Dauch Corporation (DCH) Earnings Call Transcript & Summary

Great. Thanks, everybody, for joining us back at the conference here. Next up, we have American Axle, one of the largest global drivetrain technology companies that is wrapping up the integration of a transformative acquisition being MPG and delivering really well through the current crisis, all things considered. We believe it's a bellwether here really weathering a storm. One of the people have been concerned about on the leverage side. But as I kind of asked the question on the call, it feels like you guys have the situation in a headlock, certainly from a balance sheet and operating perspective, even though it's tough. We're very happy to have Chris May, Vice President and CFO; and Jason Parsons, Director of Investor Relations, here today to answer questions from American Axle. And with that, Chris, I'll turn it over to you for some opening comments.

Okay. Thank you, John. Good afternoon, John. Good afternoon, Doug. Good afternoon, everyone, online. We're certainly very excited to participate in the Bank of America Merrill Lynch Auto Summit, I'll call it, the virtual edition. So I think we should have a good 50 minutes here. So before I begin, though, I would direct your attention to our presentation materials on our website for our forward-looking disclaimers, just to make you aware of those. And of course, we are just really a week off now of our earnings release last Friday. And as we released at that point, that really had a nice start to the year, strong margins, strong cash flow. But of course, the focus of our attention now is on today and the future. Our North American and European operations have down -- have been down substantially since end of March. And hopefully, to get some activity started here in the back half of May. We are seeing activity as it relates to that -- associated with our customers. So that's a very positive for us. We've been very focused on our cost controls, our cash management and our liquidity and of course and probably most importantly, a return to work safety for all of our associates on a global basis. But even that as a backdrop, we continue to win new business. Last week, we announced another electrification award, new business award. Also announced we were recognized for our technology with PACE awards in our E-drive units. So David articulated all that information last week on our earnings call. So very positive and continue to see great momentum in that space for us. I trust you have a long list of Q&A, John and Doug and anyone online. So I guess at this point, I would suggest maybe we just sort of turn it back over to you, and we can go ahead and get started.

Great. Chris, maybe just to open up and ask sort of the first obvious question. As you're looking at the restart in both North America and Europe, I'm just curious what you're seeing early days in the process. And one of the challenges is, you hear a restart, but that means that the light switches are going on, and people are returning to plants. Not necessarily that you're running at any capacity utilization level that would be meaningful. So I'm just curious what you're seeing in the early days from scheduled releases from your customers? What you guys are doing on the restart? And maybe also maybe talk about the 2 major hurdles, particularly in North America, which sound like they're Michigan and Mexico, which you have operations in, obviously. So just curious on your insight on those 2 key hurdles as well.

Yes. Certainly. Great question and a good, I think, segue to start into our forum here today. We're clearly in the very early stages of a restart and a ramp-up in our North America operations as well as our European operations. Our operations in China are almost at pre-COVID '19 levels. So they continue to run strong and good demand for the products we supply for Mercedes as well as some of the crossover vehicles in that space. But I think the crux of your question is really more focused on our North America and European operations. And I would tell you each region is a slight bit different. We're seeing over the last week or so, some low level activity here in North America as we supported some non-auto customers, albeit, reasonably small. But now we're in the position with Michigan primarily opening for production early next week, us being prepared to support our customers here in the United States assembly plants, and that started already here this week. So starting to see some lift from that perspective. Our largest operation, as you know, is our facility in Mexico. And as we sit here today, the state mandate of Mexico is to not reopen until June 1. And that continues to be the line of sight for which we see, and we are preparing accordingly to support our customers in Mexico and elsewhere that we would ship out of Mexico through that process between here and there. So starting to see, again, some mobile activity across the board. So we take those as positive signs. But of course, we look forward to sort of get up and running with the appropriate safety protocols, the appropriate safety procedures, and being able to support our customers' needs going forward.

So Chris, when you think about the China ops being back to close to normal pre-COVID levels, that's very impressive, a function of the market, but also a function of your ability to ramp back up quickly. If you think about North America specifically, maybe because of the delay in Mexico or the later start date by mandate, could you see really by the end of June or sometime in July, being back up to normal, assuming that the U.S. demand level is reasonable? I mean how do you think about the return to normal, whether it be more on the plausible stake as far as production is close to demand because that's very difficult to call at the moment?

Yes. I think -- and I think as the crux to your question, John, just for clarity, on our ability to get back to normal or more holistically for the industry just to make sure I understand it properly.

Well, I mean both. I mean first and foremost, you can control what you can control and getting your capacity back to where it was before. So that's what you can control. And then maybe also what you're seeing from schedules from your customers in the near term. But more importantly, what you're capable of getting back to -- is really the crux of the question?

Okay. Yes. I would say, first and foremost, based upon the schedules we see preliminarily, the dialogue we've had with our customers, you're seeing sort of a phased approach, a step-in where one shift would begin and then thoughts of the second shift, third shift in the appropriate facilities. And then the corresponding supply chain to support that. And we -- as we sit here today, we are aligning to support that cadence. We feel confident that we're able to do so, not only inside our factory wall but also coordinating with our supply base, which is critical, obviously, for us to produce our parts and ultimately ship in to our customers. That's a pretty active risk management element of our business as well. So making sure our facilities are able and capable to meet the demand safely. I think we're in pretty good shape as we sit here today. I think you're starting to see interest for our customers to pull product over the foreseeable future. And I think we're aligned with that as well. So fingers crossed, we're just starting to step into this, right, with -- like I said, Michigan really opening up and many other states in the U.S. here next week to support. You're starting to see that demand start to come up. And then we'll obviously phase in Mexico a couple of weeks after that.

And the -- sorry?

No, I would just say we feel confident and prepared as we sit here today. But obviously, we've got to get up and running. And I'm sure there'll be some bugs you got to work out for some of these new procedures and protocols, but we're confident.

And Chris, we've been hearing from other suppliers that the releases seem to be more stable, predictable and moving in the positive direction, really in the last week or 2. I'm just curious if that's something that you're seeing and you have confidence in these releases being more real. Obviously, things are just restarting right now. So it's all TBD, but it seems like there's some optimism amongst the supply base that volumes are real. They're relatively stable. And they know what they need to target in the next month or 2 coming out of the automakers schedules that they're seeing. Is that something you guys are seeing as well?

I would tell you, look, as we're seeing the, I would call it, the start dates or the opening dates of some of the OEM facilities. Obviously, the schedules are becoming more real. There's very frequent interaction with our customers daily or multiple times a day, to be frank, and aligning to ensure that they're able to get up and running, close coordination with supply chain teams at our customers as well as with us and our supply base. So yes, I would say there's an element of optimism to that, but it's very early stage. We need to get up and running first and then start to go from there.

Okay. And as you've been running your channel [ guys ] down the line in your Tier 2 and 3 suppliers, maybe some of the steel companies, do you have a relative level of confidence in line of sight that there's no major triggers down the line in Tier 2 or 3 suppliers? I mean how are your guys monitoring that?

Yes, that's something we have through both our purchasing and risk management and supply chain teams, basically a daily hands-on process to ensure our supply chain is ready to go. Obviously, there's some small pockets of challenges we're working through, but nothing we see that's going to prohibit us from starting production and meeting our demand. And given the scope of what we're dealing with, I think we're pleased at this point from our supply base's ability to get us into open up production. Obviously, the challenges from that will come up when you start to hit rate. But given our fact that we're very close to them, our risk management approach, we feel pretty confident at this point that we're going to be able to navigate through any supply chain issues that would emerge in the future.

Okay. That's helpful. I mean when you think about what you've been able to achieve here in very short order, getting to cash flow breakeven with your sales down 25% to 30% in 2020, we'll see if down 25% to 30% is too optimistic or too pessimistic. We'll see. But regardless, I mean, that is a pretty impressive performance financially. What has it taken to get there? And how much of that you [ thrifting ] around CapEx and business operations? How much of that do you think could be sticky because it's a really impressive performance in very short order?

Yes. No, thanks for those comments, John. And we've been very focused on -- and even prior to recent events, you may recall, we talked a lot about this last year as well is making sure that we have an installed variable cost structure that we have levers that we can pull to further some of our fixed cost reductions, levers to manage our CapEx. And really, you're starting to see some of those play out, especially on the cost structure side, from a pure cash side, also on the CapEx side, where we have already stepped down from where we thought we would be $325 million of CapEx this year at the beginning of the year. We already have a good line of sight, solid line of sight to being down to $250 million spend. And to be frank, we're trying to keep that sticky going forward to where we would be 5% of sales or below on a go-forward basis in the next near term, meaning a couple of years. And that's through capacity optimization, throughput optimization, some purchasing, some -- recalibrating some of our maintenance and how we manage that even tighter to thrift out some of that CapEx in a positive way, meaning optimizing maintenance discount on equipment versus different mechanisms where it may have in the past. So we're excited and optimistic about our CapEx being sticky, and we're optimistic and excited about some of the, I would call it, cost reductions we have taken to address the near-term issue with COVID-19 that we're able to retain some of those savings in years past 2020. So we've taken some manpower reductions, some fixed cost reductions, and we look to hold those for an extended period of time. So I think we got really try to take advantage of this situation and continue to keep us lean and mean, if you will, going forward.

Okay. That's incredible. And if we were to think more just on the margin or decremental margin side, I mean, obviously, 2Q is going to be, hopefully, right, I mean it's not a great thing, but hopefully, that will be the worst of it, and we'll see some recovery out of that bottom, specifically here in North America. When you think about decremental margins in the second quarter and then the recovery as we get into third quarter and fourth quarter, do you think there's going to be somewhat of a mirror image on those? And how much tougher do you think it's going to be in the second quarter and the first quarter on decrementals? Because you had great performance in the first quarter relative to some -- to what some people feared?

Yes. If I think about our decremental margins, which you've seen us perform, let's call it, over the last 12 months. During the GM work stoppage, let's call it, the third and fourth quarter of last year combined, we were sort of between 30% to 35% decremental margins on that. The COVID impact that we identified in our first quarter of 2020. So that was at 28%. Now that was a little bit lower than what you experienced on the GM work stoppage in part for 2 reasons. One, you had a little limited mix of the company in terms of contribution margin, but also since it was a complete, call it, shutdown the last week or so, we were able to get out some semi-fixed costs out of our system pretty quickly. So it's actually pretty impressive, the team reacted that fast, so that was great. You're right. I hope second quarter is the worst of it. And that's certainly would be positive for everybody. But as we enter the second quarter, from a decremental margin standpoint, a couple of things to keep in perspective. Number one, really, you'll have a little bit overweighting of some of that full-size truck mix down, right, for effectively almost 2 months versus where you didn't get impacted as much in the first quarter when you saw those decrementals. So that's generally a little bit more of our richer contribution margin product. And you'll have some of the efficiencies to get back up and running in the second quarter, whether it be our internal or any inefficiencies through the supply chain that we've articulated and also have started to plan for it in some of the materials we published, we've tried to estimate what we thought we might experience from a cost perspective from that standpoint. But then I think as you step out of the second quarter and you're cycling up, our thought process would be some of these restructuring costs and saves would be sticky like we talked about. And then you would be somewhere in that -- you'll be range bound, it'd be depending on the mix similar contribution margin to where you've seen us previous to these downturns. So I don't know if that helps you frame up a little bit how we think about it, right?

That's very helpful. I mean and just more generally, sort of -- even more structurally, a lot of this activity is being out of short-term necessity reaction. I mean as you're going through this, do you think there's any other sort of realignment of capacity restructuring that might come as the opportunity and a financial opportunity presents itself 1 to 3 years out that you're seeing right now? Or I mean, is a lot of the work that you're doing on the MPG side internally, you're going to keep just going and there's not anything new, there's just going to be existing opportunity that you're going after?

Yes. No. As part of the acquisition with MPG over the last couple of years, we've taken a handful of factories offline in terms of capacity, right? And we're sort of nearing the end of that full integration here in 2020, as we've articulated previously. I think as we sit here today and you look at our playbook of how we address our costs, if we -- as we get through this, I would call it, near-term blip, and I don't mean blip as it's going to recover back, but when you have a little better line of sight from this very depressing scenario to what you see in the next couple of years may run at, we're focused on maintaining strong profitability. And if -- whatever the -- we believe the market we would face, we will align our capacity accordingly. And if there's opportunity to take out additional capacity, we absolutely will. If it's required to take out, we absolutely will, but that takes a little bit of time. So our near-term focus has been on cost structure actions we can get sort of an immediate bump out of as well as a medium-term bump in terms of headcount reductions, pay cuts, travel restrictions and so on and so forth. But capacity-wise, aligned with the needs of the industry is one of our top cost structure initiatives. And obviously, if we do that properly, you'll see strong performance out of this company.

That's great. I think Doug is [indiscernible]. Doug, you there?

Yes, sure. Doug Karson here. Thanks, guys, for letting me chime in from the credit side.

Hi, Doug.

So I think first, I would ask on liquidity levels. I think you guys ended at about $1.5 billion liquidity at 1Q. So first question, are we looking for any further draws on the revolver? I mean is there any potential to raise incremental debt, if necessary? And then kind of related to that, you've got some flexibility recently offered on the credit agreement. And how is the kind of the headroom there as far as the covenant relief? Maybe I'll follow up with something, but I'll start there.

Okay. Doug, I think you had a lot of questions wrapped in there. So yes, we did end the first quarter, it was about $1.46 billion of liquidity, and that's cash on hand plus our revolving credit facility, and we have a couple of small facilities around the globe. And that included just under $700 million of cash for which we had $200 million drawn on our revolver. Subsequent to the end of the quarter, we did draw to hold as cash another $150 million of cash, which we conducted in the early April time frame. So from a liquidity standpoint, from a cash standpoint, we feel we're in a good spot. From a debt maturity standpoint, we have really no near-term maturities, the closest -- the nearest one of size is $350 million net in the fourth quarter of 2022, then we're really not until 2024. So from a maturity standpoint, I think we're in pretty good shape as we sit here today. But obviously, that's starting in our radar screen and how we think about that. Your question is if necessary, would we take on additional debt? If necessary, yes, we would do what we needed to do to preserve the liquidity of this company. Or if there was an opportunistic way to access the markets, certainly something we would always consider and look at, as we've done historically, but we'd certainly do in this environment as well. And then, lastly, yes, we did get an amendment on our revolving credit facility. We believe we have adequate headroom here in the near term to navigate through the challenges that we've been talking about on this call and to give us the liquidity we need to properly run the company.

That's very helpful. Thanks for helping give parameters around that. And then my final question before I turn it back over to John. I think net leverage is around 3.3x, as you recently reported it. You've been on a campaign to continue to get that leverage a little bit lower as we could potentially head into an automotive downturn, you may be prompted by this COVID disaster. So I guess, big picture, how do you feel the ideal leverage to be, I mean, kind of if you could update us on your time line and try to get to where you think you need to be? And just kind of letting us know where delevering remains in your capital allocation priority. So really just a little talk on leverage.

Yes, certainly. So we did end the first quarter at 3.3x net debt leverage. Obviously, with a rapid decline in sales, which you're seeing here in the second quarter, I think you'll find that leverage statistic in 2020 obviously will be somewhat distorted from where you've seen our recent trends, and that's a mathematical equation of that. I think as we think about leverage as one of our top capital priorities is to continue to reduce gross debt on the company. Obviously, the near term, our focus is on liquidity on your first question that you asked. But once this gets past us, thinking and considering and continuing to reduce the leverage of the company is a top priority for us from a capital perspective. As I think about targets and when these targets could be achieved, I think it would be at this point, given the circumstance of where we're in, obviously, we pulled all our guidance and commentary associated with that, I think it'd be a little premature to do that. But how we think about it is no different than how we thought about it 6 months ago in terms of reducing our leverage and focused on that balance sheet management.

Perfect. All right. Thanks so much. I'll turn it back over to John.

Okay. Thanks, Doug.

Maybe if I can tug you in the other direction a little bit from the -- from an equity investor standpoint. I mean over time, I'm just curious if you're seeing the opportunity to win takeover business as some of the other suppliers in the world might be a little bit more challenged financially. How much opportunity is there in that regard? And obviously, you don't want to lever up at the moment. You want to go in the other direction. So that's totally understandable, but the MPG acquisition was made with the aim at diversifying the business away from North America and GM. I'm just curious, as you think about sort of this tug of war between diversification and leverage, if there's anything you would think about sort of in the near and midterm. And I, once again, recognize you don't want to take on leverage, you want to pay it down. But are there any opportunities within that context to try to diversify the business through either takeover business or smaller tuck-in acquisitions that might not be leveraging advance? I mean how do you think about that desire to also diversify the business? And where do you think you are right now in your diversification efforts? Is there more that you need to execute on over time?

Yes. No, great question, John. Obviously, diversifying our business geographically, customer and product set was an objective -- been a key objective for us for the last 5-plus years. Our MPG acquisition was part of that. I think we -- at least in the COVID-19 situation, I think we're sort of in the early stages of where some of these opportunities could present themselves. But if you think about right at the end of the fourth quarter of last year, meaning 2019, we saw an opportunity with a distressed supplier to -- with a very, very small investment of, I think, it was about $8 million, pick up a $50 million book of business that aligned perfectly in our vibration control system business. It was accretive on day 1. So look, we're aware of these situations and where they make good sense to do, within our capital structure. I think it's something we would absolutely consider. So -- and that also expanded us geographically in our European footprint. So this concept is on our mind. These are things we are aware of, and we look for opportunities. And if one presented ourselves, we would certainly think about it. Ex the current circumstance, our top priority obviously is navigating the challenges of the current quarter and getting back to production. That is clearly priority one right now. I want to be very clear about that. But being a diversified [ whole ] supplier in the key markets that we participate in is an important factor for us longer term.

Got it. Okay. And then as -- can you hear me -- and then as you think about the -- sort of the stress at the automakers like through the rest of the value chain, there are questions as to their capital allocation. I'm just curious as you look at the product pipeline in the near term, RFQs for future product, I mean has anything changed out there as far as -- particularly on electrification and obviously the powertrain side, that's either good or bad for you? And one of the things that seems kind of intriguing is that the EV penetration may take longer given lower gas prices and their financial stress in the value chain, and that may play well to your core business that generates more cash and allows you to invest in your future business. So I'm just curious if there's anything you're seeing in the product pipeline from the automakers, and then as you think about sort of this transition, this may actually be, ultimately be an advantageous event from that standpoint?

Yes. I guess maybe in reverse order. As it relates to our core business, and I think you've heard us maybe articulate this before, we have -- we're quite bullish on our core business for a period of time, an extended period of time. And I think the macro events of today, I think, further support that view, by the way. But interesting enough, I think OEMs in certain regions that were maybe really pushing electrification to continue to -- that hasn't declined. The interest in electrification and growth in the China market remains strong, and that's where we're seeing some of our recent wins that we've announced. And the interest to drive that further continues to exist. The North America market, I think, has been mixed on electrification interest and that's still mixed. And the European front still have interest in electrification. That still seems to be there. And then the respective OEMs and their views on that still seem to be supporting that view even through the current environment today. But I think that creates some opportunity for us even more so for growth in that space, but also for protecting, enhancing and possibly even growing our core book of business as well in the current environment.

Okay. I mean just one of the things that's going on right now, it seems like there's a shortage of large trucks or particularly pickups in inventory and through the month of May, that's going to get even tighter without real -- any real volume production. It seems like with lower gas prices and this tight inventory, particularly in North America, plays straight into your sweet spot, being particularly GM's trucks. How do you think about sort of mix in its recovery? Because it does seem like it's right up your alley. And at least for the remainder of this year and maybe even beyond in the recovery mix to be a real constructive factor for you that is very underappreciated.

No, that's a great point, John. And obviously, we've always been very bullish on the pickup drug segment through different gas prices, through different economic cycles. But right now, we find very interesting that if you look at recent sales data, the pickup truck market continues to be strong and gaining share within that sales data or mix coupled with, obviously, the large platforms we supply, General Motors being one of them, really took a lot of supply out during their work stoppage last year, taking a lot of supply out right now which our view will just continue to create that pent-up demand for that product that will require production of that product, which obviously plays right to our top line revenue. Same with some of the -- our other full-size truck customers, the demand for that product seems to be very strong from, not only consumer interest, but as you mentioned, some of the macro points of low fuel prices. Things of that nature will continue to drive interest and demand for this product segment. And we feel we're in a very nice position as it relates to the pickup truck and the product we supply. So we supply to SCA, General Motors, Nissan and others in that space and in that Tier 2 level, our sub-driveline components across even broader spectrum than just those platforms.

And maybe just to wrap up because we're -- we've got another -- I think just another 2 or 3 minutes here. If on [ you could give us a range on your dollar content per vehicle ] on sort of a fully loaded GM pickup versus a baseline pickup? I mean what's kind of the range of content you're going to have on full-sized trucks?

Yes. So I think the lower end of that range would be, for example, the 2-wheel drive vehicle would effectively have one of our -- we've said the blended average. Let's start there -- the blended average is about $1,500 to $1,600 for a pickup truck vehicle. So if you have a heavy 4-wheel drive, heavy duty truck, it's going to be well north of that. If you have a sort of light-duty, 2-wheel drive, it's going to be south of that because you only have 1 axle, right? So that sort of -- the ranges in the $2,000 plus on the heavy-duty all-wheel drive or 4-wheel drive applications it's probably going to be slightly less than $1,000 on just a small 2-wheel drive low torque engine mix. So your average across the board, $1,500 to $1,600.

It seems like a mix opportunity for you also in the near term, at least from where we're looking at?

Yes.

Yes. I mean it just -- I mean, it seems like it's -- I mean, something that -- we'll see where it lands, but it seems like it's moving in your direction for now. I think with that, we've got to wrap it up because we just have a minute left here. So we very much appreciate the time for this session as well as all the time you're giving to investors in these one-on-ones. So really, Chris and Jason, thank you very much for the time. We appreciate it today.

Yes. I appreciate it, John, Doug. Thank you very much. Hope you have a successful conference for the balance of the day.

We will because of you. Thank you so much.

Take care. Bye-bye.

Thank you.