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 2022 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. [Operator Instructions] As a reminder, today's call is being recorded. I'd now like to turn the floor over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Thank you, Jamie, and good morning. 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 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 1-877-344-7529, replay access code 5108684. This replay will be available through February 24. 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.

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 2022. Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Executive Vice President and Chief Financial Officer. To begin my comments today, I'll review the highlights of our fourth quarter and full-year 2022 financial performance. Next, I'll cover our achievements in 2022 on both electrification and on our legacy business. 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. AAM's fourth quarter operating results, similar to the third quarter, were negatively impacted by industry macro conditions. However, AAM concluded the year with strong cash flow performance for the fourth quarter and the full-year of 2022. We continue to stay focused on managing the factors that are under our control. AAM's fourth quarter 2022 sales were $1.4 billion, and for the full-year, AAM sales were approximately $5.8 billion. From a profitability perspective, AAM's adjusted EBITDA in the fourth quarter was $158 million or 11.3% of sales. For the full-year, AAM's adjusted EBITDA was $747 million or 12.9% of sales. It was simply a challenging year. AAM was negatively impacted by supply chain disruptions including semiconductor availability, which likely impacted global production by over 4 million units in 2022. Combined, these factors drove significant customer production volatility and additionally, we navigated higher input costs throughout the year, including rising utility, labor and material costs. Relative to the first half of the year, the second half of 2022 was a more difficult operating environment for us. That stated, even with these challenges, we found solutions to mitigate a number of these issues and still advance…

Thank you, David, and good morning, everyone. I will cover the financial details of our fourth quarter and full-year 2022 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 2022, AAM sales were $1.39 billion compared to $1.24 billion in the fourth quarter of 2021. Slide 10 shows a walk of fourth quarter 2021 sales to fourth quarter 2022 sales. In the quarter, we experienced a lower negative impact from semiconductor and supply chain challenges, which we estimate at approximately $21 million. Positive volume, mix and other was $128 million. The Tekfor acquisition contributed $84 million to sales. And lastly, metal market pass-throughs and FX lowered net sales by approximately $68 million, with metal and FX both lower. Although sales were up year-over-year, we note that supply chain volatility continued sequentially from the third quarter, resulting in frequent changes to schedules. For the full-year of 2022, AAM sales were $5.8 billion compared to $5.16 billion for the full-year of 2021. The primary drivers of this increase were the Tekfor acquisition, which occurred on June 1 and accounted for approximately $200 million in sales and additional volume and mix throughout the year. Now let's move on to profitability. Gross profit was $167.2 million in the fourth quarter of 2022 compared to $140 million in the fourth quarter of 2021. Adjusted EBITDA was $157.7 in the fourth quarter of 2022 versus $164.6 last year. You can see the year-over-year walk down of adjusted EBITDA on Slide 11. In the quarter, higher sales due to a lower impact of semiconductor availability and overall volume and mix and other added a net $39 million of adjusted EBITDA versus the prior year. Fourth…

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

Good morning, guys.

Good morning, John.

Good morning, John.

Hey. First question on the step-up in R&D. I mean we saw some of the fruits of that in its early stages in some of the stuff – the products you showed us out in Vegas, packaging around the inverter and the electric motor were very interesting and fairly unique. But I'm just curious, as we think about this R&D step up, how much of it is program-based for products that are in the bidding process and you may have won versus product development to really go and pitch your EV technology to your consumers? I'm just trying to understand how much of this is structural going forward or how much is kind of a step-up here in the short run as well?

John, this is David. I would say a lot of our initial spending right now is more on the platform-based technology to get our portfolio in a position that we can actively market to our customers. Clearly, there will be some program-based spending as we win new business going forward. But the majority is platform-based to put the product line in place. And once that product line is in place, then we'll expect that to scale down. But hopefully, some of the program wins will – may require us to spend some additional electrification engineering resources or R&D as we book new business.

Okay. And then just sort of a housekeeping or two quick housekeeping, Chris. The volatility in schedules and the disruption, can you just remind us what that cost you in 2022? What you expect in 2023? And then also, when we think about gross versus net on net new business or new business, it seems like there's a big attrition this year of $200 million. How should we think about attrition against that gross business bookings over time?

Yes, John, in terms of your first question associated with the efficiency impacts. If you think about – if you look at our – the walks that we provided throughout the course of the year, we have a call in there called performance and other. And for example, in the fourth quarter, it's minus $13 million. The vast majority of that would be associated with the impact of some of that volatility. So you saw that both in the third quarter, which was a little lighter than that. You saw some further onset in the fourth quarter that we articulated. The variances that you saw in the first half of 2022, I wouldn't really articulate those more as efficiency related to the volatility because those were comparing to periods, I would call them, an almost near-COVID shutdown type of activity at the beginning of 2021. But those variances that you see on our walks in the back half of the year would be by and large indicative of what we're experiencing through our operations. The second question – does that answer your question?

Yes. So I mean, so you're talking about something that's in the $20 million, $30 million range, I mean if you kind of put that together?

Yes, over the back half, that's what we experienced, correct, that's reasonable.

And do you expect that to continue into 2023 at the same rate eventually if the world stabilizes, that would then go away? Is that a fair statement?

Yes, that's fair statement. Correct.

Okay.

And I think your second question then was associated with attrition. We have $200 million of attrition on our year-over-year sales walk that relates to some programs in China and also some in North America. We have historically said the impact associated with that was between $100 million to $200 million this year, is at the higher end of the range. I would think more closer towards the midpoint kind of in the subsequent years.

Okay. Great. Thank you very much, guys.

Yes. Thanks, John.

Thanks, John.

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

Hi. Good morning, and thank you for taking the question.

Good morning, Dan.

Good morning. Wondering if you could just talk a bit to the mix trend? Obviously, T1, if you look at some of the third-party schedules, I think that's forecasting them to be down year-over-year. Can you just talk about the impact of mix on margins?

Yes. So from a broad perspective, as associated with mix as it relates to – if you think about our two largest programs, T1, RAM is obviously a large program. I'll come back to both of those in a minute. The rest of production, I would expect to continue as volumes come back that to increase on the rest of the business, so that will start to increase its [proportional sale] mix of our overall business. RAM, probably very similar year-over-year. So obviously, you can compute how the mix would impact from that. And on the T1 perspective, I believe some estimates – third-party estimates yesterday were just updated to be a little bit more elevated. I would think about that sort of the lower end of our sales range. We're a little more bullish on that platform. Our customers are a little more bullish on that platform, we believe. So think of our midpoint of the range, maybe about 5% higher than current IHS estimates, and we're probably a little higher than that at the high end of our range. But again, we're a little more bullish on that. But you'll see the rest of our book of business continue to grow as part of that mix.

Great. Thank you. And then the second question is on your electrification backlog. So your narrative on EV is that you have a variety of ways to win between subcomponents to full three-in-one system. Could you maybe break down of that 40% of the backlog that is EV? Is there a rough idea of the mix on subcomponents, full drive units, some of the casing and the rough CTV that's implied there?

Yes. Dan, this is Chris again. Yes, the mix, think about it slightly more than half is associated on the – think of the drive units, the other – the remainder then would be on the component side. And then from a – I think your second part of your question was content per vehicle. Obviously, on the drive units, as you've heard us maybe articulate our content per vehicle is very significant associated with those. Think of up to $2,500-plus. And then on the component side, depending on the vehicle, depending on the component supply, we could be up to $500 per vehicle.

Okay, great. Thank you.

Yep.

Thanks, Dan.

Our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.

Thank you very much. Good morning.

Good morning, Emmanuel.

First question on the Tekfor acquisition. It seems based on your 2023 walk, you're expecting maybe a margin contribution sort of like the low double-digits based on the guidance. Can you just remind us if this is the right margin profile for the business going forward or if there's more incremental opportunity for improvement?

Yes. So if you think about – they came on mid-year, June 1, 2022. And if you look at the full-year performance, the Tekfor had for us and contributed in 2022 from an EBITDA perspective, it was just a little bit north of 7%. And you may recall, going into this transaction, we saw a great opportunity to expand some of our diversification in customers, but also a great synergy opportunity. So the incrementals you see coming on line for 2023, you're sort of more than 10% to 12.5% range. So you're accomplishing a couple of elements that you're bringing on the full cost business for the first five months, plus you're starting to see some of those synergies start to kick in, in 2023. So that implies sort of $5 million to $10 million range of synergies coming online because you'll get a holistic lift to your margins. I would expect synergies to continue to grow after this period as well. And then obviously, once we transition past the full-year 2023, their change in revenues will be on a variable profit basis.

Yes. That makes sense. I wanted to ask you about non-material cost inflation. I think you had previously indicated you expect some of this inflation to be sticking around for the year. I don't really see it as a sort of a major factor in the walk. Is this not a headwind for this year? Or do you anticipate offsetting these cost increases with productivity?

Yes. No, it continues to be a headwind in particular areas such as labor and some other costs that we incur. It's included in our productivity, inflation and other common net column. If you think about in 2022, our net residual after customer recoveries for the bulk of this type of inflation was about $60 million. We also had some labor inflation on top of that. Our expectation is that on a net basis is lower than that, lower than half of that here in 2023 versus 2022. But again, customer recoveries and productivity initiatives will help us set a lot.

Okay. And just very finally, if I can squeeze one more.

Sure.

So I guess in terms of overall message, right? So your industry conditions are still fairly choppy, and that sort of continues to put some pressure on margin. What sort of – what do you need to see to get back towards sort of like a path of stable margins or margin expansion? Is it just – is it mostly around the volatility of schedules? Is it sort of like additional industry volume growth? I guess what would be needed for that?

Yes. Emmanuel, this is David. I mean, clearly, the first thing is we just see stabilization in our business, right? We were dealing with so much uncertainty and volatility in our production schedules. So first thing is stabilization of the production schedules. Clearly, any growth, as the market starts to recover and rebuild some of the inventory, I don't think the inventory will ever go back to historical levels, but incremental growth will be positive for us. And then we also need to see stabilization of the workforce from a labor standpoint. And we're not waiting around for that. We're making investments in automation and other things to take those things into our own control. But the biggest thing would be stabilization across the board.

This is Chris. That's from the labor perspective. Your question even more broadly as it relates to margins. Obviously, volume drives a lot of that stabilizing or reducing, even metal market reimbursements, obviously, inflation that we just talked about that you're asking about. And ultimately, as David mentioned in some of his prepared remarks, it continued to squeeze down on some of our fixed cost and capacity utilization increases will drive margin as well.

Thank you very much.

Yes.

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

Hi. Good morning, guys.

Good morning, James.

Just as a follow-on to the last question, just taking a step back and looking at by segment, thinking about most of nearly all of the R&D investments taking place in the Driveline segment, what is really – what are the driving forces that challenges in the metal forming segment? And does this fourth quarter represent the bottom, right? I mean because we've seen some pretty notable sequential refines from an EBITDA perspective. Does the fourth quarter mark the bottom for metal forming? And if not, just time line on that? And when does this get better? When does this get better for this segment?

Yes, James, this is David. Yes, we do expect the fourth quarter this past year to be the bottom. Clearly, the big issue we're battling is labor availability in our metal forming area. We're working hard to stabilize that and also bring automation into those factories. But clearly, it's a heavy fixed cost business. We need volume running across it. We clearly run a lot better when we have the incremental volume going across that. At the same time with scheduled volatility, you can't lay off people. So therefore, there's an incremental cost, the same 10 new people that we're bringing in don't have that experience level and we're incurring some incremental overtime and scrap that we historically haven't endured. But we do think the fourth quarter was the bottom of the metal form performance. We'll start seeing some improvement to that quarter-to-quarter going forward.

And James, this is Chris. One other point I would add. You mentioned that regretfully, so that the R&D is disproportionate on the Driveline segment of our business. What I would tell you, at least from an inflation standpoint perspective, utilities, costs and metal market impacts are overweight to the metal forming side of the business. So you see some of that on their margin pressure, and you saw that sort of play out through the course of 2022, as those cost elements moved around, and you saw inflation for utility, in particular in Europe, which is where they have a large concentration of businesses.

Got it. Understood. That's helpful. And then just one on interest expense. What's driving the higher interest expense? Is it – was it the refi that took place in the fourth quarter just carrying a higher interest rate? Or should we assume you're carrying some more short-term related debt on the balance sheet?

Yes. I would tell you, it's a composition of three elements. First, we actually are – although it's hard to see, receiving some benefits from our continued debt pay down. But the two elements driving the net cost up would be, one, when we refinanced our Term Loan B, the spread on that was up 125 basis points versus the Term Loan B that was originally put back in place in 2017. And secondly, as you know, this is a variable rate debt instrument. So it's effectively sulfur plus the spread and sulfur is now, what, 3x or 4x what it was a year ago. So that's really driving a piece of that. A good chunk of this we have hedged, but holistically, the rates are up on the variable debt instrument.

Understood. Thank you.

And ladies and gentlemen, our final question today will come from Ryan Brinkman from JPMorgan. Please go ahead with your question.

Hi. Thanks for taking my question.

Good morning, Ryan.

Good morning. How should we think about R&D and CapEx trending as a percentage of sales beyond 2023? And as we drill down to the impact on like EBITDA or FCF over a multi-year period, do you expect that the earnings and cash flow headwind from higher electrification spending is more of a like multi-year timing issue given that spending is taking place in advance of product launches and that the contribution margin when these products do launch will offset the higher cost over time? Or I guess said differently, like while dilutive initially is the pivot toward electrification accretive, dilutive or neutral to EBITDA margin and free cash conversion over the medium and long-term?

Yes. From a cycle – from a cash perspective, as you point out, and David mentioned in one of the previous questions, our R&D spend would be elevated as we're building out our product portfolio. That would then decline and then you have some potential program specific R&D as you step into launches. But we would see some opportunity over an extended period of time, as you mentioned, in the future, we would expect this then to at some point pivot and decline down. From a CapEx perspective, we're coming off of 2022, which was, I think, the lowest percent of sales for CapEx in the company's history. Our guide here this year, which continues to have program launches, also electrification element of it, still quite low by our historical standards to 3.5% to 4%. But our commentary around this has been to try to maintain our CapEx on the near and mid-term at less than 5% of sales. We have been very focused on capital efficiency and effectiveness. And even as we're pivoting into electrification, continuing to maintain a good, healthy control and balance over our CapEx spend is a top priority for the company. Now where could you see a different solution is when you win a significant amount of new and incremental business inside of the company where you would have to spend some extra dollars, we think that would be a great investment to make.

Okay. Thank you very much.

Yep.

Great. Thank you, Ryan. And we want to 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.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.