Skip to main content

Market Overview

American Axle Q1'16 Earnings Conference Call: Full Transcript

Share:

Operator:

Good morning, my name is Ammy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the <b>American Axle & Manufacturing Inc.</b> (NYSE: AXL), First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there'll be a question-and-answer session. If you would like to ask a questions during this time simply press star then the number one on your telephone keypad, if you would like to withdraw you question press the pound key.

As a reminder today's call is being recorded. I would now like to turn the call over to Mr. Jason Parsons Director of Investor Relations. Please go ahead Mr. Parson

 

Jason Parsons:Director of Investor Relations:

Thanks and good morning. I would like to welcome everyone who is joining us on AAM's first quarter of 2016 earnings call. Earlier this morning we released our first quarter of 2016 earnings announcement, you can access this announcement on our website www.aam.com or through the PR Newswire services. To listen to a replay of this call, you can dial 1855-859-2056 reservation number 87956018. This replay will be available beginning at 1 PM today through 11:59 PM Eastern Time May 15.

Before we begin I would 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, which may cause future activities and result 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.

During the quarter we will participate in the following conferences. The 2016 KeyBanc Capital Market Industrial Automotive and Transportation conference in Boston on June 2. The Deutsche Bank 2016 Global Industrial and Material Summit in Chicago on June 8. The Barclays 2016 High Yield and syndicated loan conference in Colorado Springs also on June 8.

The 2016 -- Energy Industrial conference in New York on June 9 and the Citi 2016 Industrial conference in Boston on June 15.

In addition we are always happy to host investors at any of our facility. Please feel free to contact -- or myself to schedule a visit. With that let me turn things over to AAM's Chairman and Chief Executive Officer David Dauch.

 

David C. Dauch:Chairman, President & Chief Executive Officer:

Thank you Jason and Good morning everyone. Thank you joining us today to discuss AAM's financial results for the first quarter of 2016. Joining me on the call today is AAM's President, Mike Simonte and Chris May, our Vice President and Chief Financial Officer.

To begin my comments today I'll first provide some highlights of AAM's first quarter of 2016 financial performance. I will also update you on recent business developments before turn the things over to Chris. After Chris covers the details of our financial results, we will open up the call for any questions that you all may have.

Let me briefly discussed some of our first quarter financial highlights. First, our first quarter sales were $969.2 million approximately the same as the first quarter of 2015. On a year-over-year basis, the revenue gains associated with higher production volumes at our North American light truck program and a launch of our new business backlog in first quarter of 2016 were offset primarily by reductions in sales lower metal market pass-throughs and foreign currency translation as well as the impact of -- a North American commercial vehicle program.

AAM's non-GM sales in the first quarter of 2016 were $323.2 million as compared to $328.9 million in the first quarter of 2015.
Including the impact of our Hefei China joined venture, AAM's non-GM sales were approximately 37% of the total sales in the quarter. Second, AAM delivered record quarterly gross profit and the EBITDA performance in the first quarter of 2016. Our gross profit increased by $21.2 million to $174 million in the first quarter of 2016 and our gross margin was 18% compared to 15.8% in the first quarter 2015, a 220 basis points increase.

With respect to EBITDA, our EBITDA an increased $12.3 million to $149.8 million in the first quarter of 2016 and our EBITDA margin was 15.5% of sales compared to 14.2% in the first quarter of 2015, a 130 basis point increase.

And third, AAM's net income in the first quarter of 2016 was $61.1 million or $0.78 per share and this compared to $53.2 million or $0.68 per share in the first quarter 2015, a 15% increase. And finally, key measures of balance sheet strength and credit protection continue to move in a positive direction in the first quarter of 2016. On the trailing 12 months basis to March 31 of 2016 AAM's positive free cash flow was over $200 million and EBITDA leverage ratio was 1.9 as of March 31, 2016 and our coverage ratio was 4 times.

In addition, in March, 2016, AAM's corporate family credit rating was upgrades one notch by Moody's to be a---. Further validation of the continued improvement of AAM's balance sheet strength. All-in-all the first quarter financial results reflect very strong North American light vehicle full-size truck and SUV production, continued positive growth in China on the strength of cost over vehicle luxury passenger car segment and outstanding operational performance by our team. This is a very consistent message that we've had with recent quarterly performances.

Chris will cover more details of the first quarter 2016 financial results later on the call. Let me now shift gears and cover some business highlights for you. From an operational excellence perspective as we mentioned we continue to take advantage of strong capacity utilization for our full size truck and SUV programs that we support in North America. In addition our teams across the globe have delivered productivity improvements in operational efficiencies that are directly contributing to our record profitability.

Meanwhile we remained very focused on and -- launches and the execution of some team programs yet this year. These programs included includes customers such as Nissan, Mercedes, Ford, Jaguar, Land Rover, Fiat Chrysler and --. It is also important to note that the first quarter 2016, we entered into a new agreement with a UAW-represented associates at our Three Rivers Michigan facility which represents our largest facility here in the U.S. This new market comparable agreement ensures that we have labor cost structure to be violent and competitive always through the 2021 period of time.

We are very pleased with this accomplishment.

Technology wise we have the opportunities to showcase our latest research and development achievement at the 2016 winter test activity, that took place in the upper ---- here in Michigan and near to Artic Circle in Sweden. The 2016 event future day has expanded fleet of 16 demonstration vehicles for customers to experience -- performance of AM Blaze mechanical and electric drive technology in the most extreme conditions. Our advanced technologies will put to the test in snow, ice and extreme cold and yes they delivered.

One of the key technologies future as part of winter tested is our EAM hybrid electric drive line system. Customers were able to drive vehicles with these systems which delivered increased fuels efficiency decreased step high emissions and therefore performance improvements. Regionally there has been a significant customers interested in our hybrid and electric dry products. Increased 14 activity of these technology coupled with the EAM programs launch already included in our backlog.

Make through a very exciting time for both AAM and our EAM team.

In addition AAM also showcase our latest mechanical drive innovation in all new completely redesigned familiar white -- and drive units that we refer to as quantum. This break through technology demonstrates AAM's commitment once again to be an industry leader in technology innovation. We took our traditional Axle which is not been materially redesign for nearly 100 years and utilized cutting edge engineering tools and technique to revolutionized that design and streamline the manufacturing process. The result than also achieves a significant match reduction, increased fuel, timing and efficiency and then scaleable more across multiple applications all with no lots of performance or power.

Quantum has had the forefront of the innovation curve and has the potential to provide AAM a significant competitor advantage for many years to come. Customer responses from our weather test activity were extremely positive. AAM's suite demonstrates vehicles exhibit our commitment to technology leadership and to provide solutions for our customers needs today and for the future.

As it relates to new business we continue to make progress in offsetting the sales impact related to the transition risk of the next generating full size GM truck platform.

Back to October, 2015, we communicate to you that we had repaid about 35% to 40% of the sales impact associate with GM's source and decision, based on we have the major new global program that we had received. After adding the couple of recent program wins we now estimate that we have cover 50% of the estimated sales impact for this transition. Keep in mind this transition does not fully impact AAM in to 2020 and these new wins fall nicely into that time frame. These recent developments continue to demonstrate our ability to earn new business and validate the confidence we have in filling the sales gap, that was recreated when the full-size truck next generation change over.

We continue to work and well over a $1 billion to new an incremental business opportunities most of which falls in that 2018 to 2020 time frame, and look forward to providing further updates at 2016 progressive year.

On a separate note today I am pleased to announced that we have established a share repurchase program. Under the program our board of directors has authorize AAM to purchased to a $100 million of common shares through December 31, 2018. The share repurchase program demonstrates our confidence in AAM's long-term growth and free cash-flow generation as well as our commitment to create and deliver value to our shareholders.

To be clear we remain very focused on organic growth reduce in our leverage and identifying strategic opportunities to accelerate our growth and diversification. We consider this share repurchase program ---- and overall capital allocations strategy and we believe this balance approach benefits all stockholders. Lastly before I turn it over to Chris let me wrap up by making a few closing remarks regarding our outlook for 2016.

I communicated in February that we expect 2016 the another record year for AAM sales and profitability and this quarters performance was a great stuff. We continue to target full year sales of $4 billion this is based on the anticipated launch schedule programs in our new and incremental backlog as well as the assumption of the US light vehicles are to be in a range of 17.5 million to 18 million units here in 2016. We are now targeting EBITDA margin in the range of 14.5% to 15% this represents 25 basis point increase of the top end of the EBITDA margin range from our previous disclosure.

We continue to target free cash-flow range of $120 million to $140 million in 2016 and we are targeting CapEx for capital spending of approximately 6% of sales. To sum things up, our strong first quarter financial results position AAM to achieve our full year 2016 financial target. As we look forward to the remainder 2016 we remained very focused on supporting the launch programs our new business backlog and advance in AAM's product technology. biotechnology to drive long term profitable growth and shareholder value. This concludes my prepared remarks for this morning.

I thank you everyone for your attention today and for your continued interest in AAM.

And now I will turn the call over to Chris. Chris?

 

Christopher J. May:Vice President & Chief Financial Officer:

Thank you, David and good morning everyone. Today I will cover the financial details of our first quarter of 2016 results with you today. Let's get started with sales, on a year-over-year basis sales were $969.2 million in the first quarter of 2016 compared to $969.1 million in the first quarter of 2015.

Production volumes for the North American light truck and SUV programs we currently support were over 9% in the first quarter of 2016 as compared to the first quarter of 2015. This increased includes the new business launch of rear -- for Nissan Titan.

Sales in the first quarter of 2016 also reflect the impact of lower medal market pass-throughs to our customers as well as FX translation mainly related to the weakening of the Brazilian real and -- against the US dollar. Metal market and FX accounted for an estimated $25 million reduction in sales in the first quarter of 2016 as compared to the first quarter of 2015. AAM's content per vehicle which is measured as the dollar value of product sales supporting our customers North American light truck and SUV programs was $1,611 in the first quarter of the 2016. This compares to the $1,676 in the first quarter of 2015.

Most of this decreases is content per vehicle as related to lower metal market pass-throughs and differences in product mix.

Now let's move onto profitability, AAM's continued to deliver strong operating profit metrics. Gross profit was a $174 million or 18% of sales in the first quarter of 2016. This compares to $152.8 million or 15.8% in the first quarter of 2015.

Operating income increased by $14.1 million to $98.4 million in the first quarter of 2016. Operating margin was 10.2% compared to 8.7% in the first quarter of 2015. EBITDA or earnings before interest, income taxes, depreciation and amortization was $149.8 million in the first quarter of 2016, or 15.5% of sales. This compares to EBITDA of $137.5 million in the first quarter of 2015 or 14.2% of sales.

AAM continues to take advantage of our strong capacity utilization on our North American light truck and SUV productions as well as increased growth and profitability in China. We are also benefiting from lower net manufacturing costs resulting from productivity improvements in operational efficiencies as well as favorable environment as it related to certain commodity costs.

Now let will cover SG&A, interest, other income, and taxes. SG&A expense including R&D in the first quarter of 2016 was $75.6 million or 7.8% of sales. This compares to $68.5 million or 7.1% of sales in the first quarter of 2015. A significant driver of increased SG&A spending in the first quarter 2016 was R&D spending.

R&D spending for the first quarter of 2016 was $30.9 million compared to $27.3 million in the first quarter of 2015. The increase in R&D primarily related to investments in [01:51] such as our electrification driveline systems, Quorum and our mechatronics and electric control systems initiatives. SG&A in the first quarter of 2016 also reflected higher staffing requirements related to our global growth and engineering initiatives as well as wage and benefit inflation.

Net interest expense in the first quarter of 2016 was $23 million, $1.3 million lower than the first quarter of 2015. Primarily reflecting the benefit of the voluntary prepayment we made on our term loan in December of last year. Other income was $1 million in the first quarter of 2016. Gains and losses related to FX re-measurements netted to nearly zero this quarter and the other income we recorded in the first quarter of 2016 consisted primarily an earnings from our Hefei joined venture.

In the first quarter of 2015, other income was $2.4 million of which approximately $2 million representing gains related to the favorable impact of the re-measurement of peso denominated assets and liabilities. Income tax expense was $15.3 million in the first quarter of 2016, as compared to $9.2 million in the first quarter of 2015. The effective income tax rate was 20% in the first quarter of 2016 as compared to 14.8% in the first quarter of 2015. There were no significant discrete events in the first quarter of 2016 that impacted the effective income tax rate and we continue to expect a full year effective income tax rate to be between 15% and 20%.

Taking of all these sales and cost drivers into account, GAAP net income was $61.1 million or $0.78 per share in the first quarter of 2016 compared to $53.2 million or $0.68 per share in the first quarter 2015. All in, this was a strong net profit result for the first quarter of 2016.

Now let's move on the cash flow and the balance sheet. We defined free cash flow to be net cash provided by operating activities plus CapEx net of proceeds received form the sale of property, plant and equipment.
Net cash generated by operating activities in the first quarter of 2016 was $26.2 million. Capital spending, net of proceeds from the sale of property, plant and equipment, was $50.0 million in the first quarter of 2016. Reflecting this operating activity in CapEx, AAM's free cash flow in the first quarter of 2016 was a use of $23.8 million. This compared to use of $37.1 million in the first quarter of 2015.

It is not unusual for an automotive supplier to use cash in the first quarter due to seasonal working capital trend. Also the first quarter of 2016 free cash flow includes approximately, $26 million in tax payments related to our Mexican trend ---- issues that we have previously, disclosed. In total, as we've share with you previously we expect to pay between $30 million, $40 million in 2016 for this trend ---- items.

Now, let me address key credit metrics and our liquidity position at the end of the quarter. At March 31, 2016, AAM's EBITDA leverage or the ratio of EBITDA to net debt was 1.9 times. AAM's EBIT coverage or the ratio of EBIT to net interest expense improved the four times at the end of first quarter. Both of these credit metrics have calculated on LTM basis and are adjusted to exclude the impact of debt repayment cost we incurred in the fourth quarter of 2015.

One final note on the balance sheet. AAM ended the first quarter of 2016, with fully available liquidity of approximately $851 million consisting of available cash and borrowing capacity of AAM's global credit facilities. This represents an appropriate levels liquidity for the company. Before we start the Q&A, let me add this quick comment to AAM's 2016 outlook.

As David mentioned, we've reaffirmed our guidance for 2016 and increase the top end of our EBITDA range to 15%. The first quarter results are great start for AAM and reinforce our confidence in meeting our financial targets for 2016. We are excited for the opportunity to continue our strong operating performance and high cash flow yield throughout the rest of the year.

Thank you for your time and participation on the call today. I am going to turn the call back to over Jason so we can get started with Q&A.

 

Question & Answer

 

 

Jason Parsons:

Thank you Chris and David. We have reserve some time to take questions. I would ask you please limit your question to no more than two. This time please feel free to proceed with any questions you may have.

 

Operator:

At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad. We will pause for a just moment to compile the Q&A roster. Your first question comes from the line of Itay Michaeli with Citi. with. Itay your line is open.

 

Analyst:

Thanks guys this is actually Justin on behalf of Itay congrats on the quarter.

 

David C. Dauch:

Thanks Justin.

 

Analyst:

Morning. So quick questions on the 18% gross margin that you guys put up can you give some color as to what drove the margin improvement really and how we should think about the cadence for the rest of the year.

 

David C. Dauch:

Yes certainly very strong quarter for us as it relates to gross profit margin as well as our EBITDA margin. What I would tell you Justin if you look inside embedded in the quarter we have a very strong healthy full size truck mix in particular as it relates to the K2 slight blend to our overall revenue concentration was a little bit higher there and that obviously drive significant capacity utilization performance in our factories and they are are running very well so we are able to convert that into contribution margins, strong productivity initiatives.

There is a little bit of favourability and -- effects and you do the math on that form a margin perspective it's around 25 to 50 basis points just on the math dynamic alone and of course as we mentioned in some of our prepared comments our China operation also -- strong --for the quarter.

 

Analyst:

Perfect that's extremely helpful and then I guess my second question is around the new business coding activity if you can give some maybe visibility in the trajectory that you guy's have for '18 and '19 as we kind of progresse through these years and maybe any further traction with the Ecotrack product and the estimates that you guys have previously put out I believe the $600 million for 2018 and how that's progressing and moving forward.

 

David C. Dauch:

Justin as you said I mean in our backlog already we have got between current production and the backlog we are well over $600 million of Ecotrack business recorded on a significant amount of Ecotrac with disconnecting all those drive business along with our latest technology as far as the electric and hybrid electric driveline systems as part of the over a billion dollars that we're reporting at this time in time so we see tremendous opportunities for in our latest technologies of both Ecotrack and EAM.

So we are very pleased it what's taking place there. Clearly we are very excited about the new wins that we had in this past quarter year that offsets now 50% or 35% to 40% a lot of the GMT and exact the source of decision on the full size truck. So gain continue progress and we will keep you guys posted the Europe progresses and as we already said before we are very confident that we can offset that business going forward.

 

Analyst:

Perfect again thanks so much for the questions and congrats on the quarter.

 

Operator:

Your next question comes from the line of John Murphy with Bank of America/Merrill Lynch. John your line is opened.

 

John Murphy:Bank of America/Merrill Lynch:

Good morning guy's. Just a first question here is about the broader industry and it kind of one coding but there is a lot of discussion coming from companies like Fiat Chrysler specifically but also the broader industry about changing over car capacity to cross over capacity and potentially even trucks of overtime. I am just curious if you are seeing any positive impact here in the short one given your set of exposure of the Cherokee and potential growth in Fiat Chrysler just think it's a real opportunity open up here.

 

David C. Dauch:

Yes John as I said you and said to everyone -- I mean worldwide in this week by as far as our business right now with trucks and SUVs being strong with cost per vehicle is picking up momentum and being very strong in the luxury passenger cars business that we enjoyed as well. But to get into question with regards to FCA and there we are focused on trucks and SUVs specifically the -- side of things and crossovers and again that complements our product portfolio. Yes we are seeing opportunity there as you know we've done very strong working relationships with FCA not only here in the US, but now on the global basis with expansion of some of the EcoTrac disconnecting although drive into China, and as there is globalize net whole platform and we expect to benefit further and also -- truck and SUV opportunities that present themselves.

 

John Murphy:

Okay. That's helpful and second question just on quantum I apologize for the augments here but David as you're talking about this, I mean your talking purely about, actually you are talking about sort of a set sort of drive train set. I am just trying to understand that if this is something that as you said could be scaleable cross applications.

I would assume this would be more on the crossover and car side, but just curious if they potentially ever be any crossover between trucks I am just trying to understand how broad that spectrum across applications really means.

 

David C. Dauch:

John it very broad I mean it's predominantly its better initially on the truck and SUV side of the business. But at the same time it can support front axel applications, rear axel applications and -- applications for crossover. So it's the whole platform that we are putting together that scaleable or products the different vehicle architectures between truck SUV and crossover vehicles and luxury passenger car.

So we are very, very excited about this technology and again heavily focused on mass reduction fuel efficiency and again making it scalable so we can realize the -- scale associate with it.

 

John Murphy:

Very impressive. Thank you very much

 

David C. Dauch:

Thanks, John.

 

John Murphy:

Thank you very much.

 

David C. Dauch:

Thanks, John.

 

Operator:

Your next question comes from the line of Rod Lache with Deutsche Bank Rod your line is open.

 

Rod Lache:Deutsche Bank:

Thanks, good morning everybody. I had a couple of things one is I just wanted to understand a little bit better this gross margin improvement. So your revenue was flat year-over-year, your gross margin improve by little bit over $20 million even if I add back the $25 million from the commodity pass-through and say on flat commodity basis it would have up by $25 million $20 million gross profit improvement would be a pretty huge conversion. So on a dollar basis can you give us a sense of how that bridge kind of looks on a year-over-year basis?

 

Christopher J. May:

Yes, certainly. If you think about Rod this is Chris. Couple of those pieces put together China as you know going through significant launch mode in the past couple of years and that's convert to significant profitability here for the company.

In addition, we do have some favorability as it relates to FX associated if you look at the key inputs that we used especially as related to the -- we've benefited from that pretty substantially. Our operations are running quite frankly very-very strongly. They are now out of launch mode over the past couple of years running very steady strong lines and they get significant conversion on that. So I would tell it's volume and mix associated with the underlying volumes it's dozen of items that I spoke about and they have deliver the results.

 

Rod Lache:

Okay. I guess it maybe just thinking about this looking forward your EBITDA this quarter was up your margin was up by 130 basis points. But if my math is correct on your margin guidance it looks like your margins would be kind of flat from Q2 to Q4. So wouldn't some of these benefits sort beyond ongoing that would help the year-over-year margin comparison as we looked to Q2 to Q4.

 

David C. Dauch:

Yes, clearly and we increased our guidance contemplating those exact circumstances. A couple of things as you think going forward through the year, you saw metal industries for example sort of kind of drop-off in January and February and they are on the way back up. Right, so you'll have a little bit of dynamic associated with margin on that element alone.

Some of the cadence of our annual price downs in particular as it relates to the K2 start to impact us in the second and third quarter and those are sort of annual overlapping type of items and then we do pick up a little bit of pricing expense kind of in the second half of the year getting ready for a big launches in 2017. So we do have a few items kind of working against that trends, but we believe very strongly we're in a continue to perform that's why we took our guidance up today.

 

Rod Lache:

Okay, great. Thanks and just a last question does the how should we be thinking about this share repurchase announcement and it seems like up until recently the company was just extremely focused on external M&A opportunities and having achieved kind of a leverage target that you guys wanted to see. It would seem that was still be a big focus for the company and may be in consistent with starting to deploy cash towards the share repurchases.

 

David C. Dauch:

Rod this is David. I am I think the way you need to look at this is what we have communicate all along is that we are going to do everything in balance as it relates to our capital uses and in the past we predominantly are focused on the organic growth and also the debt manage or balance sheet strengthening. A same kind as you highlighted and we've clearly are very focused on M&A activity, but we're also looking at the other -- available to us in regards to shareholder activity.

So we'll keep everything in balance that with as relates those capital usage and we will evaluate where we think that we get the best return based on that the capital and placement of that capital going forward. But in the past we were limited and regards to what we can do with the focus on organic and balance sheet strengthening and then we started opening up the play book into the strategic side we are still very focused on the strategic side especially as we looked into transform this organization but at the same time we want to make sure we getting return to our shareholders as well.

 

Rod Lache:

This means David that may be some of the M&A opportunities that you have been looking at might not be that near term or that large.

 

David C. Dauch:

No it still gives us the opportunity to bolt on different M&A activities at same time it is a more significant transformational M&A opportunity that may arise it maybe part of us to review our overall capital allocation strategy. So we are not limiting at this point in time all are trying to do is keep our options open and make sure we have balance across how we want to utilize that capital going forward. But if the right transformational opportunity presents itself, so we have to revaluate our capital allocation strategy. But right now we feel this is the right thing for us to be doing.

 

 

Related Articles (AXL)

View Comments and Join the Discussion!

Posted-In: Earnings News

Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Premarket Activity
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Fintech Focus
A daily collection of all things fintech, interesting developments and market updates.
SPAC
Everything you need to know about the latest SPAC news.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at vipaccounts@benzinga.com