Good morning and welcome to the American Axle & Manufacturing Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to David Lim, Head of Investor Relations. Please go ahead.

Thank you and good morning. I’d like to welcome everyone who is joining us on AAM’s third quarter earnings call. Earlier this morning, we released our third quarter of 2022 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 in 1-877-344-7529, replay access code is 525256. This replay will be available through November 11. Regarding the Investor Relations calendar, we would like investors to mark your calendars for our technology event in Brighton Drive in Las Vegas on January 4, 2023. With that said, 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. Now, 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 third quarter of 2022. Joining me on the call today are Mike Simonte, AAM’s President; and Chris May, AAM’s Vice President and Chief Financial Officer. I’d like to begin today’s call by addressing the media activity from yesterday regarding AAM. We put out a press release earlier this morning addressing it. While it is our longstanding policy not to publicly comment on market rumors and media speculation, we feel it is important to state that we are not engaged in any discussion to sell the company and that we are not otherwise for sale. In the ordinary course of business and executing our strategic plan, we continuously monitor market conditions and assess industry developments and we regularly consider strategic opportunities that serve the best interest of the company and its shareholders. Finally, we do not intend to make any further comments or respond to any inquiries regarding these matters on this call. That said, the agenda for today’s call is as follows. I will review the highlights of our third quarter financial performance. Next, I will touch on some exciting business development news inside the quarter regarding wins with electrification and significant wins with our traditional business. Lastly, I will discuss our updated 2022 financial outlook before turning things over to Chris. After Chris covers the details of the financial results, we will open up the call for any questions that you all may have. So, let’s begin. Overall, AAM’s third quarter 2022 financial results were impacted by higher than expected production volatility and year-over-year inflation. AAM’s third quarter sales were $1.5 billion. As we exited the second quarter, we anticipate a relatively more stable operating environment in the second…

Thank you, David and good morning everyone. I will cover the financial details of our third quarter results for 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 third quarter of 2022, AAM sales were $1.54 billion compared to $1.21 billion in the third quarter of 2021. Slide 9 shows a walk of third quarter 2021 sales to third quarter 2022 sales. First, we account for the change in the year-over-year impact from semiconductors and supply chain challenges. While we continue to be significantly impacted by this issue, we did experience a year-over-year lower negative impact, which we estimate added approximately $136 million of sales in the quarter. Positive volume mix and other was $113 million and the Tekfor acquisition contributed $92 million to sales. And lastly, metal market pass-throughs and FX lowered net sales by approximately $10 million, with metal up and FX lower inside of that net number. Now, let’s move on to profitability. Gross profit was $177.4 million in the third quarter of 2022 as compared to $165.6 million in the third quarter of 2021. Adjusted EBITDA was $198.4 million in the third quarter of 2022 versus $183.2 million last year. Please refer to our adjusted EBITDA walk on Slide 10. In the quarter, the year-over-year change in semiconductor availability and volume mix and other added $43 million and $13 million respectively to adjusted EBITDA. Third quarter material, freight and utility inflation, net of customer recoveries, negatively impacted EBITDA by $12 million. This pacing is consistent with our full year estimate and continued progress of recoveries with customers. R&D was slightly higher by approximately $1 million and continues to run in the range of $35 million to $40 million…

Thank you, Chris and David. We have reserved some time to take questions. [Operator Instructions]

Thank you. [Operator Instructions] And the first question will be from Ryan Brinkman from JPMorgan. Please go ahead.

Hey, great. Thanks for taking my question. Could you may be give an update on the pace and progress of negotiations with customers to recover premium non-commodity costs? I think maybe you’d already been a little less impacted by higher commodity costs because you’ve had an above-average level of pass-through arrangements in your country, but nobody had anything in there with regards to the non-commodity costs to – is the see pricing still negative? I don’t know what do you think the outlook is for that going forward? And would just love to get your take on – I know you have less exposure to Ford, but I guess they handed out $1 billion in the quarter, which allowed some other companies to beat maybe the automakers that you’re in discussions with, you have more exposure to might be a little bit taking a different cadence of reimbursement or something. Just how should we think about this issue?

Brian, this is David. I’ll make some initial comments, then if Chris wants to chime in, he can. But as we’ve said, and I said in my prepared remarks, we continue to make meaningful progress with all of our customers on a global basis with respect to some of the commercial and economic recoveries. We clearly have some more work to do just based on the continued level of increases that keep coming into our company. I would characterize the discussions as being very fair and balanced with our customers, some better than others. But at the same time, overall, I think, balanced and we definitely are on track with what we said we would do in this area, a big challenge that we are still facing as an organization as an industry is, especially the energy and the utility issues, especially in the European market. That’s a big issue that we’re going to have to continue to address as we go forward here. But overall, I’d characterize them as being fair and balanced discussions, meaningful progress made, but more work to do.

Yes. Ryan, this is Chris. I would offer a couple of other data points to align in with your question. I know you made some reference to some activity here inside of the third quarter. I would refer you back to some of our previous commentary on this, where in the first quarter of this year, we were almost $30 million off from an inflation standpoint on that topic. And you noticed we close that gap pretty meaningfully inside of the second quarter with a lot of our customers, almost cut that exposure in half, and we’ve been now running at that kind of much lower rate due to those negotiations in the first half of the year. And then secondarily, you also commented on the pricing element inside of our walks. This is our annual year-over-year long-term negotiated pricing arrangements with our customers. We stepped into this year. We told you it’d be around $40 million. This is just consistent with that. That’s outside the scope of the economic recoveries that you’re referring to.

Okay. Great, thanks. And could you just maybe comment, last question, a bit more on the Chevrolet Colorado GMC Canyon win. It’s an important one, I think. It’s a conquest. And a lot of what’s been going on at Axle the last number of years has had do in part with your relationship with GM, their decision to in-source a portion of their full-size truck platform and then later with their strategy around OTM drive. So you’re still winning business there. What does this say about the relationship with them and how it could potentially evolve over time?

So Ryan, this is David. We have a very strong relationship with General Motors. We value the relationship that we have with them. We’ve had a strategic partnership for well over 25 years plus. We’re their largest driveline supplier. We’re honored to pick up this Colorado Canyon business. We conquested this from our largest competitor in this space, it’s an important vehicle segment that continues to do very well in the marketplace. So we’re excited to launch it next year, which is great. At the same time, we’ve been GM supplier of the year 6 years in a row. So they look to us with solid operating experience and performance and technology leadership and outstanding quality, much like many of the other OEMs do. We expect a long-term positive relationship with General Motors going forward including activity on electrification. And that’s about all I can really say at this point in time. But we’re highly confident in our technology, we feel very good about our relationship with General Motors, and we will continue to look to maintain and strengthen that relationship as we go forward.

Great, thank you.

Thanks, Ryan.

The next question is from John Murphy from Bank of America. Please go ahead.

Hi, good morning, guys. I just wanted to follow-up on the outlook here. I mean a number of times you alluded in the call that the fourth quarter would be similar to the third quarter, and then you gave us some puts and takes. So I appreciate that. But I mean, as you think about your key product volumes in the fourth quarter versus the third quarter, are you saying they are going to be relatively similar? And then Chris, you said there were some negatives on the contribution margin side or the EBITDA side of $30 million in contribution margin, $20 million on metals and then $5 million to $10 million on volatility that would kind of indicate all else equal, that you’re looking for sort of $60 million lower on EBITDA versus, I think, the third quarter, right? And the third – the fourth quarter implied EBITDA is $155 million to $175 million. So I mean that would take us down to the $140 million ish range, and you’re applying $155 million to $175 million. So there might be some good guys that are occurring in there. So really just kind of if you can help us walk or kind of explain what you’re thinking about on the sequential third quarter to fourth quarter on the top line and then on the EBITDA line as well.

Yes, certainly, John. When I – let me just sort of recalibrate. When I articulated the guidance walk of the volume and mix, the inventory and a little bit of efficiency, that was for the full year. That was not just the fourth quarter. So I was articulating the elements that were going on inside of our third quarter and fourth quarter combined walk in to our previous guidance to our current guidance from a full year perspective, not just the fourth quarter. So that would be sort of point one. But if you think about going from Q3 into Q4, our commentary on a production day basis, so think about the fourth quarter has 3 or 4 less production days in the third quarter, we would expect our revenues on a production day basis or our volumes to be similar to the third quarter, but holistically, collectively for the quarter would be less because of less production days, if that makes sense.

Yes.

So as we walk from Q3 to Q4, I mean, the element obviously would be lower volume and mix just holistically with the lower production days that I just articulated with you. We should see some benefit with the absence of that inventory absorption issue kind of somewhat behind us. We will experience probably a little bit more of that if metal continues to come down inside of the fourth quarter, and then that will be behind us. You take those two elements and then you got some puts and takes around the horn on a variety of other elements that are pretty close to get you walking to our midpoint of that range.

Okay. That’s helpful. And then just to follow-up, on the 50,000 trucks to 100,000 trucks that you think are going to be out of the schedule in the fourth quarter that could have been in the schedule because of supply chain disruptions, do you think that will be made up quickly as we get into early 2023, or is this a thing where these get – put on the side or those – that production run just gets put off indeterminately?

Yes. So, I would tell you, on the 50,000 to 100,000 truck reference that you made, again, that was for the entire back half of the year, second half of the year versus our previous thought 90 days ago. We experienced some of that decline in the third quarter, and we are obviously projecting a little bit of that decline versus our previous estimate inside of the fourth quarter. But as David mentioned on his prepared remarks, right, we continue to see expectation of demand for those full-size vehicles and how their production schedules came into next year, I think it’s a little too early to call, but we are still holistically bullish on those platforms. It’s across multiple customers as we think of 2023 and beyond.

But you understand that’s pure supply chain disruption. It has nothing to do with inventory building in the channel that the dealers are in transit. This is purely supply chain issues?

Yes. John, this is David. I mean the three big things impacting all of us in the industry right now, clearly, semiconductors, but the supply chain issues themselves have become a much greater issue. And those supply chain challenges are really driven because of labor shortage – or labor availability issues that are out there. I do expect there is still a pent-up demand for these products that are out there. I do think the OEMs will continue to balance in the desired inventory levels that they want to put in place in order to continue to benefit from the transaction pricing that they have and lower incentives. But at the same time, they have got to replenish the shortage in inventory that’s out there. And that’s why I think this pent-up demand will continue. It’s just – the big issue really just comes down to us getting stability back in the supply chain so that they can consistently run their facilities on a normal basis versus the volatility that we are experiencing and no immediate notice on shutdowns, which creates a lot of problem for the supply base, AAM included.

Very helpful. Thank you, guys.

Thank you.

The next question is from Rod Lache with Wolfe Research. Please go ahead.

Good morning everybody. David, I am not asking you to comment on GKN specifically. You already told us that you won’t. But I just wanted to get your thoughts on how you are thinking about the market strategically. Do you think that broader consolidation is worth exploring? Do you think it happens over time, because the last time a combination of driveline suppliers was proposed the synergies were pretty big. So, I just wanted to get high-level – just how are you thinking about the market and how things kind of play out in the space?

Yes. Rod, as I have said before, and then you and I have talked, I mean I still believe that there will be consolidation that will take place in the auto space, both from an OEM standpoint. You are already starting to see that, or select partnerships that are coming together because everyone can’t afford to do things on their own and try to – manage current ICE business as well as the transition to electrification and mobility. I think you will see further consolidation within the supply base. As we have said all along, we want to be a consolidator. At the same time, we are going to manage our priorities based on a capital allocation standpoint. And our focus right now is supporting our organic growth and our strength in our balance sheet. At the same time, you have seen us take strategic actions from an inorganic standpoint, but within our capital structure, with the recent things that we have done with the Tekfor acquisition and some previous things before them. But again, I do think there will be consolidation in the space. I think it’s going to be healthy for the industry when it’s all said and done. But that’s probably what I can really say or comment on at this point in time.

Okay. I appreciate that. And I wanted to ask just to clarify that I am seeing in Q4 year-over-year revenue growth from $1.2 billion last year to $1.4 billion this year and it looks like kind of similar, maybe just a tad lower revenue in the fourth quarter versus the third quarter, but you also had that $20 million inventory charge in the third quarter. So, just – I am just curious about what – what am I missing that drives the sequential decline in EBITDA?

Sequential decline. Are you referring to Q4…

Look, either – look, Q4 of last year to this year, I mean you have higher revenue, but similar EBITDA. And then sequentially, it looks like similar revenue, but lower EBITDA. So, either way, would just be helpful to get a little bit of a bridge from you.

Sure. Well, if you think – let’s start with the sequential Q3 to Q4. At the midpoint, our revenues are implied to be down from the third quarter, over $100 million down. So, it’s sizable from a volume and mix perspective. So, that is the key negative driver inside the sequential walk between Q3 and Q4. You do get a benefit of the reversal of that inventory absorption benefit and net everything else, there are small puts and takes around the horn that sort of wash or written into the midpoint of our guidance. If you think about Q4 of last year into Q4 of this year, very similar, as you mentioned, volume and mix is up. But don’t forget this year, we do have those net inflationary factors that we have talked about. We have been running that $10 million to $15 million a quarter now since the second quarter of this year. FX and metal still while declining down is up from last year. And you may recall in the fourth quarter of last year, our R&D expense was very low. We had a favorable benefit of some customer reimbursements for that, that we are not expecting to occur here in the fourth quarter of this year. And then we got some – a little bit of favorable productivity that will drive it up a little bit from there on a year-over-year basis. That’s how I would think about last fourth quarter to this fourth quarter.

Okay. Thank you.

Thanks Rod.

The next question is from James Picariello from BNP Paribas. Please go ahead.

Hey. Good morning guys. Can you just confirm, so what is the full year commodities impact now with the additional $20 million you set within the guidance?

Commodity.

Commodity impact. Yes. So, we have experienced – through the first – we do disclose this as a standalone item inside of our year-over-year loss from a combined FX and combined – with our metals in terms of productivity. So, sales impact was $56 million, profit was down $26 million. So, that was excluding the $20 million inventory item. So, that inventory item would be on top of that. And then right now, some metal indexes are starting to trend down into the fourth quarter, like I mentioned, scrap steel. But some of them have not, like aluminum continue to sort of hang around sort of the consistent level over the past couple of months. Magnesium is also in a very similar spot. Those are key inputs for us. So, we have not disclosed the specific amount for the fourth quarter, but that’s where we have been trending. They have been trending down a little bit holistically for us.

Okay. Understood. And then just on the inventory absorption timing of this $20 million. Just want to make sure I fully understand it. So, regardless of commodities pricing for next year, the impact – this impact will get unwound in ‘23, or will it still be dependent on certain market dynamics?

No. I mean it’s effectively unwound itself. So, now, once we step into a lower run rate with metal, we will start to realize that benefit of the lower metal costs running through our P&L. You probably have another quarter here, meaning the fourth quarter as we step down even further. But this should be a good thing for AAM going forward, assuming metal stays – as you know, they change every 30 days, and they can move quick in either direction like we experienced in the third quarter.

Right. Or every two hours, right. Just on the Tekfor acquisition, the $9 million positive contribution, is that trending ahead of expectations? It just seems like a pretty decent contribution right from the start regarding that acquisition.

Yes. So, that’s effectively a 10% EBITDA margin on the Tekfor business. That was sort of a – we acquired them on June 1. That was pretty close to our expectation in terms of the near-term. We thought it would be high-single digits, and we are pretty much on track for that. Our synergy potential and expectations would be for that to step up, as we mentioned, more into 2023. But it’s pretty much in line with what we thought, below obviously our average, but we expect it to get up. This is a meaningful deal from a synergy perspective for us.

Great. Thank you.

[Operator Instructions] The next question is from Joe Spak from RBC Capital Markets. Please go ahead.

Good morning everyone. Thanks.

Good morning Joe.

I think Chris, you may have sort of just answered this, but just to be clear on the inventory adjustment. Is there still an impact in the fourth quarter, or – and then going forward from there, you should start to benefit if prices stay lower, or is that really still done for now, I guess on a year-over-year basis?

Yes. So this dynamic happens, it’s really an inventory valuation perspective from an accounting – months through our P&L. So, if it drops again dramatically, which as you know, is good for us, you will continue to expense out higher-priced inventory sort of think of it in a period where your revenue reimbursement from your customer is lower. It will pass within a quarter, and then it’s good when you are into the lower metal market run rates from there. So, to the extent they drop even further in the fourth quarter, maybe you have a little bit of an impact to that, but again, you will start to benefit from the lower metal cost holistically.

Okay. So, I guess the view is that impact in the third quarter mostly sort of gets you to current sort of spot pricing levels for the metals?

Yes. It’s pretty close. That was driven by predominantly scrap steel, which was a rapid decline. And you saw this, as I mentioned in my prepared remarks. We actually had the opposite phenomenon happened in the second quarter of ‘21, which was a very positive benefit for us. So, think of it just sort of unwound itself over the course of the last 12-plus months as metals have come back down.

And then, David, look, I know as sort of Rod mentioned, I sort of heard your comments on deals and I know you don’t like to comment on speculation. I guess again, stepping aside from any specific deal, this isn’t the first time we have seen your company in speculatory news about a transaction. So, I was wondering, and this is managing that in the past has also expressed, I guess some frustration valuation. So, maybe you could just add a little bit in terms of Board and management psyche when you sort of see the market reaction to these news and how you think about that going forward?

Well, obviously, the news articles are a distraction to the management team in our business with respect to what came out and what we have to do to go forward and put out a public statement with respect to the company is not for sale, hasn’t been for sale. So, it’s disappointing that we have to do that and redirect our management time. But at the same time, we want to be very clear to the investment community and our stakeholders that we are not for sale. We have a job to do. We have a business to run. Part of our business is not only going to grow organically, but to look at what can we do to grow inorganically. We are going to continue to assess the market and look at what we can do to strengthen our company as far as our balance sheet and show growth in the marketplace, at the same time, continue to deliver the profitable results that we do as a company. So, we will continue to look at the market conditions and the opportunities that present themselves. That’s just doing a good job from a management and leadership standpoint with the proper support from governance. But at the same time, all I can do is just be clear again, that we are not for sale.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to David Lim for any concluding remarks. End of Q&A:

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

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.