American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) Q1 2023 Earnings Call Transcript
American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) Q1 2023 Earnings Call Transcript May 5, 2023
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 First Quarter 2023 Earnings Conference Call. As a reminder, today's call is being recorded. And 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 and good morning. I'd like to welcome everyone who is joining us on AAM’s first quarter earnings call. Earlier this morning, we released our first 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 8763803. This replay will be available through May 12. Before we begin, I'd like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties, which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission. Also, during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website. With that, let me turn things over to AAM’s Chairman and CEO, David Dauch.
David Dauch: Thank you, David, and good morning, everyone. Thanks for joining us today to discuss AAM’s financial results for the first quarter of 2023. Joining me on the call today is Chris May, AAM’s Executive Vice President and Chief Financial Officer. To begin my comments, I'll review the highlights of our first quarter financial performance. Next, I will touch on some exciting news in the quarter, including significant developments with our electrification business. The momentum of our technology is clear and is accelerating. The combination of our technology leadership, including power density, mass optimization, efficiency, and MVH expertise, is driving strong interest in our product portfolio. After Chris covers the details of our financial results, we'll open up the call to any questions that you all may have.
So let's begin. AAM’s first quarter of 2023 sales were $1.49 billion. AAM continues to be impacted by downtime at our largest customers and production volatility. We are closely monitoring the overall macroenvironment, including rising interest rates and consumer sentiment that drives production and demand. We remain focused on factors that we can control. From a profitability perspective, AAM’s adjusted EBITDA in the first quarter was $175 million, or 11.7% of sales. Disruption in the supply chain and changes to the production schedules adversely impacted AAM in the quarter. This continues to be exacerbated by a tight labor market. We anticipate this backdrop to continue throughout 2023, but remain hopeful that the operating environment should incrementally improve in successive quarters.
We experienced launch costs in the first quarter as the company is in the launch mode on some of our most significant launches of the year. We anticipate these costs to stabilize in the following quarter. And Chris will provide more details about our EBITDA performance in the quarter. AAM’s adjusted earnings per share in the first quarter of 2023 was a loss of $0.01. AAM experienced a cash outflow in the quarter, and AAM’s adjusted free cash flow use in the first quarter was $17 million. Let me talk about some exciting business updates and key highlights which you can see on slide 4 of our investment package. Earlier this year at our Technology Day, we showed the investment community the strengths and the advantages of our electric propulsion product portfolio.
Today, that technology foundation is continuing to manifest into tangible results. We are very pleased to announce that AAM will supply Stellantis with e-Beam Axles for a future electric vehicle program. The program is set to launch in the latter part of this decade. We are limited on any other further details that we can share on this significant program, but we are clearly demonstrating our capabilities and value proposition in electric propulsion technology and systems integration to the OEM community. This is a great example of how AAM is leveraging the axle heritage of the company with cutting- edge electric propulsion technology leadership of today to drive our future growth. In the past several quarters, we have announced multiple e-Beam awards with , Jupiter and now Stellantis, and we expect the momentum to continue as we are in significant conversations with a number of other OEMs. Remember, our e-Beam and EV are designed to support multiple vehicle segments and architectures.
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Additionally, AAM made a commitment and investment in the Global Strategic Mobility Fund, which is managed by EnerTech Venture Capital. The investment provides AAM with access to new startup and fully vetted high-tech companies advance in automotive technologies. From a business recognition standpoint, we are excited to share that AAM was once again recognized by General Motors with the Overdrive Award for its efforts in sustainability. This is our third consecutive year of receiving the Overdrive Award, which recognizes suppliers for performance in such areas as purchasing, manufacturing services, customer care, after sales, and logistics. AAM also made the list of America's best large employers by Forbes, our fourth time in doing so and Newsweek recognized AAM as one of America's most responsible companies here in 2023.
From an ESG perspective, we are also very pleased to announce that we recently published in April our 2022 Sustainability Report. Some of the key highlights of this report include achieving our SBTi validation of Greenhouse Gas Emission goals. An A minus rating on the CDP Climate Change survey, hiring our first executive for diversity, equity and inclusion, improving our all safety performance metrics and establishing a Supplier Sustainability Council while increasing our spend with diverse suppliers. Clearly, AAM is committed to properly growing our business in a way that is sustainable, socially responsible and equitable. To close out my comments, slide 6 shows our guidance, which is unchanged. And AAM is targeting sales from $5.95 billion to $6.25 billion, adjusted EBITDA of approximately $725 million to $800 million, adjusted free cash flow of approximately $225 million to $300 million, which assumes a capital spending in the range of 3.5% to 4%.
So again, unchanged from earlier guidance. In the continuation of the theme that started in the past several years, the operating environment remains dynamic, but we are hopeful to see some stabilization in the second half of the year, and it is difficult to predict when normal will return. But until it does, we will continue to remain focused on cost control, daily performance and execution, continuous improvement, quality performance and bringing the future faster. As we've communicated many times before, our aim in the future, and we will continue to drive our efforts towards securing our primary legacy business, generating strong free cash flow, strengthening our balance sheet, advancing our electrification portfolio, and positioning AAM for future profitable growth.
I'm very excited about what lies ahead for AAM. And that concludes my remarks. Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Chris May. Chris?
Christopher May: Okay. Thank you, David. And good morning, everyone. I will cover the financial details of our first quarter 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 first quarter of 2023, AAM sales were $1.49 billion, compared to $1.44 billion in the first quarter of 2022. Slide 8 shows a walk of first quarter 2022 sales to first quarter 2023 sales. In the quarter, pricing was approximately a $5 million impact, positive volume mix and other was $10 million. And the primary contributor to the year-over-year sales increase with the Tekfor acquisition which contributed $101 million to sales. And lastly, Metal Market passthroughs and FX lowered net sales by approximately $48 million.
With Metal and FX both lower. During the quarter, the key full size truck programs that we support experienced a fair amount of downtime. Overall, while North American production was up year-over-year, our primary full size truck platforms related products were generally flat year-over-year. Now, let's move on to profitability. Gross profit was $160.6 million in the first quarter of 2023 as compared to $186.8 million in the first quarter of 2022. Adjusted EBITDA was $175.4 million in the first quarter of 2023 versus $196.1 million last year. You can see the year-over-year walkdown of adjusted EBITDA on slide 9. In the quarter volume mix and other added $4 million of adjusted EBITDA. R&D increased by approximately $8 million to support product launches and our electrification technology development.
Net inflation, performance and other was a headwind of $27 million. For some color on this variance, it is a mix of net inflation for labor and materials, inefficiencies due to production volatility and launch costs we incurred as we are ramping up significant new programs in the quarter. Going forward, we would expect labor inflation to remain, efficiencies to improve with stability and launch costs to continue into the second quarter and reduce thereafter. Let me now cover SG&A. SG&A expense including R&D in the first quarter of 2023 was $98.3 million, or 6.6% of sales. This compares to $86.1 million, or 6% of sales in the first quarter of 2022. AAM’s R&D D spending in the first quarter of 2023 was approximately $43 million. As we mentioned before, R&D will trend around the $40 million range per quarter as we continue to invest in our electric drive technology, capitalizing on the growing number of electrification opportunities that are before us, including the Stellantis announcement today.
The good news here is we continue to see multiple new electric propulsion opportunities driving this investment. Let's move on to interest and taxes. Net interest expense was $44.6 million in the first quarter of 2023, compared to $41.7 million in the first quarter of 2022. Although, our total debt is lower at quarter end on a year-over-year basis, the rising rate environment is driving the interest rate increase. In the first quarter of 2023, our income tax expense was de minimis as compared to an expense of $3 million in the first quarter of 2022. For 2023, we expect our adjusted effective tax rate to be somewhat elevated in the 40% to 50% range, primarily due to an increase in a current period valuation allowance. Taking all this into account, our GAAP net loss was $5.1 million in the quarter, or $0.04 per share in the first quarter of 2023, compared to a net income of $1 million or $0.01per share in the first quarter of 2022.
Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was a loss of $0.01 per share in the first quarter of 2023 compared to $0.19 share in the first quarter of 2022. Let's now move to cash flow and the balance sheet. Net cash provided by operating activities for the first quarter of 2023 was $32.1 million. Capital expenditures, net of proceeds from the sale of property, plant and equipment for the first quarter of 2023 were $46.2 million. Cash payments for restructuring and acquisition related activity for the first quarter of 2023 were $4 million. The net cash inflow for insurance proceeds in the operating section of the statement of cash flows related to the Malvern fire was $7 million in the quarter.
Reflecting the impact of these activities, AAM incurred an adjusted free cash flow use of $17.1 million in the first quarter of 2023. We note that historically, working capital is often an outflow in the first quarter and we experienced that trend this year. From a debt leverage perspective, we ended the quarter with net debt of $2.4 billion, an LTM adjusted EBITDA of $726.6 million, calculating a net leverage ratio of 3.3x at March 31. In the first quarter, we continued to reduce our outstanding debt by over $25 million and we intend to continue to utilize the free cash flow generating power of AAM to strengthen the balance sheet by reducing our outstanding debt. As for the rest of the year, slide 6 shows our full year guidance. Our 2023 financial targets are unchanged from when we initially provided them on February 17.
For sales, we are targeting the range of $5.95 billion to 6.25 billion for 2023. This sales target is based upon a North America production of 14.5 million to 15.1 million units and select assumptions for our key programs. Underpinning our North America production and sales ranges, we anticipate the GMT1XX program on a year-over-year basis to be flat to up to approximately 5% or 10%. In terms of quarterly cadence considerations, we would expect continued launch costs into the second quarter and customer inflation recoveries more weighted in the second half of the year. While uncertainty remains, we are cautiously optimistic that the operating environment will improve throughout the year. Our adjusted EBITDA target is $725 million to $800 million, and our adjusted free cash flow target is $225 million to $300 million.
So big picture, this quarter has been a busy quarter, with critical launch activity, experienced more large truck downtime than expected, has been impacted by volatility and efficiencies, and has had a robust R&D spend. However, the even bigger picture, customer interest in our new electrification products is growing, and our business is transformed with each new award we earn. So 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 the 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 that you may have. Jamie?
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