American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) Q4 2023 Earnings Call Transcript

American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) Q4 2023 Earnings Call Transcript February 16, 2024

American Axle & Manufacturing Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.16652 EPS, expectations were $-0.16. AXL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone. My name is Jamie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, today’s event is being recorded. At this time, I’d like to turn the floor over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

David Lim: Thank you, Jamie, and good morning, everyone. I’d like to welcome everyone who is joining us on AAM’s fourth quarter earnings call. Earlier this morning, we released our fourth quarter of 2023 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 2703442. This replay will be available through February 23rd. Before we begin, I’d like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties, which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.

For additional information, we ask that you refer to our filings with the Securities and Exchange Commission. Also, during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures as well as 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 of David Dauch.

David Dauch: Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM’s financial results for the fourth quarter and full year of 2023. Joining me on the call today are Chris May, our Executive Vice President and Chief Financial Officer. To begin my comments today, I’ll review the highlights of our fourth quarter and full year 2023 financial performance. Next, I’ll cover our achievements in 2023 on both our electrification and legacy businesses. After Chris covers the details of our financial results, we will open up the call for any questions that you all may have. So let’s begin. From a big picture standpoint, AAM’s fourth quarter operating results were negatively impacted by the UAW work stoppage.

However, our performance was on track with our improvement objectives that we shared with you on the last call, ending a challenging 2023 on a positive trajectory. In addition, we continued to generate positive cash flow and pay down our debt along the way. AAM’s fourth quarter of 2023 sales were $1.5 billion. And for the full year, AAM sales were approximately $6.1 billion. From a profitability perspective, AAM’s adjusted EBITDA in the fourth quarter was $169.5 million or 11.6% of sales. For the full year, AAM’s adjusted EBITDA was $693.3 million or 11.4% of sales. AAM’s adjusted earnings per share in the fourth quarter of 2023 was a loss of $0.09 per share. For the full year, AAM’s adjusted EPS was also a loss of $0.09 per share. For the full year, AAM’s adjusted free cash flow was $219 million.

This cash flow was deployed in 2023 to support debt reduction and electrification investments to position us for future growth. Chris will provide additional information regarding the details of our financial results in a few minutes. On slide four of our presentation deck, we are providing an update to our performance objectives overview slides that we initially shared with you in the last quarter. First, we experienced more customer stability in the latter part of the fourth quarter and that trend has continued into the first quarter of 2024, which is a positive. However, it is early in the year, and we remain optimistic but a little cautious. The UAW work stoppage ended in the fourth quarter and impacted plans to all resumed production, and we now consider this matter close its entirety.

As for commercial recoveries, we concluded a number of discussions at the very tail end of the year with positive results. We accomplished our primary objectives for 2023 and now have a few customers to close out in the first quarter here in 2024. We are also making steady progress on improving operations at a number of underperforming plants, and we’re on track with our objectives and progress has been good. We will continue to allocate the necessary resources to get these plants back to AAM standards and in the time frame that we noted on the chart. Overall, we feel very good about the glide path we are on to resolve the aforementioned topics. Let me now talk about business updates and the 2023 highlights, which you can see on slides five and six.

New for the quarter, we are very pleased to announce that AAM will supply DongFeng with final drive units for a four-wheel drive plug-in hybrid SUV program in the China market. We’re also happy to share that AAM will provide eLocking differentials to Mahindra SUV program launching here in 2024. And lastly, we have begun shipping electric vehicle components to VinFast for its midsized electric vehicle program from our recent Tekfor acquisition. On the recognition side, AAM’s China operations was recently recognized by SAIC-GM for quality excellence and supply chain stability and also earned an excellent Supplier of the Year Award from Chery itself. On slide six, it clearly highlights that 2023 was a challenging year from many perspectives, but it also was an eventful year for us with many accomplishments, and I just want to highlight a few of those accomplishments.

After sharing with you our e-Beam awards with EKA Mobility and Jupiter, we announced a significant win with Stellantis, supplying 3-in-1 e-Beam for a future EV program launched in the latter part of the decade. This was soon followed up with an e-Beam award announced with Skywell and Mahindra. In addition, our cutting-edge e-Beam technology is a PACEpilot Award finalist. As you already know, we won multiple PACE awards for electric driving customer collaboration over the years. So I’m excited about what we continue to do in that area. Our technology is certainly being recognized and it gives us further confidence about our competitiveness. In addition, our legacy business continues to gain traction globally. We announced award with FAW Group, supplying independent front axles for multiple plug-in hybrid vehicle models and with JETOUR providing power transfer units and rear drive modules from multiple all-wheel-drive SUV programs.

These awards signify AAM’s broad product portfolio that supports multiple powertrain configurations. Finally, in 2023, AAM was recognized with a number of business and DEI awards. In particular, Forbes named AAM one of America’s best employers for diversity in 2023. AAM continues to make great strides in diversity, equity, inclusion as well as environmental sustainability, and we look forward to publishing our new sustainability report in the near future. Now let’s talk about our strategy, and we’ll continue to secure our legacy core business, which we’ve made very good progress on. We’re improving and optimizing our operations, we’re driving EBITDA and free cash flow performance in generation. And as you know, our business model is designed to yield solid conversion with consistent volumes, and those volumes are getting stronger.

At the same time, we’ll continue to invest in electrification and solidify our position as a global leader in e-Propulsion systems, providing the OEMs with cost-effective, high-value solutions from e-Beam axles and electric drive units to components as well. However, the reality of the industry is — however, the reality is the industry is in an air pocket as OEMs reassess their respective electrification strategies, driven by many factors, including consumer adoption, electric infrastructure, cost and government regulations, just to name a few. As these factors are being weighed, AAM will continue to run our aforementioned playbook and be ready for any shifts in powertrain needs. Before I turn it over to Chris, let me discuss our three-year business backlog and our 2024 full year financial outlook that was included in our press release this morning.

AAM expects our gross new business backlog covering the three-year period of 2024 through 2026 to be approximately $600 million. For the backlog breakdown, please refer to slide seven. About 50% of our backlog stems from electrification, and this is up from last year, which was at 40%. We expect the launch cadence of our backlog to be $300 million in 2024 and $175 million in 2025 and $125 million in 2026. The new backlog nicely encompasses the mix of ICE and electric programs, including pickups, CEV programs in Asia and additional model variants for other sophisticated electric drive units to highlight a few. Our backlog factors in the impact of updated customer launch timing, our latest customer volume expectations and does not include replacing business just and only new and incremental business.

And the backlog encapsulates recent OEM powertrain trends and timing estimates. From a launch standpoint, we have 19 launches in calendar year 2024, which should drive growth over the next several years. 2024 is a big year for AAM in terms of launch activity. In addition to our healthy $300 million new business backlog this year, we have major replacement business launches taking place already in the beginning of this year. And particularly with the Ram heavy-duty truck, the ICE version and GM midsized CEV platforms. Both of these sizable and popular platforms will continue to help fuel AAM’s business into the next decade. So let’s talk about 2024 from an end market perspective. We forecast production at approximately 15.8 million units for our primary North American market.

We are monitoring multiple factors that can swing production, including interest rates and the health of the consumer. Slide eight illustrates AAM’s 2024 financial outlook. AAM is targeting sales of $6.05 billion to $6.35 billion, adjusted EBITDA of approximately $685 million to $750 million, and adjusted free cash flow of approximately $200 million to $240 million. In the longer term, we’ll continue to stay focused on securing our core business, generating strong free cash flow strengthening our balance sheet, advancing our electrification portfolio and positioning AAM for profitable growth. Team AAM looks forward to a positive and productive 2024. That concludes my formal remarks. Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Chris May.

Chris?

Christopher May: Thank you, David, and good morning, everyone. I will cover the financial details of our fourth quarter and full year 2023 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 fourth quarter of 2023, AAM sales were $1.46 billion compared to $1.39 billion in the fourth quarter of 2022. Slide 11 shows a walk of fourth quarter 2022 sales to fourth quarter 2023 sales. Positive volume mix and other was $158 million, driven in part by our backlog and certain platforms not impacted by the UAW work stoppage. UAW work stoppage had an $84 million negative impact to sales in the quarter. And lastly, metal market pass-throughs and FX lowered net sales by approximately $1 billion with metals lower and FX higher.

For the full year of 2023, AAM sales were $6.1 billion as compared to $5.8 billion for the full year of 2022. The primary drivers of the increase were volume and mix, the five-month contribution from our Tekfor acquisition, and AAM’s new business backlog, partially offset by the UAW work stoppage and lower metal market pass-throughs. Now let’s move on to profitability. Gross profit was $154.9 million in the fourth quarter of 2023 as compared to $167.2 million in the fourth quarter of 2022. Adjusted EBITDA was $169.5 million in the fourth quarter of 2023 versus $157.7 million last year. You can see a year-over-year walk down of adjusted EBITDA on slide 12. In the quarter, volume, mix and other added a net $39 million of adjusted EBITDA versus the prior year.

The UAW work stoppage had a $23 million negative impact to the quarter. R&D was slightly higher year-over-year to support product launches and our electrification advancements. And maybe most importantly, net inflation performance and other was $13 million favorable as plant efficiency improvement objectives remained on track, and we concluded a number of commercial discussions at the tail end of last year. For the full year of 2023, AAM’s adjusted EBITDA was $693.3 million and adjusted EBITDA margin was 11.4% of sales. Let me now cover SG&A. SG&A expense, including R&D in the fourth quarter of 2023 was $95.7 million or 6.5% of sales. This compares to $88.5 million or 6.4% of sales in the fourth quarter of 2022. AAM’s R&D spending in the fourth quarter of 2023 was approximately $40 million.

As we head into 2024, we will continue to focus on controlling our SG&A costs and investing in our electric drive technology. We expect R&D to be flattish year-over-year. We anticipate about $35 million to $40 million per quarter on average, although it can be lumpy as we expect the annual pace of spending to moderate in the coming years as we finish developing our electric platform technologies. Let’s move on to interest and taxes. Net interest expense was $42.9 million in the fourth quarter of 2023 compared to $36.9 million in the fourth quarter of 2022. Although our total debt is lower at quarter end on a year-over-year basis, the rising rate environment drove the interest expense increase. In the fourth quarter of 2023, we recorded income tax expense of $5.8 million compared to an expense of $4.1 million in the fourth quarter of 2022.

The unusual book rate for the quarter includes the recording of valuation allowances that we have discussed in previous calls. As we head into 2024, we expect our adjusted effective tax rate to be approximately 25% to 30%. Taking all these sales and cost drivers into account, our GAAP net loss was $19.1 million or $0.16 per share in the fourth quarter of 2023 compared to net income of $13.9 million or $0.11 per share in the fourth quarter of 2022. Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was a loss of $0.09 per share in the fourth quarter of 2023 compared to a loss of $0.07 per share in the fourth quarter of 2022. For the full year of 2023, AAM’s adjusted loss per share was $0.09 versus earnings of $0.60 in 2022.

Let’s now move to cash flow and the balance sheet. Net cash provided by operating activities for the fourth quarter of 2023 was $52.9 million. Capital expenditures, net of proceeds from the sale of property, plant and equipment for the fourth quarter of 2023 were $55.9 million. Cash payments for restructuring and acquisition-related activity for the fourth quarter of 2023 were $7.5 million. Reflecting the impact of these activities, AAM generated adjusted free cash flow of $4.5 million in the fourth quarter of 2023. For the full year of 2023, AAM generated adjusted free cash flow of $219 million compared to $313 million in 2022. As a team, we remain focused on free cash flow conversion, including managing CapEx effectiveness and efficiency and reducing cash restructuring payments.

From a debt leverage perspective, we ended the year with net debt of $2.2 billion and LTM adjusted EBITDA of $693 million, calculating a net leverage ratio of 3.2 times at December 31st. This is down from 3.3 times leverage ratio at September 30th of 2023. In 2023, we lowered our senior gross debt by over $140 million, including over $85 million in the fourth quarter, we will continue to strengthen the balance sheet by reducing our outstanding indebtedness. AAM ended 2023 with total available liquidity of approximately $1.5 billion, consisting of available cash and borrowing capacity on AAM’s global credit facilities. Before we move to the Q&A portion of the call, let me provide some thoughts on our backlog and 2024 financial outlook. In our earnings slide deck, we have included walks from 2023 actual results to our 2024 financial targets, and you can find those starting on slide 14.

From a backlog perspective, the industry is at a juncture where OEMs are reformulating their electric vehicle product plans and timing, driven by a variety of factors. Similar to the industry, AAM is not immune to these cross currents and our new 2024 to 2026 backlog reflects timing of this environment. However, the good news here is under various scenarios, our base core business can remain quite strong for longer. Demand for our new next-generation business we are launching should be robust and possibly extend further. And all that is good for AAM. Let’s talk about our guidance for 2024. For sales, we are targeting the range of $6.05 billion to $6.35 billion for 2024. The sales target is based upon a North American production of approximately 15.8 million units and assumptions for our key programs.

New business backlog launches of approximately $300 million and attrition of approximately $220 million. We are cautiously optimistic that the supply chain has done a better footing to support more stability versus the past several years, but we are monitoring this very closely. From an EBITDA perspective, we are expecting adjusted EBITDA in the range of $685 million to $750 million, and let me provide some color on the key elements of our year-over-year EBITDA walk that is on page 15. We expect to convert our year-over-year product volume and mix increase at approximately 25% variable profit. As mentioned earlier, our R&D spending will be flattish year-over-year as we invest in our future and support electrification products and projects that we are in various stages of development.

AAM expects to deliver cost reductions, operational productivity and commercial actions to mitigate inflationary costs and deliver year-over-year efficiency gains. You can see year-over-year performance improvements at a net favorable $35 million on our walk. And lastly, we expect the net negative impact to the metal markets and FX, with the majority of this related to the strengthening of the Mexican peso. On page 16, from an adjusted free cash flow perspective, we are targeting approximately $200 million to $240 million in 2024. The main factors driving our cash flow changes are as follows. We have higher capital expenditures stemming from key launches and investments such as automation. A number of these launches are related to our large next-generation core programs that we secured and we are targeting CapEx as a percent of sales of approximately 4% to 4.5%.

We are also expecting moderately higher cash interest and taxes. Lastly, while not included in our adjusted free cash flow figures, we estimate our restructuring payments to be in the range of $15 million to $25 million for 2024 as we look to finalize the integration of recent acquisitions and further optimize our business. We continue to focus on the reduction of these type of expenditures. In addition, we expect to use the free cash flow generated in 2024 to continue to reduce debt further solidify our position in electrification and take advantage of select market opportunities to support growth should they arise. We are excited about AAM’s cash flow generation potential as we launch over $10 billion of next-generation full-size truck axle programs with multiple customers from mid-decade to beyond 2030.

From a CapEx perspective, our goal is to remain under 5% of sales, but there could be years that we may spike over that mark depending on launch cadence. As it relates to cadence for the year, sales cadence is similar to 2023 with first and fourth quarters being lower than the second and third quarters. And as depicted on our slide four of our deck, we anticipate exiting the listed challenges by the second quarter. From a cash flow perspective, we expect the seasonal cash flow use in the first quarter. Overall, we’re expecting a more stable operating environment relative to 2023. As underperforming plans hit operational stride, costs stabilize and additional productivity improvements are achieved, AAM to generate nice future EBITDA conversion, setting up the opportunity for continued financial performance.

Thank you for your time and participation on the call today. I’m going to stop here and turn the call back over to David, so we can start Q&A. David?

David Lim: 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.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Dan Levy from Barclays. Please go ahead with your question.

Dan Levy: Hi, good morning. Thanks for taking the questions. Wanted to start with just a couple of questions on the ’24 EBITDA walk. Maybe you could just clarify a couple of items here. The metal markets and FX, just what are you assuming in terms of peso case of transaction headwinds and anything on the commodity side? And then maybe I see R&D is a $5 million headwind. What are the puts and takes within that? How much is R&D related to EV programs versus core R&D on ICE?

Christopher May: Yes, Dan, good morning . This is Chris. I’ll take both of those questions. We’ll start with the R&D that we can talk about the FX and metals. From an R&D perspective, this really gets us to a run rate of about $40 million a quarter, up from $155 million in 2023 to $160 million in 2024. And principally, this continues to be the build-out of some of our electrification platforms. So as David mentioned, we do have some large, I would call it, replacement business launching this year, which will require a little bit from an R&D perspective, more on the B side. And so that really — that’s why we said sort of year-over-year, we see it flattish. From a metal market and FX perspective, as you can see on that walk, it is minus $20 million.

Most of that is just simply related to the strengthening of the Mexican peso. As you know, we’re a large consumer of the peso. We used about MXP5 billion to MXP6 billion a year inside of our Mexico operations. It’s about 1.5 points lower than our experience in 2023. So we’re sort of in that 18% to 18.25% range is our estimate going forward, and that’s a blended rate with our hedges as well as some floating.

Dan Levy: Okay. And the peso assumption, that now is a full true-up? Or there’s still some heads outstanding that in the future once those reset, that would be an additional headwind based on where the peso is?

Christopher May: We’re at a consistent, I would call it a year-year rolling hedge program. So we’re constantly hedging three years out at various levels from a risk management perspective. And it will ultimately depend on the underlying spot rate to how you place those forward into the subsequent one, two or three years.

Dan Levy: Great. Thank you. The second question is on the where essentially 40% of the prior backlog of 50% of the current backlog gets you to similar electrification bookings. Maybe you could just provide some context on those figures in light of the slowdown, some of the pushout of programs that we’ve seen, how much of this is booked and solid versus still based on maybe the easy assumptions from the OEM?

Christopher May: Yes. Dan, I’ll take the first crack at that as well. At least from a — I mean these are all booked programs. Obviously, we’re subject to volume estimates from our consumer — or our customer is writing other inputs and our own judgment on those. And yes, while it clipped up from last year, meaning from a percent of the backlog from 40% to 50%, keep in mind, inside of ’23, we were launching a fair amount of our drive units with AMG and some others as well. So some of those started production already. So this is some incremental wins that we had that will launch over the next couple of years. But from an absolute dollar, it’s flat, but we’ve already started to record the actual revenue of some of the prior backlog in 2023, and that continues to grow.

Dan Levy: Great. Thank you.

Operator: Our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.

James Picariello: Hi. Good morning, everyone.

David Dauch: Good morning, James.

James Picariello: Just on your EV program exposure. Just any way to think about the EV programs you have in your backlog that you’re reporting in the rolling three-year figure relative to your key platform OEM exposure, just in terms of what that overlap could look like as we consider the possibility for EV programs to get — further get pushed and/or delayed just in terms of what that replacement, the legacy production benefit could be or what that dynamic looks like?

David Dauch: So James, this is David. Let me take a crack and Chris can add to it. First of all, there’s a delay in EV program, so that’s good for our business. We can generate strong margins. And in that area, strong cash flow, continue to fund our electrification growth going forward. At the same time, continue to pay down debt, and work on tactical acquisitions where it makes sense. So we see that as a positive for us. At the same time, we’re going to continue to develop the portfolio that we need for electrification. As Chris has already highlighted and I highlighted in my comments, we continue to win new electrification awards. But to your point, many of the customers are rescoping their program, their content per program and the volumes that go with that.

And so our backlog, as we said earlier, is growing year-over-year. We’re quoting $1.5 billion of new and incremental business, of which greater than 75% of that is electrification based. But most of what we’re working on is the latter part of the decade. So I think you’re going to see as the OEMs sort out their plans over the next, let’s say, 12 to 24 months because I think it may take that long. Because ultimately, the market is the boss and they’ve got to put their portfolio in place to be able to support what the consumer demand is. So we’ll adjust accordingly, but any delay in EV is only going to ask for more ICE to get inventories where they need to be which, like I said earlier, is a positive thing for AAM. So, Chris, I don’t know if there’s anything you want to add or not.