Q4 2023 American Axle & Manufacturing Holdings Inc Earnings Call

Participants

David Lim; Head, IR; American Axle & Manufacturing Holdings, Inc.

David Dauch; Chairman of the Board, Chief Executive Officer; American Axle & Manufacturing Holdings Inc

Christopher May; Chief Financial Officer, Vice President; American Axle & Manufacturing Holdings Inc

Dan Levy; Analyst; Barclays PLC

James Picariello; Analyst; BNP Paribas Exane

John Murphy; Analyst; Bank of America Corp.

Joe Spak; Analyst; UBS Group AG

Tom Narayan; Analyst; RBC Capital Markets Corp.

Presentation

Operator

Yes, 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 speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the star key then the number one on your telephone keypads. If you'd like to withdraw your question, you may press star and two. 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 ADM'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 one eight seven seven three four four seven five two nine replay access code two seven zero three four four two. 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 and with that, let me turn things over to AAM's Chairman and CEO, 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 have a very 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 and in 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. 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 full year, and 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. And adjusted EPS was also a loss of $0.09 per share for the full year. And 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 4 of our presentation deck, we have provided an update to our performance objectives overviews by the 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 UAW work stoppage ended in the fourth quarter and impacted plants have all resumed production and we now consider this matter closes entirely.
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 that close out in the first quarter here in 2024. We're 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 AM standards in the timeframe 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 5 and 6 new for the quarter. We are very pleased to announce today and will supply Dong Fong with final drive units for four-wheel drive plug-in hybrid SUV program in the China market. We're also happy to share that AAM will provide E locking differentials to Mahindra at SUV. program launching here in 2024. And lastly, we have begun shipping the electric vehicle components to them fast, Ford's midsize electric vehicle program from our recent tech for acquisition. On the recognition side, A. And B 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 charitable cherry itself.
On slide 6, it clearly highlights the 2023 was a challenging year from many perspectives, but it also was an eventful year for us with many accomplishments. I just want to highlight a few of those accomplishments that are sharing with you our e-beam award with EQM mobility and Jupiter. We announced a significant win with Stellantis supplying 3-in-1 EVN's for future EV program launched in the latter part of the decade. This was soon followed up with an e-beam and warm analysis of Sky well and Mahindra In addition, our cutting-edge e-beam technology is a paid pilot Award finalist. As you already know, we won multiple PACE awards for our 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 that gives us further confidence about our competitiveness. In addition, our legacy business continues to gain traction globally, we announced award with FAW Group supply and independent front axles for multiple plug-in hybrid vehicle models. And with J two are providing power transfer units and rear drive modules for multiple all wheel drive SUV programs. These awards signify a broad product portfolio that supports multiple powertrain configurations.
Finally in 2023 and was recognized with a number of business and DEI. awards, in particular, Forbes named a and one of America's Best Employers for Diversity in 2023 and 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 will continue to secure our legacy core business, which we've made very good progress on were improvement and optimizing our operations were 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 for me, beam axles and electric drive units and to components as well. However, the reality of the industry isn't in it. However, the reality is the industry is in an air pocket as OEM.s 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 and we expect that 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 7, 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, $175 million in 2025, and $125 million in 2026. The new backlog nicely encompasses a mix of ICE and electric programs, including pickups, CV programs in Asia and additional model variants for other sophisticated electric drive units. To highlight a few. Our backlog factored in the impact of updated customer launch timing, our latest customer volume expectations and does not include replacement business just and only new and incremental business backlog and encapsulate 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 midsize CUV platforms. Both of these sizable popular platforms will continue to help fuel AMES business into the next decade.
So let's talk about 2024. From an end-market 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 8 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, strengthen our balance sheet, advancing our electrification portfolio and position AAM for profitable growth, profitable growth. You may and look forward to a positive and productive 2024.
That concludes my formal remarks.
Let me now turn the call over to our Executive Vice President, Chief Financial Officer, Chris May.

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, AM 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 million 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 tech for 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, mainly.
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 and 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 finished developing our electric platform technologies.
Let's move on to interest and taxes that 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 included 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 2020 to 40 for the full year of 2023. And 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 and generated adjusted free cash flow of $219 million compared to $313 million in 2020 to 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 31. 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 and ended 2023 with total available liquidity of approximately $1.5 billion, consisting of available cash and borrowing capacity & M'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've included walk 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 crosscurrents 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 ADM.
Let's talk about our guidance for 2024 for sales, we are targeting the range of $6.05 billion to $6.35 billion for 2020 for 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 hits on better footing to support more stability versus 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. It 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 and we expect 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 as a net favorable $35 million on our walk. And lastly, we expect a 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 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're also expecting modestly 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 in the second and third quarters. And as depicted on our Slide 4 of our deck, we anticipate exiting delisted challenges by the second quarter.
From a cash flow perspective, we expect the seasonal cash flow used in the first quarter. Overall, we're expecting a more stable operating environment relative to 2023 as underperforming plants and operational Stride costs stabilize and additional productivity improvements are achieved and 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?

Question and Answer Session

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.

Operator

At this time, I'd like to remind everyone that in order to ask a question, please press star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. 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. Tom, maybe you could just clarify a couple of items here, metal markets and FX. Tom, just what are you assuming in terms of So in case of transaction headwinds and anything on the commodity side? And then maybe C R & D is a $5 million headwind. What are the puts and takes within that on how much and R&D related to EV programs versus core R & D on IT?

Christopher May

Yes, Dan, good morning. This is Chris. I'll take both 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 buildout of some of our electrification platforms. So as David mentioned, we do have some large home. I would call it replacement business launching this year, which will require a little bit from an R&D perspective, more on the DI 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 use about MXN5 billion to MXN6 billion a year inside of our Mexico operations, it's about a point and a half lower than our experience in 2023. So we're sort of in that $18 million, $18.25 million range of 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 it full true up or are there still some hedges outstanding that, you know in the future, once those reset, that would be an additional headwind based on where the peso is?

Christopher May

We've had a consistent, I would call it a three year rolling hedge program. So we're constantly hedging three years out in various levels from a risk management perspective. And it will ultimately depend on the underlying spot freight to how you place those forwards into the subsequent one, two or three years?

Dan Levy

Great. The second question. Thank you. The second question, I'm not in the backlog where essentially, you know, 40% of the prior backlog, 50% of the current backlog gets you to similar electrification bookings. Maybe you could just provide some context on those figures in light of slowed down some of the pushout of programs that we've seen and how much of this is booked and solid versus -- still based on any higher EV or some from OEM.

Christopher May

Yeah. I'll take the first crack at that as well, at least from a. But I mean, these are all booked programs. Obviously, we're subject to volume estimates from our consumer or our customer is writing other inputs in our own judgment on those. And yes, while it clicked 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 stores 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 dollars flat. But we've already started to record the actual revenue, a similar 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.

James Picariello

Just on on your EV program exposure is just any way to think about the 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 are delayed just in terms of what that replacement legacy production of benefit could be or what that dynamic looks like?

David Dauch

So Jim, this is David, let me take a crack and Chris can add to it on. First off, there's a delay at EV program that's good for our business and feel we can generate strong margins and that area's strong cash flow continued to fund our electrification growth going forward, at the same time, continue to pay down debt. We're kind of 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 re-scoping their program, their content per program, and that are the volumes that go with that.
And so with 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's electrification based, but most of what we're working on it as the latter part of the decade. So I think you're going to see at 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 markets, the boss and they've got to put their portfolio in place to be the support with the consumer demand is. So we'll adjust accordingly. But yes, any delay in AV 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 Asia.

Christopher May

Chris, I don't know if there's anything you want to add or not add specifically to the electrification of products inside of our backlog, there's not a lot of overlap with our existing business. As you know, AMG. is going into multiple derivatives as we talked about previously. So that continues to expand on that set. But some of the announcements over the last year that we've talked about, especially in the China and Indian markets. Those are incremental to us, but we do see a little bit of overlap on the component side. So the extent that ICE is stronger, obviously, our ICE business would pick up any slack from the components as far as how we're thinking about electrification that I think will fix.

James Picariello

And then just my follow-up is, as certain OEMs consider a pivot to hybridization more an emphasis on it as a full driveline supplier, what could be the conceivable the fastest turnaround to get a new and existing? And I line to like to incorporate hybrid. Just high level thoughts on that?

David Dauch

James, for us, the product components and subassemblies that we manufacture between ICE and hybridization are very similar to one another. So we can get to the market very quickly without a lot of change is really what the OEMs, how they want to identify that the type of hybridization that they want to put into their vehicles. But again, that could be a positive for our company.

Christopher May

Yes. So James, keep in perspective a few years back. Some of our customers had some large truck platforms that are hybrid, it was the exact same answer for us and that would it would entail additional content for you potentially as well. But there is potential, especially on some of our BCS business as they have in, depending obviously how they operate, what type of engine sizes, et cetera, inside of a vehicle. But potentially.

James Picariello

Yes. Thank you.

Operator

And thanks Our next question comes from John Murphy from Bank of America. Please go ahead with your question.

John Murphy

Good morning, guys on spreads and you have more questions on the backlog. When you look at this until you presented that EV, does that include EV and hybrids? And I wonder if you could maybe give us a split there.
And also, Chris, on slide 14, you gave us this great 20 attrition against the $300 million gross. So we had a net new business backlog in your roll on in '24 of $80 million. I just wonder if you have some similar guidance or something you'd give us there for '25 and '26, so we could back into a net new business backlog?

Christopher May

Yes. So let's start with the first question. As it relates to our EUV backlog, it's all about with the exception technically in the AMG. product. As you know, we supply is technically a hybrid, but it is an electrified axle, but the rest is all best in terms of that half. And that's not hybrid in terms of how we think about attrition going forward. As you know, this was a little bit larger year for us. There was a couple of platforms that we supply that ceased production. But as you go forward, we typically think about somewhere between $100 millionto $200 million of attrition on an independent annual basis. So you can use midpoints of those going forward for the time being.

John Murphy

Okay. And then just one more follow-up for me. You're in if you're not accounting for potential upside in the mid CUV. program at GM is relaunching the RAM HG. any upside in GMT. Our programs are going to get that full-size truck at GM. I mean, there's news no accounting for that at all in this backlog whatsoever.

David Dauch

No that, no, let's call our core business and credit outlook and the backlog. John is doing incremental business. We consider that to be replacement business, which is part of our core financials Okay.

John Murphy

And Chris, you mentioned margins on this near and long term on this backlog that rolls on. If you could just kind of talk about maybe the difference between the EV and the, um, the ICE backlog fell off.

Christopher May

But we've not put we've not provided specific margin guidance on splits from EV. two RI.'s business in the future. But as we've stated previously, our goal is to drive maximum financial performance of these, the ultimately replicate what we have today, but has a long way to go. They have long tails before they reach volume, et cetera, go through a normal cycle of a product, right? Don't have investments upfront. So I have no problem buying startup and then we'll get into volume later in their life cycle.

David Dauch

But it's no different. I mean, yes, we're generating strong margins on our ICE business today. But because we've got size and scale, the EV business doesn't have the size and scale today. So you can naturally expect those margins will be lower. But at that size and scale grows over time, you can expect that we'll stay focused on delivering on our financial hurdles.

John Murphy

Very helpful, guys. Thank you so much.

Operator

Our next question comes from [Linda Dolin] from Deutsche Bank. Please go ahead with your question.

I was wondering if you can provide an update on the labor situation. It was a it was a very helpful slide, including the deck and maybe you can go into any sort of like latest it changes in the availability of labor and at what kind of improvement you're anticipating and that's embedded within within Dallas?

David Dauch

Yes, this is David of labor's going to continue to be the problem for the industry going forward. Here is not just American Axle issue as an industry and just an overall economic issue on there's a scarcity in labor that's out there today. Clearly, we're doing our necessary things in order to secure our labor going forward. We're making adjustments and base ways and fully loaded labor costs, and we're bringing in incremental workers and where we need to even temps that we have to we're investing heavily in automation and robotics right now to address any shortfalls that we might have in the labor side. And we're obviously driving productivity inefficiencies or trying to free up labor in our existing plants that can be reallocated to other facilities or other work within those facilities. So and we're also looking at consolidation opportunities as well to free up labor. So we can transfer it to other locations. So it's demanded a lot of time and a lot of attention. It's not an issue that's going away at the same time with that labor, you're also seeing an increase in costs associated with employing that labor. That's going to be sticky. And we here that we're going to have to find a way to offset as we go forward or pass through.

Thank you. That's very helpful. And I guess in related terms, and I was wondering if you can maybe break down the last bucket in the EBITDA walk obviously, inflation from labor is a headwind as you as you said, but what are the other breakdown in buckets that you're hoping to generate, whether it's from recoveries from customers or some of the plant efficiencies that you're planning to generate?
Yes, Wendy, I think you're assuming to our year over year walk of the $35 million of performance improvement via creation in what inflation is embedded in there. But yes, what are the different buckets time, but in that and done that perform and how we are certainly room there?

Christopher May

Yes. So as we think about inflation stepping into 2024, we will have labor inflation as everyone well, and we do have other inflation embedded from some of our purchased components. But through some of our core plant productivity initiatives were offsetting much of that labor inflation. That would be our expectations, same with anything from the supply base or have commercial arrangements with our customers to mitigate that but far less in scope than we experienced in 2022 and 2023. I think that answers your question.

Yes, got it. Thank you. So much for the color.

Operator

Our next question comes from Joe Spak from UBS. Please go ahead with your question.

Joe Spak

Thanks. Good morning, everyone. And maybe just a couple of more on the backlog, David, you sort of mentioned this air pocket where it makes sense because people are and figuring out what to do with EVs and delaying it, but then they're also extending some some nice programs. So I think like last year, you talked about a $1.5 billion quoting funnel. Is there any sort of update on that activity?

David Dauch

Joe, as I was saying earlier about where we still have about $1.5 billion of new and incremental quoting opportunity today heavily weighted towards electrification. But as the customers are sorting out that LRPP., it may adjust the timing of some of what we're putting out as far as the launch cadence of that is, but it also, as I mentioned, it may be those launches will most likely be later in the decade versus mid decade, particularly what we see right now.

Joe Spak

Okay. And then, Chris, I my answer to when you're answering John's question before about the attrition in the outer years, you talked about that continual sort of plan for $100 million to $200 million. I guess conceptually why your customers are extending programs, why wouldn't it be at a lower level if there's extending some of the current programs?

Christopher May

Yes. So I mean, the $100 million -- great question. $100 million to $200 million. I mean we have tens or hundreds of different programs we have through our entire global franchise sales. Some are smaller engine programs or transmission programs are driving programs occasionally they'll cease production of a vehicle, like, for example, use us to cease production of the Jeep Cherokee last year. So those are types of things that will fall into the attrition bucket. If they're extending programs, you have the chance to mitigate some of that attrition is higher rates and then maybe they'll continue engine production on certain size engines for an extended period of time, which was very well to our component business. So it is a little bit of a mix of a lot of factors, but you do have vehicle nameplates that from time to time Warner sub-transmission or sub engines, it's simply cease production and replace with something else that you have digitalization.

David Dauch

This goes back to work with the OEMs do with their long-range product plans. But as Chris indicated, they've already made some decisions to cancel certain programs or stop manufacturing programs. We're going to feel that that spike or that impact periodically. But historically, we're going to be in that $100 million to $150 million in normal attrition. And I want to get into some of the higher years can be $200 million, $200 million-plus, right? But it's been pretty consistent in that $100 million to $200 million range. And we've been able to offset that obviously, with this air pocket that I'm talking about.
Hopefully, some of the extensions on these programs that we're starting to see will cover up some of the attrition that's there on. But the other big thing for us is to make sure that we can demonstrate incremental and profitable growth going forward. And most of that that we're working on right now is electrification base, which is going to be that latter part of the decade. So that's that Air Park and we're talking about between now and then, but it can be filled with incremental volume as the production ramps up and as our ramps up and inventory gets to desired levels yet.

Christopher May

So just think big picture, generally speaking, yes to your to your underlying thesis, Joe. If programs are extended, that's generally good for us.

Joe Spak

Thanks for the color.

Operator

Thanks, Joe. And ladies and gentlemen, our final question will come from Tom Narayan from RBC. Please go ahead with your question.

Tom Narayan

Hey, guys. Thanks for taking the question. So there was a large European OEM who was saying that they expected in 2024. They would have to make meaningful and concessions to their suppliers because of cutting production on EVs, they just have to make those agreements whole.
Just curious, is this just something you guys anticipate there's some choppiness of orders moving around contracts you guys have with them with your OEM customers such that they they would have to compensate you guys if they're shutting down, particularly and EV schedules, et cetera.

David Dauch

Well, clearly, anytime you have a program adjustment, whether it's ICE or hybrid or EV and investments are being made and volumes are being realized or programs are being delayed, there's commercial discussions that need to take place and those are taking place with all the OEMs are all the suppliers that are made investments to support the OEMs, especially as they're adjusting some of those timings and is not excluded from those discussions. So we're in discussion with our different OEMs, just trying to better understand their long range. Our product plans understand the timing and the re-scoping of their programs and then understanding the impact that it may have on the business cases and the plans that we put together, obviously, where we can redeploy assets if need be or allocate those assets to other business, we'll do that between ICE hybrid and EV, but same time with their sunk investment in regards to some of the R & D's activity that's taking place that will need to make sure we're covering appropriately. So that's what I'd say, I guess.

Tom Narayan

And then a lot of folks are thinking that 2024 could be a year of M&A in the auto space. You have volume's not necessarily growing that much. A counter to that would be obviously high financing costs. You guys do have a little bit of leverage, but just curious as to your guys' appetite towards being maybe acquisitive in 24.

David Dauch

Well, we've said all along that we want to be a consolidator. And we actually started that activity back in 2017 with the acquisition of MPG. We've also done some other tactical acquisitions since that time, the latest one being the TekCore acquisition that we did last year. We'll continue to look at what I'll call it, tactical M&A right now that we can operate within our current capital structure. But if there's other opportunities that make business sense for us that ultimately strengthen the company going forward and position us as an organization going forward. We'll look at those opportunities as well. And we've got a fiduciary responsibility to do those types of things. So we'll definitely keep M&A in our radar screen.

Tom Narayan

Okay. And if I could sneak one final one. Sorry, David, Chinese OEMs potentially entering Europe and obviously Europe and then but then maybe even producing locally in the US. Just curious as to how you guys think about business something in our customer subset, maybe you're underexposed to could you could you easily pivot more Chinese OEM exposure? Should this should this happen? Thanks.

David Dauch

Well, the good news is we're growing our China business, especially on the electrification and the BP have side of the business and there are becoming global OEMs there clearly on the offensive now where before they were looking into satisfying their demand within the country of China. But there, obviously, you're attacking their position themselves in Europe very aggressively right now in Mexico. And there's no doubt it's just a matter of time before they come strong to the U.S. quite honestly, I think a lot of countries are going to have to look at what mechanisms that they need to put into place and to protect some of their businesses, meaning the automotive businesses, whether that's tariffs or other types of things to level the playing field on. But ultimately, it means game on on a low cost producer that can produce a quality product that the consumer desires, he's going to win in the long run. So it's just going to elevate the game of everyone at the OEMs and technology will be a differentiator as we go forward. But the Chinese have vertically integrated the best side of the business. But I also think it's important to point out a couple of things is I don't think Bells are going to make up 100% of volume on a global basis anytime soon. So ICE and hybrid and even hydrogen will play a meaningful role going forward.
I also think in Europe, the luxury cars are pretty well dominated by the Europeans. So they go that's a tough market to crack because of the performance that goes with that. And that same thing holds true here in North America from a truck and SUV and crossover standpoint, but especially truck and SUV, there's very loyal buyers in those areas. So they're a new entrant, a growing entrant, and they're going to gain market share. But at the same time, it's an opportunity for companies like us and other suppliers.

Tom Narayan

Thanks so much.

David Dauch

Jamie, I think that was our last question.

Operator

Ladies and gentlemen, that was our last question. I'd like to turn the floor back over to you, Mr. Lim for any closing remarks.

David Lim

Thank you. And we thank all of you who have participated on this call and appreciate your interest in ADM. We certainly look forward to talking with you in the future.

Operator

Ladies and gentlemen, that will conclude today's conference call and presentation. We do thank you for joining. You may now disconnect.