We're on. All right, let's move on. Representing American Axle, we got Chris May, Chief Financial Officer, and David Lim, Head of Investor Relations. Gentlemen, thank you for joining us. Good morning. Good morning. So, I had a few clients earlier today saying, "Hey, when you're up there with Axle, you know, please, please have them comment on some of the volatility around GM's production schedules that, you know, has been in the market, and, you know, how that might impact us on the quarter." So maybe we want to start off with that. Sure. Then we'll go on to other topics. Go right for that. Broaden the aperture after that. Sounds good. Sure. Well, first of all, thank you, Adam, thank you, Morgan Stanley, for hosting this event. It's always a wonderful event to come out here and, you know, discuss key topics of the day. Before we talk about our remarks, I do alert everybody to look at our forward-looking statements. You can find them on our website and all our IR materials. It's good reading. It's great reading, and now I just made General Counsel happy, so- There we go. ... I'm good to go. Yeah. They, they have really low handicaps, by the way. Yes. They're good golfers. Yes, they do. Keep going. Yes, they do. Mm-hmm. Look, you know, we came out of the second quarter. We had a decent quarter for the company. We had a really strong cash flow delivery. Looking towards the back half of the year, you know, kind of we saw some positive momentum on lower volatility in the second quarter. Thought process was stepping into the back half, we would see continued improvement in volatility. Mm-hmm. What I will tell you, sort of from a trend perspective, inside of the third quarter, to your question, Adam, is we've actually seen an elevated level of volatility with some of our customers, in particular, General Motors. Some of the key plants that we supply into, we've seen 2-3x the amount of downtime this quarter than we did in the second quarter of this year. And it was sort of a little bit widespread. Mm-hmm. They hit some of their light vehicle trucks and light-duty truck plants. We've seen it, some other plants, they've also articulated in some of their press releases. So there's been a fair amount, and of course, that impacts us negatively from a revenue perspective. Inefficiencies have caused probably a little greater than we've seen here inside of the second quarter, and, you know, really starts to constrain a little bit of our production. So we absolutely have experienced that, inside of here of the third quarter. Are you able to say how many days lost? I mean, obviously, we still got a little bit yet to go here. Mm-hmm ... inside of the quarter, but I, you know, just trying to calibrate toward some of the specific plants we ship to. As I mentioned, sometimes, in some cases, 2-3x the number of days that we experienced inside the second quarter. We didn't articulate in the second quarter how many downtime days we've had at each respective plants. Mm-hmm ... but it's been a fair amount here. Some rules of thumb, again, to remind people, and we can do it offline as well, how much per day, how much per week or, you know, the exposure to General Motors? Well, I mean, our exposure to GM, GM is about 40% of our revenues. You know, Stellantis is 20%. Mm-hmm. Ford's a little over 10%. And it's not wide-based at GM. I mean, it's- Mm-hmm it is specific plants. Okay. You have to sort of bifurcate out. But the plants affected were, how are they? Would they be representative or skew? Well, it was mostly on some of the plants, of course, that impact us are the truck plants. Mm-hmm. You know, you can see their production per day at some of these plants, and as you know, we have high content, anywhere $1,500-$1,700 per vehicle lost in some of these plants. All right. So you're going to lose something there, right? So tell me, what-how do you then gain it back? Or what, from your experience, I mean, with that level of disruption that you're witnessing right now, what would-how would you think ahead in terms of your ability to make up for that? Could it be done by the end of the year, or would we need more time than that? Well, look, certainly, you know, we build to their schedules. Mm-hmm. You know, so if they, if they choose to make that production up, obviously, we're ready and prepared- Mm-hmm . and capacity to do so. Mm-hmm. So look, they're key products that have strong demand inside of the market from the light truck segment. Mm-hmm. So we're still very optimistic and bullish on those platforms holistically, so we're ready to build. Looking beyond GM, you know, the worst seems to be over on the production side, at least, again, GM aside. In the weeks following Q2 results, GM aside, any other comments on of the disruptions, or is this really just an isolated GM kind of situation? You know, I would say we still saw volatility at some of our other customers. Mm-hmm. It seems a little bit more outside with that one customer in particular here this quarter, but we still experience it at other customers, and it's for a variety of reasons. They don't always share with us why, but what we're, you know, told, it's generally a supply chain issue or a constraint issue, and in some cases, there's been some logistical challenges inside of North America, is our understanding. Without isolating a specific customer, but, you know, you would have a view on demand, not just what the schedules that you're told. It's a pretty tricky environment right now. There seems to be a lot of pent-up demand. In my opinion, I'm pretty impressed how sticky price has been. Sure ... and how sticky volume has been, too. And, you know, while we're staring at all the pace of inventories in the channel, well, yeah, tell us how you would see inventory levels in the channel? And, what would be any other comments you'd have on forward demand? Yeah, let's talk forward demand. Maybe we do the two smaller ones that are relevant- Mm-hmm ... to us first, think Europe and China. Mm-hmm. You know, we've seen some uptick in European production. I would say we're still very cautious on how we think about that going forward, but it has, at least through the course of the year, been positive for a lot of different reasons, but cautious. In China, also, I think we're a little cautious on that volume, but again, that's a very low exposure for us for our company. So our main area of focus, of course, is North America in terms of demand for ultimately the vehicles and the platforms we support. So from our perspective, you know, from an inventory rebuild, from a vehicle, in the vehicle park out in the space, you know, we believe there's still upward demand, elements inside of consumers, right? Mm-hmm. Vehicle ages continue to age in some of the key segments that we support. But if you really break it down into a couple of the... called buckets, so from a light truck, pickup truck standpoint, right? Demand, from our view, continues to be good demand, but it looks like the OEMs have sort of leveled into maybe from an inventory level where they want to be, so they're producing to that demand. Mm-hmm. And they do appear to be doing a really nice job of, I'll say, managing that supply-demand curve from a pricing element. Mm-hmm ... that you articulated From a full-size SUV segment inside. Yeah of North America, we see demand very strong, very low days on hand in terms of inventories and handled. I think it's in the mid 20s, which is very low. Wow. I mean, it takes a while to get one of those trucks, and there's great demand for it. So we still see very strong demand for that product on our builds as well as our customers. And then from a crossover vehicle segment, which is a key element for our business as well, you know, they sacrificed some of that production over the past two years, really, to support truck production when semiconductors and others were constrained. So we've seen now a nice steady rebuild of inventory, but a nice, strong demand for that product as well. So I think the crossover vehicle segment seems to be doing well from a demand perspective. Mm-hmm. And, you know, slowly building their inventories where they need to be. If what you're describing makes sense, seems a bit like a mix headwind. Am I wrong? I don't know. What are your other comments on mix? For us? Mm-hmm. Well, look, yeah, you know, I think when that comment comes, it often comes to the OEMs from a mix question. "Hey, is mix going to impact you negatively going forward?" Our view would be this: truck demand continues to be robust and steady and strong. If the OEMs should want to build additional mix from their perspective, adding in more crossover vehicles, that's generally more volume for us because our truck franchise will continue to run deep. Right, like annuity. They'll add crossover vehicles, so that's actually very good for us. That's additional. It's additive. It's additive, right? Mm-hmm. It's not really. You're not going to move pickup truck production for crossover vehicle production. It's a different end customer. But the concept of, you know, during COVID, when they were constraining, prioritizing your higher mixed vehicles, just would assume that that would represent or maybe, maybe what you're describing is more neutral. Well- It's not just as simple as looking at. No. From a mix, a pure mix inside of a full-size truck, you know, we think of mix, we think two-wheel drive, four-wheel drive. Mm-hmm. It impacts us. That has a very strong correlation in terms of mix to us, but we also see a very healthy four-wheel drive mix. We don't see that changing. So when the OEMs are adding their "mix," quote, unquote, which is crossover vehicles, generally speaking, it's positive to us. Okay. It's giving us additional volume, and that's what we saw play out over the last 12 months. What's from the cost inputs? Some material costs was easing. Maybe there's a little volatility now. Let's see what the Saudis are trying to do. It seems like they're trying to create a little more inflation ahead of... Well, we'll see what happens. We'll see. I'll cut that, cut that comment. But, anything you want to call out in terms of, you know, tailwinds, headwinds, and then also on labor? Just holistically. Yeah. economically? Just, yeah, just thinking about what's going into the factory and, you know, what might have changed over the course of the summer. Yeah. You know, last year, we had a fair amount of inflationary headwinds associated with pushback from our supply base as they had laboring cost increases, utility cost increases, and generally broad inflation that was impacting their products. Mm-hmm. We saw a fair amount of headwinds associated with that last year from our supply base. We also faced significant utility headwinds last year from inflation. Mm-hmm. Labor, we saw some last year. Transform that into this year, and I think it was a net $60 million impact to us last year, net of recoveries. Step into this year, we still had, I would say, a little bit of residual, inflation coming from our supply base as they were continuing to experience it. Now, as we are positioning more towards labor inflation. Mm-hmm. Right? Coming through that chain. So we see continued a little bit from our supply base, so a little bit on the labor side, from an inflationary headwind economic piece. I would say utilities, as you know, have come, have come down to our benefit. We stepped into the year, we thought we had had a net impact to us of about $20 million, and through the first half of the year, that's where we sit, about $20 million. Our customer recoveries to mitigate some of this is a back half story for us, and we're actively working on some of that today. What's the confidence on those recoveries? Look, I mean, our confidence is high. We have work to do. We still have to close some of our larger customers. Mm-hmm. You know, last year we got, I would say, majority of that done in the second quarter, the residual in the third quarter, third quarter. Looks like this year, it's going to be a third and fourth quarter activity. So let's play out a UAW scenario where, you know, the—your OEM customers and your D3 exposure is what it is, you are disproportionately exposed to their labor cost inflation. Let's say wherever it is, 30%-40%, I don't know. They how do you think of that in terms of if they are then looking for savings, as they see their margins, their profit margins being hit 20%-30% on paper, and they'll make their efforts to try to recover that, you know, what do you do as an organization to try to prepare for that? Where is there maybe some low-hanging fruit for you? You mean in terms of them coming back to us? Yes. Look, at the end of the day, we have a contractual price with our customer. Mm-hmm. You know, both sides should honor that, and I would expect that to be the case. We have critical products with a lot of technology in them, and I would continue to support that. Mm-hmm. Obviously, we'll look for productivity inside of our shops, like we always have, to mitigate our costs, to continue to provide them a value product. Okay. Any other directional puts or takes for the remainder of the year or into 2024? Do you want to- Yeah, I think, you know, as we step into 20 Uh- 2024, you know, if you think about some of the, a little bit of overhang we've had into this year would have been launch costs, especially in the first half, as we were getting up and launching the Colorado Canyon, in particular for GM. Normal launch costs, at that size, that's a huge launch for us. We have, obviously, some inefficiencies associated with a lot of this volatility, so I would expect that to diminish. Well, we were hopeful it was going to happen third quarter. Obviously, there's some pressure on the third quarter, but focusing on the run rate and exit rate into 2024, I would expect that to diminish as well. And then if inflation moderates, that should be positive for us. The other element from a headwind perspective, you know, the peso, we're a large consumer of the peso in Mexico. Mm-hmm. We have sizable operations there that support our North American operations, and the Mexican peso has strengthened against the U.S. dollar. So we'll have a little bit of that associated with into next year. But if things stabilize, you know, we'll have our core productivity programs that will start to then creep back into the favorable performance of the company, in addition to the things I just talked about. The peso inflation, labor inflation in Mexico? Well, I mean, there's always labor inflation in Mexico. Mm-hmm. It's generally higher as a percentage, just based on, just absolute percentage-wise, but it's manageable through our productivity programs. Mm-hmm. Questions for Chris or David? Want to address? Let's think about it. You guys can calm down if you want. All right, let's move into the strategy around the portfolio. Chris, you and David like to emphasize your agnostic product portfolio, and how you can offer customers, you know, the everything from ICE to hybrid, and now to full E-EV in terms of the components for, you know, integrated e-axles and the like. They work with Mercedes-AMG, and others, Jaguar, et cetera, being part of that. When you consider the majority of your businesses, you know, kind of even by the OEM and admission, is at some form of a de-adoption or runoff, if you will, while 40% of your backlog is EV, doesn't that present an opportunity for you to kind of really make some pretty chunky capital allocation decision changes, and that, that could be beneficial to shareholders? Absolutely. I mean, it's set up to our existing business, right? You hear it when David talks about agnostic, and it's from a product portfolio perspective, right? So we have a very, highly installed, strong, capable, segment of our business in terms of our infrastructure to support the existing products today, which will have a long tail on them, highly cash accretive, won't require a lot of capital to invest from that perspective. Should be long run off from a cash flow generation. You continue now to see a high interest in our product set from an electrification standpoint. Mm-hmm. We have announced several wins recently over the last 12 months in our e-beam axle space. Probably the feature one, which was earlier this year, which was Stellantis, which will launch in the back half of the decade, which will be a fantastic program for the company. We've won now a couple in India and China, and we're also seeing a sizable interest in our component business, which is allowing us to really flex and utilize our existing capital infrastructure as part of our vertical integration from forging and machining, now supporting those components either into ICE or into electrified vehicles. So from a capital allocation perspective, we think we can put a reasonable amount in to grow the business from an organic perspective and have the cash flow yet to continue to strengthen our balance sheet or use it for other purposes. Tell us a little more about the Stellantis program, if or what you can tell us. Yeah. So, I mean, we're, we're limited on what we can say. It's a, it's a very meaningful program from a size perspective. It launches in the latter part of the decade. Mm-hmm. It features our e-beam axle, which, as you know, on our ICE business, is core bread and butter for the company in terms of beam axle. We have now taken that. I'll use the word niche market. It's a very big market, so it's not really a small in terms of niche, but from an expertise into now our e-beam space, and that will launch on a couple of key platforms for Stellantis going forward. So it's a sizable program, really, frankly, very excited about this one. So I would love your views on CapEx and R&D as a percentage of sales, not any individual year, but the trend in the years ahead, given the change in the business mix. Sure. How you think about a blend of, you know, ICE runoff versus EV run on in terms of your margin development? Sure. Well, let's talk, R&D and CapEx, especially as it relates to, call it, the pivot of some of that product portfolio into electrification. As I mentioned in my previous remark, we think we can really minimize some of the capital investment in our ICE stuff, which gives us that nice cash flow runoff generation piece. On the investment then, to make that pivot from an R&D perspective, you know, we articulated, call it 12-18 months ago, we would step up our quarterly R&D spend to about $35 million-$40 million per quarter. As we built out our electrification portfolio- Mm-hmm. I would expect that run rate to continue for a period of time. As that portfolio has been built out, that should decline, and it would somewhat be replenished as we're launching new programs in the electrification space. So we think we're sort of near the peak of what we have to invest from an R&D perspective on a run rate basis. Mm-hmm. over a period of time, at some point, that will then start to decline, right? As we've made that pivot on some of our products, which we think is a nice trend for us, especially then, because you're getting towards the latter part of the decade, you're launching these new programs, they're coming online and your R&D start to step down. From a CapEx perspective, very focused on the intensity of the capital required for these new businesses. We've done, I think, a very good job of minimizing our current capital expenditures today and over the past couple of years, and really, that's allowed us to leverage our installed base, look to optimize that, and look to make it also flexible. Some of this equipment is going to be able to support both ICE and electrification, which will minimize the investments. Right. We need to make from an electrification space. You'll have our goal, at least we've articulated sort of in the medium term, is to keep our CapEx at 5% or less, even as we're making this pivot. Where would you see that maybe elevated? It could be concentrated in a year or two if you had a couple of very large programs come on you all at once, which, you know, at the end of the day, is a good investment for us to make. But we think based on our purchasing power, what we've learned on our optimization and our flexibility in our capital, we can really keep both of those R&D and CapEx in reasonable ranges as we make this pivot. David, anything you want to add there? I mean, everything he said, I mean- Yeah. That's the way that we're taking a look at it: upfront investment, and then once we get the platform all set, and then at that time, it's just programs that roll on. Yeah. Mm-hmm. Electrification, just broadly, from today's perspective, let me say T0 to T3, if EV adoption in the U.S. is slower than expected, is that good, bad, or neutral for your business? If it's slower? Yeah. Oh, it's absolutely good. I mean, you have this very heavily capacitated, installed ICE base that are on fantastic programs that- Mm-hmm. our customers and their customers love. Right. We won't need to invest a ton of money into continuing that for a long period of time. Mm-hmm. As you know, we're on the next generation of almost all of our big programs today. So, we're under contract well beyond 2030 for many of these things. Mm-hmm. So it would be, it would be very positive for us- Okay. from a margin and a cash flow performance. Coming to the audience again. Burning questions?... I know. I'm excited, too. I can't. I can barely, yeah, no. Come on, guys. Okay, I'll give you another chance. Okay. I'm not going to give up on you yet. Let's go to the financial outlook. So the capital allocation strategy leverage stood at 3.3 times at the end of June. You generated around $100 million last quarter of cash. You don't have any significant bond maturities until 2026. We have a small piece in 2026 and then a larger 2027. Yeah. So kind of when considering changes in the rate environment and the growth of your EV business, where's the sweet spot of your leverage? You know, where can you take it? Where do you want to take it? And how soon could you get there? Yeah, look, I would tell you our sweet spot would be sort of around the 2x leverage perspective. Mm-hmm. Why do you say that? Well, that brings us more in towards, call it the average or so of our space, right? We're a little bit heavy compared to our peers. We get a lot of pressure associated with that. That's no surprise to anybody. But our focus has been deploying that cash flow to reduce the gross indebtedness of the company. So we've over the last four or five years, we've paid down almost $1.3-$1.4 billion of debt. We'll continue to do that going forward. The leverage number has been a little bit sticky because we've been in this sort of lower production environment, so our EV has been a little bit lower, so that calculated leverage has just sort of been sticky. Once the volume starts to upclick, once some of these productivity initiatives start to upclick over the next couple of years, we'll continue to generate cash paying that gross debt down. That leverage number will, will move very quickly. Mm-hmm. Our objective in the near midterm would be get towards that 2x net leverage. Just to give you a chance, I think I know the answer to this, but confirming that your business is sufficiently self-funded and that you have enough self-generated capital, even given your growth objectives and the changes in your customers' portfolio, that you, you're not—there's no, I wouldn't say zero, but no elevated risk of equity dilution? No. We believe, our cash flow generating power of the company can clearly service our debt- Mm-hmm. meet our capital allocation needs Mm-hmm. and continue to pivot with the industry towards electrification. Adam? Please. One thing I wanted to ask- Sure. That was your question about if EV adoption happens faster, I think we'd be in also a great position in that scenario, too. I'm with you. Yeah, because, you know, the OEMs, in our view, right now, they don't—they probably don't have enough capacity to supply all the vehicles that they would produce in a fast rising uptick scenario. Mm-hmm. In our view, we win both ways. I mean, I think that I'll just be... You know, you've read my research. Your overwhelming customer exposure base, I think, is going to be a very small fraction of the volume they've targeted. And I think that the UAW negotiations have kind of, if they were about to pull back dramatically on their EV programs, you don't, you're not going to announce that a week before UAW. You want to kind of go in there, you know, with options. I think that when reality sets in, they see their labor costs go up a lot, and they see that these EVs are piling up on lots and the warranty issues attached to them. I'm not trying—I'm a nice guy, but I, I think, I think there's going to be a bit of a, "We need to recalibrate." That doesn't mean they give up, but a recalibration could mean a very, very significant pushing out to the right. And I think that that's going to contribute to the U.S. market being the slowest adopting EV market in the world by far. And the segments that you're exposed to will be the slowest adopting segments within the slowest adopting geo. Does that mean that you can relax and be complacent? Hell, no. You're not. I kind of get nervous whenever I hear auto suppliers investing in BEV stuff. So I'm like: Who told you to do this? Or, or was this informed by a press release or a conversation with a product development person at an OEM customer that's probably not going to be there or not make the product they said they would? That makes me nervous, but I think you're pretty, pretty darn well positioned- Mm-hmm. in either scenario. Yeah. Yeah. To your point, right now, and as everybody knows, infrastructure, that's what has to be nailed down, is infrastructure. Onshoring is- All sorts of stuff. Onshoring is really easy politically, I think, to announce getting it done. We'll see, guys, we'll see. One more chance. Like, if someone asks a question, I would say I'd buy, I can definitely buy you a beer. I'll make you a drink. I can't promise gummies, but there may be, there may be other people. I can't, I can't say that. Anything else, folks? Any other final remarks from you guys that you think we didn't hit on or you've had a lot of meetings this morning, you said they were good meetings? Yeah, they were good meetings. Topics you wanted to, You know, look, the topics that continue to be asked of us, you know, today, I would expect throughout the course of the day. Obviously, it's a busy week for our customers. They got a few things on their hands. We'll navigate through- Couple things. and we'll navigate through that accordingly, you know. We think we're well positioned, as you say, to leverage should the pivot dial down a little bit on electrification. And I think the products we're on, as you know, you know, if David Dauch was here, he would tell you he's very bullish on the full-size truck segment for us. Yeah. We are very cognizant of the cash that we invest to that business to make sure we're harvesting it over a long period of time. We're ready to go. We'll get through this year- Yeah. We're looking forward to next year. You got it. Oh, thanks, Chris. Thanks, David. Thanks for spending time with us. For you, Adam, go blue. Go blue. Yeah. Always. Yeah. Be there. Thanks, everybody.