of the back half of this year. Now, in the third quarter as you know they've taken some downtime in the full size trucks that we're experiencing this week that we talked about. So that dynamic plays a little bit inside of the third quarter.

Great. And then the premium freight in the quarter. Any color on the magnitude of premium freight as a drag?

Yes. We had a little bit - think of it in the concept - framework a couple of million dollars’ worth of premium freight inside of the quarter due to basically challenges inside of the supply chain to make sure we have adequate supply, it wasn't material.

Got it. Thank you. And then as a follow-up, I think in the past, you talked about this Award in Europe with Luxury OEM for eDrive, and I think that program is supposed to launch in the back half of this year like a P3 eDrive unit. And maybe you could just give an update on that program. But on top of that, how is that program created an entry point for discussions with that customer, whomever that may be on their bad program,I'm just trying to get a sense for whether any progress you're getting on advanced hybrid is giving you an entry into higher content discussions on EV?

This is David Dauch. You're right and we are going to be launching a new electrified program, a P3 application for our Luxury European OEM at the end of this year. At the same time, there'll be seven variants to that program that will launch over a multiple years and going forward here. Clearly anytime you have the opportunity to work that closely with an OEM and advance a new technology you're going to build and strengthen the relationship, not only and strengthen their confidence in us as it relates to our development side. But also our ability to launch successfully that program. We expect other opportunities to present themselves. Because of the technology that we're developed and we're also seeing other opportunities that could use that P3 type application in the Luxury OEM that we're working on today is supportive of us sharing that capability with some others that are out there right now. So we feel very good about opportunities that are - first of all, the opportunity that we have with them, and at the same time other opportunities that will present themselves with respect to whether it's P3 or P4 applications in the future. And then clearly we're working a lot of other advanced technology in the electrification space that will demonstrate to the customers and that is, yes, they've got to determine based on their long-range product plans. What their technology needs are, and what they want to do in-house themselves versus what they want the supply base provides. All we can do is provide them a competitive offering and solution that offers that value proposition that we referred to earlier.

Okay. And that P3 eDrive unit, how much does that differ technically from a bev eDrive unit?

I mean, it's a different architecture completely from a full bev type application. It's more technical than I really want to get into here. But at the same time, this is a high-performance passenger car, like I said, with derivatives off of that, wheel in the other vehicles that we're spending most of our time with P4 type solutions, our full battery electric-type vehicles.

Got it. Thank you.

Our next question comes from Joseph Spak from RBC Capital. Please go ahead with your question.

Thanks. This is Garrett on for Joe. Maybe going back to the margins, but taking a step back, I mean you just put up almost 18% margin in the first half. I think even if you normalize for some of the timing differences associated with the inventory and kind of more normalized R&D, I think you're still high 16% right around 17%. So, I mean what can we kind of extrapolate about the underlying production or performance of the business in the first half as we think about a more normalized operating environment where hopefully scheduled volatility comes down, as the semi situation improves, commodity supply chains and it should improve. I realize kind of pricing may be normalizes and then mix may be a slight headwind. But what is kind of the underlying performance in the first half say about, what this business can do as things normalize?

Yes. I don't want to oversimplify the answer to this. But our underlying business ex those items you talked about such as semiconductor impacted metals, very strong in the first half, it's going to be very strong in the second half. It's going to be very strong going forward beyond that.

Okay. And then maybe just switching gears to the NIO win, I think in the past you said components CTV can be as high as $500, maybe give us some sense of where the NIO win lies in that? And then of kind of the EV sourcing activities, the 80% of the $1.5 billion that you're quoting. I mean, what percentage of those is based on conversations where customers are looking for you to supply the full eDrive solutions versus just components?

This is David Dauch speaking. As we indicated to the investment community I mean we're approaching the market in four different ways as it relates to our electrification strategy. One is on the component state, so think gears and shafts. Two is on the sub-assembly states, so think differential assemblies and others. Three is on the gearbox, and four is on the fully integrated unit. We're clearly seeing opportunities in every one of those categories right now. We're capitalizing on that and the latest one being the new award, which is a sub-assembly application. The pricing is in line with some of the things we've guided in the past and we see more opportunities presenting themselves going forward. On the fully integrated electric drive units, just because our technology has been more demonstrated and more understood and well received by the customer base, and just because of the content per vehicle is going to swing disproportionately in that direction. However, there is plenty of opportunities present in itself, in the other three categories I mentioned to you.

Okay. Thank you very much.

Thank you.

Thank you.

And our next question comes from Brian Johnson from Barclays. Please go ahead with your question.

Yes. Just have a question around the issue of OEMs particularly by protecting their full-size truck platforms, building vehicles that don't have chips and stored on lots around their factories. Just as we kind of get out the sharp pencils for this quarter and next quarter? Do you have any sense of the magnitude of that deal because that may not show up in IHS or its production numbers, because they're not finished trucks, but from your perspective, you would have delivered an axle set to those factories?

Yes Brian, this is David. I don't know a specific number and there's clearly everyone at the OEMs is building full units with chips, they are building or change the configuration in some trucks to take out chips. So they can still sell those directly to the marketplace with less capability and performance and maybe the fully integrated ones. And there is clearly other vehicles that are being built short of chips right now. I can't tell you what that exact number is. But it's impacting all the - trade three truck manufacturers and clearly, they're going to have to - as soon as they get the steady supply and chips to put those back into the system. I just don't know what that volume is of the top my head. It's probably better to ask OEM that question.

Okay and a second question, just following up on the NIO win congratulations. Did that start as a component discussion or did you pitch the drive - the e-motors and the dry modules. In fact some of your kind of knowledge of the capabilities and then wound up with a subcomponent?

You got to remember, they have existing suppliers today. And they've got some issues with some of those existing suppliers as it relates to the capability of the product and the performance, especially in the area of NVH. We bring a tremendous skill set there. So first we solve an issue that they have. Second, we obviously identified opportunities that we could cope going forward. And third, there is extended dialog that is taking place, we're hopeful that there will be other opportunities that could even include some of our advanced technology going forward.

Okay. Thank you.

Yes. Thanks, Brian.

Our next question comes from Adam Jonas from Morgan Stanley. Please go ahead with your question.

Hey, everybody. First a clarification, that 80% of the quoting activity that was electrification you mentioned it was hybrids and other forms of electrification. Can you tell us a split of hybrid versus BEV, for example of the 80% quoting?

Adam, this is David Dauch, the majority of its electrification. So I mean when I say majority, almost all.

Meaning - electrification meaning non-hybrid by pure BEV?

Correct.

Thank you. And David or team, any comment on - I know it's a tricky question because there is some flux and scale economies are not comparable. So the profit of these wins the margin profile of these wins versus what may be rolling off of the D-adoption. Can you provide color on that, and I'm not expecting the exact answer, but just color on if it's lagging? How much or is it approaching breakeven at EBITDA and any kind of color you could say so we can think of as these programs ramp when we could narrow the gap between presumably I would gas margins that just by virtue of the starting point is a bit lower than what you're - what's rolling off? Thanks.

Yes, hey Adam, this is Chris. As we think about new business that we source or are sourced with our customers and we price and approach it right, we maintain a very tight financial discipline. Margins are one element of that return on invested capital is another element of that. But big picture, our objective is to continue to be a high margin performing supplier, both in our traditional business and in our future business.

Appreciate it. Thanks.

Our next question comes from Itay Michaeli from Citi. Please go ahead with your question.

Great, thanks good morning, everyone.

Good morning.

So just a quick housekeeping to start, if I just look at the D&A and CapEx outlook for the year and compare it to the first half, I think kind of implies your CapEx up significantly in H2 D&A down quite a bit. Maybe just color on the flows there?

Yes, CapEx is clearly weighted to the back half of the year and in particular more so in the fourth quarter, as we're launching some of the programs that we've previously announced in beginning that process. As it relates to D&A, a little bit weighted to the first three quarters of the year you may notice, we had some accelerated depreciation associated with one of our customers that exited a region in Brazil. So that actually seizes that acceleration at the end of the third quarter, So that's the dynamic you're seeing from a depreciation standpoint.

Great, that's helpful Chris. And then just kind of going back to maybe a bigger picture incremental margin question and I know it's early to talk about 2022. But if we do have a smoother production cadence next year and then also considering some investments you're making electrification. Is, there any updated thoughts on how to broadly think about a range of incremental margins beyond 2021 given the choppiness this year?

Yes, if you think about going into next year right you'll pick - as the semiconductor issue passes, you will pick up volume which you know our contribution margin is generally very attractive with that. As you know, some of our customers are adding full-size truck capacity and volume requirements that we just talked about Oshawa previously that's obviously very attractive to our overall revenue line into next year. And that's very positive from a revenue perspective. On the cost side in the house, as we've mentioned, we'll continue to invest in the R&D space. So I would expect that to continue to increase slightly over time as kind of and those are probably are two major items thinking about walking into next year. But you have your normal stuff that we would typically talk about in terms of pricing, partially offset with productivity and a few other items.

Great stuff a quick follow-up. Did you share what R&D is expected to come in this year?

Right now, in the first half of the year we're a little over averaging about $30 million a quarter, we said that would step up in the back half of the year that step-up will probably be similar to what we would see into next year. So typically we've been talking at $35 million to $40 million range, we've been trailing under that recently. But we're going to start to move into that range here over the next three, six, nine, 12 months.

Perfect, that's all very helpful. Thank you.

And our final question today comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.

Yes hi, good morning everybody.

Good morning, Emmanuel.

Just wanted to come back to the 80% of quoting activity from electrified solution, which is a very big number and I was comparing that to your I think 15% of the three-year backlog, which is EV solution. So would you expect over the next three years or more to sort of help your backlog shift to overwhelmingly electrified solution or I guess how should we think about it?

Yes, Emmanuel this is David. The answer to that question is absolutely yes. I mean we're seeing less and less traditional opportunities from the OEMs right now and more and more of the electrification which is clearly indicative of what I just covered with the 80% of our quoted opportunities are in that electrification space.

Okay. And then do you have any initial data obviously early days on the electrification efforts. But do you have any initial data on win rates on some of this quoting activity and maybe in comparison with the traditional business? I'm generally curious to know if you have the opportunity over the next few years to get your annual backlog contribution above the $200 million, so that is averaging right now and back to higher levels that may be used to be a few years back?

Yes, no - we’re clearly comfortable in regards to our ability to win business going forward. As you know, historically, we've been in that 25% to 30% win rate on our traditional business, as long as we can continue to support that and then some - we'll have plenty of opportunity to offset any business that is trading out here, which is in that $100 million to $200 million range. But trending to the low end of that range right now we recognize our backlogs, with a lower backlog that we had in some time. But we fully expect that we'll be growing that backlog in years to come going forward.

And I guess some of your initial experience on electrification wins. Is the 25% to 30% win rate potentially applicable for those opportunities as well?

We're winning our fair share in the business and that's all I really want to say about that.

Okay. Thank you.

Yes. Thank you.

Thank you.

Thank you. Emmanuel 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. Thanks.